Wealth creation is on every individual investor’s agenda. Many of you start your investing journey early on in life, often coinciding with your earnings journey. Unfortunately, the investment journey is full of bumps and many of you drop off even before you can reap the full benefits of investing.
Serious investing towards various life goals is not a possibility without planning to create a portfolio which is no easy task. It is very likely that you will face several challenges on this journey that can impact your ability to make astute investment decisions.
Some of the challenges faced include:
- Emotional and behavioural biases: Greed and fear tend to impact your ability to make the right investment decisions. Greed makes you hold on to loss-making investments in the hope that they eventually turn profitable while fear acts as a deterrent and stops you from buying investments at market lows. Often you might have exited a certain investment in response to negative news only to see that the negativity was temporary in nature. Or, perhaps, kept waiting for the market to correct and watched other investors ride the bull run.
- Inability to determine asset class exposure: It is well known that you should not put all your eggs in one basket. From a portfolio perspective, this means allocating money to multiple asset classes like debt, equity, gold, etc. Each asset class serves a different purpose and hence, needs to be in your portfolio in a certain proportion. For example, equity has long-term growth potential, debt can provide stability, and gold can be used as a hedge against inflation. However, as an individual investor, you might find it challenging to determine how much to invest in equity, how much to invest in debt, and how much to invest in gold. Additionally, it is even more challenging to know when to move from one asset class to another.
- Inability to select the right investments: If you are a mutual fund investor, then you know that you have multiple investment options from which you can choose. There are various debt and equity schemes, with each following a different investment strategy or philosophy. Within this large suite of offerings, you may find it difficult to select the schemes that best suit your requirements. Additionally, you might also want to contemplate investing in international equities either directly or through mutual funds, both of which would require some amount of expertise.
- Challenges with respect to optimally managing tax impact: As an individual investor, the income you generate from your investments is subject to taxation. But it is not as simple as that. Equity schemes are taxed differently from debt schemes. Even within each asset class, taxation can differ based on the investment holding period. Additionally, you can also make certain investments that can help you reduce your taxable income. Thus, knowing and managing taxation is an important part of investing.
Now, to combat many of these challenges, mutual funds have introduced multi-asset funds which have the capability to take exposure to several asset classes within a single scheme. They are managed by experienced fund managers and can help you combat many of the challenges that come in the way of a comfortable investment journey. Through multi-asset investing you could combat all of these challenges simply by investing in a single mutual fund scheme.
Addressing this requirement, ICICI Prudential has announced the launch of a passively managed multi-asset scheme. The offering is innovative in terms of the asset class exposure the scheme provides. The offering is structured in a fund of fund format which invests across multiple asset classes such as equities (domestic and international), debt and gold. Within equity, the offering has the flexibility to invest across market capitalization, sectors/themes are it domestic or international markets while proactively managing risk.
Since this is a passively managed fund of fund, the exposure to the above-mentioned asset classes will be via ETFs or index funds. The Scheme is capable to invest in any ETFs/ Index Fund launched by any other mutual fund in India. In terms of asset allocation, domestic equity ETFs/Index Funds will range between 25-65 per cent, Domestic Debt ETFs/Index Funds allocation will be 25-65 per cent, Gold ETFs will be upto 15 per cent and overseas ETFs and Index Funds can range from 10-30 per cent. As a result, this offering can be considered as a one-stop solution for asset allocation needs and can be considered as a part of your core portfolio.
by, Harshvardhan Roongta, CFP, Roongta Securities