Diversification Builds Resilience And Reinforces Disciplined Investing

Recently, financial media was awash with reports that the stock markets have delivered worse than bank FD returns over the last year. While one year is not the correct time frame to evaluate an asset class like equity, the stark difference in stock market returns over the last year compared to previous years does highlight the inherent need for investors to stay diversified.

Much like the scientific wisdom of having representation of different food groups such as carbohydrates, proteins, fats, minerals, vitamins and micronutrients that the different components of a wholesome meal provide to your body, an investment portfolio that’s diversified across asset classes nourishes your savings nest egg. In today’s climate of global uncertainty, the broader macroeconomic environment remains fragile, prompting the International Monetary Fund (IMF) to downgrade its Global GDP growth forecast for 2025 to 2.8%. India’s economic fundamentals, however, continue to exhibit relative resilience with low inflation accompanied by stable GDP growth.

The Multi-asset vitamin for your portfolio:

While equities may offer the potential of outperforming inflation over the long term, hybrid funds may provide optimal risk adjusted returns with relatively lower downside risk. Especially for the large mass of investors that prioritise capital preservation and portfolio stability; a diversified approach that doesn’t put all your eggs in one basket is essential. In fact, empirical research shows that asset allocation was not only the single most important determinant of portfolio returns but also the most dominant one.

This is where hybrid funds, such as Multi -asset allocation funds, come in. In these schemes, fund managers make strategic allocation calls shifting between equities, fixed income, and commodities to manage risk effectively while capturing growth opportunities. Each component of the portfolio performs a different role; equity builds long-term wealth, bonds provide regular income and precious metals, such as gold, offer effective hedges against inflation, geopolitical risk, and market volatility.

Insurance against fallacious choices:

Multi-asset allocation funds also help protect investors from another common mistake, chasing last year’s best-performing asset class. History shows us that winning asset classes rotate, so chasing last year’s best-performing asset is often an invitation to get in after the party is almost over.  Most multi-asset allocation funds use a model that guides the fund managers on how much of each asset class will help deliver the optimal returns for an investor. This helps avoid the fallacy of being swayed by herd mentality.

Rebalancing discipline:

Investing in a diversified portfolio of asset classes with low to negative correlation helps reduce downside risk. Negative correlation implies that when the equity market declines due to economic or geopolitical concerns, other asset classes like debt and gold may appreciate as investors seek relative safety. Back testing of data shows that most well-performing multi-asset allocation funds have managed to fall less during bear markets than the broader markets. Multi-asset allocation Funds thus provide a blended return that’s less volatile and yet competitive for investors.

What’s more, these schemes also help you rebalance exposure without incurring tax incidence every time the portfolio composition is changed. Some Multi Asset Allocation Funds in India are also eligible for the concessional long-term capital gains taxation applicable to equity-oriented funds after one year. This is because fund managers maintain gross equity allocations of a minimum of 65 per cent using a combination of fully hedged arbitrage positions and actual direct equity investments.

What should investors look for in a multi-asset allocation fund?

Since the primary premise of these funds is to offer you a team that can bat, bowl and field regardless of the pitch and the bowler, investors should examine whether the delivery is in line with the promise.

For instance, within equities, does the scheme diversify across market capitalisations? Does it also have the option to invest in global equity markets? Does it invest in multiple commodities, such as gold and silver, or only one of them? Does it run the debt portion conservatively by not investing in debt rated below high safety by independent credit rating agencies?

Investors should evaluate whether their chosen fund delivers an optimal risk adjusted return with equity taxation. Patient, disciplined investing with built in diversification holds the potential to help investors realise their long-term goals.

A wholesome approach ensures that you not only get all the nutrients your body needs but also include some of your favourite foods. Investors seeking tax-efficient avenues for their long-term investment goals should seriously consider multi-asset allocation funds because they can deliver optimal risk-adjusted returns in a complex macroeconomic setting.

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