Why multi-asset allocation matters more than picking winners

Equities, debt and gold are moving through different cycles. Investors face a familiar choice: try to pick the next outperformer, or spread money across several asset classes. The recent market environment has made that decision harder. Indian equities have stayed volatile under global macroeconomic and geopolitical pressure. Gold and silver have corrected after strong runs. Debt has offered steadier but moderate returns.

Multi-asset allocation strategies, which combine equity, debt and commodities such as gold and silver, are gaining relevance, said Harshad Patwardhan, chief investment officer at Union Asset Management Company. He called asset allocation the first key step in an investor's journey.

Different asset classes tend to outperform at different points in the economic and market cycle, Patwardhan said. Their performance can be influenced by macroeconomic conditions, geopolitical events and fund flows. Predicting which asset class will perform best next is difficult for most investors.

Patwardhan also pointed to the potential tax and transaction implications of moving between asset classes. A multi-asset allocation fund can let investors access several asset classes through a single vehicle. The fund manager adjusts allocations as market conditions change.

The diversification benefit comes from the fact that equity, debt and precious metals do not necessarily respond to the same economic or market factors in the same way.

Sanjay Bembalkar, head of equity at Union Asset Management Company, classified equity and debt as "efficiency assets", whose prices are linked to underlying cash flows. Gold and silver are "scarcity assets", whose prices are driven largely by demand and supply. That difference can result in lower or negative correlations between asset classes at different points in the cycle, potentially making a diversified portfolio more resilient.

Investors should not interpret multi-asset allocation as a strategy that eliminates downside risk.

"Multi-asset fund's category are not designed to eliminate risks," Bembalkar said. Such funds can also experience volatility, particularly during extreme market conditions. Correlations between asset classes can also change during periods of market stress.

The objective is better management of portfolio risk, not complete downside protection. Combining assets with different risk and return characteristics and rebalancing the portfolio over time can potentially reduce drawdowns and make the investment journey smoother than remaining concentrated in a single asset class.

For investors, another benefit is behavioural. According to Bembalkar, diversification can help reduce the tendency to chase whichever asset class is currently performing strongly, or the fear of missing out.

A multi-asset fund may be particularly relevant for investors who do not want to continuously decide when to move between equity, debt and gold. The strategy combines diversification with active allocation and periodic rebalancing, allowing investors to outsource some of the asset-allocation decisions to the fund manager.

Patwardhan said there is no one-size-fits-all answer. The choice depends on the investor's risk appetite, investment horizon and existing portfolio. For some investors, a multi-asset fund can form a core allocation. For others who already have a defined asset-allocation strategy, it can complement existing equity, debt and gold investments.

He said the strategy is best suited to a long-term investment horizon and can be considered as a core portfolio category. Investors with short-term liquidity requirements should maintain an appropriate allocation to instruments suited to those needs rather than relying on a multi-asset strategy for near-term cash requirements.