Mutual funds endeavor to cater to the needs of different types of investors. Hence, there are various schemes with specific investment objectives, risk exposure, and asset allocation strategies. Today, we are going to talk about a category of mutual fund- Multi-Asset Allocation funds. Let’s find out what they are and the things you need to keep in mind before choosing them for your portfolio. Read on!
What are Multi-Asset Allocation Funds?
A multi-asset allocation fund invests in multiple assets offering diversification across various asset classes. The most common asset classes where these schemes invest are Equity, Debt, and Gold.
The fund manager can dynamically allocate investments in these asset classes based on the way the economy and markets function. For example, if the stock markets are optimistic, then the fund manager might try to increase the portfolio’s exposure to equity-related instruments and reduce debt instruments.
Also, if the overall economy of the country has a gloomy outlook, then investment in gold might increase as gold generally tends to perform well when other asset classes are heading south.
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.
Now that you know the workings of a multi-asset allocation fund, here are a few more things to you must take note of:
According to the Securities and Exchange Board of India (SEBI), a multi-asset allocation fund is required to mandatorily invest in at least three asset classes with a minimum allocation of at least 10% in each of them.
While this means that investors get exposure to three asset classes by investing in a single scheme, the minimum limit of 10% might compromise the element of diversification. For example, if the fund manager is not optimistic about the economy, then the portfolio might have a higher exposure to gold-related investments and minimal exposure to equity and/or debt.
Hence, before making the purchase, investors must ensure that they go through the scheme-related documents carefully and choose a scheme that specifies a specific exposure to various asset classes that are within the risk tolerance level of the investor.
One of the most popular investment advice is to create a diversified portfolio of investments across various asset classes. This is exactly what a multi-asset allocation fund is about. So, should investors merely invest in a multi-asset allocation fund and stop worrying about the diversification of their individual portfolios?
Portfolio diversification for an investor is different than that for a mutual fund scheme. While a mutual fund attempts to achieve an investment objective by keeping risks under check like an individual investor does, the fund manager and a dedicated team of professionals work to ensure that the objectives are met.
On the other hand, individual investors need to ensure diversification of their portfolios by investing in assets that have a low correlation to each other. This way even if one asset class is performing well, the other is not negatively impacted.
Further, a multi-asset allocation fund does not allow investors to achieve style diversification like value or growth, market capitalization-based diversification, etc.
Since there is no mandate of having more than 65% of holdings in debt or equity, the taxation of multi-asset allocation funds varies with each scheme. While equity funds are preferred by most investors who are sensitive to tax, it is important to read the scheme-related documents carefully to understand how the fund house intends to position equity in the scheme’s portfolio. Investors should not make any assumptions with respect to the tax rules and can talk to the fund house in case of any queries.
Like in any other active mutual fund, the role of a fund manager is crucial in a multi-asset allocation fund. More so because there is no specific investing style of the scheme. For example, the scheme might decide to invest around 30% of its corpus in equity-related instruments but without a predetermined investing style, the fund manager can choose stocks from any sector or market capitalization.
While some schemes might declare these aspects in the scheme-related documents, there is still a lot that rides on the fund manager in multi-asset funds. Hence, it is important to ensure that investors check the track record and performance of the fund manager before investing.
Multi-Asset Allocation Funds can be a good addition to any investor’s portfolio provided the scheme is chosen carefully. The decision that investors need to make if they desire portfolio diversification is – if they want to opt for a scheme that invests in multiple assets or take the responsibility of investing in different assets themselves. If the choice is the former, then the points mentioned above can help choose the right scheme based on their profile.
Disclaimer: This blog has been contributed by the content desk of Quantum Mutual Fund AMC. The views expressed here are of the author and do not reflect those of Groww.