Once upon a time, the range of investments was limited to risk-free fixed income instruments. Older generations in India viewed asset classes that carried any element of risk with tinted glasses of cynicism. While these investment strategies may have worked to varying degrees, a growing number of retail investors are realizing that diversification is essential to a successful investment journey. A money management equation where asset class weightings are heavily skewed toward one or two variables can rarely withstand the vicissitudes of the market and even real world situations.
Asset allocation is the recipe investors need to find to maintain optimal levels of diversification in their portfolio, aligned with their risk appetite and investment horizon. However, while asset allocation can be the cornerstone of a successful investment journey, decoding the right formula can be a difficult exercise for many investors, especially those new to the game.
Various studies have been done – although the numbers may vary, the basis is that asset allocation is the main driver of return for any portfolio. You need to get the right building blocks for any investor’s portfolio to reduce volatility and maximize returns. Through asset allocation you touch on various asset classes – be it equities, fixed income, commodities, especially gold and there are a few other classes as well of assets in which some multi-asset funds may invest.
Investing in multi-asset mutual funds has become a sought-after choice for many. As a hybrid fund class, it allows 10% of the investment portfolio in at least three different asset classes, primarily stocks, bonds and commodities. The underlying principle is that these asset classes react differently to a given macroeconomic situation and that the risks are therefore largely ironed out over the long term.
ICICI Prudential Mutual Fund recently gave a special presentation on multi-asset funds with Kaustabh Belapurkar, Director – Fund Research at Morningstar, highlighting how multi-asset funds can help investors achieve their allocation goals of assets. Here are some excerpts from the event organized by veteran journalist Gautam Srinivasan:
Belapurkar kicked off the session by explaining how asset allocation can be simplified with multi-asset funds. “I think it’s important to bring structure and diversity to a portfolio. Each investor has a different objective, investment time horizon and risk-return parameters. All of these calls for different asset allocation requests. But the fact remains that you can’t fill your portfolio with just one asset class and try to stay out of the market. The point I’m trying to make is that each asset class has its own set of different characteristics, different holding periods, but when you marry the three what it can do is that one class may tend to be volatile, another asset class will be largely stable with respect to the return criterion,” he said.
The structure of these funds plays a crucial role in helping investors determine whether or not the fund is right for them, especially based on their diversification needs. Belapurkar explains that SEBI has established a definition of what a multi-asset fund should do and according to this, it should own at least three asset classes and a minimum of ten percent in each of those asset classes. “The three main asset classes are equities, fixed income and commodities. Most multi-asset funds would have a large allocation to equities to start with and it would be best for investors to look at the underlying mandate to start with. I think the broader rationale is that since equities are a great long-term asset class, fund companies want investors to be exposed as an important part of their portfolios. Of course, there is a tax aspect to this, but generally most of them tend to own more than 65% equity. It could be a mixture of Indian and foreign stocks. Beyond that, they would also have bands that they would have set regarding fixed income securities depending on whether the stocks would be attractive or not.
Regarding the time horizon that investors should bear in mind before investing in these funds, he opines: “The majority of multi-asset funds would have a significant portion of their portfolios in equities and, remember, some of them might cover some parts, but stocks would still be the predominant underlying component of that. I would ideally recommend that investors have a 5 year investment horizon, which I believe would be the bare minimum to invest in these funds.
As is the case with any other asset class in the investment world, Belapurkar asserts that multi-asset funds should also be chosen after proper deliberation and care should be taken to avoid the simplistic notion that the Adding a multi-asset fund to one’s portfolio would serve the purpose. “The other most important point is that these are great asset allocation tools, but remember that not all investors’ asset allocation will be tied to a multi-fund. -assets. It may not be the only fund in your portfolio. While this is a great tool as you don’t need to buy asset classes separately, you may need to flesh out the portfolio to achieve the desired asset allocation you need “, he explains.
Disclaimer: This article was written on behalf of ICICI Prudential Mutual Fund by the HTBS team.