A Vanguard study reveals that asset allocation dictates up to 90% of long-term portfolio returns, dwarfing security selection at a mere 10%. The dynamic world of investing encompasses a plethora of assets: equity, debt, gold, mutual funds, silver, REITs, INVITs, and more. Such diversity further underscores the impossibility of predicting a consistent winner. The solution? Diversification across asset classes via multi-asset mutual fund schemes.
Benefits of Diversifying Across Multiple Assets Every asset class boasts its unique market cycle and reaction to global events. The COVID-19 pandemic, for instance, saw equities plummet while gold surged, and debt held firm. By spanning multiple asset classes, investors harness the dual advantages of diversification and reduced portfolio volatility. Predominantly, multi-asset funds comprise equity (65% for tax benefits), with the remainder distributed among debt instruments and commodities.
Defining Multi-Asset Category As per SEBI’s classification, multi-asset funds are a subcategory of hybrid schemes. They obligatorily invest a minimum of 10% across three distinct asset classes. Numerous fund houses offer these, with five having a track record exceeding five years. CRISIL’s research substantiates the consistent superiority of diversified portfolios over equity-only funds between 2003-2017.
When juxtaposed with dynamic asset allocation funds, multi-asset funds often emerge superior, especially from a risk-adjusted standpoint.
Why Opt for Multi-Asset Allocation? Equities might be lucrative over extended periods, but ignoring the cyclical nature of all asset classes can be detrimental. External factors, such as geopolitical tensions or pandemics, can destabilize one asset while bolstering another. By veering towards the top-performing asset periodically, investors inadvertently damage their portfolios. Multi-asset funds obviate such concerns, offering a diversified portfolio tailored by experts based on prevailing market conditions.
Tax Implications The financial composition of a multi-asset fund determines its taxation. Fund of Funds or ETFs attract debt taxation. Conversely, an equity allocation surpassing 65% entails equity taxation. There is a third category which is aiming at a minimum of 35% equity but not exceeding 65%, and the rest in the other asset classes directly (not through ETF) then it attracts 20% tax with indexation benefit for holding more than three years.
Conclusion Multi-asset funds are a worthy addition to any portfolio, guaranteeing diversification, reduced volatility, and potential return augmentation. However, before diving in, ensure the fund’s strategy resonates with your financial goals and risk tolerance.
Pravin Bhalerao, Managing Partner, Pranitya Wealth LLPFINANCIAL
Disclaimer
The views are personal and are not part of the Outlook Money editorial Feature.