Portfolio diversification is a popular term in the investment sector. It has been a commonly opted strategy for investors for a long time. This strategy entails an investor diversifying or dividing the total investment amount into different channels instead of making a single investment. The perk? The opportunity to achieve great returns from high-risk investments and balance risk via low-risk investments. A multi-asset allocation fund has a similar principle.
In general, mutual funds allow investors to invest in a broad range of channels with minimal effort. A multi-asset allocation fund does more than that by balancing risk and returns in unpredictable markets. Read on as we explore in depth how multi-asset allocation funds are the answer to uncertain market conditions!
What is a Multi-Asset Allocation Fund?
Think about a mutual fund that must invest the pooled money from the investors across multiple asset classes, which generally are equity, debt, and one more asset class, like gold or real estate. The Securities and Exchange Board of India (SEBI) has specified in its guidelines that each fund must invest in at least three asset classes and maintain a minimum of 10% allocation in each.
This particular structure of the multi-asset allocation funds works as a risk and return adjustment mechanism.
Why Uncertain Markets Require Asset Diversification
Volatility is a major characteristic of uncertain markets, where asset prices go up and down based on multiple causes, such as inflation, rate rises, geopolitical tensions, or slowdowns in the economy. Here, depending on the asset class, such markets open up your investments to tremendous risk. For instance, equities will sell off during a downturn, while gold tends to appreciate as investors are seeking shelter. Debt instruments, like government bonds, will provide stability and steady returns during a stock market downfall.
That’s where diversification comes in.
By diversifying across various asset classes, you minimise the total risk of your portfolio. When one asset class is doing poorly, others can earn you back. This method assists in preventing your portfolio from experiencing huge losses during times of turmoil and produces a more consistent pathway toward building wealth, particularly for long-term objectives.
How Multi-Asset Allocation Funds Adjust Risks and Returns
The overall purpose is to balance the prospect for growth (returns) and stability (risk control). Here’s how the best multi asset mutual funds do it:
Risk Spread Through Diversification
Investing in asset classes that react differently to market situations prevents multi-asset funds from relying too much on a single avenue. For example, equities may provide high growth but are also volatile. Debt securities, however, are likely to offer low yet stable returns. When a particular asset does not perform well, another could perform better, thus cushioning the overall effect.
Active Rebalancing
Fund managers constantly review market conditions and rebalance the portfolio to redistribute the weightage among asset classes. If equities are likely to underperform, more money could be allocated towards debt or gold. Such an active strategy allows the fund to benefit from market potential while minimising risk exposure.
Customised to Investor Profiles
Most multi-asset funds have risk profiles – low, moderate, and high. Investors can select a fund that suits their investment horizon and risk appetite. Conservative funds can be more debt and gold-oriented, while aggressive funds can be equity-oriented.
Effective in Uncertain Markets
Multi-asset funds are more stable in unstable or unpredictable economic conditions, such as increasing inflation, geopolitical tensions, or abrupt policy changes. Since they do not rely solely on the results of a single market segment, they can more easily absorb shocks and provide steady returns.
Should You Invest in Multi-Asset Allocation Funds
Anyone looking for risk and return-adjusted investment options can go for a multi-asset allocation fund. It is also suitable for investors with a slightly conservative approach who want to explore the market. There’s more, though!
When an investor wants a simplified, balanced approach to investing in multiple asset categories without going through the hassle of individually managing each investment, multi-asset allocation funds present perfect opportunities. Experienced investors looking for a particular type-based or customised asset allocation can also find these funds useful.
Important Factors to Keep in Mind When Investing
A multi-asset allocation fund has multiple benefits, but it does require certain considerations:
- Remember that at least 10% allocation is compulsory even if an asset class is not performing up to the mark, which limits flexibility.
- Use the multi-asset allocation funds not as the only investment portfolio diversification strategy, but as a part of it.
- Tax liability depends on the underlying assets. For instance, if a minimum of 65% of the fund is not invested in equity, it will not qualify for the taxation rules typically applicable to equity.
Final Thoughts!
Once well-familiar with how the investment works and how to strategise, find the best multi-asset allocation fund, as per your investment portfolio and objectives. It is crucial to compare different funds, review historical performance and volatility, and evaluate fund managers’ expertise before committing to the investment.
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