The perspectives shared
by Madhu Lunawat (Founder and MD, The Wealth Company)
In today's dynamic and
often volatile financial landscape, investors are increasingly seeking
strategies that can provide both growth and stability. While traditional
investment avenues have their merits, the need for a more resilient and
diversified approach has never been more apparent. This is where multi-asset
allocation funds emerge as a powerful solution, offering a balanced and
disciplined approach to wealth creation. Think of a multi-asset allocation fund
as a well-balanced cricket team.
You need aggressive
batsmen (equity) who can score quick runs and take the game forward, steady
middle-order players (debt) who stabilize the innings when wickets fall,
all-rounders (gold) who contribute in multiple ways, and a reliable
wicketkeeper (cash) who catches opportunities. A team with only aggressive
batsmen might score quickly but collapse under pressure. Similarly, a portfolio
needs different “players” with different strengths to win the long game.
Key Message: “Champions
aren’t built on star players alone. A winning portfolio, like a winning team,
needs balance across all positions.”
The Need for
Multi-Asset Allocation
The primary challenge
for most investors is not a lack of options, but rather the complexity of
choosing the right mix of assets. Equities offer high growth potential but come
with significant volatility. Debt instruments provide stability and regular
income but may offer limited capital appreciation. Gold and other commodities
act as a hedge against inflation and economic uncertainty, but their
performance can be cyclical. A multi-asset allocation fund simplifies this
complex decision-making process by investing in a diversified portfolio of at
least three asset classes, with a minimum allocation of 10% to each, as
mandated by the Securities and Exchange Board of India (SEBI). This ensures
that the fund is not overly reliant on any single asset class, thereby
mitigating risk and providing a more stable investment journey.
The Role in Asset
Allocation
Multi-asset allocation
funds play a crucial role in strategic asset allocation by providing a
professionally managed, diversified portfolio within a single investment. The
fund manager actively monitors market conditions and economic trends,
dynamically adjusting the allocation between different asset classes to
optimize risk-adjusted returns. For instance, during a bull market, the fund
may increase its equity exposure to capitalize on rising stock prices.
Conversely, in a bear market, the allocation may shift towards debt and gold to
preserve capital and cushion the portfolio from steep declines. This active
management and automatic rebalancing save investors the hassle of constantly
monitoring their portfolios and making tactical allocation decisions.
Who Should Invest?
Multi-asset allocation
funds are particularly well-suited for a wide range of investors:
●
First-time investors: These funds provide a
simplified and diversified entry point into the world of investing, eliminating
the need to pick individual stocks or bonds.
●
Investors with a low to moderate risk
tolerance: The diversified nature of these funds helps to smooth out returns
and reduce volatility, making them ideal for those who are not comfortable with
the high-risk nature of pure equity funds.
●
Long-term investors: By providing a balanced
exposure to different asset classes, these funds are well-positioned to deliver
steady, long-term growth.
●
Investors seeking a hassle-free investment
experience: The active management and automatic rebalancing features of these
funds make them a convenient, "invest and forget" solution.
Hybrid Multi-Asset
Funds vs. Equity-Heavy Funds
It is important to
distinguish multi-asset allocation funds from their more aggressive
counterparts, such as aggressive hybrid funds. While both fall under the hybrid
category, their risk-return profiles are significantly different.
|
Feature |
Multi-Asset
Allocation Funds |
Aggressive
Hybrid Funds |
|
Equity Allocation |
Typically 10-70% |
65-80% |
|
Asset Classes |
Minimum 3 (e.g.,
equity, debt, gold) |
Primarily equity and
debt |
|
Volatility |
Lower |
Higher |
|
Risk Profile |
Balanced |
Aggressive |
|
Ideal Investor |
Risk-averse to
moderate |
Risk-tolerant |
Aggressive hybrid
funds, with their high equity allocation, tend to outperform in bull markets
but are also more susceptible to sharp declines during market downturns.
Multi-asset allocation funds, on the other hand, provide a more stable and
consistent performance across market cycles. The 10-year average return for
aggressive hybrid funds is slightly higher at 12.12% CAGR compared to 11.12%
for multi-asset funds. However, it is interesting to note that the
top-performing multi-asset funds have delivered returns that are comparable to,
and in some cases, even better than their aggressive hybrid counterparts, but
with lower volatility.
Volatility During
Crises like COVID-19
The COVID-19 pandemic
served as a stark reminder of the importance of portfolio resilience. During
the market crash of 2020, many equity-heavy portfolios suffered significant
losses. Multi-asset allocation funds, however, demonstrated their ability to
weather the storm. The inclusion of debt and gold in the portfolio helped to
cushion the impact of the sharp decline in equity markets.
As a result, these
funds experienced lower drawdowns and recovered more quickly than their
equity-heavy counterparts. This ability to provide stability during times of
crisis is one of the most compelling reasons to include multi-asset allocation
funds in any investment portfolio.
Conclusion
In a world of
increasing uncertainty, multi-asset allocation funds offer a compelling
proposition for investors seeking a balanced and disciplined approach to wealth
creation. By providing a diversified portfolio of different asset classes,
these funds can help to mitigate risk, reduce volatility, and deliver steady,
long-term growth. As the first Indian woman to establish a mutual fund house, I
am committed to empowering investors with the knowledge and tools they need to
achieve their financial goals. I believe that multi-asset allocation funds are
an essential component of any well-diversified investment portfolio, and I
encourage all investors to consider them as a part of their wealth creation
journey.
(The perspectives
shared in this column reflect the author’s own views and interpretations.)