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Multi Asset Allocation Fund : A complete guide to diversification

Written by - Akshatha Sajumon

May 12, 2023 9 minutes

Multi-asset funds are hybrid funds that invest in different asset classes. The assets in which these funds typically invest are equity, debt, and gold. These funds are also called asset allocation funds. Multi-asset funds help investors in the diversification of their portfolios by investing across different asset classes.

Multi-asset funds are a new category of mutual funds in India. According to SEBI regulations, multi-asset allocation funds have to invest at least  10% of their portfolio in a minimum of 3 different asset classes. A typical multi-asset fund includes more than just one asset class in its portfolio, thereby making it a group of assets in one single fund. 

Multi-asset allocation funds give investors access to a well-balanced and well-diversified portfolio of investments that offer them steady income and capital appreciation at the same time.

How do Multi-Asset Allocation Funds work?

As we have discussed earlier, multi-asset allocation funds are hybrid mutual funds that invest across different asset classes. This means that there can be a fund that invests in equity, debt, and gold. Many fund houses give an option of investing in overseas bonds and equities as well or real estate. 

Investing in such a diverse asset mix can help investors lower their risk. This is because different asset classes have different correlations and behave differently in various economic cycles. For instance, gold gives great returns when there is uncertainty or a grim economic outlook. At the same time, other assets offer negative or no returns. 

Similarly, it is less likely that equity and debt both do go at the same time. So, when equity is not doing well, the fund’s debt portion could do well and vice versa. When Indian markets are in a bad phase, US equities may be doing well. 

Investing in these different asset classes protects from the risk of being invested in a single asset class. But, when there is less risk, returns also tend to decrease. So you should have a minimum horizon of at least 3 to 5 years to get the maximum benefit from your investment in a multi-asset allocation fund.

Benefits of Multi-Asset Allocation Funds

Multi-asset funds are known for the diversification offered by investing in different classes of assets. However, there are many other benefits that they offer to investors. Let us look at the advantages of multi-asset allocation mutual funds:

 The most significant advantage of a multi-asset fund is that it facilitates investors to lower their risks and expose their portfolios to diverse asset classes. These asset classes have their risk-reward factors and correlations in different market cycles.

Experts led Rebalancing
It is important for any investor to monitor their portfolios and rebalance them from time to time to tide through the markets’ volatility. Thankfully, multi-asset allocation funds come with an automatic portfolio rebalancing system which is managed by experienced fund managers who have a better understanding of the market movements. 

Well-balanced portfolio
 As mentioned earlier, investors get the benefits of different asset classes by investing in just one fund. Through multi-asset mutual funds, they can have a well-balanced and well-diversified portfolio at their disposal.

Avoids Portfolio Rebalancing Costs
When you rebalance your portfolio on your own, there are costs involved. It could be exit load, taxes, etc. But in a multi-asset allocation fund, rebalancing is a feature of the fund. So, it comes across as a smart way of saving portfolio rebalancing costs.

Works well for long term investors
The diversification offered by multi-asset allocation funds works well for investors with a long-term horizon. 

The tax treatment of a multi-asset allocation fund depends on the asset allocation of the fund portfolio and the holding tenure of the fund. 

Taxation based on fund allocation: If the multi-asset allocation fund invests more than 65% of its portfolio in equities, then the capital gains are taxed like an Equity Fund. The average holding of the past 12 months is considered to determine equity/debt holdings. For equity mutual funds, a holding period of 12 months is classified as Long Term, but for Debt mutual funds you will have to be invested for 36 months to get classified as Long Term. 

Capital Gains Tax:  Short term gains (holding period of 1 yr for  Equity mutual funds & 3 yrs for debt funds)  are taxed as per the slab of the individual.  For equity mutual funds, Long term capital gains of up over Rs 1lakh per year is taxed at 10% (no indexation allowed). For debt mutual funds the returns are taxed at 20 % with indexation if the investments are held for more than 3 years. 

Risks associated with Multi-Asset Allocation Funds

Here are the risks associated with multi-asset allocation funds:

  • Market risk: The overall performance of the fund can be influenced by fluctuations in the financial markets. If the markets experience a downturn, the value of the fund’s assets may decline.
  • Asset class risk: Different asset classes, such as stocks, bonds, and commodities, have their own unique risks. Poor performance or volatility in a particular asset class can affect the overall fund returns.
  • Manager risk: The success of a multi-asset allocation fund depends on the decisions made by the fund manager. If the manager makes poor investment choices or fails to adapt to changing market conditions, it can impact the fund’s performance.
  • Currency risk: If the fund invests in assets denominated in foreign currencies, fluctuations in currency exchange rates can affect the returns. Currency movements can either amplify or reduce the gains or losses of the fund.
  • Interest rate risk: If the fund has exposure to fixed-income securities, changes in interest rates can impact bond prices. When interest rates rise, bond prices tend to fall, which can negatively affect the fund’s performance.
  • Liquidity risk: Some assets held by the fund may have limited liquidity, meaning they cannot be easily bought or sold. If there is a lack of buyers or sellers in the market, it may be challenging to convert these assets into cash at desired prices.

 Who should Invest in Multi-Asset Allocation Funds?

  • Those seeking exposure to equity

As a hybrid instrument, multi-asset allocation funds can be a convenient way to expose investors to equity.

  • Long term investors

If you invest for long-term goals (at least three years), then these funds are suitable for you. 

  • DIY Investors

For those new-age investors who are starting their investment journey in DIY style and are unclear about the optimum asset mix, multi-asset funds can be an excellent way to have a well-diversified and well-balanced portfolio.

  • Investors with a low-risk  appetite

Since these funds’ multi-asset allocation strategy helps even out the risks, this can be a suitable instrument for investors who have a low-risk appetite and want a steady appreciation on their investments. 

  • Investors who don’t regularly monitor their investments

It can also be suitable for investors who cannot monitor their portfolios at regular intervals as it has an automatic rebalancing feature available. 

  • Investors in higher tax slab

Investors who belong to higher tax slabs can benefit from indexation on their long term capital gains.

Factors to keep in mind before investing in Multi-Asset Allocation Funds

We have already seen that multi-asset funds have myriad benefits. The investors can have peace of mind if they stay invested in such funds. However, you may need to keep in mind certain factors before investing in these funds. 

  • The allocation of portfolios in a multi-asset allocation fund can vary between different Mutual fund companies, so you would need to do your research to see which fund matches your risk/reward profile.
  • If an individual invests in a multi-asset allocation fund to achieve multiple goals, especially with different time horizons, then it may get difficult to meet your financial goals/needs with multi-asset allocation funds as these funds work well over a long term horizon.

A multi allocation fund may be a good addition to your mutual fund portfolio for a wide variety of investors as mentioned above. 

How to invest in Multi-Asset Allocation Funds in 2023

Investing in Multi-Asset Allocation Funds in 2023:

Selecting the right Multi-Asset Allocation Fund:

  • Research and compare different funds based on their investment strategies, historical performance, and expense ratios.
  • Consider factors like asset allocation, fund manager’s expertise, and the fund’s track record in different market conditions.

Determining investment goals and risk tolerance:

  • Identify your financial goals, such as capital growth, income generation, or capital preservation.
  • Assess your risk tolerance by considering factors like investment horizon, financial stability, and comfort with market fluctuations.
  • Align your investment goals and risk tolerance with the fund’s objectives and asset allocation strategy.

Investing through mutual funds or ETFs:

  • Choose between mutual funds and exchange-traded funds (ETFs) based on your preferences and investment approach.
  • Mutual funds offer professional management and a wide range of options, while ETFs provide flexibility in trading on stock exchanges.
  • Consider factors like expense ratios, minimum investment requirements, and ease of diversification when selecting between mutual funds and ETFs.

Frequently Asked Questions

What are the asset classes in a multi-asset allocation fund?

There are many asset classes that a multi-asset fund invests in. The common classes include debt, equity, gold,  real estate, commodities, and exposure to international stocks and bonds.

 Are Multi-asset funds a good investment?

Yes. If you are looking for diversification and are unclear about the asset mix you should have to achieve your goals, then multi-asset funds are for you. Though, you should consult your financial advisor before investing in these funds.

What is a multi-asset portfolio?

A multi-asset portfolio is a strategy that invests in various asset classes to diversify and reduce risks. The outcome is a well-diversified and well-balanced portfolio.

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