Tide Over Market Volatility With Multi-Asset Strategy

The past one year has been very challenging for equity investors given the heightened equity market volatility.] Also, the returns have been lacklustre. As a result, investors are in two minds: whether to stay invested or book profits as a means to minimise the harm that market volatility could inflict on the overall portfolio. Equity, as an asset class, has attracted a sea of investors over the past few years. Be it through direct equity or through equity mutual funds, statistics show a historically high interest in equity investments. Equity, no doubt, is one of the best performing asset classes over the long term. 

Hence, investors tend to think that equity is the only asset class which can give returns but a majority of them fail to understand the short-term risk associated with equity at any given point of time. Also, investors fail to understand their own risk appetite as a result of which when the market turns volatile, they suddenly discover they lack the power to withstand equity market volatility. Time and again, we have seen that investors tend to succumb to recency bias. Here, an investor tends to think that the asset class which performed the best in the past would continue to do so in the future as well. 
 

Also, they will believe that an asset class which performed poorly in the recent past will remain a laggard in the future too. This situation is known as recency bias in investment terminology. Such a situation has the potential to inflict irreparable damage to the portfolio. One of the easiest ways to circumvent such a situation is by adhering to asset allocation. Asset allocation is the practice of investing across various asset classes like equity, debt, gold, etc. This ensures that the portfolio is adequately diversified and over the long term ensures a good investment experience.
 

Irrespective of the market conditions, be it extreme volatility, uptrend or downtrend in the market, or a prolonged consolidation phase, a multi-asset strategy tends to yield optimal results in the long term. By adhering to this strategy one can keep investment-related stress at bay as the portfolio will not be adversely impacted under any market condition. The other benefit of such an approach is that it effectively takes care of investors’ irrational financial behaviour which keeps appearing along the course of one’s investments. 
 

Multi-Asset Strategy
As an investor, one must realise that none of the asset classes can be an evergreen performer. Be it equity, debt, gold or real estate-related investments — all are different asset classes and have distinct market cycles which may or may not be in sync with each other. For example, in 2020, post the pandemic, Indian equities rallied while debt and gold were under pressure. On the other hand, in 2022, gold rallied and outperformed all the other popular asset classes like equity and debt. In effect, an investor who had allocation only to equities would have had a tough year. Conversely, if an investor had allocation to equity, debt and gold, i.e. a multi-asset strategy, then such an investor’s experience would have been good despite the lacklustre equity performance. 
 

Understanding Multi-Asset Fund
As a means to help more and more investors access this strategy, mutual fund houses have launched the multi-asset fund. Such a fund has the flexibility to invest in three and more asset classes at any given point in time. Here, typically, fund houses tend to invest 60-70 per cent in equity, 20-25 per cent in debt and the rest is allocated to gold and infrastructure-related instruments like infrastructure investment trusts and real estate investment trusts. Given the prevailing elevated equity market valuation, allocation to equities can be on the lower end of the allocation spectrum. Such a diversified asset allocation not only reduces asset concentration risks but makes your investments tax-efficient while offering inflation-beating returns in the long term. 
 

As a result, investors can consider making lump sum investment in this type of offering. To conclude, an investment portfolio based on a multi-asset strategy can help an investor overcome several investment-related hiccups — be it valuations, timing or financial behaviour. Given the fact that volatility is part and parcel of the investment process and the scenario can change overnight as has recently happened in the wake of the Adani Group incident, it is best to stick to a strategy that spreads the risk. This evergreen investment strategy will not only help you attain your financial goals but also ensure that the investment experience remains a happy one.