Updated on: Jan 13th, 2022
3 min read
Mutual funds aim to meet the needs of various types of investors. As a result, there are several investment goals, risk exposure, and asset allocation strategies to choose from. Today, we’ll discuss a form of mutual fund called multi-asset allocation funds. Let’s look at what they are and what you should do before adding them to your portfolio.
A multi-asset allocation fund diversifies across asset groups by investing in different securities. Equity, debt, and gold are the most common asset groups in which these schemes invest.
The fund manager will dynamically allocate investments in these asset classes based on how the economy and markets operate. If the stock markets are bullish, for example, the fund manager can increase the portfolio’s exposure to equity-related instruments while reducing the exposure to debt instruments.
Since the returns are not based on a single asset class, the portfolio has a better opportunity to generate risk-adjusted returns and weather volatility.
Diversified schemes aren’t always feasible
According to the Securities and Exchange Board of India (SEBI), a multi-asset allocation fund must invest in at least three asset groups with a minimum allocation of 10% in each.
Although investors may gain exposure to three asset classes by investing in a single scheme, the 10% minimum limit can jeopardise the diversification aspect. If the fund manager is negative about the economy, the portfolio might have a higher allocation to gold-related investments and a lower allocation to equity and/or debt.
They aren’t a viable choice for diversifying individual portfolios
An investor’s portfolio diversification varies from that of a mutual fund scheme. As a mutual fund, like an individual investor, seeks to achieve an investment goal by managing risks, the fund manager and a committed team of professionals to ensure that the targets are reached.
Individual investors, on the other hand, must maintain portfolio diversification by investing in assets with low correlation to one another. This means that even though one asset class performs well, the other is not affected.
Further, a multi-asset allocation fund does not allow investors to achieve style diversification like value or growth, market capitalisation-based diversification, etc.
Since there is no requirement for multi-asset allocation funds to retain more than 65% of their assets in debt or equity, the taxation of these funds varies by the scheme. While most tax-conscious investors prefer equity funds, it is crucial to carefully read the scheme-related documents to understand how the fund house plans to place equity in its portfolio.
The performance of these funds is strongly affected by the fund manager
A fund manager’s position in a multi-asset allocation fund is essential, just like in any other active mutual fund. This is because the scheme has no particular investment style. For example, the scheme may decide to invest about 30% of its assets in equity-related instruments. Still, the fund manager may choose stocks from any sector or market capitalisation because there is no predetermined investment style.
Multi-asset allocation funds can be an outstanding addition to any investor’s portfolio if the scheme is carefully selected. If portfolio diversification is desired, investors must determine whether to use a scheme that invests in several assets or take on the burden of investing in various assets themselves. If the former is the case, the guidelines outlined above will help them choose the best scheme for their needs.