In the world of investing, diversification is a timeless principle that all individuals should uphold, regardless of market conditions. Too often, investors tend to overcommit to a specific asset class, particularly when it appears to be performing well. For instance, during the post-pandemic correction, Indian equities embarked on a remarkable recovery, luring individual investors into the rally.
However, as equity market turns volatile, the importance of asset allocation becomes increasingly pronounced. At such times, the equity portion in an investor’s portfolio remains vulnerable to potential downturns. Prudent asset allocation across various asset classes is essential to shield the portfolio against downside risks.
The power of diverse asset classes
Investing in a mix of asset types, including debt, stocks, gold, REITs, InvITs, and more, is a straightforward strategy for retail investors to navigate turbulent market conditions. Over extended periods, most of these asset classes exhibit either negative or extremely low correlation coefficients, helping to mitigate portfolio drawdowns.
Each asset class in a portfolio serves a distinct purpose. Historical performance data underscores the fact that the winning asset class changes regularly. Debt tends to excel in contracting economies, while equities often thrive in expansionary periods. Gold, on the other hand, serves as a hedge against inflation. Therefore, creating a portfolio with an optimal asset allocation tailored to one’s goals is key to maintaining stability and reducing portfolio volatility.
Challenges for individual investors
However, merely investing across asset classes is not sufficient. Regular rebalancing is necessary, which can be a challenging task for novice investors. Behavioral biases, driven by emotions like fear and greed, often hinder investors from adhering to their asset allocation strategy and making prudent investment decisions.
Deciding how much to allocate to each asset class and when to sell or rebalance a portfolio presents a quandary for individual investors. This requires a delicate balance. Moreover, every buy and sell transaction during rebalancing incurs capital gains taxes, further complicating the process.
The multi-asset scheme solution
This is where the concept of a multi-asset scheme comes to the rescue. Multi-asset schemes are dynamically managed hybrid offerings that provide exposure to three or more asset classes simultaneously. They offer an efficient solution to address these challenges. Investing in a multi-asset fund allows investors to diversify risk across multiple assets and eliminates emotional biases, as the fund manager handles asset allocation. Additionally, investors can rest easy knowing that rebalancing is conducted at the fund level, thus avoiding the intricacies of capital gains taxes.
Historical evidence shows that investors who adhere to asset allocation principles throughout market cycles tend to accumulate more wealth over time. In the current investment landscape, considering a lump-sum investment in a multi-asset fund is a prudent choice. Moreover, individuals can also include this category of funds in their core portfolio, perhaps through systematic investment plans (SIPs), for a well-rounded investment strategy.
In conclusion, a multi-asset fund offers an effective means of achieving diversification, managing asset allocation, and overcoming behavioral biases. With the potential to enhance portfolio stability and performance, it presents a valuable option for investors in today’s dynamic financial landscape.