Multi-asset funds allow investments in multiple assets including gold and international equity
By Joydeep Sen
It has been proven that allocation is the critical part of investment. Not just allocation, but a judicious allocation to various assets in a ratio that suits you. However, predicting market levels for investing in individual assets does not work. Investors tend to invest more in assets that are performing better at a given point in time. Thus, investment allocation mostly happens in equity (i.e. domestic equity) and debt. However, two different asset classes have given superior returns of late—international equity and gold—and this has brought the topic of asset allocation to the fore again.
While investing in Indian equity is participation in a growing economy and debt offers attractive accrual levels, the benefits of allocation to other asset categories like international equity and gold are diversification and participation in rupee depreciation. The returns we derive in India on these two assets are converted to rupee value from USD.
The rupee has been depreciating historically against the USD and may continue to depreciate in future. This gets added to the returns.
How can you do it?
One way to do it is to decide your allocation ratio as per your needs and investment horizon and invest in individual funds. There are specialised funds for domestic equity and debt. There are feeder funds that invest in funds abroad, where you can choose the investment theme. For gold, there are gold ETFs and gold fund-of-funds investing in gold ETFs. The other way is multi-asset funds that invest in multiple assets as per the mandate of the fund.
Which are these multi-asset funds? There was a recent NFO from Motilal Oswal AMC that has a fixed allocation to international equity but the allocation across other asset classes is not defined, i.e., it will be decided by the fund manager. There are funds like ICICI Prudential Multi-Asset Fund (largest corpus size in the multi-asset category), Axis Triple Advantage Fund, Tata Multi Asset Opportunities Fund and HDFC Multi-Asset Fund, that invest in domestic equity, debt and gold. The allocation to a particular asset at a point of time is decided by the AMC, within the range for that asset as defined in the mandate of the fund.
The other approach is to have a defined allocation to a particular asset, without the influence of a fund manager.
There is an upcoming NFO—Nippon India Multi Asset Fund—that has a discipline-based approach to allocation. This fund will invest 50% in domestic equity, 20% in overseas equity, commodities 15% (including 10% in gold) and 15% in debt.
Which is a better approach?
Wealth management theory says allocation should be made as per your risk appetite, your investment horizon, needs, requirement, etc. That is, allocation should be decided irrespective of the market level of the asset or the view on that asset. You can do the allocation through specialised funds, i.e., equity, debt, gold and feeder funds, but this would require periodic rebalancing as one asset class will outperform others at any point of time leading to a higher allocation. Many investors prefer a multi-asset fund where that follows a disciplined approach.
It is important to avoid the common mistake of allocating to any asset category or a particular fund based on latest performance, which is known as recency bias. You have to be clear about your risk profile, the risk profile of the investment and your horizon. Go ahead with the fixed allocations across asset classes in a disciplined manner; unlike investors who missed the latest rally in gold and international equity, you will not miss the next bus —whenever the rally happens.
The writer is founder, Wiseinvestor.in