As can be seen from the chart, diversifying one’s portfolio across different asset classes will not only help generate wealth across market cycles but also help to preserve it.
Human Bias and a Way Around It
Human behaviour tends to encourage an investor to stay invested in an asset class that is doing well at a certain point in time. The expectation is that the high return delivering asset class will continue its stellar performance in the future as well. However, the irony is, no one can predict how an asset class will behave for even shorter periods of time, let alone a few years later.
One of the proven solutions to the challenges posed by this human bias is to adhere to the much spoken about asset allocation. Asset allocation means dividing your investments across various asset classes and not just the anticipated high return asset class. Now that the theory part is known, it is time to consider how this can be achieved in practical terms too.
The practical challenge faced by an investor in asset allocation is manifold – it starts with recognising which asset class to invest into, when to rebalance, how to minimise tax incidence when re-balancing etc. In effect, there is no easy way to execute a multi-asset strategy without investing some serious time and effort in the knowledge to understand the performances of various assets classes across different cycles. In order to make this task easy for investors, mutual fund houses have over the past decade been offering multi asset funds.
What are Multi Asset Funds?
Multi Asset fund is a category within the hybrid mutual scheme offerings wherein the fund invests in at least three or more different asset classes at the same time. Most of the funds in this category offer exposure to equity, debt and gold, while some others have also added real estate investment trusts (REITs) and infrastructure investment trusts (InvITs) to the mix. With the rise in interest in international equity as a separate asset class, several fund houses have added international equities and funds to the portfolio as well.
Benefits of Multi Asset Investing
Through this single multi asset fund an investor gets access to a diversified asset allocation portfolio. This ensures that the portfolio does not suffer from undue pressure if a certain asset class were to face a sharp correction or volatility. Generally, all asset classes do not outperform or underperform together. By diversifying in different asset classes, the relative risk associated with the portfolio gets reduced to a large extent. Furthermore, within equity asset class, an investor also gets exposure to companies across market-cap which helps in generating relatively better returns in the long term.
When it comes to rebalancing, a fund manager and his team of analysts, who are hands on with economic and market related developments, invest the fund corpus in an efficient manner on the basis of evolving opportunities across the different asset classes as per the scheme mandate. Since rebalancing is dynamic in nature, this aids in tapping various opportunities thrown up by the market. If an investor were to rebalance the portfolio himself, which entails booking profits in one asset class and investing in another asset class, each transaction would attract taxation, be it short term or long term. As a result, continuous rebalancing proves to be a less than optimal experience. At the same time, when such an exercise is done by the fund management team in a multi asset fund, investors do not attract taxation, making it a much more tax efficient route of investing across asset classes. Investors are only liable to taxation on their gains, in mutual funds, at the time they redeem part or full amounts from the fund.
Things to Remember
While choosing a multi-asset fund, investors must keep in mind a few things. One, ensure that the investment strategy of the fund is in sync with your risk profile. One can give preference to a fund that dynamically changes exposure to equity assets depending on market valuations. Two, understand the investing philosophy behind the fixed-income/debt play and research or enquire the fund management track-record when it comes to anticipating and reacting to interest-rate changes. Three, choose a multi-asset fund that has years of experience in navigating Indian equity markets and different asset classes they are invested into.
With multi asset funds as a part of your portfolio, the need for diversification with an aim for greater risk-adjusted returns is taken care of through asset allocation. For investors looking for lump sum investment opportunities, multi asset funds are a worthy consideration. An investor can also consider initiating long term SIP in these funds, which is always a preferred disciplined way of investing.
(The author of this article, Yogesh Sharma is the Founder & CEO of Y S CAPITAL (AMFI registered Mutual Fund Distributor). Views expressed in this article are personal and may not necessarily reflect the views of Outlook Magazine.)