When Investment is made in a fund, that invests in multiple assets (which in turn offers diversification across various asset classes), then that kind of fund is known as a multi-asset allocation fund.
The need for different kinds of investments is catered under mutual funds. Thus, there are countless schemes with specific investment objectives, risk exposure, and asset allocation strategies.
What are multi-asset allocation funds?
Multi-asset allocation funds allows investment in various asset classes. Equity, debt, gold, etc. are a few of the common asset classes where these schemes invest.
Investment in these asset classes is based on the way economy and market function. The allocation of these dynamic funds can be done easily by the fund manager. An example of the same is provided below.
If the stock markets are optimistic, the fund manager can try to increase the exposure of the portfolio to equity-related instruments and try to reduce debt instruments.
Also, when the general economy of the country has a low-spirited outlook, then investment in gold is likely to increase as gold tends to perform well when other asset classes are having a low performance.
There is always a better opportunity to generate risk-adjusted returns and weather volatility because the returns are not based on a single asset class.
Given below are a few pointers and strategies to know the Working of a multi-asset allocation fund:
Diversification of the schemes may not always be possible
There is a mandatory requirement by the “Securities and Exchange Board Of India” (SEBI) stating that a multi-asset allocation fund has to invest in at least three asset classes which should have a minimum allocation of 10% each in them.
This means that there is an exposure of three asset classes with investment in a single scheme, along with a minimum limit of 10% of diversification.
For example, if the fund manager is not sure about the economy, then the exposure to the portfolio might be higher for gold-related investments and there may be minimal exposure for equity and/or debt.
It is advisable for the investors to make sure that they go through all the schemes related documents carefully and choose a scheme that specifies a definite exposure to various asset classes that happen to be within the acceptance level of the investor.
They do not provide an answer to individual portfolio diversification
To create a diversified portfolio of investments, the most popular advice is to invest in various asset classes. And a multi-asset allocation fund is all about it.
So the question which arises is either investors should merely invest in multi-asset allocation fund or should they stop worrying about the diversification of their individual portfolios.
There is a difference between portfolio diversification for an investor and for a mutual fund scheme. The objective of a mutual fund is to achieve an investment by keeping a proper check on risks. This is achieved with the help of the fund manager and a dedicated team of professionals who work to ensure that the objectives are met.
On the other hand, there is a need for individual investors to ensure the diversification of their portfolios. This can be achieved by investing in assets that have a low correlation with other invested assets.
The only setback of a multi-asset allocation fund is that it does not allow investors to achieve style diversification such as “value or growth, market capitalization-based diversification, etc.”
Taxation will depend on the composition of the portfolio
Since it is not mandatory to have a holding of more than 65% in debt or equity, the taxation of multi-asset allocation funds varies from scheme-to-scheme. Although most investors, who are sensitive to tax, prefer investing in equity funds, and are advised to read all the schemes related documents carefully. Proper understanding of the documents helps to comprehend how the fund house plans to position equity in the scheme’s portfolio. There should not be any assumptions from the investor’s side with respect to the tax rules. In case they have any queries, investors are advised to talk and clear it with the fund house.
An important role is played by the fund manager regarding the performance of these funds
For investing in a multi-asset allocation fund, the role of the fund manager is quite crucial.
For example, it may happen that the scheme decides to invest around 30% of it’s corpus in equity related instruments, but without any predetermined investing style. The fund manager can choose from any sector or market capitalization.
Although many schemes might declare some of their aspects in the scheme related documents, there is still a lot on the shoulder of the fund manager while investing in multi-asset allocation funds. Therefore, it is important to make sure that the track record is checked by the investors along with the performance of the fund manager before investing.
Who should invest in a multi-asset allocation fund?
Multi-asset allocation funds are most suitable for investors who have a low-risk craving but also want to enjoy smooth returns on their investments.
Multi-asset allocation fund aids such an investor to compensate for the risks that come along with investing in just one type of asset class.
It also ensures a smooth flow of income for the investors even at the time of underperformance by some asset classes as compared to other asset classes.
Advantages of multi-asset allocation funds
Exposure of investor portfolios to different asset classes along with various risk-reward factors can be enabled with multi-asset allocation funds. It permits investors to lower their risk and develop steady earnings through various market styles.
2. Rebalancing portfolio
Rebalancing of the portfolio is important for ensuring that investments are distributed properly in those asset classes that generate more returns than the others. A multi-asset allocation fund provides an option for automatic portfolio rebalancing which helps investors in all sorts of ways. An investment market is a volatile place. Thus, rebalancing a portfolio is the key to flow through ups and downs.
3. Ready-made portfolios
It is not possible for everyone to create a tailor-made portfolio by a professional. But by investing in a multi-asset allocation fund, they can avail a well-balanced investment option along with a ready-made portfolio. By investing in just one type of fund, investors can take the advantage of various asset classes.
4. Unrestrained entry and exit
There are no charges of any amount either for entering a scheme or to exit it. Investors can gain free entry and exit if there has been a redemption of 10% of their investment before a year has passed.
If the investor does not redeem the remainder in one year, then an exit load is charged at the rate of 1%.
Investors who have experience in asset allocation portfolio rebalancing maybe be able to earn the full benefits of multi-asset allocation funds.
A multi-asset allocation fund can become a good addition to any investor’s portfolio as long as the scheme is chosen carefully. The decision to be made by the investors is – whether they want to opt for a scheme that makes them invest in multiple assets or whether they want to take the responsibility of investing in different assets themselves.
If the investor takes the former choice, then the above-mentioned points can help them choose the right scheme based on their profile.