Thematic Funds: A Smarter Way To Invest In India’s Growth

Achieving consistent and substantial returns has become an increasingly daunting endeavour for the average investor navigating today’s volatile and fast-paced financial landscape. The variables that dictate the asset performance, evolve at a rapid pace while the market volatility turns out to reach some unprecedented levels. Within a single year, investors may witness markets breaching—or perilously approaching—the thresholds that delineate a bull and a bear cycle. In such an unpredictable environment, even a minor misstep in asset allocation can result into some significant underperformance, potentially eroding the principal capital.

Forecasting has grown increasingly complex, as macroeconomic disruptions and escalating geopolitical tensions have started to emerge with an alarming regularity. This confluence of uncertainty leaves investors grappling with a pivotal question—which category of funds can deliver dependable returns, when equities trade at inflated valuations and debt instruments remains vulnerable under hawkish central banks, while the inflationary trends fluctuate amid volatile crude oil prices?

Amid such turbulence, multi-asset funds offer a compelling solution. These funds employ a diversified strategy to generate reasonable returns while mitigating risk. By encompassing a broad spectrum of asset classes—including equities, debt, gold, covered options strategies, international equities, and REITs/InVITs—they provide a stable foundation for long-term growth. Their proven track record of delivering consistent returns, with reduced volatility, shields investors from the pitfalls of momentum-driven investment, where the past performance is mistakenly assumed to predict the future success as well. This cognitive error often leads to poorly timed investments in fleeting trends rather than investing in sustainable opportunities.

Historical data highlights the importance of diversification. Over the past 25 years, equities have led as the best-performing asset class in 14 years, while debt and gold have each claimed leadership in five and six years respectively. Multi-asset funds eliminate the guesswork of predicting market winners, emphasizing instead, the optimal blend of assets to achieve balanced performance. Extensive research underscores that the asset allocation accounts for over 90% of medium-to-long-term portfolio performance, far surpassing the contributions of market timing or individual security selection.

Meticulously designed, multi-asset funds combine the growth potential of equities, the stable income of debt instruments and the inflation-hedging qualities of gold. Their approach leverages assets with low or negative correlations to reduce the portfolio volatility. For instance, the correlation between equities and debt is -0.26, while that between equities and gold is -0.07. These negative correlations enhance the diversification without compromising on returns. Over the past two decades, equities have delivered a Compound Annual Growth Rate (CAGR) of 13% with a volatility of 20%, while debt has offered annualized returns of 8.5% with much lower volatility of 4.9%. A multi-asset strategy balances these dynamics with reasonable risk-adjusted returns.

Many multi-asset funds typically allocate around 65% to equities and equity derivatives (with hedged exposure to maintain tax efficiency as equity schemes, although not all multi-asset funds qualify for equity taxation). They dedicate 10–30% to debt instruments, with the remainder invested in gold, covered calls, international equities, and income-generating assets such as REITs and InVITs. These funds employ a systematic, data-driven allocation model, complemented by periodic rebalancing, to ensure resilience and adaptability even in volatile market conditions

In the ever-shifting landscape of global finance, multi-asset funds exemplify the wisdom of diversification. They provide a robust, disciplined approach for investors seeking to balance risk and reward, offering a path to stability and growth even in uncertain times.

Disclaimer: The Views are Personal and not a part of the Outlook Money Editorial Feature