When discussing the importance of diversity in one’s finances, the phrase “don’t put all your eggs in one basket” is frequently used. The chief element to grasp is why it is necessary to diversify assets across asset classes.
During the global financial crisis of 2008, gold returned 28.61 percent, while Indian and world equities were both in the red, down 56.54 percent and 30.27 percent, respectively.
Gold, on the other hand, had positive returns of 22.42 percent in 2009. By 2013, gold had returned a negative 7.90 percent, and equities had diverged as well, with global equity yielding 35.76 percent while the Indian market yielded 4.82 percent.
This demonstrates that asset class winners change every other year, and there is little link between these asset classes. As a result, the best way to maximize returns is to use wise asset allocation and rebalance as needed.
Asset Class Mix
Equity, debt, gold, and real estate are the key investing asset classes under discussion. Real estate is unsuitable for the average investor since it necessitates a significant one-time investment. Along with this, a fourth asset class in the form of global equity has emerged in recent years.
Through international funds or ETFs issued by domestic investment institutions, Indian investors are increasingly getting exposure to innovative global companies such as Apple, Meta, Netflix, Microsoft, and others.
How do you go about allocating assets?
You should consider investing in all four asset groups to diversify your portfolio appropriately. We tend to stick to asset classes that we understand well due to our poor grasp of the complexities of numerous asset classes.
The other option is to invest in a mutual fund plan that will take care of everything for us. There is a range of alternatives within each asset class from which to pick.
There are two options for dealing with the problems. Invest in a mutual fund that invests directly in all of the asset classes, or invest in a fund that invests in a variety of asset classes. The second approach has a better chance of generating higher returns since it allows you to benefit from the targeted experience of the underlying scheme’s fund managers.
ICICI Prudential has developed a Passive Multi-Asset Fund of Funds to solve the issues of optimal asset allocation. The scheme is designed to invest in all four asset categories outlined before, with some constraints applied to each of the asset classes.
Taxation
The fund of funds is classified as a debt fund for tax reasons. If you hold your units for more than 36 months, any profits you make on their sale or redemption will be considered long-term. Short-term capital gains will be included in your regular income and taxed at the slab rate relevant to you. Long-term capital gains will be taxed at a flat 20% after indexation.
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