Across market levels, maintaining and manoeuvring asset allocation is critical for investors to reach their financial goals. Investing across equity, debt and perhaps commodities (mostly gold) may be a good way to diversify and insulate your portfolio in volatile or uncertain markets.

Baroda BNP Paribas is rolling out a new multi-asset fund. The new fund offer (NFO) closes on December 12. As with all multi-asset funds, the scheme will look to invest in equity, debt and gold.

How does a multi-asset strategy work? Is it suitable for investors of all risk appetites? And how have the existing multi-asset funds delivered? Read on for greater clarity on these aspects and whether the Baroda BNP Paribas Multi-Asset Fund is suitable for your requirements.

Investing in multiple avenues

Each of equity, debt and gold serves a different purpose in the overall construction of your investment portfolio.

For most investors, equities should be the key part of their portfolios for achieving long-term goals. Debt comes next and is expected to provide certainty of returns with low or no risk. Finally, gold is generally considered to be a good hedge against inflation, though there have been periods when returns from the yellow metal have been spectacular or dismal for extended timeframes.

All the three avenues combined suitably with your risk appetite and goal timelines, make for a reasonably sound asset allocation strategy.

Here are some key points to note about multi-asset strategies.

-         Equity, gold and debt have extremely low or negative correlation with movements in each other and therefore can reduce volatility in a portfolio

-         In 2008, 2011 and early 2020, when equities corrected sharply, gold delivered solid returns.

-         Data from the fund presentation indicates that on a rolling three-year basis from April 2002 to October 2022, an investment in ratio of 65: 15: 20 in favour of equity, gold and debt would have delivered a average return of 15.4 per cent and a median return of 12.8 per cent. These are healthy figures. The equity in this case is the Nifty 500 TRI, the gold part is World Gold Council prices of the yellow metal, and the debt part is the Nifty Composite Debt index.

-         When the equity portion of a multi-asset fund is 65 per cent or more, you get equity taxation advantage, with 10 per cent to be paid on gains (on a holding for more than a year) in excess of Rs 1 lakh

-         For investors who may not be able to make the right asset allocation decision, such funds can be a good starting point

-         You may not be able to maximise returns with multi-asset funds. But you can get optimal risk-adjusted returns over the long term and convincingly beat inflation.

Baroda BNP Paribas Multi Asset Fund looks to maintain equity, debt and gold (via gold exchange traded funds) ratio at 65-80 per cent, 10-25 per cent and 10-25 per cent each. The fund would also invest in REITs if necessary.

Multi-asset fund performance

Not all fund houses have dedicated asset allocation funds. The large ones do have them. Over the past one, three, five and seven-year timeframes, ICICI Prudential Multi-Asset and Quant Multi Asset have delivered the best returns. These funds have reported higher returns than equity indices such as the BSE 100 TRI.

HDFC, Axis and SBI’s multi-asset funds have given moderate performances.

What should investors do?

A hybrid fund can indeed be a good starting point for investors who are starting off. Apart from aggressive hybrid schemes, multi-asset funds, too, can be good additions. Even for experienced investors who wish to reduce their portfolio volatility by investing across asset classes, these funds would be suitable for optimising returns.

There are exciting funds in the space. And ICICI Prudential Mult-Asset Fund, with a 20-year track record, would be our first choice. Investors can wait for Baroda BNP Paribas Multi Asset Fund to develop a track record before taking exposure, as a demonstrated ability to take smart calls across at least three asset classes is required.