Irrespective of any economic climate, investors seek portfolios that can capture the upside in any asset class while protecting the portfolio from any sharp downturns. This can be made possible only by adhering to multi-asset investing – a strategy which offers both diversification and overall stability to the portfolio.
Understanding Multi-Asset Approach
Multi-asset investing is a strategy that involves investing across various asset classes instead of investing in just one or two asset classes. The allocation to each of these asset classes should be based on one’s risk tolerance and investment goals. Adopting this approach can help mitigate the risk associated with a single asset class and optimise returns as well.
Another advantage of this approach is that the portfolio will comprise of asset classes that have zero to low correlation with each other. As a result, when one asset class underperforms, the overall portfolio gets supported by the returns from the other performing asset classes.
Key Asset Classes in a Multi-Asset Portfolio
Equities: While equities carry significant risk in the short term, this is also the asset class with the highest growth potential over the long run. Investors can take exposure to this asset class via equity mutual funds or through direct investing.
Debt: Debt is a relatively stable asset class among the various options available. Debt could be in the form of Government bonds, corporate bonds, commercial papers, certificates of deposits and treasury bills. Each of these options provides investors with regular and almost predictable income. However, the debt as an asset class is prone to credit and interest rate risk.
Commodities: Commodities such as gold and silver offer diversification and protect portfolio against volatility and inflation. They act as a hedge against market volatility.
Building a Multi-Asset Portfolio Here is how you can build a multi-asset portfolio:
Determine Your Investment Goals: Your multi-asset portfolio mix will depend on your financial goals, the time horizon of these financial goals, income, age and your risk tolerance.
Asset Allocation: Decide the allocation proportion to each asset class. For example, if you are young and have the risk appetite, then you may opt for an equity-heavy portfolio for your long-term goals.
Rebalancing: It is important to regularly review your portfolio to maintain your desired asset allocation. For example, owing to the equity market rally, the equity allocation may have increased in the portfolio over the past few quarters, which may be beyond your level of comfort. In such a case, you might want to rebalance your portfolio by booking profits in equities and deploying the proceeds in other asset classes.
Alternate Approach
For any lay investor following a multi-asset investing strategy can be a daunting task. It is here that they can consider mutual funds based on this strategy. Such a fund is mandated to invest a minimum of 10% each in at least three or more asset classes. Most often such funds invest in equity, debt and commodities. The beauty of these funds is that the fund manager can invest and rebalance the fund’s portfolio as per the current and expected market scenario.
However, it is important to understand that diversification within a multi-asset allocation fund is different from the diversification that you may need at a portfolio level. For this, you can consult a financial advisor who can help towards building a balanced portfolio as per your requirements.
Disclaimer
The views are personal and are not part of the Outlook Money editorial Feature.