It is important to spread investments across multiple asset classes to create an efficient portfolio — one that can generate the highest possible returns at a given level of risk
APART from equities and debt, there are asset classes like gold and real estate that form a significant part of the investment portfolios of most Indian investors. Each asset class exhibits different levels of risk and offers variable levels of potential reward, with the more volatile asset classes historically generating higher returns over the long term. That is why it becomes very important for all of us to spread our investments across multiple asset classes to create an efficient portfolio - one that can generate the highest possible returns at a given level of risk.
Typically, equities are considered to have the most risk but also have the highest potential to outperform all other asset classes over the long term. That is why, it should form the key component of a portfolio that aims at long-term wealth creation. The accompanying chart illustrates the outperformance of Indian equities over other asset classes in the last 10-year period.
Debt as an asset class can be further broken down into bonds and cash. However, returns from bonds can be calculated with greater certainty than those from equities and they also tend to be more consistent, which make bonds a less volatile asset class. Apart from generating returns, the major role of bonds is in providing stability to an investment portfolio. Cash investments include bank accounts and fixed deposits offered by banks and companies. Real estate appeals to most Indian investors for its appreciation potential in an inflationary economy apart from the utility and satisfaction derived from owning real, tangible assets. But given the lack of transparency and liquidity, it is not widely considered as an active investment option by most investors. But most Indian households buy gold for marriage and gifting purposes rather than using it as an investment option. That is why we believe that those looking at saving for children's marriage need to be provided an option to invest systematically in gold and at the same time, protect from any future rise in gold prices.
A portfolio appropriately diversified across asset classes is expected to smooth out volatility and help ensure more stable returns. For investing towards a future financial goal, multi-asset investing becomes all the more important as the portfolios can be structured appropriately to align towards individual goals. For example, a children's education portfolio can have a larger proportion of equities (say 70%) and the rest in debt to provide funds over the long-term for children's education. The marriage portfolio needs to have an allocation to gold ETFs which is expected to provide a cushion against any rise in the price of gold, keeping in mind financial needs at the time of marriage. Mutual funds are also the most versatile when it comes to multi asset investing as there is a range of funds to choose from across asset classes - cash, bonds, equities. In developed markets like the US, lifestyle and lifecycle mutual funds, generally included in the hybrid fund category, have grown in popularity among investors and retirement plan sponsors in recent years. Lifestyle mutual funds, also referred to as target risk funds, maintain a predetermined risk level and generally use words such as "conservative," "moderate," or "aggressive" in their names to indicate the fund's risk level. Fidelity worldwide offers many such lifestyle and lifecycle funds as well as multi-asset strategic funds which undertake active asset allocation. In India too, it offers the Fidelity Wealth Builder, an asset allocation fund of fund and has recently launched a goal based multi asset product called as the Fidelity India Children's Plan which has portfolios aligned towards three specific goals - education, marriage and savings - for children.
