Which asset class will outperform next? Experts say investors should focus on asset allocation instead of chasing winner

With equities, debt and precious metals moving through different cycles, investors are facing a familiar dilemma. Should they try to identify the next outperforming asset class or spread their money across several of them?

The recent market environment has made that decision harder. Indian equities have remained volatile amid global macroeconomic and geopolitical uncertainties, while gold and silver have also seen periods of correction after strong runs. Debt, meanwhile, has offered relatively steadier but moderate returns.

Against this backdrop, multi-asset allocation strategies, which combine investments across equity, debt and commodities such as gold and silver, are gaining relevance as a way to reduce dependence on the performance of any one asset class.

“ Asset allocation is the first key step in the journey of investment for an investor,” said Harshad Patwardhan, chief investment officer at Union Asset Management Company .

Different asset classes tend to outperform at different points in the economic and market cycle, he said. Their performance can be influenced by macroeconomic conditions, geopolitical events and fund flows, making it difficult for most investors to consistently predict which asset class will perform best next.

Patwardhan also pointed to the potential tax and transaction implications of moving between asset classes. A multi-asset allocation fund can allow investors to access several asset classes through a single vehicle, while the fund manager adjusts allocations as market conditions change.

The diversification benefit comes from the fact that equity, debt and precious metals do not necessarily respond to the same economic or market factors in the same way.

“Different asset classes do not always respond to the same market factors in the same way,” said Sanjay Bembalkar, head of equity at Union Asset Management Company . He classified equity and debt as “efficiency assets”, whose prices are linked to underlying cash flows, while gold and silver are “scarcity assets”, whose prices are driven largely by demand and supply.

This difference can result in lower or negative correlations between asset classes at different points in the cycle, potentially making a diversified portfolio more resilient.

Investors should not interpret multi-asset allocation as a strategy that eliminates downside risk.

“Multi-asset fund’s category are not designed to eliminate risks,” Bembalkar said. Such funds can also experience volatility, particularly during extreme market conditions. Correlations between asset classes can also change during periods of market stress.

The objective, therefore, is not complete downside protection but better management of portfolio risk. Combining assets with different risk and return characteristics and rebalancing the portfolio over time can potentially reduce drawdowns and make the investment journey smoother than remaining concentrated in a single asset class.

For investors, another benefit is behavioural.