Unsure how to diversify across asset classes? Try multi-asset investing

According to American-British investor and banker Sir John Marks Templeton, “Diversification is a safety factor that is essential because we should be humble enough to admit we can be wrong.” The concept of diversification involves allocating your investment corpus to different asset classes, based on your investor profile, with the intention of mitigating the risk posed by any single asset class. Further, optimal diversification, across key asset classes, enables you to benefit from the growth potential of each of those assets, rather than remaining on the sidelines with investments in a singular asset.

For instance, if you have invested only in the stock market, you will find yourself in a stressful situation during market downturns, since your portfolio will be in the red. Alternatively, if you invest in equities, debt, gold and real estate, your portfolio will perform well even when a single asset class, say equities, performs poorly. This is the power of diversification. So, how should you go about diversifying your portfolio?

Is it necessary to pick individual assets, and bifurcate your investment corpus in several directions? Or is there a simpler way of enjoying diversification, while investing in a single avenue? If you are unsure of how to diversify your portfolio optimally, you have the option of considering the multi-asset category mutual fund. Let us understand more about this all-weather scheme.

Leveraging multi-asset funds

Multi-asset mutual funds invest across a variety of equity categories, including large, mid, and small caps, along with other asset types like debt and commodities. These funds aim to achieve a balanced risk-return profile by diversifying investments across multiple assets. Managed by expert portfolio managers, these funds adjust allocations based on market trends, economic forecasts, etc., making them well-suited for the current market environment.

Key advantages of multi-asset funds are their inherent diversification, which lowers the risk linked to focusing on a single asset type. Such diversity typically leads to greater stability during volatile market phases. Additionally, these funds offer the flexibility to modify asset allocations, allowing them to capitalise on market opportunities and mitigate risks as market conditions evolve.

Multi-asset funds also actively balance risk by adjusting their investment mix; for instance, they might decrease equity investments and increase holdings in bonds and cash during economic downturns. Thus, multi-asset funds provide an adaptable investment option catering to a range of risk preferences.

Does multi-asset investing suit your needs?

While multi-asset investment funds are an excellent means to diversify your portfolio through a single avenue, whether or not such a scheme is right for you depends upon your unique investor profile. Suppose you have a comparatively lower risk appetite, and fear situations wherein you may lose a large part of your portfolio due to market volatility, multi-asset investing may be a good choice.

Separately, if you wish to construct a diversified portfolio, but do not know how to allocate to different asset classes, then a multi-asset scheme could be the solution. You can also use multi-asset funds to enjoy the benefits of professional fund management and tracking, without needing to keep an eye on the pulse of the market. You can invest in multi-asset funds as long as these schemes align with your risk appetite, return requirements, time horizon and investment goals.

Over the years, mutual funds have become a superlative option for investors keen on participating in the market without undertaking active trading themselves. Given the volatile nature of the market, and the potential inherent in different asset classes, during different market scenarios, multi-asset funds can offer investors optimal diversification from a single window. Not only will these schemes enable you to mitigate your portfolio risk, but they will also empower you to capitalise on the changing conditions of the market. Therefore, if you wish to have your finger in every pie, without overextending your finances, multi-asset investing is the way to go.

There are several fund houses which offer a multi-asset scheme. While deciding on which to invest into, the optimal approach is to seek the help of a financial advisor who will help you navigate through the fund selection journey. Conversely, if you are a DIY investor, check the long term track record and consistency in fund performance.

Disclaimer: The article is authored by S.VENKATARAMANI, Chief Executive, Genuine Investments. The opinions expressed are those of the author and do not necessarily reflect the views of Business Insider India. Do your own research (DYOR) before deciding to invest in any financial asset class: