Every asset class performs differently in diverse market environments, each offering its own risks and return potential. Investing in a single asset class exposes your portfolio to the risk of the performance of a single asset class. These risks are termed as Idiosyncratic Risk which include sector specific investments or a particular company’s stock, etc., which are the absolute opposite of systematic risk. Similarly, investing in multiple asset classes that are correlated to each other will have the same effect as investing in a single asset class. An investment in a diversified equity mutual fund and nifty tend to be highly correlated, since a MF is likely a subset of its benchmark, while gold which is different asset class altogether will be negatively correlated to the same. By diversifying your investments across various uncorrelated asset classes investors can hedge their portfolio from Idiosyncratic Risks. This form of investing is called Multi Asset Investing.
The strategy
Multi asset investments are a rich mixture of different asset classes. Here fund managers follow a strategic investment avenue philosophically based on an in-depth understanding of the current market cycle, inflation rates, past asset performance and more. Each individual element in a multi-asset portfolio reacts differently to the current market scenario, this low correlation between the underlying assets helps hedge against market risks, especially during volatile markets.
You may be wondering how are Multi Asset Investments different from Balanced funds?
Multi Asset Funds vs Balanced Funds
Balance funds are a mix of Equity and Debt instruments more in terms of a vanilla strategy. There are a variety of Multi Asset funds and each is a rich mixture of unique combinations of domestic equities, foreign equities, debt or commodities. Another stark differentiator is Balanced funds are all rupee assets, while multi asset funds give you the avenue to invest globally, thus diversifying your portfolio across geographies. Balance funds are typically aligned to meet or beat a benchmark, while Multi Asset Funds are designed to achieve specific investment outcomes; these outcomes could be aligned to building long-term with low volatility or steady returns across market cycles.
Components of a Multi Asset Fund:
A multi asset portfolio’s mix of non-correlated asset classes helps in yielding in hedging your investment against market volatility while offering comparatively better risk adjusted returns. Each asset class contributes its own set of benefits to your portfolio. Here are the benefits each asset class has to offer:
• Equity – Identifying market winning equities helps generate alpha in your investment.
• Debt – Investing in conservative yet quality debt instruments offer stability and liquidity.
• Commodities (Gold) – Gold is an excellent investment that hedges investments against inflation and geopolitical risks. The highest price of 24 karat gold in August 2019 was approx. Rs.39,383 per 10gm, the same in August 2020 hit an approx. high of Rs. 56,091 per 10gm.
• Foreign equities – Investing across global markets provides the necessary diversification to portfolios.
What returns can you expect from a Multi Asset Fund?
High returns are inevitably the outcome of high risks. Unfortunately, high returns cannot be consistently achieved due to the unpredictability of the market. It is difficult to predict how an asset class will perform and hence achieving gains consistently can be an arduous task. Multi Asset Funds aim to deliver steady returns by adopting a diversified active investing approach. With the right risk management framework these funds have the capability to deliver steady returns even in volatile market scenarios. It is very rare for all investment instruments to fall in value simultaneously and hence when one asset class fails to perform the other asset classes compensate for it with their gains, thus ensuring steady gains through proper diversification.
Benefits:
• With Multi-asset investing targets a specific outcome. This makes it measurable thus allowing you the benefit to invest based on your investment goals.
• A precise risk management framework provides your investments the necessary protection even in extremely volatile markets.
• Investors investing individually in multiple asset classes can be a complicated task with regards to tracking each investment instrument, while a multi asset route allows mimic and invest in funds managed by financial experts.
• These funds are dynamically managed by its fund manager, giving it the potential to gain from short-term opportunities for better potential returns and be consistent over long-term volatility.
Consider this, if investor ‘A’ had invested Rs. 1,000 in equity in 2007 and investor ‘B’ had invested the same amount in gold; A’s entire capital would have been washed out in 2008 when equity dipped to an all-time low of – 51.3%. Simultaneously, investor B’s investment would have appreciated by 30.1%. Similarly, over the period from 2008 to 2020 each asset class has moved up and down the chart proving no asset class can be an all-time winner. A multi-asset strategy precisely aims to beat this volatility by dynamically investing across multiple asset classes to provide steady returns across changing market scenarios.
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