How Multi-Asset Funds Navigate Market Volatility And Improve Returns

The world is becoming increasingly dynamic and so are the returns from different asset classes. Sectors or the fund classes that become the flavour of the season—attracting many investors, often lose their shine after a short period, while the underdog sectors suddenly turn up to be the talk of the town, pushing the previous trend into oblivion. A typical example of this can be seen in the movement of capital, shifting from small-cap funds to large-cap funds this year. The investors are now seeking companies with strong fundamentals and stable balance-sheets in the large-cap space as compared to chasing small caps with high earnings growth. The market is witnessing this shift in paradigm due to the diminishing valuation comfort seen across the sectors, with India now being one of the most expensive markets among the major economies. In 2024, large-cap funds have witnessed an inflow of ₹11,403 crore so far, as compared with the net outflows of ₹3,717 crore seen during the same period last year. In contrast, small-cap funds have seen inflows of ₹21,671 crore in the first nine months of this year—about 25% lower than last year’s inflows.

The performance of different asset classes over a long period suggests that the ranking of asset classes changes every year. This is because each asset behaves differently depending on the economic cycle or macroeconomic phase. For example, the BSE Sensex index has been the best-performing asset in four of the last ten years, with returns ranging from 14% to 28%. In comparison, gold has been the top performer in five of the ten years, with returns ranging from 8% to 23.8%. The bond index was the best performer only once, in 2015, with a return of 8.7%. Notably, both gold and the equities have delivered negative returns this year. The significantly varying performance of different asset classes proves that one must maintain a diversified asset allocation, that includes equities, bonds, and gold, in order to consistently generate reasonable returns. Equities offer superior long-term return potential despite higher volatility; with a track record of approximately 15-16% annual returns over the last two decades, it makes them the top wealth creator across different assets. Bonds or debt provide stable income and portfolio stability, delivering consistent returns over the long term. Gold—an old favourite among Indian investors—experiences phases of consolidation and growth and acts as a reliable hedge against inflation, protecting portfolios against inflation and global risks.

It therefore becomes necessary for an investor to strategically allocate their funds in mixed assets. It is this very factor that is generating the increasing interest in the multi-asset funds. Currently, the multi-asset funds is the only fund category that offers exposure to a wide variety of asset classes, ensuring that the diversified investments yield strong returns across different market conditions. A multi-asset fund enables investors to diversify their bets without the need to predict which asset class will perform the best. This fund category builds an optimal portfolio, capturing the benefits of all asset classes to varying degrees. Typically, a multi-asset fund maintains a minimum allocation of 10% to more than three asset classes. Additionally, the derivative instruments such as covered calls, aim to benefit from range-bound markets while increasing the overall yield of the portfolio.