Multi-asset mutual funds offer the most important thing an investor can have—good strategic asset allocation. By putting your eggs in different baskets, a multi-asset fund portfolio is well suited to perform in different environments. Historical data shows that asset class performance often tends to be cyclical in nature. But above all, unpredictable. Therefore, smart investors who keep this in mind prefer to spread their bets across different asset classes.
Consider some of the most popular asset classes known to the masses – Stocks, Debt and Gold. Stocks, in your portfolio, play the role of wealth creator but go through phases of consolidation and growth in the process of wealth creation. Debt, on the other hand, tends to provide stability to your portfolio and provide consistent returns. And finally gold, which also comes with its consolidation and growth phases, acts as a good hedge thus protecting your portfolio from risks such as inflation.
Decide on allocation
When a lay investor decides to allocate money across asset classes, one of the main determinants, at a subconscious level, is to allocate more to that asset class that can generate the most yields. For example: for an investor performing this exercise in 2021, the option of choice would have been stocks, as markets were steadily heading north. However, this is exactly what should not be done. It is important to recognize that different asset classes behave differently in different phases of the economy. Depending on one’s risk appetite, it is important to spread investments across any currently outperforming asset class. Investors should remember that asset allocation aims to create a balance between your investments so that there are no extremes in the portfolio.
What should an investor do?
Investors around the world are in cautious mode as global central banks have embarked on a course of rate hikes. The optimal approach at such a time would be to stick to asset allocation and opt for multi-asset strategies. Indeed, the equity market should remain volatile in the meantime. At the same time, the debt market could offer stable returns while gold could provide a hedge against inflation. This is especially true at a time when inflation is reaching multi-year highs in both developed and developing countries.
The easiest way to gain exposure to multiple asset classes through a single fund is to use a multi-asset fund. In a multi-asset fund, the objective is to maintain a minimum exposure of 10% to three or more asset classes. However, depending on market situations and various other factors, a multi-asset fund changes its allocation to ensure that investors make the most of the investment opportunities offered by different asset classes.
When choosing a multi-asset fund, investors should keep a few things in mind. First, make sure the fund’s investment strategy is aligned with your risk profile. Favor a fund that dynamically modifies exposure to equity assets based on market valuations. Second, understand the investment philosophy behind the fixed income and debt game and learn about the track record of anticipating and reacting to changes in interest rates. Third, choose a multi-asset fund that has years of experience navigating the Indian markets.
Take away key
The diversification of asset classes offered by a multi-asset fund helps reduce the overall risk the portfolio faces. This is an important feature that investors often tend to overlook, but which in the long run comes back in times of distress. Indeed, investing in a diversified portfolio ensures that you are not at the mercy of the performance of a single asset class. Since a layman does not have the time and expertise to track every shift in the economy and asset class, the optimal approach is to outsource this to a team of fund managers. for you through a multi-asset fund.
Given the nature of the fund, investors may even consider a lump sum investment in this fund. Alternatively, if you are an investor looking to create an anchor fund in your portfolio, this may be suitable. A SIP over the years can be a prudent way to invest.