The Investor's Swiss Army Knife

Retail investors who’re not interested in new-fangled or high-capital investment avenues typically have four main asset classes available to them: debt instruments (such as bonds), gold, international equities, and domestic equities.

Which of these asset classes you prefer depends on your risk appetite, future plans, and stage of life.

However, one thing is quite clear: each of these classes comes with its own set of trade-offs.

For instance, government bonds are extremely safe investments, but the returns you get on them are quite meagre. 

In contrast, domestic equities offer excellent long-term returns, but at the price of high volatility and greater overall risk.

But what if you could strategically combine these asset classes in such a way that they yielded something greater than the sum of its parts?

That’s exactly what multi-asset allocation (MAA) tries to accomplish.

Consider the table below¹, which indicates the CAGR* of various asset classes and a MAA strategy over 3 different periods: 3 years, 10 years, and 20 years. 

You can see that the MAA strategy yielded returns that were mostly better than those of debt, gold, and international equities, and came pretty close to the returns delivered by domestic equities.

But suppose we looked at the absolute returns delivered by these asset classes and a MAA strategy between 2000 and 2024, as well as their corresponding standard deviation (a measure of volatility): what would we find then?

This is where the MAA strategy fully unfurls its wings: as you can see in the table below¹, the MAA strategy delivered a CAGR (12%) that was very close to that of domestic equities (13%), but with a much lower standard deviation (12% vs 22%)!

This means that over the long run, a MAA strategy has the potential to perform almost as well as domestic equities without being as choppy and volatile.

In addition, by investing in gold, debt, international equities, and domestic equities, a MAA strategy provides not just general asset-class diversification but also geographical diversification!

What does this mean for you? A lower chance of losing money, and more peace of mind.

So before you start making large investments in a single asset class, you might want to take a look at how various multi-asset allocation funds have been performing.

And if you need help putting such ideas into practice, or with any other aspect of the investing process, our experts are always here to guide you: simply click here.

* Compound annual growth rate: the effective mean annual growth rate of an asset after taking compounding into consideration. 

¹ Source: Contrarian EPS, Bloomberg, DSP. Data as on May 2024. Data is since 2000. Data taken for Debt - CRISIL Ultra Short Term Debt Index, International Equities - MSCI ACWI TR, Domestic Equities - Nifty 500 TRI. Multi Asset Allocation is 15% Debt, 20% Gold, 15% International Equities, 50% Domestic Equities.