What is the Role of Commodities in Multi-Asset Allocation Funds?

A multi-asset allocation fund is an open-ended mutual fund that invests in at least three asset classes – such as equity, debt, commodities etc – each of which typically responds differently to market trends. Fund managers can also adjust the allocation ratio dynamically in response to market movements and their insights. This can help such funds optimise return potential, mitigate risk and leverage different market scenarios.

While the equity portion of the portfolio provides growth potential, the debt component lends relative stability to the investment, especially in volatile times. The remaining asset classes in the portfolio – which often include commodities, exchange-traded commodity derivatives or REITs/InVITs – can also play an important role in mitigating risk and generating reasonable return potential. This article focuses on the role of commodities in multi asset allocation funds.

Table of contents

How multi-asset allocation funds invest in commodities
Importance of commodities in multi-asset allocation fund

How Multi-Asset Allocation Funds Invest in Commodities

Many multi-asset allocation funds invest in commodities through gold and silver exchange-traded ETFs These can play an important role in enhancing portfolio diversification and hedging against market volatility and economic uncertainty. Additionally, some commodities are considered safe-haven assets, which have long-term value and are typically less affected by economic downturns than volatile avenues such as equities. They can even potentially offer growth opportunities during turbulent times.

Importance of Commodities in Multi-Asset Allocation Fund

Commodities can play the following roles in a multi-asset allocation fund portfolio:

Inflation hedge: Commodities such as gold and silver can potentially be an effective hedge against inflation. As inflation increases, the value of these metals may also rise. This can make them valuable during periods of high inflation.
Volatility hedge: Commodities, such as gold and silver, may play a vital role in a multi-asset allocation fund by serving as a hedge against stock market volatility. When the stock market is unstable, commodities can potentially retain their value or not fall as drastically as equities. Metals such as gold and silver also emerge as safe haven investments during volatile times – given their historical significance and relative stability, investors flock to these avenues during uncertain times. This can help increase portfolio stability and potentially mitigate the impact of equity market downturns.
Upside potential: Commodities such as gold and silver can offer growth potential, optimising overall portfolio returns.
Low correlation with equities: Commodities usually have a low correlation with traditional asset classes such as equities. This implies that there is not much similarity in the price movements of gold and equities – one does better when the other falls. Incorporating commodities into a multi-asset allocation fund can therefore help leverage market situations where equities are underperforming.

Conclusion

Commodities play a crucial role in multi-asset allocation funds by enhancing diversification and a cushion against some market risks. Gold and silver, through ETFs, can serve as hedges against inflation and market volatility. Their low correlation to traditional asset classes can help lend relatively stability – and even upside potential – during market downturns. A multi-asset allocation fund with commodities can give investors a balanced investment avenue with some resilience to unfavourable market conditions.

FAQs

What are commodities in the context of multi-asset allocation funds?

Commodities in multi-asset allocation funds can comprise investments in gold ETFs or silver ETFs. These assets can diversify a portfolio and offer a hedge against market volatility, optimising the risk-return balance in a portfolio.

How do commodities help in hedging against inflation in multi-asset allocation funds?

Commodities such as gold and silver have historically emerged as a hedge against inflation because their value tends to increase as prices in the economy go up. This helps mitigate impact on the purchasing power of the investment.

Mutual Fund investments are subject to market risks, read all scheme-related documents carefully.
This document should not be treated as endorsement of the views/opinions or as investment advice. This document should not be construed as a research report or a recommendation to buy or sell any security. This document is for information purpose only and should not be construed as a promise on minimum returns or safeguard of capital. This document alone is not sufficient and should not be used for the development or implementation of an investment strategy. The recipient should note and understand that the information provided above may not contain all the material aspects relevant for making an investment decision. Investors are advised to consult their own investment advisor before making any investment decision in light of their risk appetite, investment goals and horizon. This information is subject to change without any prior notice.