“One-stop solutions like Multi-Asset Fund of Funds can be a good choice for your asset allocation needs,” Chirag Mehta said in a webinar on January 19.
Speaking about “Navigating Uncertainty with the Right Asset Allocation”, Mehta said that uncertainty is the only certainty in markets and investors need to just focus on things they can control. Mehta said that aggressive hybrid funds are heavily inclined towards equity and hence do not give a proper hedge to your portfolio.
“Most aggressive hybrid funds out there have a minimum allocation of 65% to equities and given their lopsided allocation, they are unbalanced to an extent. So, when you are looking at a solution for your asset allocation needs, you need to ensure you are going to a fund that is unbiased and not lopsided to a particular asset class.” said Mehta.
Different asset classes respond differently to macroeconomic developments and tend to move in cycles. There have been years when equity markets had a great run like in 2021, years when only bonds were dependable, and years when gold shined like in 2020, and these periods did not typically overlap. Fund managers like Chirag Mehta believe that it is imperative to spread money across asset classes to smoothen out the ups and downs.
“Equities are one of the best asset classes to generate long term growth. But at the same time, there could be risks that could knock equities down by 30-40% in any given year. Are you ready to accept that kind of risk, that kind of drawdown in your portfolio? If not, you need two other asset classes to smoothen the risks out. Debt can lower volatility in your portfolio and gold can limit downside risk. So, you mix all three in a proportion that will help you sail any kind of market environment,” said Mehta.
Chirag Mehta also spoke about an alternate strategy for those who do not want to bet on multi-asset funds for various reasons. He said that the strategy has worked like a magic formula historically “There is the 12-20-80 strategy that has worked across time horizons, across cycles. As per this strategy, 12 months’ worth of your monthly expenses should be parked in a very safe place- liquid fund, bank fixed deposit, or any other risk-free avenue. After setting aside 12 months of safe money, whatever money is left could be split between 80% to equities and 20% to Gold. When you look at investing 20% in gold, you should ideally choose a gold fund of funds or gold ETF. The 80% to equities must be diversified across styles of equity management that provide diversification,” said Chirag Mehta.