Are you in favour of having a multi-asset class in 2023? The equity markets were almost muted last year because of the kind of great returns that we have seen in the past for 2022. It was all about the sectors and some of the stocks performing. Debt was also muted although gold has shone very much. That shine is continuing even in 2023 and real estate has also fared better. In terms of volatility and return in all of these asset classes, how is 2023 going to be?
Your observation is bang on may be in 2022, some bit of this got exaggerated, given the dollar-rupee movement. For example, in gold, the rupee returns for the investor were usually positive. It was in the vicinity of 13 odd percent for the year whereas the dollar return for gold was very similar to a fixed income moderate duration fund would have given.
In 2022, a couple of things panned out. One was relentless rate hikes across the globe with a view to combat inflation and because of that, the fixed income returns range for 2022 was at the lower end of 1-1.5% to a higher end of about 4-4.5%. The interesting thing to note is that these categories actually did not return negative despite the fact that we saw the yields move up quite relentlessly.
Moving into 2023, we need to keep in mind that asset class rotations are inevitable whether one looks at two years back, three years back or you go one year, two years, three years and hence to have a reasonably well rounded portfolio, one has to keep the risk appetite in mind as well as longevity.
I would say that the role of asset allocator funds and the right kind of asset allocation assumes renewed significance as we are almost plateauing out on interest rates but the vulnerability from the global fund continues persists.
But in the multi-asset class category, will you go and vouch that 2023 could be the year for all of these categories clubbing all of these assets in one and expecting returns out of that. Can this asset class and fund category give better returns than investing individually?
If you look at the past 12 months, certainly the multi-asset category has demonstrated metal strength predominately. This category comprises equity, fixed income and gold in varying proportions. Gold has been the clear winner of the year as far as 2022 is concerned, followed by equities and fixed income in varying combinations.
Given where we are from a macro perspective, given that on a risk reward base, precious metals like gold continue to retain their sheen, multi-asset allocator funds could be a very good complementing strategy to the current asset allocation portfolio.
So whether we are talking about just 2023 – though I would say do not plan it only from a one-year perspective – it looks like this could be a theme given the pace at which these categories are moving. So we are better off leaving it to these category funds to be able to play that role at least in a tail ended allocation to the portfolio.
But you are still making a point that it could be a good complementing fund category. If I have around Rs 100, what will be your advice on how much you can look to divert for this particular category?
There are two parts to your question or two ways to answer your question. If my appetite for risk is still reasonably high on a Rs 100 portfolio, I would still prefer to be allocated higher towards equities, maybe 65% to 70%, and the remainder could be a combination of both fixed income as well as the multi-asset allocator funds.
However, if my risk appetite is quite conservative, more than 80-85% of my portfolio would be in fixed income, which is where we seem to be trending as far as 2023 is concerned. But if you give it for a year’s time, a tail-end allocation of 10% to 15% should still go into these multi-asset allocator strategies.
The advantage is that the combination of three asset classes blended into one will allow you to give a nice skew or even pull up the returns of the predominant asset class depending on fixed income or equities when the chips are low for one of these asset classes. That is something which we saw play out phenomenally well last year.
Going ahead in 2023 do you feel that multi asset class because with inflation different categories react differently this can prove to be a portfolio of an investment which can be inflation proof?
Within the multi asset category, as an asset that has demonstrated its mettle as an inflation fighter or an inflation solution provider, equities stand tall, followed by gold. Fixed income seldom has the agility or the ability to outperform inflation on a consistent basis. It could be tactical of course. Hence my view would be to look at it from a holistic perspective.
There could be pockets even in equity as an asset class, the way we saw last year. Its ability to fight inflation or beat inflation, especially when inflation is moving at a faster pace clearly gets restricted if we look at a larger canvas over a 3-5-year horizon. If you also have that in mind and if you do not want to expose your portfolio predominantly to only one asset class, please feel free to go and use the multi asset allocator for allocating money because then you will get all in one and even if two asset classes perform better than the third one, that itself will give you a bump up as far as the inflation is concerned.
How beneficial are these when it comes to the tax aspect because all of these different asset classes have different tax methodology but when we are clubbing all these asset classes in one, what happens to tax saving?
Only if the portfolio is predominantly equity, you will have the equity taxation which in this case is greater than one year and that qualifies for long-term capital gains. Every other category actually qualifies for the fixed income taxation which means the long-term capital gains kicks in after three years.
If one has to select a multi-asset category fund what kind of a bifurcation or investment he should be looking out for because in this category, at least 10% of the investment has to be there in different funds or asset classes. So the preference should be for one fund which has more diversification or more inclination towards the equity class. Second, if somebody is looking to invest now, what should be the preferred way of investing in SIP or a lumpsum?
When you are looking at a multi-asset allocator, one needs to be mindful whether you are picking up a very dynamic multi asset allocator or a reasonably static with a minimum mandatory and a top up. These are the two key things.
Typically, we have seen that most multi asset allocators have a reasonably high skew towards equity as an asset class over and above the mandatory requirement. Given that these are not categories which are recommended from a one year perspective, one could initiate investment but typically, even these are investments which play out full mettle over a three-year horizon.
Look out for the category within this which is skewed towards equity and allows you to participate in reasonable quantum towards gold and fixed income. On your second part, whether it is to be SIP or STP, given where we are in terms of markets, if you are doing a multi asset kind of a strategy, you are okay to do a lumpsum even right now or at best an STP where you put a lumpsum into an overnight liquid ultra short term fund and grade your entry into such categories over the next couple of quarters.
Given the wobbliness of the market, that could be one way out. But if you are still preferring a diversified equity fund route, then you are better off doing a combination of SIP plus STP now.
