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Power of 3 in 1: Prudent Use of Different Assets to Beat Investment Blues

Author: Kumar Shankar Roy/Wednesday, November 20, 2019/Categories: Exclusive

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Power of 3 in 1: Prudent Use of Different Assets to Beat Investment Blues

Equity, fixed income/debt and gold. These three asset classes are regularly used by financial investors. However, investors like to use one asset class. So, equity funds serve the purpose of equity investments. Debt funds are apt for those looking for fixed income like profile. Gold funds and exchange-traded funds (ETFs) are utilized by investors who don't want to invest in either equity or debt asset classes. This single-asset approach is often responsible for dragging down portfolio returns in bad times. Wouldn't it be nice if investors used multiple asset classes in the same fund? This is why multi asset funds are gaining traction.

Multi-asset mutual funds use the power of more asset classes to give you a better investing experience. They combine the best of different asset classes so that you never miss out on the good days of an asset class. Thus, this approach helps investors avoid the need to buy different things.

One mutual fund house puts the concept of multiple asset classes in a simple way. Just as strong Wi-Fi performance requires the presence of all three bands of the signal, your investments also require to be present across various asset classes for strong portfolio performance.

The most important thing you can have is a good strategic asset allocation mix. So, what the investor needs to do is have a balanced, structured portfolio – a portfolio that does well in different environments --- this is what Ray Dalio, hedge fund investor and founder of Bridgewater Associates, said.

By spreading your money across different asset classes, you an investor diversify your bets. No investment expert knows which asset class will do well in the next three years. Amid this uncertainty, it is better to use all the different avenues to safeguard your investments. Today, India offers you different asset classes including gold, equity, debt, INVITs/ REITs. The last asset class is still developing.

Asset class performance is often cyclical and unpredictable. There can be years when one asset class does better than others. There can be years when two asset classes don't perform. There is no way of knowing about them earlier. Only when you participate in an asset class, do you give yourself a chance to enjoy the gains. Look at years like 2014, 2015, 2017 and 2019. For instance, in 2014, equities did very well with Sensex up 30 per cent but gold lost two per cent, while debt gained 10 per cent. In the next year i.e. 2015, Sensex dropped five per cent as equity investments floundered while gold lost 10 per cent. Debt/fixed income was steady at 8-9 per cent. In 2017, equities were back in form with Sensex rising 28 per cent and gold gaining 13 per cent, but debt/fixed income returns fell to six per cent range.

Equity: It gives an investor the potential of capital appreciation. But, equity is also the highest risk for investors. Equity, in your portfolio, plays the role of wealth creator but goes through phases of consolidation and growth during the process of wealth creation.

Debt/fixed income: The fixed income investment schemes offers accrual returns but returns are always moderate in nature. The risk is least in case of debt. Debt aims to offer stability to your portfolio and provides opportunities for stable and consistent returns over a long period.

Gold: The yellow metal provides investors with an asset class that is not linked to equity or debt. Gold also acts as a hedge against inflation. Don't forget that even gold, despite its advantages, comes with its phases of consolidation and growth. Between 1998 and 2004, the gold price return was flat. Between 2004 and 2013, gold gave a compound annual growth rate (CAGR) of 7.5 per cent.

Thus, combining these three asset classes in one multi asset mutual fund gives you the power of 3 in 1. These funds falls in hybrid category. They use asset allocation methods to distribute investments across different asset classes. Multi asset allocation funds have over Rs 12,900 crore of investor assets.

Let us check out the returns of these types of funds. For instance, ICICI Prudential Multi Asset Fund has given 3 year returns of 9.5 per cent and 5 year returns of 7.6 per cent. Axis Triple Advantage Fund has delivered 3 year return of 8.7 per cent and 5 year return of 7.9 per cent. Quantum Multi Asset and SBI Multi Asset Allocation Fund have given 7-8 per cent return in 3 and 5 year periods.

Do note that there are some multi asset funds (see chart) which have given 4-6 per cent returns over 3 and 5 year returns. This may be because fund managers of these multi asset funds were not able to accurately do the asset allocation. Do remember that getting the right asset allocation i.e. how much will be allocated which asset, is a key to fund performance. Being in the wrong asset at the wrong time will cost your returns. When you decide to invest in a multi asset fund, look at the following factors.

One, find out how the fund diversifies its assets. Does it actually spread out its investments across multiple assets, or just keeps a static view of things? This is important because a fund-house might be an expert in one asset class, and may not have adequate expertise in other asset classes.

 

Two, does the fund rebalance the portfolio at regular intervals based on the performance of underlying assets, relieving the investor from monitoring asset markets?

Three, what is your cost of investing in such a fund? Find out the expense ratio in its category and compare that with the fund. There are funds with an expense ratio of 0.3 per cent and there are funds with an expense ratio of 2.6 per cent. So, choose carefully..

(The writer is a journalist with 14 years of experience)

 

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