In the volatile world of investments, diversification is key to mitigating risks and generating stable long-term returns. However, allocating investments across different asset classes like stocks, bonds, and cash requires an in-depth understanding of macroeconomic trends, asset class cycles, and constant portfolio rebalancing. This is challenging even for experienced investors.
Multi-asset funds offer investors an easy way to achieve diversification without having to spend considerable time and effort tracking multiple investments. They give you the benefits of equity funds, debt funds, and gold. By allocating your portfolio to a high-quality multi-asset fund, you can benefit from the expertise of professional fund managers who actively shift allocations based on changing market conditions. This article explains why including a multi-asset allocation fund is essential for Indian investors of all sizes.
Correlating risks across asset classes
Individual stocks, sectors, bonds, and commodities all have idiosyncratic risks that do not necessarily correlate with the broader market. However, during periods of high volatility or economic downturns, risks across assets tend to become correlated. This was visible during the COVID-19 crash of early 2020 when both equity and debt markets saw huge sell-offs.
Similarly, risks remained correlated after the 2008 global financial crisis as well as during the Asian financial crisis and dot-com bubble burst of the late 1990s. Multi-asset funds help reduce overall portfolio risk through diversification as declines in one asset class tend to be offset by increases in another non-perfectly correlated asset over the long term.
Managing asset allocation dynamically
Successful investing requires timely adjustments to portfolio allocations based on economic conditions and market cycles. Multi-asset managers have the flexibility to quickly shift allocations away from risky assets into safe havens as situations demand. Their research expertise allows for identifying turnaround opportunities and existing positions before major drawdowns.
For example, funds upgraded their equity exposure during the post-COVID rally and reduced it later as valuations peaked. They increased weightage on commodities ahead of the recent surge. Such nimble, dynamic asset allocation management is difficult for most individual investors to implement smoothly on their own.
Riding different business and economic cycles
Economic factors like growth rates, interest rates, and inflation differentially impact the performances of assets like equities, bonds, gold, and real estate over time. By allocating across diverse assets, multi-asset funds can benefit investors through changing cycles.
For example, over the last decade – as interest rates fell, equities strongly outperformed other assets benefiting from ample liquidity. Now, with rates near rock bottom, other alternatives like commodities are primed for decent returns if global growth and inflation pick up. A well-managed multi-asset fund’s balanced approach smoothens ups and downs from cycle to cycle.
Managing volatility and delivering consistent returns
Effective diversification across lowly correlated assets allows multi-asset funds to deliver more consistent returns with lower volatility compared to individual holdings. This makes them ideal for investors with medium to long investment horizons and conservative risk profiles.
Rather than market timing, their buy-and-hold dynamic approach focuses on downside protection and participation in upsides over complete market cycles. Returns may not match the best-performing asset of a particular year but will avoid disastrous losses through prudent safeguarding of capital.
Lower cost of portfolio management
Multi-asset funds provide instant diversification at a fraction of the cost involved if replicating the same diversified portfolio through direct investments. Their economies of scale reduce expense ratios, ensuring higher wealth accumulation for investors over the long run.
Also, contrary to individual stocks, their liquid nature allows starting or increasing investments through systematic investment plans (sips) without worrying about unfavorable entry or exit points. This makes them well-suited even for first-time investors.
Enhancing returns through expertise
Seasoned portfolio managers continuously research new opportunities, and implement strategies based on macro insights and developments in global markets Indian individual investors often lack access and resources. Their extensive research network and understanding of international best practices help multi-asset funds augment returns.
A well-allocated multi-asset fund is the easiest and most cost-effective way for investors – ranging from newbies to experienced wealth creators – to achieve true diversification, manage risks dynamically, and maximize risk-adjusted returns over long periods of market and business cycles through mutual fund investment. Its balanced approach provides resilience against black swan events while harnessing growth at different stages. Given the benefits, every portfolio should include at least a basic allocation to a high-quality blended mutual fund.