Navigate Overvalued Markets Through Multi-Asset Investing

Multi-asset investing is a strategy where investors invest in multiple asset classes such as equities, debt, gold, REITs, infrastructure investment trusts, etc. Different asset classes perform differently under different market conditions. As a result, investing in varied asset classes can help reduce risks and optimise portfolio returns. For instance, when the equity market is volatile, the presence of debt investments such as bonds which offer stable returns will help provide downside protection to the overall portfolio. 

Historical Performance of Different Asset Classes
A single asset class cannot perform consistently over an extended period of time. One asset class might outperform all the other asset classes in a particular calendar year and may underperform the next year. In effect, no one can predict which asset class will do well at any given point in time. To illustrate this point, let us consider the performance (annual returns) of mutual funds that invest in different asset classes, such as equities, debt and gold. 

Here, we can see that no single asset has beaten other asset classes in the last few years. Additionally, if one asset class performs well, other asset classes may not give similar returns. Hence, having a mix of different asset classes is important for a well-rounded portfolio. 

Why Multi-Asset Investing?
Economies across the globe are witnessing a paradigm shift.Developed economies are under pressure due to persistent inflation and weak growth numbers while the Indian economy has been a picture of strength owing to the various prudent measures put in place both by the government and the Reserve Bank of India. However, the challenge now for the Indian equity markets is the elevated valuations at which the benchmark indices are trading. Thanks to the constant rally, the valuations are no longer cheap. 

Bloomberg data shows that the Nifty 50 index has reached a two-year high PE multiple of 22. The Nifty’s PE multiple measures how much investors are willing to pay for each unit of earnings. This 40 per cent premium over the average valuation highlights a unique situation, wherein the Nifty 50 is now the second-most expensive global index. At such times, exercising caution is of the utmost importance. This is where multi-asset investing strategy emerges as a helpful way out in such situations. 

Understating Multi-Asset Funds
Multi-asset allocation funds are hybrid mutual funds that invest in three or more asset classes, which is one of the easiest ways to invest in multiple assets. As per the Securities and Exchange Board of India (SEBI), multi-asset allocation funds must invest at least 10 per cent of their assets in three or more asset classes. As a result, basis the changing market conditions, the fund manager here can take a call on which asset class to invest in or not. Also, the fund manager can decide whether to increase or trim the allocation to certain asset classes basis the asset class attractiveness. 

Given this flexibility, if you are an investor wondering where to deploy fresh investments during the current times, then a multi-asset fund could be a good starting point. Over the short as well as the long term, data shows that this category has delivered stellar returns at reduced volatility. Over the last one year, the average category return has been 21.8 per cent. Extending the duration to three, five and ten years, the average category return has been a CAGR of 14.4 per cent, 13.7 per cent and 10.8 per cent, respectively 

To conclude, a multi-asset approach to investment helps balance risk and return by investing across various asset classes. This strategy helps an investor to benefit from the advantages and opportunities that various asset classes have to offer in any market scenario. Also, one need not worry about profit booking or rebalancing the portfolio as all of these will be done by the fund manager on an investor’s behalf, making it a win-win scenario for the investor.

The writer is Mutual Fund Distributor