Can a multi-asset fund be a substitute for portfolio rebalancing?

It is often said that the best way to create, conserve and multiply wealth is through prudent asset allocation. The idea here is to have your capital invested across different asset classes such as equity, debt, commodities etc. to protect your corpus from any untoward development in one particular asset class. Each asset class has its own unique market cycle dotted with periods of outperformance or underperformance.  

Given the dynamic nature of economic and market cycles, historical trends of various asset classes over the past decade and more, shows that the winning asset class keeps changing every year. Since one cannot predict which asset class will do well and at what point in time, what aids a portfolio is having a prudent mix of asset classes. This ensures that an investor has the opportunity to gain from the investment opportunities each of the asset class presents. Also, one can lower the overall portfolio volatility, reduce drawdowns and generate better risk-adjusted returns over longer time periods.

Even for seasoned investors, choosing the optimal asset mix of asset classes along with selecting the right investment instrument within each asset class can be an intimidating task. Moreover, periodic rebalancing of assets is necessary such that the portfolio can deliver returns commensurate with risk appetite and long-term financial goals. 

Essence of Rebalancing

Rebalancing is an important step in the long term success of a portfolio. What investors often fail to understand is that rebalancing is a risk-control tool. On the face of it, rebalancing might seem counter-intuitive as it involves booking profits in certain asset classes and allocating the gains to an underperforming asset class. The objective is to reinstate the portfolio back to its original asset allocation mix without letting factors such as greed or fear influence the decision making. This requires serious time and effort which can be challenging for several investors. This is where multi-asset strategies emerge as a handy solution. 

As the name suggests, a multi-asset fund gives investors access to multiple asset classes within a single fund without worrying about asset allocation or portfolio rebalancing. The typical asset mix in a multi-asset fund comprises of equities, debt, commodities and multiple other asset classes. Based on the changing market conditions, availability of attractive investment opportunities, the fund manager will make the necessary allocation changes, rebalance as and when required. 

Another advantage of multi-asset fund is that investors do not incur short or long term capital gains tax whenever the allocation to various asset classes is shuffled. Had the same been done on an individual portfolio level, every time a profit is booked, an investor would incur taxes on each of the transaction. 

Investment Option

Today, an investor can choose from a wide variety of multi-asset funds which are either actively managed or passively managed. An investor looking for a low-cost multi-asset fund can consider offerings which are passively managed. 

Despite the portfolio consisting solely of passive offerings, the quantum of allocation to various asset classes remains actively managed. This approach enables the offering to make the most out of volatile times and over long-term, offers the potential to generate superior risk-adjusted returns. 

So, if you are an investor who is unsure in which asset classes to invest at a particular point in time, when to rebalance, worried about operational hassles and taxation incurred on rebalancing, then a multi-asset fund is likely to be an optimal investment option. This is because by the very nature of the fund, each of these challenges stand addressed. Through the active management of the offering, the fund has the potential to make the most out of market dislocations in any asset class in which the fund invests in. An investor can consider such a type of fund for lump sum investment irrespective of the market environment.

To conclude, if a multi-asset fund is the core of your portfolio and most of your investment is allocated to a multi-asset fund, then you need not worry about rebalancing as the fund manager will do it on your behalf. In all other cases, ensure that you adhere to an asset allocation plan and rebalance whenever there is a distortion in that allocation ratio.