Balancing Portfolio Risks and Rewards via Multi-Asset Allocation

Author: Tiramareddy Ravi Kumar, Mutual Fund Distributor

With peace talks in West Asia gaining ground, despite occasional skirmishes, AI-led business disruptions and the recent correction in larger global tech names, stability returning somewhat to the local currency and slow reduction in FPI selling are factors helping Indian equities limp back to normalcy.

Despite the occasional volatility in g-sec and other bond yields, debt as an asset class has been consistent in recent years. After relentless run, gold prices have finally hit the speed breaker as geopolitical tensions subside, the dollar gains strength due to rate hike prospects and safe haven demand reduces.

Investors looking for risk-adjusted performance with lower volatility must look at combining assets smartly.

Asset Cycles Differ

Equities are the growth drivers, but their trajectory is not linear. From 1992 to early 2003, it was a consolidation phase with the BSE Sensex giving 0% returns in 11 years. From 2003 to early 2008, the index rallied at a massive 38% CAGR.

The global financial crisis, sovereign debt challenges in Europe, domestic NPA spikes and other factors led to a moderation in returns to 8% CAGR during 2008-2018. Despite challenges in the form of NBFC crisis, COVID-19 pandemic, wars, supply chain disruptions, penal trade tariffs, energy price surges and currency depreciation, the BSE Sensex gave 13% CAGR over the seven years from 2018 to 2025.

Debt as an asset class has held steady over the decades. Bonds primarily provide stability and consistency to the portfolio without taking too much risk. When 5-year rolling returns are taken from 2007 to 2025 for the CRISIL Composite Bond Fund Index, we get an average of 7.2% returns annually over the 18-year period.

Gold insulates the portfolio from inflation and adverse currency movements as well as global risks. From December 1998 to mid-2006, the yellow metal (MCX Prices) gave nil returns. In the subsequent seven years till December 2013, gold delivered a spectacular 25.8% CAGR. For the better part of the subsequent six years till December 2019, gold price remained at the same level. Over the past six years till December 2025 the precious metal has zoomed at 23.7% CAGR. Thus, gold has its own phases of rallies and consolidations.

Combining non-correlated assets that differ in their dynamics can deliver optimal risk-adjusted performance for investors.

Following a process

Investing in any asset class requires a careful assessment and a process to make the right selections.

Continuous evaluation of growth trends, interest rate cycles, inflation patterns, earnings momentum, and sector valuations to identify phases of a business/economic cycle becomes necessary. Capital must be deployed in sectors or themes or market caps where the risk-reward is favourable based on macros and valuations.

Debt investments require a smart assessment of opportunities across duration and credit spectrum. Based on the interest rate cycle, duration strategies and for accrual strategies for carry are to be devised smartly.

Gold requires monitoring of global inflation, geopolitics, interest rates, the US Federal Reserve’s action, real g-sec yields in the US, fiscal balance and the growth prospects or the lack thereof.

A fund of funds can help investors cut through all challenges of having to choose allocations, shuffle holdings to reflect market conditions and rebalance periodically as the scheme manager would take active calls based on rigorous models and research inputs.