Why investing in multi-asset funds can reduce dependence on equity now as the benchmark indices have touched an all-time high?
One of the reasons why investors suffer is because they move out of an asset class completely when they are faced with adverse market conditions. It is quite common to see them selling their equity investments during stock market downturns and moving out of debt during the periods when the stock market does well. Many investors who invested in gold a few years ago are facing the dilemma of whether to stay invested or move the money into equity funds.
Multi-asset funds could take care of those investor anomalies. Since the money remains invested in different asset classes, investors do not miss out on sudden gains in an asset class. But one misses out when a particular asset class does well for prolonged periods, in case, he does not have that asset class in his overall portfolio too. However, the key to achieving investment success in the long run would be to maintain the right balance between risk and reward.
What should be the ideal investing period in a multi-asset fund?
Multi-asset funds can be part of the core portfolio for long period investing. For most assets and risky assets primarily, expected return is directly tied to being compensated for expected inflation. When inflation pans out as per expectations, traditional assets such as stocks, bonds and cash are expected to do well. But when inflation that materialises is different or drastically different from what was priced in or expected by market participants, asset prices get impacted. There are certain assets that do well during periods of unexpectedly high inflation. Historically, commodities have served this purpose well, outperforming other asset classes when inflation has been unexpectedly high. No single asset class does best in each inflationary environment, so being broadly diversified is the only way to hedge against an inflation surprise.
Why should investments be based on an asset allocation strategy?
An individual investor can do asset allocation on his own. He can buy an active equity midcap and small cap fund, an equity Nifty 50 ETF, a bond fund, Gold ETF. However, doing this through a fund offers two advantages :
1) Under each asset class which type / style / instrument to hold can be best decided by a professional money manager
2) Moderate shuffling or tactical allocation calls by a professional money manager if and when required
3) Taxation efficiency — rebalancing or changes to the portfolio can happen without taxation impact. Only if the units of the multi asset fund are redeemed, will there be a taxation impact.
4) It is cumbersome for HNI and retail investors to take exposure to commodity arbitrage and commodity directional strategies on their own. This fund is a convenient way of taking exposure towards Commodities.
Investors can take exposure to multiple asset classes. Also, this structure makes cash available from within the portfolio at the right time when not many investors on their own shell our cash towards correcting asset classes.