Smart investing: Asset allocation in the time of Coronavirus crisis

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April 15, 2020 3:30 AM

Multi-asset funds of mutual funds can be a good option for asset allocation mix even as gold is a good diversifIer. Also, do keep emergency funds in debt funds & fixed deposits

 Investors must realise that in a goal-based investment with a multi-year time horizon, market volatility is your friend.Investors must realise that in a goal-based investment with a multi-year time horizon, market volatility is your friend.

At a time when the Sensex has crashed 25% since January this year and interest rates on fixed income products are trending down, investors must look at asset allocation which will help them to take strategic calls in the portfolio. Instead of being fully invested in equity or debt, an investor must have a diversified portfolio across asset classes such as equity, debt, gold and even real estate.

The first step for asset allocation is to outline the investment objective. This will help an investor to shortlist the investment instruments best suited for achieving one’s financial goals. For long-term investing, investors must have pre-requisite goals in mind, such as buying a house, higher education of children or retirement, and their decisions should be based on building a portfolio that will help them achieve these goals. Investors must realise that in a goal-based investment with a multi-year time horizon, market volatility is your friend.

Investing over the long term is one of the few smart ways which can help achieve your financial goals. When investors take investment decisions based on market sentiments, then they are prone to higher amount of losses. A long-term investor can reverse losses by having patience and thus overcome short-term losses in equities.

Brijesh Damodaran, managing partner, BellWether Advisors LLP, says asset allocation is a must in the wealth creation journey and it is unique for each individual. “An individual should setup the asset allocation framework based on the goal, risk appetite and risk tolerance. Do ensure that at least 36 months of liquidity is in place, as black swan events can create uncertainty, out of the blue,” he underlines.

Emergency funds in debt
An individual must keep some cash, ideally in short-term fixed deposit or liquid funds of mutual funds to tide over any financial emergency. Investors often use liquid funds for investing in equity-oriented mutual funds through the systematic transfer plan. Investors can also look at overnight funds as they invest purely in bonds with maturity of only up to one day. Liquid funds held for more than three years are eligible for long-term capital gains tax with indexation. If redeemed before one year, the investor will have to pay tax as per one’s tax slab.

Multi-asset funds for allocation mix
Multi-asset funds of mutual funds can be a good option for asset allocation mix as they invest in a combination of equity, debt and gold exchange traded funds. These funds are more diversified than hybrid funds or balanced funds. One of the main advantages of multi-asset funds is that higher returns from a particular asset class can offset poor returns from another class.

Typically, multi-asset funds have an equity allocation of around 65% and the rest in debt and gold. The fund manager does the reallocation of the asset mix depending on market volatility and returns. Investors do not have to pay any extra charge if the fund house does the rebalancing. Experts say such funds are better than investing directly in stocks, bonds or gold as the fund house does the rebalancing and helps the investor to hold a diversified portfolio. An investor can invest in multi-asset funds through systematic investment plans. The top five multi-asset funds in terms of asset under management are ICICI Pru Multi-Asset Fund, UTI Multi Asset Fund-Reg, Tata Multi Asset Opp Fund-Reg, Axis Triple Advantage Fund-Reg and SBI Multi Asset Allocation Fund-Reg.

Gold is a good diversifier
Gold prices are rising as various central banks across the world have announced large-scale quantitative easing measures. The precious metal has become a risk-free asset to hold and its rising prices are indicating that global worries are still intact. For an individual investor, investment in gold is a useful diversification tool. Ideally, it should be 10-15% of the total portfolio.

Chirag Mehta, senior fund manager, Alternative Investments, Quantum AMC, says any correction can be a good entry point for investors to accumulate long-term positions. “The macroeconomic backdrop has become increasingly favourable for gold. The world is currently staring at virus induced economic deceleration which is expected to encourage a rotation of money from risk assets like stocks and bonds to defensive assets like gold,” he says.

While most Indians prefer to invest in the precious metal in the physical form, Sovereign Gold Bond (SGB), gold exchange traded funds (ETFs) of mutual funds are efficient ways to invest in the precious metal. The government has announced the calendar for SGB for the first half of this financial year. It will be issued from April 20-24, May 11-15, June 8-12, July 6-10, August 3-7 and August 31-September 4. One can also invest in gold funds through systematic investment plans and, in case of ETFs, one can buy each month. However, SGBs are a better way to invest in the metal as the investment will earn an interest.

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