When we talk in terms of asset classes there are three to four that immediately come to our mind. First and foremost, we think of equities. These generally provide long-term capital appreciation and can potentially enhance portfolio returns over the long-term. However, their risk level is also relatively higher compared to the other asset classes. The second most common asset class is debt.
This asset class offers accrual returns and provides stability to your portfolio returns. Then there is gold which historically has been used as a hedge against inflation and economic instability as it has historically held strong during adverse macro-economic environments. Other asset classes such as Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs) are other asset classes that can be a good value add to the portfolio. As is evident, different asset classes add something different to your investment portfolio, thereby helping you potentially improve overall portfolio returns.
Another equally important benefit of spreading your investment portfolio across multiple asset classes is risk mitigation. The main thing to remember here is that not all asset classes perform in a similar manner at a given point in time. Sometimes equities perform very well, at other times it could be debt or gold. Correspondingly, when one asset class is negative there are other asset classes that might be flat to positive. This ensures that sharp negative movements in any one asset class do not have an extraordinarily large impact on your investment portfolio. As a result, by diversifying your portfolio across multiple asset classes, you reduce the risk of big losses in your portfolio.
Now, the question that is most important is, “how do you optimally invest across multiple asset classes and shift from one asset class to another in response to changes in the investment climate?”
The easy answer to this is – Multi Asset Mutual Funds
These funds invest across multiple asset classes in an attempt to achieve optimal diversification. While most funds primarily invest in equity and debt, there are also several that additionally invest in gold, REITS, InvITs, and follow investment strategies like covered call options (an investment strategy that aims at benefitting from range bound markets while increasing the overall yield of the portfolio). There are several benefits to investing in multi-asset mutual funds. Some of these include:
• Optimal diversification: It is already clear that by investing across multiple asset classes you can achieve portfolio diversification. However, when you invest in multi asset funds you not only get asset class diversification but can also achieve diversification by investing across market capitalisations i.e. large-caps, mid-caps, and small-caps. As a result, you are able to achieve optimal diversification.
• Rebalancing: This is perhaps the biggest benefit of multi asset funds. Since all the asset classes do not move in tandem, the challenge for a lay investor is to identify the asset classes that are expected to do well and then rebalance your portfolio accordingly. In a multi asset fund, skilled fund managers automatically rebalance the investment portfolio to ensure that exposure is maintained to the right set of asset classes.
• Tax efficient: As an individual investor, if you want to rebalance your portfolio you need to redeem your investments in one asset class and then correspondingly reallocate the redeemed money to another asset class. This means that when you redeem, you will have to pay short-term or long-term capital gains on your investments depending on the holding time period. However, when mutual funds buy and sell investments, they are not liable to pay these taxes. Thus, from the perspective of an individual, investing in multi asset funds is relatively more tax efficient.
Which one to Choose?
There are several offering by various fund houses in the multi asset category. Of these, a reliable name is the ICICI Prudential Multi Asset Fund. It has been a consistent performer in the category and has delivered an encouraging investment experience thus far. The fund over the last one year has delivered returns to the tune of 60%, outperforming the benchmark by 22.4%.
To conclude, multi asset funds can add value to your portfolio in multiple ways and should be considered for optimal portfolio diversification and enhancement of long-term returns.
(The author Rubina Singla is a Mutual Fund Distributor. Views expressed in this article are personal and may not necessarily reflect the views of Outlook Magazine)