Consider Multi-Asset Fund for a Balanced Portfolio

An old proverb, “Don’t put all your eggs in one basket,” aptly applies to investing. Regardless of the market’s state, diversification remains a fundamental principle. Investors tend to overcommit to a particular asset class, especially during its high performance. For instance, Indian equities saw a remarkable recovery post-pandemic correction, attracting enthusiastic individual investors.

As indexes hit all-time highs, asset allocation becomes even more critical. During these periods, the equity component in an investor’s portfolio often swells, exposing holdings to potential downturns. Hence, prudent asset allocation across various classes is essential to shield against portfolio downside risks.

Investing in diverse asset types—debt, stocks, gold, REITs, InvITs, etc.—is a simple way for retail investors to navigate uncertain times. Most of these assets display either negative or extremely low correlation coefficients when observed over ten to twenty years, aiding in limiting portfolio drawdowns.

Significance of Diverse Asset Classes

In a portfolio, each asset type has a certain function to fulfil. Various asset class’s historical performance data reveals that a winning asset class changes every other year. Debt typically performs well in contracting economies, while the equity market typically performs well in expansionary economies. Since gold serves as a buffer against inflation, it is impossible to exclude it from the asset mix. Hence, the secret is to assemble a portfolio with the ideal asset allocation to satisfy one’s needs. A more stable and less volatile portfolio will result from exposure to a range of asset classes in suitable ratios, which will contribute to a diversified and less volatile portfolio and a more comfortable journey towards objectives.

Obstacles an Investor Faces

Merely investing across asset classes isn’t sufficient; periodic rebalancing becomes crucial. However, for novice investors, this task might prove challenging. Behavioral biases, particularly fear and greed, obstruct investors from adhering to asset allocation, impacting their decision-making in investments.

Furthermore, determining how much to allocate to each asset class and when to sell or rebalance a portfolio involves intricate decisions. This requires a delicate balance, considering the associated long-term or short-term capital gains tax with each transaction during the rebalancing process. Thus, rebalancing poses significant challenges. This is where a multi-asset category structure emerges as an all-in-one solution.

A Multi-Asset Scheme: What Is It?

Multi-asset schemes are hybrid, dynamically managed offering that give investors exposure to three or more asset classes at once and provide an appropriate way to satisfy investors’ needs for asset allocation. This category structure aids in avoiding each of the previously stated difficulties. An investor can be confident that risk is distributed over several assets by making an investment in a multi-asset fund. Additionally, the investment will be shielded from the feelings of fear or greed that an investor may occasionally experience because the fund manager will be allocating assets. Investors don’t need to worry about tax implications because rebalancing is done at the fund level. As a result, an investor gains exposure to a variety of asset classes through investments in a multi-asset fund.

History demonstrates that investors who have adhered to asset allocation across market cycles have always emerged wealthier over time. Considering the current environment, investors seeking to make a lump sum investment may consider investing in a multi-asset fund. One can also consider investing via SIP and have this category fund as a part of one’s core portfolio.