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December 14, 2022
Reading time: approx. 9 minutes
Hear how multi-asset allocation funds can help you mitigate downside risk in 2023
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In 2022, India’s economy will be affected by the Russia-Ukraine war affecting global supply chains, inflation that has led to an increase in interest rates, all of which have had a significant impact on Indian markets. The current year has not been easy for investors, with volatility and uncertainty affecting market performance.
Many investors are experiencing unprecedented economic and market events this year. In addition to current geopolitical concerns, any further escalation between China and Taiwan will increase market volatility. In many developed economies such as the US, there is an opportunity to raise the head. Even if there is a global recession, the impact on India may be minimal.
Despite uncertainties due to macroeconomic fluctuations, there is still hope for investors. Sentiment in the market has turned bullish due to continuous buying by FPIs. After pulling funds out of Indian stocks in the last 2 months, FPIs made a strong comeback in November. This was the third month this year after July and August that FPIs saw net inflows. This is possible because India is considered to have good growth prospects. Apart from this, lower crude oil prices and easing inflation are some of the factors that have helped the market’s positive outlook for the coming year.
2023 can be a year of stability and growth for your investment portfolio. According to experts, inflation is expected to moderate as some drivers are dissipating and issues such as supply chain are being addressed. This allows central banks to take a break from aggressive interest rate hikes. RBI’s policy rates are expected to peak in the first quarter of 2023 and remain at that peak for a long time. The geopolitical crisis, the direction of inflation and the Federal Reserve’s monetary policy will be the main influencers of financial markets in 2023. How they will affect the economy is not clear, but high market volatility is one result. However, in this case it is clear.
How can investors navigate uncertain economic conditions and volatile markets?
Although easing inflation and better interest rate stability will put some pressure on central banks and financial markets, we still need to be cautious about the risk of a recession and corporate earnings in the 2023 outlook.
One must learn how to cope with such unstable events and not break down under stress. This means choosing investments that can benefit from volatility over the long term. Currently, strategic asset allocation across asset classes is the key to protecting your portfolio from downside risk.
In particular, all asset classes do not always go in the same direction, and there are times when one works below the other. If you recall, during the pandemic, equity indices fell sharply, and the debt market was struggling with liquidity issues. Gold as an asset class has risen to new heights and commands an effective portfolio diversifier, hedge, safe haven and store of value.
Graph: The performance of different asset classes varies over the years
(Historical data of last 10 years)
(Source: ACE MF, PersonalFN Research)
As you can see from the graph above, equities outperformed debt and gold in 2014, 2017 and 2021, while gold and debt outperformed in 2016, 2018, 2019 and 2020 (Covid-19 outbreak in India). . You see, in general, equities and gold have an inverse relationship – they don’t always move in the same direction.
Given these conditions, it is better for investors to follow a tactical allocation of assets across sectors and keep investing in an organized manner, as markets can be volatile. Therefore, diversifying investments across asset classes, ie equity, debt, gold and cash, is essential to weather uncertain economic conditions and volatile markets. And what better way to diversify your investments than Mutual Funds.
A multi-asset allocation strategy with variable asset allocation in mutual funds provides a better balance to equity, debt and gold and optimizes the risk-return ratio. This strategy is a way to deal with market volatility and economic uncertainty.
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What are Multi-asset Allocation Funds?
As the name suggests, multi-asset allocation funds aim to invest in multiple assets. As per SEBI regulations, these funds invest in at least three asset classes with a minimum stake of 10 percent in each. Muti-Asset Funds aim to generate moderate capital appreciation while reducing the overall risk in the portfolio from a combination of low-correlation assets (mainly equities, debt and gold). Therefore, it provides better risk protection and improves the return potential of your portfolio.
Multi-asset allocation fund managers have the ability to flexibly allocate investments across different asset classes by looking at different factors.
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Prices relative to historical averages
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Interest rate perspective
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Macroeconomic factors prevalent in India and globally
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Quality and growth potential of securities (equity, debt, gold, etc.)
The low correlation between assets allows a multi-asset allocation fund to protect against downside risk during uncertain economic conditions and volatile markets. As we approach peak rates, we expect the correlation between government bonds and risk assets to weaken, allowing the former to regain their diversification characteristics in multi-asset portfolios.
Advantages of investing in Multi Asset Allocation Fund:
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Maximum diversification of exposure to equity, debt and gold in one fund
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It helps to reduce side effects and improve profits
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Timely portfolio balancing, performance and view of each underlying asset by a professional fund manager
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It allows you to focus on your financial goals instead of timing the market.
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Less investment cost as you invest in one fund and not in different schemes in each asset class.
Multi-asset allocation funds help navigate the uncertainty of market trends with the right mix of assets. If equity markets are very volatile during uncertain times, an allocation to debt in your portfolio can provide a source of stability and income to your portfolio. On the other hand, gold as an asset class helps to limit the minimum risk.
Who should invest in Multi Asset Allocation Fund?
Multi-asset allocation funds are dynamically managed hybrid funds. They are suitable for investors seeking long-term capital appreciation with a moderately high risk profile and an investment horizon of at least 3-5 years. This is a good option for investors who want to diversify their portfolio across sectors but want to avoid the hassle of investing and tracking different schemes.
So, if you are a first-time investor looking for capital appreciation with less risk compared to pure equity funds, you can consider investing in a qualified multi-asset allocation fund. The category is suitable for investors who find it difficult to balance their portfolio according to the changing market conditions.
To sum up…
Given the headwinds in play, 2023 is expected to be the year of multi-asset investment by industry experts. A multi-asset allocation strategy provides a cushion to your investment portfolio with minimal risk. When asset allocation is defined wisely and followed according to the market outlook, it serves as an investment strategy that balances the risk-reward ratio.
Although the equity market can be very volatile in the near term, given the headwinds in play, it has the potential to outperform other asset classes in the long term. Debt is one category that can do well. Post structural weaknesses in cryptocurrencies combined with post global central banks make commodities like gold and silver interesting. One strategic way to allocate to gold is through a multi-asset fund where the fund manager allocates investments across equity, debt, gold and any other asset class. In this way, an investor can have an adjusted exposure to gold.
Additionally, a suitable allocation to debt and gold in your portfolio will protect against rising inflation and continue growth amid uncertainty if the equity market turns volatile again.
PS: If you want to select eligible actively managed mutual fund schemes, I recommend subscribing to PersonalFN’s unbiased premium research service, FundSelect.
As a bonus, you have access to PersonalFN’s popular debt mutual fund service, DebtSelect.
PersonalFN recommendations go through our rigorous process that evaluates quantitative and qualitative metrics, giving you buy, hold and sell recommendations on equity and debt mutual fund schemes. Read here for more details…
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