Multi-asset allocation funds may help investors diversify across multiple asset classes instead of depending entirely on a single category such as equity or debt. Equity markets, debt instruments, gold, and other asset classes may behave differently across economic and market cycles. Managing allocations across these investments individually may be challenging for some investors. Multi-asset allocation funds aim to provide diversified exposure through a single scheme.
This article explains multi-asset allocation funds, their purpose, investor suitability, and important considerations before investing.
What is a multi-asset allocation fund?
A multi-asset allocation fund is a category of hybrid mutual fund defined under SEBI’s mutual fund categorisation framework. These schemes are required to invest in at least three different asset classes, with a minimum allocation of 10% in each asset class.
Multi-asset allocation funds commonly combine equity, debt, and another asset class such as gold, commodities, international investments, or Real Estate Investment Trusts (REITs) and Infrastructure Investment Trusts (InvITs), depending on the scheme mandate. Through diversification across asset classes, these funds may reduce dependence on a single market segment. However, they do not eliminate market risk.
Purpose of multi-asset allocation funds
Multi-asset allocation funds are designed to provide diversified exposure across different asset classes within a single investment approach:
- Diversification across asset classes may help reduce concentration risk within a portfolio.
- Exposure to multiple market-linked asset categories may help investors participate across different market conditions.
- Investing through a single scheme may reduce the need to separately manage and rebalance investments across asset classes.
- Portfolio allocation and rebalancing are managed within the scheme mandate by the fund manager.
- These funds may suit investors seeking a relatively balanced investment approach through diversification.
Why Multi-asset allocation funds?
Understanding the features of multi-asset allocation funds may help investors evaluate how these schemes manage diversification across different asset classes:
Diversification across asset classes
One of the key features of multi-asset allocation funds is diversification. Since investments are spread across equity, debt, gold, and other asset classes, performance across asset classes may vary under different market conditions.
Fund management and portfolio rebalancing
Tracking market movements and periodically rebalancing asset allocation may not be practical for every investor. Multi-asset allocation funds are managed by fund managers who rebalance portfolios in line with the scheme mandate, market conditions, and investment strategy.
Convenience
Instead of investing separately in equity funds, debt products, gold-related instruments, and other asset categories, investors may gain diversified exposure through a single mutual fund scheme. This may reduce the need to separately manage multiple investments across asset classes.
Potential risk management
Since these schemes invest across multiple asset classes, they may experience different volatility levels compared to pure equity-oriented funds during certain market phases. However, returns remain market-linked and are not guaranteed.
Who should invest in multi-asset allocation funds?
Multi-asset allocation funds may be considered by investors looking for diversified exposure across different asset classes through a single investment approach:
- Those looking for diversified exposure across multiple asset classes through a single scheme may consider these funds.
- People seeking convenience instead of managing separate investments individually may find this approach relevant.
- Individuals comfortable with market-linked returns may prefer a relatively diversified allocation approach across asset classes.
- A diversified allocation strategy may appeal to those aiming to reduce concentration risk within their portfolio.
- Exposure to equity, debt, and other asset classes within one investment vehicle may suit long-term investment horizons.
Things to know before investing in a multi-asset allocation fund
Before investing in a multi-asset allocation fund, it may help to consider how different asset classes can affect overall fund performance:
- Weak performance in one asset class may affect the overall portfolio performance during certain market phases.
- Gold and other alternative asset classes may not perform consistently across all market conditions.
- Portfolio allocation strategies within these funds may sometimes be complex for investors to evaluate.
- Different AMCs may follow different asset allocation and investment models, resulting in varying levels of risk and portfolio behaviour.
- Changes in market conditions and asset allocation decisions may affect overall fund performance over time.
Benefits of Multi-asset allocation funds
Multi-asset allocation funds may offer diversified exposure across different asset classes within a single investment approach:
Diversification across asset classes
Diversification across multiple asset classes may help reduce concentration risk compared to single-asset category funds.
Suitable for longer investment horizons
These funds may be suitable for investors with a medium- to long-term investment horizon.
Exposure through a single investment vehicle
Multi-asset allocation funds may help provide exposure to multiple asset classes within a single investment vehicle.
Professional portfolio management
Asset allocation and portfolio rebalancing are managed by fund managers in line with the scheme mandate and market conditions.
Convenience in portfolio management
Investors may gain exposure to multiple asset classes without separately tracking and managing different investments.
Reduced need for frequent rebalancing
These funds may reduce the need for investors to manually rebalance allocations across different asset classes regularly.
Who should not invest in multi-asset allocation funds?
Multi-asset allocation funds may not align with every investment preference or financial requirement:
- Those seeking very high equity exposure may prefer investment options focused primarily on equity allocation.
- A very short investment horizon may not align with the diversified allocation approach followed by these funds.
- Investors seeking guaranteed returns may find market-linked investment products unsuitable.
- Market-linked fluctuations across different asset classes may not suit individuals uncomfortable with portfolio volatility.
Multi-asset allocation fund vs picking your own mix: A quick comparison
Choosing between a multi-asset allocation fund and managing separate investments may depend on your preferred investment approach:
| Basis of comparison | Multi-asset allocation fund | Managing your own mix |
| Investment approach | Investments are diversified across multiple asset classes within a single scheme | Investors separately allocate money across equity, debt, gold, and other investments |
| Portfolio management | Asset allocation and portfolio rebalancing are managed by the fund manager | Investors are responsible for monitoring and rebalancing their portfolio |
| Convenience | The investment process may be relatively more convenient through a single scheme | Managing separate investments may require additional time and effort |
| Flexibility | Allocation decisions are managed within the scheme mandate | Investors may have greater flexibility and control over asset allocation decisions |
| Monitoring requirement | Investors may not need to actively track multiple asset classes regularly | Regular monitoring across different investments may be required |
| Investment discipline | Portfolio adjustments are managed as part of the fund strategy | Investors may need to maintain their own rebalancing and investment discipline |
Conclusion
Multi-asset allocation funds are a category of hybrid mutual funds for investors looking to diversify investments across different asset classes through a single scheme. By investing across equity, debt, gold, and other permitted asset categories, these funds aim to provide diversified exposure across changing market conditions.
FAQs
Is a multi-asset allocation fund suitable for beginners?
Multi-asset allocation funds may be suitable for beginners looking for diversified exposure across different asset classes through a single mutual fund scheme. However, suitability depends on individual financial goals, risk appetite, and investment horizon.
What is the minimum investment horizon for multi-asset funds?
A medium- to long-term investment horizon, such as three to five years or longer, may be considered while investing in these funds because returns may vary across shorter periods.
Can retirees invest in multi-asset allocation funds?
Retirees with moderate risk appetite and long-term financial planning requirements may consider these funds after evaluating their liquidity needs and investment objectives.
Is a multi-asset allocation fund better than a balanced advantage fund?
The two categories follow different investment approaches. Balanced advantage funds primarily adjust allocation between equity and debt, while multi-asset allocation funds invest across at least three asset classes.
What risk level suits a multi-asset allocation fund investor?
These funds may suit investors comfortable with market-linked fluctuations across multiple asset classes. Risk levels may vary depending on the scheme allocation and investment strategy.
