When it comes to investing, investors often tend to go overboard on an asset class which is performing well at a certain point in time. For instance, post the pandemic correction, Indian equities staged a stellar rally and retail investors heartily participated in that rally.

Going forward, it is very likely that the equity market could be volatile till the time global central banks, especially the Fed, are done with tightening interest rates. Also, the fears of a potential recession in the developed markets could be a cause of concern affecting the market sentiment from time to time. However, the bright side is that India remains one of the most structural markets in the world.

For a retail investor, one of the easiest approaches to navigate volatile times is by investing across multiple asset classes – equity, debt, gold, real estate and global funds. Optimally diversifying across these asset classes along with rebalancing when required may not be an easy task for a retail investor. This is where multi-asset mutual fund emerges as a one-stop solution.

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Not only is this one of the most straightforward approaches to take exposure to multiple asset classes but also is a convenient way to capitalise on the opportunities present across asset classes by switching from one asset to the other whenever required. This also takes care of any potential concentration risk in the portfolio as well. Furthermore, historically, the winning asset class keeps changing every other year. The only way to make the most in such a situation is by optimally investing across asset classes, such that on an aggregate basis the portfolio benefits. This is also achieved with the help of a multi-asset fund. As a result, over the long term, the approach tends to deliver a better risk-adjusted return.

A multi-asset fund by definition will invest in a minimum of 10 per cent in three or more asset classes. Apart from equity, debt and gold, most often the asset classes which form a part of such a fund include Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs). Each of the asset classes, here, has a unique role to play. Equity brings in the growth element in the form of capital appreciation, debt provides stability through predictable returns, gold acts as a hedge against inflation and REITs/InvITs are used as a part of the yield enhancement strategies.

The allocation percentage to each of these asset classes varies depending on the market condition but typically in a multi-asset fund, equity allocation can range between 10 per cent-80 per cent, debt between 10 per cent-35 per cent, gold from 10 per cent-35 per cent and REITs/InvITs can form up to 10 per cent of the portfolio.

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These allocations are dynamically managed in a manner such that investors get the best of the investment opportunities offered by various asset classes. Today, investors have the option of both active and passive multi-asset funds. In the case of a passive fund like the ICICI Prudential Passive Multi Asset Fund of Funds, investors get exposure to global equities as well in the asset allocation mix i.e. domestic equity (25-65 per cent), debt (25-65 per cent), gold (0-15 per cent) and global equities (10-30 per cent).

Diversification within asset class:  Generally, all asset classes do not outperform or underperform at the same time. By investing across asset classes, the risk to a portfolio gets reduced substantially. Furthermore, within asset classes as well, the fund manager has the flexibility to invest across market capitalisation (in the case of equities) and various debt instruments depending on macro factors and global central banks' policy stance as a means to generate better risk-adjusted returns.

Taxation:  A portfolio rebalancing exercise comprises booking profits in one asset and deploying in another asset class. However, each of these transactions attracts taxes in the form of short-term or long-term capital gains. Hence, rebalancing can be a challenging activity for an investor when done individually. However, when the same is done at a fund level, as in the case of a multi-asset fund, investors need not be worried about taxation aspects. This makes investing in a multi-asset fund a much more tax-efficient route of taking exposure to various asset classes.  

Better risk-adjusted return: Getting the asset allocation right over the long term is a game changer in the wealth creation journey. Thanks to the diversification across and within asset classes, the portfolio does not have to face concentration risk. All these aspects put together help in generating an optimal risk-adjusted return.

Given the current market condition, if you are an investor considering investing across various asset classes, then a multi-asset category fund can be a worthy consideration.

(The writer is the executive director and CIO of ICICI Prudential AMC)

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