Should you invest in multi asset funds pre-election for post-election gains? (2024)

As we head towards the end of the election season, the markets have turned volatile. While this was expected, some voices within the Indian polity predict a massive rally in equities post-election results. This anticipation may tempt some investors to over-allocate to equity markets. However, while equities are a valuable component of any investment portfolio, it's essential to consider the limits and risks associated with them.

The case for multi-asset allocation funds (MAFs)

A Multi-Asset Fund (MAF) is a type of mutual fund that invests across various asset classes, including equity, debt, and commodities like gold. These funds are designed to provide diversification and balance in a single investment vehicle, which can be particularly beneficial during times of market volatility.

Why multi-asset allocation?

Wide fluctuations in returns

Different asset classes often show wide fluctuations in returns from year to year. For example, in certain years, equities might deliver phenomenal returns, while in other years, they could be negative. Similarly, the performance of gold and debt can vary significantly. By investing in a multi-asset fund, you can smooth out these fluctuations, as the varying performance of different asset classes tends to balance out over time.

Example of asset class performance:

• Equity: Typically leads to significant wealth growth over the long term but can be highly volatile.

• Debt: Provides stability and steady growth, making it less volatile than equities.

• Gold: Often acts as a hedge against market volatility and inflation.

Industry perspective

As of March 2024, the mutual fund industry's total assets under management (AUM) stood at ₹55 lakh crore. Here's the breakdown:

• Equity Funds: Rs 23 lakh crore (plus ETFs and hybrid allocation)

• Debt Funds: Rs 14 lakh crore

• Gold ETFs: Rs 30,000 crore (0.55% of Rs 55 lakh crore)

This distribution highlights the varying allocation trends within the industry and underscores the importance of diversification.

The role of asset allocation
Asset allocation is the key to achieving optimal returns and managing risk in any investment portfolio. Empirical research shows that more than 90% of the volatility in a portfolio can be managed through proper asset allocation rather than by chasing high returns in individual asset classes.

The BHB study
In 1986, researchers Brinson, Hood, and Beebower (BHB) published a study demonstrating that asset allocation is the primary factor in a portfolio’s return variability. They examined the quarterly returns of 91 large US pension funds from 1974 to 1983, comparing them with the returns of hypothetical portfolios with similar asset allocations but in passive investments. The study concluded that asset allocation explained 93.6% of the variation in portfolio returns, highlighting the limited role of active management in achieving optimal returns.

Benefits of multi-asset funds

Diversification
MAFs invest in a mix of asset classes, which helps mitigate risk and enhance returns. This diversification is particularly beneficial during periods of market volatility, as it balances the performance of various asset classes.

Professional management
In MAFs, professional fund managers handle the overall allocation and selection of securities. This includes choosing growth-oriented and high-dividend-yield companies in the equity component and determining the maturity for debt investments. Their expertise ensures that the fund is managed efficiently to maximize returns while minimizing risk.

Tax efficiency
Investing in MAFs can also be tax-efficient. Dividends from direct stock investments are taxed at your marginal slab rate, while MAFs if held for over a year, are taxed at 10% on the overall returns, provided the gains exceed ₹1 lakh in a financial year.

Practical allocation
Investors often make the mistake of allocating to asset classes based on recent performance, a behaviour known as recency bias. Instead, it’s crucial to assess your risk profile, investment horizon, and financial goals. Multi-asset funds can be an effective way to maintain a balanced allocation that aligns with your investment objectives.

Final thought
In the current volatile market environment, especially with the uncertainties surrounding post-election outcomes, a multi-asset allocation fund offers a balanced and diversified approach. It helps mitigate risks while aiming for steady returns, ensuring that your portfolio remains resilient. By considering a multi-asset fund, you can enjoy the benefits of diversified growth and stability, making it a valuable addition to your investment strategy.

(The author is Cofounder and Executive Director, Prime Wealth Finserv. Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)