The importance of multi-asset investing

When markets drop sharply, investors tend to sell in panic in a bid to avoid further losses. This intense fear of financial loss often leads individuals to act impulsively, without careful consideration. On the other hand, when markets perform well, greed takes over, prompting investors to pursue even greater profits, sometimes at the expense of assuming significant risks. Both fear and greed cloud people's judgment, underscoring the importance of diversifying investments across different asset classes to effectively manage risk.

Diversification spreads investments across various types of assets, such as equities, bonds, real estate, and commodities, thereby mitigating the impact of market downturns on overall portfolio performance. This strategy helps cushion against losses in one asset class by potentially realizing gains in another, promoting stability and facilitating long-term growth.

Furthermore, each asset class possesses distinct characteristics that cater to varying needs of an investor. Equities, for instance, are renowned for their wealth-building potential over the long term, but they can be very volatile in the short term. On the other hand, fixed income or debt instruments offer stability but returns from this asset class are typically low. Gold investments serve as a hedge against economic uncertainties and inflation, providing a safe haven during turbulent times. Therefore, a well-rounded investment strategy often involves allocating funds across these different asset classes in a defined proportion, tailored to one's investment horizon and risk appetite.

The importance of multi-asset investing
Cyclical Performance: Each asset class tends to perform differently over various market cycles. For instance, in CY 2023, the NSE 500 index delivered impressive returns of 25.8%, marking a significant increase compared to the previous year's return of just 3%. Similarly, gold exhibited cyclicality, with returns of 13.90% in CY 2022 following a negative return of -4.2% in CY 2021. By diversifying across assets with complementary performance characteristics, investors can enhance portfolio resilience and optimize returns across various market environments.

Liquidity Management: Including a mix of liquid and illiquid assets in your portfolio enables better liquidity management. Liquid assets like stocks and bonds can be easily bought or sold on public markets, providing quick access to cash when needed. Illiquid assets such as real estate or private equity may offer higher returns but may require longer holding periods and more extensive processes for buying or selling. Balancing liquidity needs across different asset classes ensures you have access to funds when required while optimizing long-term returns.

Adaptability: Multi-asset investing offers flexibility to adapt to changing market conditions and economic environments. By having exposure to different asset classes, you can adjust your portfolio allocation based on your outlook and expectations. This adaptability allows you to capitalize on opportunities and mitigate risks as market dynamics evolve over time.

How to approach multi-asset investing?
Multi-asset investing involves diversifying portfolios across various asset classes, which can be achieved through exposure to different mutual funds or securities. While this strategy mitigates risk, tracking the performance of individual investments can be challenging. Investors must monitor each fund or security regularly, which demands time and effort. Additionally, adjusting asset allocations to align with changing market conditions requires vigilance and may be time-consuming. Rebalancing the portfolio, a crucial aspect of multi-asset investing, could incur tax implications due to realized gains or losses. Therefore, investors need to weigh the benefits of rebalancing against potential tax consequences.

This is where multi-asset allocation category mutual funds come in. Through this category, investors gain access to a convenient and efficient way to pursue diversified investment strategies, enhancing their chances of achieving long-term financial goals. Multi Asset Allocation Funds are hybrid funds that must invest a minimum of 10% in at least three different asset classes. Most often the asset classes in such portfolios include equity, debt, commodities, REITs, InvITs etc. The fund manager here, based on the changing market conditions, allocates assets to make the most of the opportunities available.

At a time when domestic equity market valuations are not cheap, elections being held in over 50 countries coupled with high inflation and slow growth; in such a scenario considering a multi-asset allocation fund for investing appears to be a prudent choice. Such an approach will help mitigate risks, help withstand market shocks better and create a buffer against uncertainties, ensuring resilience in your portfolio amidst economic and geopolitical turbulence.

Disclaimer: The article is authored by Manthan Jignesh Shah,Managing Partner,Wish Worth Wealth. The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India. Do your own research (DYOR) before deciding to invest in any financial asset class.

This article is published by the Insider Studios team. You can get in touch with them on insiderstudios@businessinsider.in.