Is investing in multi-asset mutual funds a good idea in volatile times — details here

Multi asset allocation funds invest in three asset classes — equity, debt and one more asset class like gold, real estate etc. They provide investors a one-stop solution to build a balanced and diversified portfolio that can through their dynamic allocation potentially generate returns across different market conditions while limiting downside risks associated with just investing in a single asset class.

As per Mehta, factors like volatility and recognition of the fact that chasing assets is a futile exercise, are currently driving investors towards a more rational multi-asset approach.

"2022 was a great reminder on the virtues of asset allocation. Given the uncertainty and thereby tepid performance of equity and debt, it reinforced the thesis of including enough relevant diversification in portfolios while one aims to create wealth over the long run. Investors are learning it the hard way and adopting an asset allocation approach rather than chasing asset class returns," Mehta told CNBC-TV18.com.

While investors rightfully march towards readymade solutions, Mehta thinks that they need to be fully aware of the underlying asset allocation of such multi-asset funds.

"Many of these funds are biased towards one or the other asset classes either to lower risk or to get a tax advantage, only a few of them being truly balanced in their allocations. Each of them carry a different risk/ return profile and if the intention is to generate returns while controlling risks, one should opt for a truly balanced multi-asset fund," he said.

We have seen many times that a common set of drivers could bring poor returns from equities and bonds at the same time like what we saw in 2022.

Mehta believes that one needs to add low-to-negative correlated assets to portfolios like gold that could help to reduce risk.

Gold has generally done well when equity markets have suffered heavy losses, generating decent returns over the long run, making it a suitable portfolio diversifier for Indian investors. Gold is the third leg of a stool that brings the necessary balance to the portfolio and helps bring stability when things are not working for other asset classes.

As per Mehta, the decision to do it in one scheme through a solution or build a 'do it yourself' asset allocation portfolio would really depend on what the investors objective is.

"While multi assets are ready solutions, the issue is that they are 'one size fits all' solutions which may not suit most investors objectives. So, an investor can craft their own portfolio easily — something like a 12-20-80 asset allocation strategy where before you begin investing in any asset class, you should keep a financial backup or 'emergency money' ready to see you through 12 months of expenses. Ideally, park this money in a safe instrument with no risk. After setting aside 12 months of safe money, whatever money is left could be split between 80 percent to equities and 20 percent to gold," he told CNBC-TV18.com.

When you look at investing 20 percent in gold, you should ideally choose efficient forms like gold fund of funds or gold ETFs. This helps negate any worry about its purity, price, or storage hassles as against physical gold, which has pricing markups and locker charges.

Finally, a majority portion goes to the growth block when one invests 80 percent in an equity bucket that is diversified across styles of equity management, market cap segments and strategies.

"In the current market context too, the 12-20-80 asset allocation framework is ideal to capitalise on the upside potential of Indian equity markets while being able to persist amid the uncertainty and volatility created by higher inflation, tighter monetary policy, global economic slowdown etc. with the help of back-up cash, which ensures you don’t get pushed into redeeming your equity investments to meet liquidity needs — and gold, which with its negative correlation to equities, can limit portfolio losses when equities falter in the recessionary environment," Mehta suggested.