Why predicting the next best asset class is a futile exercise Thursday, Jul 18, 2019
When investing, most of us are focused on capturing the highest returns, and for that we’d obviously like to choose the best performing asset class or investment idea every single time.
But there’s a slight problem with that. No one, not even the so-called experts, can accurately and consistently know what the best performing asset class or investment idea over the next few months/years will be. Be wary if someone tells you otherwise, because those who try to predict and time the markets usually get burned.
The simple reason for this is that the best performing asset class is dependent on the state of the economy, which with its booms and busts keeps changing continuously. Assets, due to their differing risk and return characteristics, respond differently to these booms and busts, thus going through cycles of optimism (price increases) and pessimism (price falls).
Typically, when interest rates are low, debt gives lower returns but equity will be outperforming; when the equity markets are down, debt would be an outperformer; in times of uncertainty cash and gold will rule: and so on.
But don’t just take our word for it. Let’s dig into the asset class returns history in India.
PAST PERFORMANCE MAY OR MAY NOT BE SUSTAINED IN FUTURE.
(Indices Used: S&P BSE Sensex Total Return Index; MCX Gold Commodity Index; CRISIL Composite Bond Fund Index; S&P BSE SmallCap Total Return Index; S&P BSE MidCap Total Return Index; S&P BSE 100 LargeCap Total Return Index)
The colorful chart above is hard evidence that for successful investing, the question to answer is not what will change, but what will not.
And what doesn’t change is the fact that asset classes grow and contract in cycles. To put it simply, there will be periods when equity markets will have a brilliant run, periods when only bonds will be dependable, and periods when gold will shine the brightest, and these periods will not typically overlap. Thus on its own, an asset class can be quite volatile, but a mix of assets can lower volatility - simply because historically when one asset type has average or poor returns; the other usually does well.
Once we have internalized this phenomenon, it isn’t rocket science to know that holding a diversified portfolio with multiple imperfectly correlated asset classes (equity, debt, gold) and rebalancing regularly can prove to be the easiest, smartest way to make consistent, meaningful returns through the ups and downs of the economy.
Thus, concentrating investments in a single asset class (In India that is typically fixed deposits) is one of the biggest mistakes that investors could make. At least a portion of the investment portfolio should be allocated to asset classes that perform well in different economic environments. Given the unpredictability of potential economic outcomes in today’s uncertain times, holding a balanced portfolio that includes diversified assets is prudent.
The Hybrid: Multi Asset mutual fund category is one such avenue to use asset cyclicality to your advantage and ensure a consistent rate of return with limited volatility. This category of funds invests in equity, debt and gold creating a balanced risk and return profile. It thus offers investors exposure to various asset classes in a single investment.
The manager strategically moves in and out of these asset classes capitalizing on their up and down cycles, thus relieving the investor from monitoring asset markets. The portfolio strives to optimize gains and minimize downside and is ideal for the diversification and asset allocation needs of investors with low and medium risk appetite.
Don’t lose sleep over the up’s and downs of high risk investments, diversify through true multi asset funds and have a relatively steady ride towards long term wealth creation.
|Name of the Scheme||This product is suitable for investors who are seeking*||Riskometer|
|Quantum Multi Asset Fund|
(An Open Ended Fund of Funds Scheme Investing in schemes of Quantum Mutual Fund)
|• Long term capital appreciation and current income |
• Investments in portfolio of schemes of Quantum Mutual Fund whose underlying investments are in equity, debt / money market instruments and gold
Investors understand that their principal will be at Moderately High Risk
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The views expressed here in this article / video are for general information and reading purpose only and do not constitute any guidelines and recommendations on any course of action to be followed by the reader. Quantum AMC / Quantum Mutual Fund is not guaranteeing / offering / communicating any indicative yield on investments made in the scheme(s). The views are not meant to serve as a professional guide / investment advice / intended to be an offer or solicitation for the purchase or sale of any financial product or instrument or mutual fund units for the reader. The article has been prepared on the basis of publicly available information, internally developed data and other sources believed to be reliable. Whilst no action has been solicited based upon the information provided herein, due care has been taken to ensure that the facts are accurate and views given are fair and reasonable as on date. Readers of this article should rely on information/data arising out of their own investigations and advised to seek independent professional advice and arrive at an informed decision before making any investments.
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Please visit – www.QuantumMF.com to read scheme specific risk factors. Investors in the Scheme(s) are not being offered a guaranteed or assured rate of return and there can be no assurance that the schemes objective will be achieved and the NAV of the scheme(s) may go up and down depending upon the factors and forces affecting securities market. Investment in mutual fund units involves investment risk such as trading volumes, settlement risk, liquidity risk, default risk including possible loss of capital. Past performance of the sponsor / AMC / Mutual Fund does not indicate the future performance of the Scheme(s). Statutory Details: Quantum Mutual Fund (the Fund) has been constituted as a Trust under the Indian Trusts Act, 1882. Sponsor: Quantum Advisors Private Limited. (liability of Sponsor limited to Rs. 1,00,000/-) Trustee: Quantum Trustee Company Private Limited. Investment Manager: Quantum Asset Management Company Private Limited. The Sponsor, Trustee and Investment Manager are incorporated under the Companies Act, 1956.