Why Multi-Asset Approach Matters

When it comes to investing for the long term, the most popular and talked about asset class is equities. As a result, without understanding the inherent nature of equities, investors tend to go headlong and invest all their monies into equities. When the market is in an upswing, the decision may look like a smart one but when the tide turns around, the same decision of investing starts to look like a mistake. Worse is when investors in a bid to protect their capital decide to redeem their investments during the market correction phase. By doing so, they have converted their notional loss into a permanent loss. As a result, the investment experience tends to sour. 

Asset Allocation
One of the ways to circumvent this situation lies in adhering to asset allocation. The practice of asset allocation entails distributing the investable surplus across multiple asset classes such that the overall portfolio remains largely immune to the developments in one particular asset class. The basic premise here is that no two asset classes will behave in the same manner at the same time. Historical performance data, as can be seen over the past decade, clearly shows that no one particular asset class is the winner every year. Hence, it is important to diversify one’s investment across multiple asset classes. 

Graph: Source: Equity: Calendar year returns of Nifty Large-Cap, Mid-Cap and Small-Cap index. Debt: Quarterly average of GSec yields. Gold: RBI. 

Role of Asset Classes
Every asset class has a distinct role to play in a portfolio. Equities ensure there is a growth element to the portfolio. Over the long term, their presence helps creates significant wealth but the journey will tend to be volatile in nature. Even within equities, investors have the option to choose between large-cap, mid-cap and small-cap and a combination of these. Each has its unique advantages and disadvantages that an investor has be mindful about. On the other hand, the presence of debt ensures predictable returns. Also, there is an overall downside protection to the portfolio rendered by this asset class. 

The other popular asset class in India is gold. The yellow metal has a unique role to play in the portfolio. Its presence acts as a hedge against inflation and volatility in other asset classes. Often when there is increased uncertainty owing to developments like geopolitical situations, recessionary fears and the likes, the yellow metal tends to do very well. Given that the co-relation between equity, debt and gold is minimal in nature, the presence of these three asset classes over the long term bodes well for an investor 

Practical Challenges
Building a portfolio comprising various asset classes is no easy task. Investing individually in each of the asset classes is the easiest part of the transaction. But once done, this would entail keeping track of all the developments in each of these asset classes, their triggers and rebalancing the portfolio as and when required. A lay person may not have the knowledge or the skills to do the needful in the correct manner. Also, when the portfolio is rebalanced, an investor will attract short-term or long-term Capital Gains Tax, depending on the period of holdings. Addressing this requirement, mutual fund houses have the category of Hybrid Fund designed to meet this very need. 

Multi-Asset Fund
Known as the multi-asset category, by definition this category fund is mandated to invest in three or more asset classes. Over the years, several mutual funds have an offering in this category. Each of the funds here will invest across multiple asset classes, thereby ensuring that the fund manager will do the needful on behalf of the investor. Apart from investing in equity, debt and commodities, many of the fund houses are also known to invest a small portion of their assets of such a fund in real estate investment trusts and infrastructure investment trusts. 

Each of these asset classes helps diversify the portfolio in a meaningful manner. In such a fund when the portfolio is rebalanced, an investor does not attract taxation which otherwise would have been the case. To conclude, if you are an investor looking for a one-stop solution for diversifying across asset classes, a multi-asset fund is a good starting point. When choosing the fund, do remember to check the long-term performance of the fund across a complete market cycle. 

The writer is Director,VSN Fininvest Pvt. Ltd. ■ Email : support@vsnfinancialservices.com ■ Website : vsnfinancialservices.com