PROLOGUE – Asset Allocation will define your investment success
2020, from an investor’s perspective, has not been shy of volatility, drawing parallels to that of a roller coaster ride. These temporary (read as: contingent) and temperament-testing swings on the downside across global and domestic markets, has witnessed wealth preservation become the flavor of investments, over wealth creation.
All major Asset classes have been subject to multiple pain points over the last few years, as can be seen below:
1. Equity
With VIX levels touching all-time highs in 2020 and no respite in sight, investor wealth saw massive erosion in the first 6 months of 2020.
However, unlocking 4.0 is a sign of revival of economic green shoots, thus presenting attractive entry points to realize long-term healthy gains.
2. Debt
- The IL&FS crisis in late 2017, spelt doom for our shadow-banking industry, a key proponent for helping India achieve the $5 tn economy mark by 2025.
- The DHFL fraud, further augured feelings of discomfort in the debt industry with MFs not willing to roll debt or issue fresh CDs without adjusted risk premiums.
- This lead to a chain of by companies, casing one global fund house to close 6 of their prime debt funds, in recent times.
This clearly shows why risk-averse investors should not compromise on credit quality to realize growth, but stick to AAA/AA rated papers, or look into the likes of “risk-free” Govt. papers.
3. Gold
- Gold has lived up to its merit of being a safe-haven asset touching all-time levels. Converting ‘Cry’-sis into Currency, metal saw highest ever inflows on record!
- However, It too has its rusty elements!
Gold’s attractiveness as an investment case tends to be weaker during healthy economic periods, in comparison to other asset classes. Current euphoria in Gold as the sole investment vehicle is a ticking time-bomb!
As can be seen above, all asset-classes are riddled with risks. Investors overweight on either asset class can misalign their risk-return metrics.
An investor stands to find optimality in his portfolio, when the portfolio enjoys a healthy mix of all elements:
- Equity (Domestic + Global)
- Debt (AAA/AA rated papers)
- Gold
At Fisdom, your trusted E-financial advisor, we’re already 1 step ahead to address your curiosity about which product can control risk when every asset classes are deemed risky!
Presenting Multi-Asset Mutual Funds – An All-Weather Investment Product
THESIS – The Numbers Story
Every asset class has its “season”, and an investor whose portfolio is dynamically aligned to shift into said asset class, is poised to win most. All asset classes have their designated role ranging from generating alpha to acting as hedge, thus helping portfolio achieve diversification benefits.
The Multi-Asset fund category, as defined by SEBI, is to have >10% allocation into the 3 asset classes. This gives the funds the ability to adopt smart and tactful asset allocation, per market situations to deliver maximum upside potential while arresting downside risks.
The chart below shows how individual asset classes have fared across different time periods.
As can be seen above, different asset classes perform in different market conditions. One key component to not having asset classes cannibalize the contributions of component classes is to study their co-relation. The lowest possible correlation is suitable in achieving best possible asset allocations, and effective hedging in trying times like today.
The Asset class correlation matrix is as follows:
The proof of smart management to make qualitative and quantitative benefits hold true is visible in the graph shown below.
Investor Takeaway
Psychologically the human mind is designed to be risk averse. The pinch of losing almost always trumps the ecstasy of winning.
Multi-asset is an umbrella risk investment, for it acts as limiter in practice and as Balm to anguish!
You can’t control market volatility, but you can limit its effects on your portfolio. Think of Multi-asset as antibody for inflated risks. The note has brought forward the inherent risks every asset class carries… Individually. Clubbed together paints a different picture, one which is risk-efficient from the get-go.
Be it books or speeches, sound asset allocation merits a special mention when talking of investing. And Multi-Asset is an outcome of those theories.
