The Indian equity market started on a strong note in October on further improvement in economic activities. The new ‘Unlock’ guidelines allowed reopening of theatres, dine-in at restaurants, resumption of metro services, among others, albeit at limited capacity. This cheered investor sentiments and consequently the benchmark indices soared close to its record high levels.
However, towards the second half of the month weakness in global markets weighed on domestic sentiments and as a result, markets gave up some of the gains. Resurgence in virus outbreak in the USA and Europe, delay in announcement of US fiscal stimulus package and uncertainty relating to US Presidential elections, were some of the factors that dragged the market.
The equity market is expected to remain volatile in the remaining part of the year as there is a possibility of spike in COVID-19 infection rate during the winter and resultant lockdown restrictions.
Meanwhile, the RBI has cut interest rates to a multi-year low to support economic growth. Bond yields have already seen a swift rally since RBI started slashing rates and are trending in an uncertain phase. Therefore, generating higher returns from typical debt funds may not be easy.
On the other hand, after posting around 30% return on a year-to-date basis, gold prices have plateaued over the past few weeks, down by over Rs 5,500 (per 10 gram) from its all-time high. Rally in US dollar on improved macro data and profit booking in gold has kept prices in check.
How to tide over uncertain market and economic conditions?
Uncertain economic conditions and volatile markets underline the importance of diversification in one’s investment portfolio to curb the downside risk and generate better risk-adjusted returns.
It is important to note that not all asset classes can be expected to generate positive returns at all times.
If your recall, when the equity indices plunged sharply amid the coronavirus crisis and debt market was grappling with liquidity concerns, gold as an asset class soared to new highs and acted as an effective portfolio diversifier, a hedge, safe haven, and commanded a store of value.
And now when the equity and debt market have recovered significantly, gold continues to protect investors against rising inflation and support growth amidst uncertainties though it has somewhat lost sheen in the interim.
This makes tactical allocation of assets across classes an important strategy to balance risk-reward by adjusting the proportion of each asset in the investment portfolio. Hence, diversifying investments across asset classes viz. equity, debt, gold, and even holding optimal cash is necessary.
How to tactically allocate assets across classes?
A Multi-Asset fund is an easy and convenient way to get tactical allocation across asset classes. Multi-Asset Fund is a Fund of Fund scheme that invests in various mutual fund schemes falling into different asset classes such as Equity, Debt, and Gold.
The investment objective of Multi-Asset Fund of Funds, usually, is to generate modest capital appreciation while trying to reduce risk (by diversifying risks across asset classes) from a combined portfolio of equity, debt/money markets, and Gold schemes.
The investors’ hard-earned money is invested in the aforesaid asset classes via schemes/funds following the predetermined limits of allocation (minimum and maximum) to equity, debt, and gold.
As regards how much to allocate to each asset class, the fund manager of a Multi-Asset Fund of Funds evaluates the relative valuations between the asset classes, by looking at a variety of factor such as:
- Price/Earnings Ratio relative to historical averages;
- The relationship between ‘earnings yield’ to ‘bond yield’ relative to historical averages; and
- Macroeconomic factors prevailing globally, and within India
Moreover, asset allocation is not static; it is dynamic. Meaning the asset allocation is reviewed regularly, and necessary portfolio changes are done based on the analysis of the influencing factors by the fund manager.
So, a Multi-Asset Fund of Funds intends to flexibly diversify investments in assets classes that share a very low positive correlation. By doing this, it protects the downside risk by tactically investing across asset classes and be truly balanced.
Here are six good reasons to invest in a Multi-Asset Fund of Funds:
- Facilitates diversification across asset classes, which reduces risk and optimise gains
- Enables timely portfolio rebalancing, based on the performance and the outlook of eachunderlying assets by a professional fund manager
- Provides relief from timing and monitoring asset markets
- Benefit from the strong research capabilities of a fund management team
- The cost of investing is reduced
- Makes portfolio tracking easy
Who should invest in a Multi-Asset Fund of Funds?
A Multi-Asset Fund of Funds is suitable for investors seeking long-term capital appreciation, who have a moderately high-risk appetite and an investment time horizon of 3 to 5 years. With a Multi-Asset Fund of Funds, you as an investor will be able to balance the risk better with a sensible investment strategy in place. But make sure to select a worthy fund based on its quantitative as well as qualitative parameters.
This article first appeared on PersonalFN here