When all asset prices are falling, your portfolio will also be vulnerable when the market is marked for current prices. However, in the long term, there is a negative correlation i.e. inverse volatility between asset classes, which helps you earn optimum returns.
This is shown by research conducted by brinson, hoodAnd bebower (short name bhb) that more than 90% volatility in a portfolio can be addressed by asset allocation and not pursuing an asset class such as equities or debt. In 1986, these three researchers stated that asset allocation is the primary factor for a portfolio’s return variability, and security selection or market timing is secondary.
In various asset categories, including domestic equities, international equities, gold, and to a lesser extent debt, returns fluctuate widely each year. In some years, equities give phenomenal returns and in some years the returns are negative. Same is the case with gold. The only way to minimize the effects of volatility in these various investments is to focus on allocation and still earn optimum returns.
The next question is how to execute the allocation. You can do it yourself by investing in equities, bonds etc. or by investing in mutual fund schemes. Within mutual funds, there are different categories of funds like equity, debt, hybrid (a mix of equity and debt) etc. and you can invest in them.
Another way to do this is by investing in funds that are allocated to multiple asset classes. It is a common practice to go through pure-play equity or debt funds and gold ETFs / gold funds.
However, there is a small issue that the discipline of allocation of multiple assets gets hampered by market movements. When there is a sharp jump or a major correction in equities, due to a change in price, the allocation to equities, debt, gold etc in your portfolio becomes different from the intended one.
In other words, market momentum creates a slant. Another reason for the skew is that investors go with the pace, chasing the ‘taste of the times’ and consciously investing more. At one time, people were investing in cryptocurrencies when prices were rising, even though it is not a proven asset class.
The overall allocation in the mutual fund industry gives a perspective. Equity and debt are the main asset classes and the industry forms a major part of the allocation. AUM in Gold ETFs almost, 20,000 crore is only 0.5% of the total AUM of the industry. In a properly balanced portfolio, gold should comprise 10%, not 0.5%.
There are funds that offer multi-asset investment in one fund i.e. Equity, Debt, Commodities etc. If you make allocation through a fund, then AMC The allocation is as per the mandate and you are holding the units in it. As per rules, a multi-asset fund should have an allocation of at least three asset categories and at least 10% allocation to each category.
The advantage of making your allocation through a multi-asset fund is that the exposure to different assets in the same fund, the varying performances of equity, debt, gold, etc. balance each other out, and the fund gives optimum returns . To keep in mind, the asset allocation pattern of the fund should match your risk profile and investment objectives.
Let us look at a fund in this category from a perspective. ICICI Prudential Multi-Asset Fund It is the leader of the pack with a corpus size of Rs 13,016 crore as on 1st July 2022. Other funds in this category have corpus sizes ranging from Rs 16 crore to Rs 1,600 crore. The asset allocation pattern in equities is 65% or more as it is a growth asset and taxation is more efficient. Debt typically ranges from 20% to 25%, which is a stable asset class, and gold/silver is in the 10% to 15% range, which is a portfolio diversification.
This fund has performed well in terms of performance. It has given 15.2% p.a. in regular plan and 15.9% p.a. in direct plan in 3 years till 1st July 2022. If we look at the performance of 5 years, which is a little before the re-positioning, it has given 12.2% per annum in the regular plan and 13.1% in the direct plan. Notably, in the last one year till July 1, 2022, the fund has given 15.5 per cent regularly and 16.2 per cent in volatile market conditions. The average return of funds in this category (other than this fund) over the last one year is 1.1% in Regular and 2.5% in Direct plans. It was managed with derivatives in the portfolio.
The author is a corporate trainer and author
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