When all asset prices are falling, your portfolio also would be vulnerable, when marked to market for current prices. However, over the long term, there are negative correlations i.e. inverse movements among asset classes, which help you earn optimum returns.
It has been shown by research, conducted by Brinson, Hood, and Beebower (acronym BHB) that more than 90% of volatility in a portfolio can be addressed by asset allocation and not chasing one asset class like equity or debt. In 1986, these three researchers put forth, that asset allocation is the primary factor for a portfolio’s return variability, and security selection or market timing is secondary.
There is wide fluctuation in returns, every year, in the various asset categories like domestic equity, international equity, gold, and to a lesser extent in debt. In certain years, equity gives phenomenal returns and in certain years the returns are negative. The same is the case with gold. The only way to smoothen out the impact of the 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 equity, bonds, etc., or invest in mutual fund schemes. Within mutual funds, there are various categories of funds like equity, debt, hybrid (mix of equity and debt), etc. and you can invest in those.
Another way of doing it is, to invest in funds that allocate to multiple asset classes. Going through pure-play equity or debt funds and gold ETFs / gold funds is a common practice.
However, the small issue there is, that the discipline of allocation to multiple assets tends to get interrupted by market movements. When there is a sharp rally or big correction in say equity, due to price changes, the allocation to equity, debt, gold, etc. in your portfolio becomes different than intended.
In other words, market momentum creates a skew. The other reason for the skew is that investors tend to go with the momentum, chasing the ‘flavour of the times’ and consciously investing more. At one point in time, people were investing in cryptocurrencies when prices were booming, 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 staple asset classes and have the major share of industry allocation. AUM in gold ETFs at approx. Rs 20,000 crore is only 0.5% of the overall AUM of the industry. In a properly balanced portfolio, gold should comprise say 10% and not 0.5%.
There are funds that offer multi-asset investment in one fund i.e. equity, debt, commodities, etc. If you do the allocation through one fund, then the AMC is doing the allocation as per the mandate and you are holding units in it. As per regulations, a multi-asset fund has to have an allocation to at least three asset categories and have at least 10% allocation to each category.
The advantage of doing your allocation through multi-asset funds is that exposure to various assets in the same fund, the varying performance of equity, debt, gold, etc. balance out each other, and the fund delivers optimum returns. To be taken care of, the asset allocation pattern of the fund should match your risk profile and investment objectives.
Let us look at one fund in this category to get a perspective. ICICI Prudential Multi-Asset Fund is the leader of the pack with a corpus size of Rs 13,016 crore as of 1 July 2022. The corpus size of other funds in this category range from Rs 16 crore to Rs 1,600 crore. The asset allocation pattern is 65% or more in equity as that is the growth asset and taxation is more efficient. Debt usually ranges from 20% to 25%, which is the stable asset class, and gold/silver in the range of 10% to 15%, which is a portfolio diversifier.
In terms of performance, this fund has done well. Over 3 years till 1 July 2022, it has given 15.2% annualized in regular plan and 15.9% annualized in direct plan. If we look at 5-year performance, which is little prior to the re-positioning, it has delivered 12.2% annualized in regular plan and 13.1% in direct plan. Remarkably, over the last one year till 1 July 2022, this fund has given 15.5% in regular and 16.2% in direct, in volatile market conditions. The average return of funds in this category (other than this fund) over last one year is 1.1% in regular and 2.5% in direct plan. It was managed with derivatives in the portfolio.
The writer is a corporate trainer and author
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