Multi-Asset Funds: Packing A Punch

There never is really one hero, whether in the movies, in a story, or in investing. While of course the proclaimed hero creates more noise and gets more attention, like in the case of equities, we all know that equity is the hero of your portfolio, but your portfolio is incomplete without the stability of debt or the hedge of gold/silver.

Different asset classes perform differently through market cycles. For example, the average 5-year rolling returns on equity are 14 per cent, while the returns for fixed income, gold, and real estate are 8 per cent, 12 per cent, and 9 per cent, respectively, for the same time period. While equity has performed well over a 5-year period, if you look at intermittent performance, you will see that there have been years when other asset classes have outperformed equities. This difference in market performance primarily stems from the fact that multiple macro-economic factors and developments impact each asset class differently and often in an opposite manner. Which is why, if you are looking to build a robust long-term portfolio, it is important to create a portfolio that is stable and yet able to harness the growth opportunities that intermittently emerge in markets.

However, it can often be challenging to select the right asset class and determine the right exposure to each asset class. And this is where multi-asset funds can really add value to your investment portfolio. These funds invest across multiple asset classes, namely, equity, debt, commodities, and real estate, with a minimum investment of 10 per cent in each. Depending on market dynamics and opportunities, allocations are made to each asset class.

There are multiple benefits that accrue from investing in multi-asset funds. Here are three main ones:

• The growth potential of equities: Equities are considered as long-term vehicles of growth and have historically generated significant returns for investors. Equity performance is strongly linked to both macroeconomic factors like overall growth and micro-economic factors which are generally more company specific. Due to variability in both, coupled with the short-term impact of investor responses to news flows and updates, equities often tend to be highly volatile. Multi-asset funds give you the benefit of harnessing the potential of equities while reducing the volatility associated with the same through exposure to other asset classes.
• The stability of debt: Debt investments are considered fairly stable due to the ‘fixed’ paying nature of the instrument. When you invest in debt securities, the underlying assumption is that you will receive a fixed coupon payment over the life of the bond and will also be shielded from the risk that is inherent in equity investments. Due to the relatively stable nature of debt, these instruments might offer security, but they do not offer the high return potential of equities.
• The hedge of gold/silver: Then there is gold/silver as an asset class that has historically had low to negative correlation with both debt as well as equities. It has been observed that in periods of turmoil, while most asset classes generate flat to negative returns, gold and silver investments are relatively more stable. Further, during such periods they also tend to generate positive returns due to higher demand for such investments, which stems from their safe haven appeal.

Combining all these benefits is a mutli-asset fund. Thus, for all purposes, such a fund packs a punch and, in a way, ensures that your portfolio is well-allocated across multiple asset classes. Therefore, investing in multi-asset fund will help you potentially enhance the risk-adjusted returns of your portfolio.

K S Rao Head - Investor Education & Distribution Development, Aditya Birla Sun Life Asset Management Company Ltd

Disclaimer

“Mutual funds are subject to market risks. Read all scheme-related documents carefully.”