Should You Invest In Multi Asset Allocation Funds?

Date : 11/07/2023
Read: 3 mins

What makes multi-asset allocation funds popular, and should you invest in them?

Multi Asset Allocation Funds Multi Asset Allocation Funds

Portfolio diversification is essential as part of any investment strategy
With a multi-asset strategy, multi-asset allocation funds offer an exciting alternative
A portion of investment in a multi-asset allocation fund is advisable, provided it fulfils your specific investment goals and expectations

Investors continue investing in their preferred assets, while financial advisors insist on diversification. The golden rule of investing is diversifying your portfolio depending on your risk appetite. Focussing on a single asset can erode your wealth if the asset performs poorly. Therefore, portfolio diversification is always recommended, as it promotes a multi-asset allocation approach. This is precisely what multi-asset allocation funds do as well. Multi-asset allocation funds saw the highest allocation in December 2022, AMFI noted. It has emerged as the fourth most popular investment among mutual fund categories, behind small-cap, mid-cap and ultra-short duration funds.

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What is a multi-asset allocation fund?

It is a mutual fund category that adopts a multi-asset strategy towards asset allocation. It is a hybrid mutual fund that invests in different asset classes.

Mutual funds classified as multi-asset allocation funds must invest 10% or more of their corpus in at least three asset classes. The asset categories can be equity, debt and assets like gold or real estate. In other words, a multi-asset allocation fund manager can invest up to 80% in one asset category.

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What does the multi-asset approach do?

The asset composition in multi-asset allocation funds insulates the investor and the fund scheme from market risks and volatility. Short-term and medium-term fluctuations characterise equity investments. However, a well-planned equity investment can deliver strong long-term growth.

Debt investments are fixed-income investments that deliver consistent income irrespective of the market scenario. Investments in debt instruments can compensate for any potential lack of growth if the market remains in the doldrums.

An allocation in something like gold adds a different dimension to the portfolio. It has very little correlation to the stock market and can even outperform during slow market conditions. It can also go on unprecedented rallies at times.

Together, these asset classes balance the risk-reward equation in a portfolio and deliver good long-term growth.

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Why do multi-asset allocation funds appeal the investors?

Multi-asset allocation funds offer a more risk-adjusted approach towards investment. Its allocation to debt and other assets means it is less risky than different hybrid fund categories. It is also safer than a pure equity fund. It is ideally suited for investors who want a steady investment appreciation while banking on long-term equity growth.

However, the lower allocation to equities means that the returns of multi-asset funds may need to catch up to their pure equity counterparts. Besides, it is not recommended for short-term investors, and an investment horizon of at least three years is advisable.