Mindful asset allocation the key to investment success

A multi-asset allocation fund invests in multiple asset classes, including equities, fixed income, gold, silver and REITs.

Investing is not just about chasing returns—it’s about managing risk while ensuring steady wealth creation. This is where asset allocation plays a crucial role. By distributing investments across different asset classes such as equities, fixed income, gold and silver, investors can achieve diversification, which in turn helps reduce risk and enhance their overall investment experience. A well-diversified portfolio helps to offset the impact of underperformance in one asset class by ensuring that other asset classes, which often move independently, can provide support.

Traditionally, Indian households have favoured physical assets such as gold and real estate along with bank deposits. However, today’s generation is increasingly gravitating toward financial assets due to their transparency, cost-effectiveness and tax efficiency. Financial products also offer investors the advantage of professional management and dynamic asset allocation strategies that optimise risk-adjusted returns. Among the popular asset allocation products are multi-asset allocation funds and balanced advantage funds.

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A multi-asset allocation fund invests in multiple asset classes, including equities, fixed income, gold, silver and REITs.

These funds follow a static allocation approach, meaning that their investment proportions remain within predefined limits (though there are a few funds in this category that adopt significant deviation from a near-static portfolio). On the other hand, a balanced advantage fund primarily invests in equities and debt but dynamically adjusts the exposure based on market conditions, making it a more flexible investment vehicle. While equities are known to generate long-term wealth, they can be volatile in the short run. This volatility, though unsettling, also creates opportunities for investors to enter the market at favourable levels.

Data compiled from 2011 to 2024 by Aditya Birla Sun Life AMC Research demonstrates that a well-diversified portfolio comprising 65 percent equities, 20 percent fixed income and 15 percent gold delivered an annualised return of 11.45 percent CAGR. Such an approach has provided more stable returns with lower volatility compared to a pure equity portfolio, reaffirming the importance of asset allocation in wealth management. Such a well-diversified portfolio has captured 90 percent of the returns of the Nifty 50 while experiencing only 68 percent of its volatility.

When selecting a balanced advantage fund, investors should focus on how dynamically the model adjusts to changing market conditions. Point-to-point returns can be misleading; as during elevated market levels, funds with high equity levels will do better and in falls, funds with low equity levels will fall less. Hence, evaluating performance across different market cycles is essential. Key indicators such as upside and downside capture, rolling returns and exposure to valuation, sentiment, liquidity, and technicals should be carefully analysed. Some balanced advantage funds follow a pro-cyclical model, others are counter-cyclical while some combine both approaches. Understanding these nuances can help investors make informed decisions. A 'procyclical approach' is when a fund tends to make increased allocattions to equity in a rising market and reduces exposure in a falling market. Whereas a 'countercyclical approach' is when the fund increases equity allocation in a falling market and reduces allocation in a rising market.

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Similarly, in multi-asset allocation funds, it is important to examine how  asset class ranges move and whether they are structured to prevent simultaneous downturns. For instance, fixed-income credit instruments may behave like equities in a bear market, which would defeat the purpose of diversification. Investors should also assess whether these funds follow debt or equity taxation rules and ensure that their investment philosophy aligns with their financial goals.

Transparency and robust portfolio construction are key considerations in selecting the right multi-asset fund.

So, who should invest in such asset allocation strategies? These funds are ideal for a) first-time investors, who may be confused with the plethora of asset class options b) individuals with a sizeable corpus looking to reduce risk, c) those seeking alternatives to traditional instruments, and d) investors with a low-risk appetite who want exposure to equities but not lose their sleep over it. The appeal of these funds is evident in AMFI data: while the average per-folio value in equity/sectoral funds Rs 1.9 lakh, it is significantly higher at Rs 4.7 lakh for balanced advantage/dynamic funds, indicating greater investor confidence in their risk-adjusted return potential.

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Any investment success is not just about past returns but about consistency and experience across market cycles.

Investors should move beyond simply chasing a historical performance and instead focus on well-constructed asset allocation strategies that optimise risk and reward. With the right mix of asset classes, investors can achieve sustainable growth while navigating market volatility with confidence.

The author is Co-CIO and Head Equity of Aditya Birla Sun Life AMC.

(Disclaimer: The views expressed by experts on Moneycontrol are their own and not those of the website or its management. Moneycontrol advises users to check with certified experts before taking any investment decisions)