Predictions 2022: Blend of equity, debt, gold, real estate to benefit investors in 2022, says S Naren

Over the last decade, we have witnessed easy liquidity conditions and rate cuts by global central banks, which created a conducive environment for equity markets to perform. As a result, valuations across asset classes remain elevated when compared to their long-term averages. Historically, it has been observed that when any asset class is fully valued they tend to become volatile, a case which is increasingly becoming visible in the Indian equities.

Going forward, especially in 2022, with a scenario of withdrawal of stimulus measures, one may require more of active management to navigate the equity market. At such times, a combination of active management and multi-asset strategies is likely to provide better outcome for investors in the near term. Therefore, rather than focusing on a single asset class, like equities, investors should look at a combination of other assets including debt, gold, real estate and global funds. This is where a multi-asset strategy or multi-asset fund comes in.

As seen in the performance of various asset classes over the past decade and more, every other year, the winning asset class keeps on changing. The only way to make the most in such a situation is by spreading one’s allocation across asset classes, such that on an aggregate basis the portfolio can tap into the potential benefits and gains that each asset class renders. This is exactly what a multi-asset investment does.

In a multi-asset fund, the aim is to maintain a minimum exposure of 10% to three or more asset classes. However, depending on the market situations and various other factors, a multi-asset fund changes its allocation to ensure investors get the best the investment opportunities offered by various asset classes. For example, in case of ICICI Prudential Passive Multi Asset Fund of Funds, the allocation is domestic equity (25-65%), debt (25-65%), gold (0-15%) and global equities (10-30%). Equity provides the growth element through capital appreciation while debt renders the much need stability to the portfolio. Gold, meanwhile provides hedge against inflation.

For investors, who are looking for diversification across asset classes but are not sure how to achieve this objective, a multi-asset category fund could be their one-stop solution. Not only is it the easiest approach to take exposure to several asset classes, but is also one of the convenient ways of investment to reduce concentration risk in any one asset class. A multi asset strategy allows investors to switch from one asset to the other, thereby allowing an investor to capitalise from the opportunities present across asset classes and over time tends to deliver better risk-adjusted return.

Listed below are three reasons why an investor may consider multi-asset scheme in current market environment.

Asset class diversification

A strategic allocation to multiple asset classes ensure that the portfolio does not suffer from undue pressure if a certain asset class were to face a sharp correction or volatility. Generally, all asset classes do not outperform or underperform together. By diversifying, the relative risk associated with the portfolio gets reduced to a large extent.

Furthermore, the portfolio has the flexibility to invest across market capitalisation in equities. As per the market conditions, such schemes can also take sector deviation compared to the benchmark which helps in generating relatively better returns in the long term. Similarly, when it comes to debt allocation as well, the multi-asset fund invests across various debt instruments. Depending on the various macro factors like inflation, interest rates, economic activities and global central banks' policy stance, multi-asset schemes strategically change their allocation to different debt instruments in order to yield risk-adjusted returns.

Since multi-asset funds may take exposure to gold through gold exchange traded funds (ETFs) with an asset allocation range of 0-15%, such schemes offer investors a hedge against inflation as well.

Taxation

For a lay investor rebalancing the portfolio, which entails booking profits in one asset class and investing in another asset class, each transaction attracts taxation, be it short term or long term. As a result, the practice of continuously rebalancing the portfolio could prove to be a less than optimal experience. At the same time, when such an exercise is done by the fund house in a multi asset fund, investors do not attract taxation, making it a much more tax efficient route of investing across asset classes.

Better risk-adjusted return

Since the portfolio is diversified, such funds reduce risks arising out of a concentrated portfolio. Over long term, strategic change in allocations to various asset classes helps generate relatively better risk-adjusted return.

To conclude, a multi-asset category offering provides investors access to over more than three asset classes within a single fund. So, if you are investor looking to invest across various asset classes, the multi asset category fund is a worthy consideration. This category fund can be considered for lump sum investment.