At a time when equity valuation has turned expensive, investors should look at multi-asset funds which combine the power of equity, fixed income, gold and real estate to offer a differentiated asset allocation-based portfolio strategy. Investing in multi-asset allocation funds can help create a portfolio that captures the upside and protect the downside.
A multi-asset allocation fund is a type of hybrid fund investing in at least three of these asset classes with a minimum allocation of 10% to each. In case a fund manager holds a view that equity markets are looking expensive from a valuation perspective, he can reduce allocation to equity and invest more in debt or gold based on their views on these asset classes. And when markets look cheap, he can move the allocation from debt / gold to equity.
There are two ways for investors to meet their asset allocation needs. They can either adopt a “Do it Yourself” approach by investing bulk of their portfolio in wealth generating equity and some allocation to portfolio diversifiers like gold after keeping aside 12-24 months of expenses for emergencies in a safe and liquid avenue like liquid fund. This will ensure they meet all their long-term financial goals.
Alternatively, Chirag Mehta, chief investment officer, Quantum Mutual Fund, says investors can opt for readymade asset allocation solutions like multi asset funds which invest across asset classes, dynamically changing allocations based on attractiveness of the asset class. “In these one-stop solutions, investors have to track only one NAV to check the performance of their portfolio. These funds can also rebalance portfolios between asset classes to buy low and sell high in a more tax-efficient way,” he says.
In theory, a multi-asset fund should be able to capture the upside in equity markets when they are doing well and protect the downside when they correct. Dhaval Kapadia, director, Investment Advisory, Morningstar Investment Adviser (India), says given the difficulty in predicting or forecasting equity market movements, particularly over the short term, the ability of a multi-asset fund to deliver the desired outcome would largely depend on the investment process and views of the fund manager. “For instance, at the onset of Covid-19 in early 2020 when equity markets witnessed sharp falls, fund managers who reduced allocation to equity due to the significant uncertainties prevailing then would have seen significant underperformance as equity markets recovered in the second half of 2020 and delivered substantial returns in 2021,” he says.
The function of multi-asset funds is to give investors a diversified portfolio of equity, debt and gold which can combine the capital appreciation offered by equities with the stability and risk mitigation offered by debt and gold. Before investing in multi-asset funds one should see if these funds are truly and optimally balanced between the three asset classes and not overtly biased towards any particular asset class, especially equities. “Multi-asset funds with lopsided equity allocation may give good returns when markets are doing well, but will suffer more than truly diversified funds in a down market, this behaving more like an equity fund and defeating the purpose of investing in a multi-asset fund,” he says.
Pitfalls of a common portfolio
Various studies have shown that asset allocation is a key driver of portfolio performance over the long run. The asset allocation decision is typically based on one’s investment horizon and risk appetite. Investors with a medium to long term investment horizon (five years and above) and above average risk appetite can have a higher allocation to growth assets such as equity to beat inflation and achieve their financial goals. Whereas for investors with a short-term horizon, a higher allocation to defensive assets such as debt would be suitable.
Kapadia says each investor would tend to have goals with varying time horizons and risk appetite. “Multi-asset funds hold a common portfolio/ asset allocation for all investors which may not be suitable to each investor’s goals and risk appetite. For instance, a multi-asset fund maintaining a conservative allocation of 20% to equity, 60% to debt and 20% to gold may not be suited for an investor with a long-term horizon and high risk appetite. This could impact their ability to achieve desired financial goals,” he cautions.
Balancing the odds
Multi-asset funds can rebalance portfolios between asset classes to buy low and sell high in a more tax-efficient way
Before investing in such funds, ensure they are not overtly biased towards any particular asset class, especially equities
Such funds capture the upside in equity markets & protect the downside when they correct