Table of contents
Multi-asset class investment strategy refers to investing across different asset classes, such as equities, fixed income, commodities, real estate, etc., to create a diversified portfolio. This article covers the optimise returns while reducing overall portfolio risk. Read on to the origins, needs, outcomes, benefits and risks of following a multi-asset investment approach.
Understanding multi-asset class investing
Multi-asset class investing means investing in different types of assets like stocks, bonds, commodities, or real estate. By diversifying your investments, you can reduce risk and volatility in your portfolio. This helps to create a more consistent return on your investments, regardless of what the market is doing, and increases your chances of achieving your long-term financial goals.
Key Benefits of Multi-Asset Class Investing
Here are some of the main benefits of adopting multi-asset class investment strategies:
- Reduced Volatility: By diversifying investments across different types of assets that are not strongly correlated, the overall portfolio can be less volatile than if it were invested solely in stocks.
- Protection Against Market Cycles: A diverse portfolio can provide consistent returns despite market downturns.
- Better Risk-Adjusted Returns: Investing in multiple asset classes can boost portfolio returns while reducing risk, as opposed to investing in a single asset class.
- Meeting Varying Investment Objectives: Investors can tailor their asset allocation based on their unique goals for return, liquidity, and risk.
Constructing an Effective Multi-Asset Portfolio
To fully benefit from multi-asset investing, it is important to create a portfolio that consists of assets with unique return drivers. Here are some tips for creating an efficient multi-asset portfolio:
1. Determine appropriate asset classes
Based on historical data, it is recommended to choose 4-6 asset classes that have shown relatively low correlation with each other. Equities, fixed income, gold, real estate, and commodities are among the good options to consider.
2. Allocate strategically
Maximise returns and minimise risk by allocating assets based on their expected returns and risk outlook. Focus more on higher return potential assets and less on lower upside ones.
3. Choose assets with different cycles
To diversify your portfolio, select assets with different cycles within each class. Avoid choosing assets with similar cycles, like mid-cap and large-cap equity.
4. Assign some weight to stable assets
Stable assets like sovereign bonds or gold can balance out equity volatility during market stress.
5. Rebalance periodically
It is important to regularly reassess your allocation to reflect any changes in risk and return expectations across different asset classes.
Multi-asset class investment options
There are a variety of investment products available to consider for a diversified portfolio:
1. Multi-asset mutual funds
Investors can easily invest in these funds without requiring a large amount of capital as they invest in various equities, debt, and other assets according to a pre-defined allocation.
2. Market-linked debentures (MLDs)
Banks and NBFCs offer hybrid debt instruments that allow investors to access equity, debt, and commodities all in one product.
3. Fund of funds
Multi-asset funds invest in various single-asset class funds, providing exposure to multiple assets. This approach enables personalised asset allocation.
4. Multi-asset portfolio management services (PMS)
PMS providers offer personalised multi-asset portfolio services that cater mainly to high-net-worth individuals due to the large investment amounts required. These services provide direct exposure to various assets. On the other hand, multi-asset mutual funds and MLDs are more accessible and liquid for retail investors.
Key risks to consider
While multi-asset investing comes with several advantages, here are some risks to keep in mind:
- Requires continuous monitoring of fund allocation across asset classes
- The inability to time rebalancing of assets efficiently can impact the overall return
- Suboptimal asset selection could lead to inadequate diversification
- High expense ratio if investing across many funds instead of a multi-asset fund
- Potential misalignment between product labelling and actual asset allocation
Before making any investment, it’s vital to assess the quality of the product or service, the financial stability of the company, and the costs involved. Understanding these factors is crucial in minimising risks and making informed decisions.
The future of investment management is multi-asset investing
Investment managers worldwide, including India, are increasingly adopting multi-asset strategies. This approach is expected to become even more prevalent in the future:
1. Need for Reduced Volatility
Investors seek low-volatility options in the unpredictable market, and multi-asset solutions are a great fit for this purpose.
2. Customisation Drives Product Demand
High net worth individuals (HNIs) and family offices seek more flexibility in tailoring their portfolios to match their varying risk appetites and expected returns. Multi-asset solutions offer an excellent opportunity for such customisation.
3. Regulatory Push for Better Risk Management
Investment products and solutions that can monitor and control portfolio risk are gaining importance. Wealth managers are adopting multi-asset frameworks for better transparency and control over their clients’ portfolios.
Thus, multi-asset class investment strategies will shape the future of investment management in the coming years. This is because such strategies offer structural benefits that can help manage risks and meet the diverse objectives of investors.
Conclusion
While diversifying across multiple asset classes can enhance returns for a given level of portfolio risk, it requires a deeper evaluation of parameters like individual risk appetite, return objectives, and liquidity needs. Costs may also be higher than in passive single-asset investing. If structured appropriately, multi-asset class investment strategies can provide long-term stability and growth. With their expertise in tactical allocation between varied assets, active fund managers can help implement this effectively.
FAQs
In simple terms, multi-asset class investing refers to allocating your money across different asset categories like stocks, bonds, gold, real estate, etc., rather than just focusing on a single asset like equity funds or fixed deposits. The aim is to benefit from the differentiated cycles these assets follow and reduce the overall volatility by diversifying.
Traditionally, investors in India have focused heavily on assets like fixed deposits, gold and real estate. Even in financial assets, equity funds see maximum inflows driven by high historical returns. However, excessive focus on any single asset makes your savings vulnerable during market downturns. Multi-asset frameworks combat this by spreading money across assets like stocks, debt funds, gold ETFs, REITs, etc.
The most important advantage is a significant reduction in overall portfolio fluctuations. For instance, if equities are correct sharply, the loss can be partly offset by allocation to debt. It also enables customisation as per risk appetite – conservative investors can have higher fixed income allocation while moderate and aggressive investors can take higher exposure to equities.
Retail investors can consider multi-asset mutual funds that provide one window access to equity, debt and gold exposure. Some banks also offer Market-linked Debentures (MLDs) that give exposure to varying asset categories. Those willing to invest large sums can also explore multi-asset Portfolio Management Services (PMS).
You need to ensure periodic asset allocation tracking as fund managers continuously rebalance exposures. Opting for funds investing in too many assets can result in inadequate diversification. Analyse costs before investing across specific asset class funds individually – multi-asset funds usually cost less.
Leave a Comment