2020 and 2021 were quite different years for stock market investors. A time when the markets were moving ahead and making money seemed easy enough. If needed, just invest. Equity not only emerged as the preferred asset class of investors, but many even put a little too much money into the stock market.
The old strategy is no longer successful
However, now in 2022, that strategy does not seem to be successful. Equity markets are well below their record highs. Volatility has prevailed in the market. Many people now do not understand how important is diversification or diversification in allocation. When investing, diversification is very important. Hence now a multi-asset strategy has become the key to successful investing.
Multi assets invest in multiple classes
Simply put, multi-asset investing involves investing in different asset classes like equity, fixed income, cash, and gold, says Pankaj Jawanjal, Zonal Head (North India), ICICI Prudential Mutual Fund. Different asset classes behave differently in different economic and market conditions.
everyone has their time
They say that each asset class has its own time to perform. Being diversified helps investors to benefit from different market cycles. Diversified means investing in multiple sectors or assets. In addition, multi-asset investments can help in curbing portfolio volatility.
Jawanjal adds that a decline in one asset class can potentially be swiftly balanced out in another asset class. Over the long term, the importance of keeping a portfolio free of risk cannot be underestimated.
Difficult to guess at the beginning of the year
When it comes to investments, at the beginning of any financial year, one cannot predict which asset class will perform better in that year. At most, all a person can do is make an accurate guess. It is like guessing the winner at the beginning of a game.
Winners keep changing in FIFA too
Be it FIFA World Cup winner or asset class, the winners change every year. In the last five FIFA World Cups, five different countries have won the cup. Brazil in 2002, Italy in 2006, Spain in 2010, Germany in 2014, and France in 2018. Similarly, the Indian stock market performed well in 2012, but 2013 was the year of global equities.
2014 was good for both
2014 was a good year for Indian equities and fixed income. India's fixed income returns outperformed many countries in 2015. India Equity bounced back in 2017 and faltered in 2018. Instead, gold did well in 2018. Both Global Equity and Gold were affected in 2019.
it is impossible to guess
This clearly shows that investors can't predict how each asset class will perform on a year-on-year basis. Nor should investors indulge in such an exercise. The easiest way to avoid this is to invest in multiple asset classes through a good multi-asset portfolio.
Best instruments for multi-asset investment
Javanjal says that mutual funds with their diverse range can be a good tool for multi-asset investments. Multi-asset allocation fund or fund of funds, which invests in different asset classes. As such typically include equities (domestic and global), fixed income, gold and cash, and, in some cases, InvIT (infrastructure investment trusts) and Reit (real estate investment trusts).
Facility to invest in multiple asset classes
Through one fund, it is possible to invest in multiple asset classes. Managing a successful multi-asset strategy requires practically all investment skills. It is needed from individual asset classes to stock selection and asset allocation at the overall level. Since doing so requires multiple skill sets that are rarely found in a single individual, fund houses employ multiple expert teams to manage these. All this is available at a very low cost.
Expense ratio too low
For example, ICICI Prudential Passive Multi-Asset Fund of Fund (FoF) has an expense ratio of up to a maximum of 1%. As of January-end, portfolio exposure was 27.9% in domestic equity exchange-traded funds (ETFs), 25% in foreign ETFs, 34.3% in domestic debt ETFs, 4.1% in gold ETFs, and 8.7% in short-term debt.
Help reduce portfolio volatility
The purpose of multi-asset investing is to help investors reduce the volatility of the portfolio. Finally, multi-asset investing enables investors to balance risk with reward, by allocating money to both a relatively safe asset. Also, from an investor's point of view, it simplifies the investment process. Investors would do well to recognize the benefits of multi-asset investing to achieve their financial goals.
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