‘Don’t put all your eggs in one basket’, once said a wise man. In the dynamic landscape of financial markets, constructing a robust investment portfolio is crucial for achieving long-term financial goals. One strategy that is gaining prominence is the adoption of a multi-asset portfolio. This approach involves diversifying investments across various asset classes, offering a range of benefits that contribute to reduced volatility, enhanced risk-adjusted returns, downside protection during turbulent times, and access to different market opportunities.
There is a diverse set of investment opportunities across asset classes. Beyond traditional equities and bonds, investors can explore alternative investments like real estate, commodities, and structured products. A multi-asset portfolio facilitates access to these different asset classes, enabling investors like Fund of Funds to capitalise on emerging trends or capitalise on opportunities that may not be readily available in a single-asset strategy.
We shall cover each of the benefits mentioned above in detail. But first, let us take a look at the source from which the inspiration of this write-up originated. Take a careful look at the table below.
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This data is over the last 2 years (31st Dec ‘21 to 31st Jan ‘24). We compare a multi-asset portfolio consisting of equity component (Nifty 100 ETF), commodity component (Gold ETF), and debt component (Bharat Bond ETF) in equal weightage against each of these individual asset classes.
Reduced volatility
One of the primary advantages of a multi-asset portfolio is the potential to reduce overall portfolio volatility. By allocating investments across asset classes that may not move in tandem, the impact of a downturn in one market segment can be offset by positive performance in another. And this is fairly intuitive. Equity markets will not move up for the same reasons as the commodity markets would, right? For investors, this diversification can act as a stabilising force, especially in times of economic uncertainty or market fluctuations. Refer to the ‘STD’ column in the table above. For the uninitiated, standard deviation is a measure of volatility.
Enhanced risk-adjusted returns
Diversification across multiple asset classes enables investors to target enhanced risk-adjusted returns. Different asset classes exhibit varying risk-return profiles. By strategically allocating funds among equities, debt, commodities, and other assets, investors can optimise their portfolio’s performance relative to the level of risk they are willing to bear. This approach is particularly relevant in our markets, where various sectors experience diverse economic cycles.
Refer to the ‘Sharpe’ column in the table above. Sharpe is a statistical ratio that measures the risk-adjusted returns of a portfolio. The multi-asset portfolio has the best Sharpe, which means that it generates superior returns than the individual asset classes by undertaking a lesser amount of risk.
Smoother wealth creation
India’s financial markets are closely linked to both global and domestic socio-economic challenges. To refresh your memory, the shocks of the Russia-Ukraine were experienced in Indian markets. During periods of economic downturns or market turbulence, a multi-asset portfolio can provide downside protection. Assets like gold and bonds, which may have lower correlations with equities and higher tolerance towards negative news, can act as a hedge, helping to cushion the impact of equity market declines. This protective element becomes valuable for investors as it prevents their capital from getting washed off.
If you look at it from a bird’s eye view, you will notice that the progression of our multi-asset portfolio has been much smoother as compared to others. They would not rise too much during a bullish phase nor fall too much during a bearish phase, thereby providing stability. This is possible due to the better shock absorption during turbulent market times.
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In the Indian financial landscape, the importance of a multi-asset portfolio cannot be overstated. This approach goes beyond the traditional paradigm of investing solely in equities or debt. As India continues to navigate the complexities of a dynamic global economy, investors can leverage the resilience and adaptability inherent in a multi-asset portfolio.
Strategic allocation across equities, bonds, real estate, and alternative investments empowers investors to build portfolios that are not only diversified but also well-positioned to weather-changing market conditions. Embracing a multi-asset approach is not just a prudent investment strategy; it is a dynamic tool for navigating the evolving landscape of the Indian markets. In the end, one always prefers an All Weather portfolio!
Naveen KR, Smallcase Manager & Senior Director Windmill Capital
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Published: 28 Feb 2024, 02:08 PM IST