Why diversified asset allocation is essential for today's investors

Financial planners are urging investors to return to disciplined, diversified asset allocation—spreading bets across equities, debt, and gold, instead of relying on a single asset class.

WHY IS THERE A GROWING EMPHASIS ON ASSET ALLOCATION?

With stock valuations stretched, precious metals having already delivered strong returns, and the bulk of the rate-cut cycle behind us, investors can no longer rely on a single asset class to do the heavy lifting. Equities have dominated portfolios for years, but now it is starting to look less effective. The primary goal of asset diversification is to balance potential returns with acceptable levels of risk.

WHAT IS THE CASE FOR DIVERSIFICATION OF INVESTMENTS?
The market could be in a phase where there are no guaranteed winners anymore. The easy gains from cheap stocks, falling interest rates, or a runaway gold rally have played out well over the past five years. For investors, that means they should not put all their money in a single asset class. Diversification is a safety net that cushions the portfolios in the event of a sharp reversal.

HOW CAN INVESTORS DIVERSIFY THEIR PORTFOLIO? WHAT ARE THE ALTERNATIVES?

Mutual funds offer several hybrid scheme categories that provide automatic asset allocation along with tax efficiency. Popular options include equity savings funds, balanced advantage funds, multi-asset allocation funds, and aggressive hybrid funds. Investors seeking low equity exposure of 15-25%, with the remainder in arbitrage and fixed income, can consider equity savings funds. Those looking for a more balanced mix—typically 45-50% in equity and the rest in arbitrage and debt—may opt for balanced advantage funds. Multi-asset allocation funds are suited for investors wanting exposure across equity (25-65%), gold, and debt in a single product. For those with a higher risk appetite, aggressive hybrid funds offer 65-75% equity allocation, complemented by debt. These hybrid schemes not only simplify diversification but also offer more favourable tax treatment compared to pure debt instruments.