Multi-Asset Allocation Fund

Table of Content

1. What Is a Multi-Asset Allocation Fund?

2.How Does a Multi-Asset Allocation Fund Work?

3. What Are the Benefits of Multi-Asset Allocation Funds?

4. What Are the Risks of Multi-Asset Allocation Funds?

5.Multi-Asset Allocation Fund Returns: What Should Investors Understand?

6.How to Identify the Best Multi-Asset Allocation Fund?

7. Who Should Consider Investing in Multi-Asset Allocation Funds?

8. Difference Between Multi-Asset Allocation Fund & Other Fund Categories

9. How to Invest in a Multi-Asset Allocation Fund?

10. Role of Life Insurance and ULIPs in Financial Planning

11. Conclusion

12. FAQs on Multi Asset Allocation Funds

What Is a Multi-Asset Allocation Fund?

A multi-asset allocation fund is a hybrid fund which combines investments from different asset classes within one portfolio. Your investments in such a fund scheme get allocated across at least three asset classes such as equity (company stocks), debt (e.g. bonds) and commodities.

Depending on the objectives of such schemes, investment strategy, market conditions, and other factors, the assigned proportion across asset classes may vary. However, to stay classified as multi-asset funds, the schemes maintain the proportion at least 10%.

In real time, different asset classes perform differently due to market dynamics. Respective fund managers actively adjust fund allocation depending on market conditions and economic outlook. Thus, such schemes aim for potential growth through equities, instil stability through debt and use commodities (e.g. gold) to hedge against inflation.

How Does a Multi-Asset Allocation Fund Work?

The multi-asset fund works by taking a hybrid approach by allocating across different asset classes to potentially capitalise on growth opportunities and stabilise the portfolio with safer assets.

Below is a discussion of how equities may help target growth, debt or fixed income aims for stability and gold and other asset classes protect against inflation:

1. Equity Allocation

Multi-asset allocation funds allocate a portion of their portfolio into equities and equity-related securities. Fund managers aim to capitalise on the growth of those equities, as their returns are generally higher than other asset classes. Suppose a multi-asset fund allocates 40% of its portfolio to equity. After a market rally, the holdings make a gain of 10%.

As this allocation rises in value, it contributes to the overall increment of the fund's valuation. Although equities may provide a higher return, they are generally highly prone to market volatility and increase portfolio risk.

2. Debt and Fixed-Income Allocation

Debt and fixed-income securities aim to provide stability in hybrid schemes of multi-asset allocation funds. These instruments are generally corporate or government bonds, treasury bills, etc. These fluctuate less than equities or stocks, potentially compensating for portfolio risk.

Continuing with the above example, imagine the fund allocates 30% of investments across debt or fixed income instruments. Suppose the stock market faces a sharp fluctuation. Here,  these instruments may show a lower price movement, which helps moderate overall volatility. However, these instruments are still prone to interest rate, credit and liquidity risks.

3. Gold and Other Asset Classes

Multi-asset allocation funds also include investments in commodities like gold and other asset classes such as alternative assets like real estate or hedge funds. Such asset allocation may help a fund to manage the impact of inflation. This is because these assets generally respond differently when prices get higher and purchasing power gets lower.

For example, the same fund maintains a 20% allocation in gold. Now, during inflation, the value of gold increases, which helps the portfolio hedge against inflation when both stock and debt instruments may drop in valuation. However, gold prices may also decline, for example, if the central bank raises interest rates aggressively.

What Are the Benefits of Multi-Asset Allocation Funds?

Multi-asset funds may offer different portfolio construction benefits since they combine exposure to different asset types within a single scheme. From the perspective of investors, their potential benefits depend on the allocation strategy, expertise of the fund manager, prevailing market conditions and other factors. Here are some benefits worth highlighting:

1. Diversification Across Asset Classes

A proverb goes, ‘Don't Put All Your Eggs In One Basket’, in the investment spectrum. It indicates avoiding concentrating your investment in a single asset class. Here, you may ask how multi-asset funds help in avoiding concentration risk. 

Here, you must note that such a fund allocates across three or more asset classes; a decline in one asset can be compensated by the performance of another. Thus, it helps prevent the risk of concentration in one type of asset, which may otherwise increase the amount of overall losses in unfavourable market conditions.

2. One Fund With Multiple Asset Exposures

Other than potential risk reduction, a multi-asset allocation fund allows for exposure to different types of securities through a single investment. For example, an investor may look forward to investing in equity and debt related funds at the same time while maintaining exposure to commodities.

Instead of assessing the performance of each type of fund and choosing and investing in each of them separately, which is time-consuming and may increase investment expenses, this simplifies diversified portfolio construction. However, you must assess a scheme's objective, asset allocation, perceived risks and other factors before investing.

3. Potential for Long-Term Wealth Creation

This type of fund may also help with wealth creation and accumulation for the long term. As an investor, if you are investing in such a fund type, you must bear in mind that multi-asset investments are generally not designed to capitalise on quick gains. Instead, they typically suit steady wealth accumulation best.

Therefore, investors who stay invested for a medium (at least 3 years) to a longer term may experience growth through such investments. By staying invested for a long term, investors may participate in the growth potential of different sectors and market segments.

Looking for growth through multi asset allocation funds can be a wise part of financial planning. At the same time, ULIPs can offer growth potential while securing your family’s financial future during uncertain times.

What Are the Risks of Multi-Asset Allocation Funds?

While multi-asset allocation fund bring potential long-term growth opportunities, they still bear some risks that you must be aware of. For informed decision-making, especially when your hard-earned money goes into market-linked instruments, understanding such risks in detail is imperative:

1. Market and Equity Risk

As you have noted earlier, equities are prone to volatility, and a decline in the underlying equities of such a fund impacts the Net Asset Value (NAV) of such funds. For example, due to a market correction, the equity holding of a multi-asset fund declines by 15%.

This may impact the NAV, while diversification may compensate for it to some extent, but the fund may still lose value, especially in adverse conditions.

2. Interest Rate and Credit Risk

Debt investments (e.g. bonds) are prone to risks of changes in the prevailing interest rates. For example, if interest rates rise, the value of the existing underlying bonds may decline, leading to potential losses.

Aside from this, credit risk is also present, especially for corporate bonds. If any issuer of underlying bonds fails to meet its obligations and defaults, it may also impact the performance of such funds.

3. Asset Allocation and Performance Risk

Although a multi-asset allocation fund focuses on potential growth through different assets, its potential largely lies in strategic allocation of investments. Here, the expertise of a fund manager comes in. The ability of a fund manager to efficiently allocate funds helps increase the growth potential of such an investment avenue.

Also, lower-performing assets in such a scheme increase the overall risks, as gains by other assets may sometimes not be sufficient to cover losses.

Aside from investments, you must secure your family or dependents from financial crises arising from unfortunate scenarios. Adding life insurance to your financial planning helps secure a safety net in your absence.

Multi-Asset Allocation Fund Returns: What Should Investors Understand?

Potential returns from multi-asset funds may vary over time since their underlying assets are market-linked, which is dynamic in nature. Hence, the potential performance of such funds usually depends on asset allocation strategies. Also, performance relies on underlying investment instruments, prevailing market conditions, and your investment horizon:

1. How Are Multi-Asset Fund Returns Measured?

Before investing, you may assess the potential of a multi-asset allocation fund using absolute returns (for a specific period) or through CAGR (for longer periods). Understanding the investment horizon is important, as shorter terms may reflect impacts of temporary market moves. Longer periods provide a broader context of fund performance.

Hence, while comparing returns by different multi-asset funds, the investment horizon, benchmark returns, and their consistency matter. However, you must note that past performance of funds helps in understanding their historical performance and does not guarantee similar returns in the future.

2. Why Can Multi-Asset Fund Returns Differ?

A multi-asset allocation fund may generate different returns due to its exposure to different types of investment instruments. Their investment strategy, allocation levels and holdings also differ between different funds, which results in varied returns. Also, market conditions impact each underlying asset differently, contributing to overall performance.

For example, a fund with a high exposure to equities may result in positive growth during a market rally compared to a fund with more exposure to debt or commodities.

How to Identify the Best Multi-Asset Allocation Fund?

Although there is no universally best multi-asset fund for every investor, a careful consideration of some important aspects may help here. These include matching the fund's objective and risk with personal financial objectives, assessing historical performance, factoring in investment costs and more:

1. Investment Objective and Asset Allocation

While making an investment decision, check whether the objective aligns with your financial goal. Multi-asset funds may have varied risk levels based on market exposure of underlying assets. Align their risk profile with your risk appetite before finalising a fund investment.

2. Historical Performance and Consistency

A careful assessment of the historical performance of different multi-asset allocation funds gives insight into how they have performed through different market cycles and conditions. Instead of focusing on the latest figure or return, compare it over a relevant time frame (e.g., the last 5 years).

3. Expense Ratio and Other Costs

Expense ratio is the annual charge by the fund house to manage a certain scheme. Although this amount may seem small, as you stay invested for longer, it accumulates and impacts your overall potential returns. Hence, compare this ratio alongside other applicable charges by different fund houses to shape your investment decision.

4. Fund Manager, Portfolio and Scheme Details

You may also review the experience of the dedicated fund manager of a multi-asset allocation fund and their investment approach. Also, consider the prevailing portfolio composition of a fund, and analyse individual holdings with scheme-specific disclosures. All these help provide a greater context than a headline return.

Who Should Consider Investing in Multi-Asset Allocation Funds?

Different investors have different financial goals in mind, and therefore a multi-asset fund may not suit every type of investor. To understand whether you should consider this fund type or not, take a look at the following section for better clarity:

1. Investors Seeking Diversification

Investors who prefer diversification and want exposure to equities, commodities or debt/ fixed income instruments may find this type of fund effective. This eliminates the hassle of investing separately across dedicated funds for each type of investment asset.

New investors, retirees, and individuals who seek to weather market fluctuations with a balanced approach may find it suitable.

2. Investors With a Medium- to Long-Term Horizon

You have noted earlier that multi-asset allocation funds aim to accumulate growth with a medium- to long-term investment horizon. Therefore, if your investment goal is to stay invested with patience and enjoy a stable return over the years, you may find this type of fund suitable.

With a medium- to long-term horizon in a multi-asset fund, you also may be able to overcome short-term market swings. It may increase the scope of potential wealth accumulation.

Difference Between Multi-Asset Allocation Fund & Other Fund Categories

While looking for a multi-asset allocation fund, you may have come across other fund categories and may seek to understand the difference between them. Here is a breakdown of the differences between multi-asset allocation funds and other relevant fund categories:

1. Multi-Asset Allocation Fund vs Multi-Cap Fund

A multi-asset fund follows a hybrid approach and provides exposure to multiple asset types. Multi-cap funds remain within equities while investing across large, mid and small-cap companies. Thus, the multi-asset fund provides asset-class-based diversification, while a multi-cap fund diversifies within the equity market.

2. Multi-Asset Allocation Fund vs Balanced Advantage Fund

Multi-asset allocation funds allow an investor exposure to asset classes like equities, debt, commodities, etc. A balanced advantage fund dynamically adjusts exposure to the equity market and debt instruments depending on market conditions. Thus, the key difference lies in the range of asset classes covered and the way the portfolio allocation is managed.

How to Invest in a Multi-Asset Allocation Fund?

As you choose to invest in a multi-asset allocation fund, you must consider a structured approach to assess your investment goal and your chosen scheme. For a detailed understanding, take a look at the following section:

1. Assess Your Financial Goal and Risk Profile

Begin by focusing on the financial objective for which you are starting an investment. Assess how much market fluctuation you can tolerate without compromising your goal. Suppose you are investing ₹1 lakh for 5 years. Here, you must consider the asset mix of a scheme to align with your ability to withstand temporary declines.

2. Review the Scheme Before Investing

Review the scheme documents of a fund before finalising a scheme. Understand its portfolio disclosure and risk profile to assess how the fund is positioned. For example, if a multi-asset scheme has recently rebalanced its equity exposure, you get this insight from its updated portfolio information.

Also, tracking its historical performance gives you an understanding of how it may perform, but bear in mind that future performance may differ.

Role of Life Insurance and ULIPs in Financial Planning

Understanding multi asset allocation funds involves reviewing how investments are distributed across asset classes. A broader financial plan should also consider financial protection for dependents, alongside investment goals.

Life Insurance and Financial Protection

Life insurance provides life cover, with benefits payable according to the policy terms. ULIPs combine this protection with market-linked investment opportunities. When reviewing an insurance product, consider the life cover separately from the investment component rather than assessing the policy only through its potential returns.

Asset Allocation Within ULIPs

Depending on the policy, ULIPs may offer equity, debt or balanced fund options. Policyholders may also have the facility to switch between available funds to align their allocation with financial goals and risk appetite, subject to policy terms and applicable charges. Fund switching does not eliminate market risk or guarantee returns.

These features should not be confused with the multi-asset allocation mutual fund category. The available investments and allocation limits must be checked in the specific ULIP’s fund and policy documents.

Policy Charges, Investment Risk and Liquidity

ULIP outcomes depend on underlying fund performance and applicable charges. Depending on the policy, charges may include premium allocation, fund management and mortality charges. Review these alongside the policy’s life cover, investment options and benefits.

In unit-linked policies, investment risk is borne by the policyholder. Linked insurance products do not offer liquidity during the first five years of the contract. Consider these restrictions alongside financial goals and liquidity requirements, and consult a qualified financial adviser before making a decision

Conclusion

A multi-asset allocation fund is a fund of hybrid nature which invests across equity, debt, commodities and other sorts of investment instruments. With this, investors have the opportunity to get exposure to multiple asset classes through one scheme rather than investing in separate dedicated schemes and ensure diversification in their investments.

FAQs on Multi Asset Allocation Funds

1. What is a multi-asset allocation fund?

This is a type of hybrid fund that spreads your invested money across at least three asset classes. Instead of targeting potential gain from a single asset class, it spreads the risks across multiple market segments. This way, such funds aim for diversification where potential losses from one asset can be compensated by the performance of another asset.

2. Is a multi-asset allocation fund a good investment?

Whether a multi-asset fund is a good investment or not depends on the profile and needs of an investor. If you are comfortable with stable growth over a longer term and want to avoid higher risk, it may suit you. However, investors who prefer risk for potential quick growth and have a shorter investment horizon may not find it suitable.

3. How are multi-asset allocation fund returns calculated?

Such funds calculate returns by measuring changes in their respective NAV over a specified timeframe. This calculation considers changes in underlying investment values, earned income and adjusts for expenses. Investors consider these returns as an absolute for shorter periods and annualised returns over longer horizons.

4. Are multi-asset allocation funds risky?

Yes, such funds still involve risks as they invest across equities, debt, commodities and others. Their equity component is exposed to stock market volatility, while their debt component may be affected due to interest rate changes. Commodities also face price fluctuations, which may affect the overall performance of such a fund.

5. What are the benefits of multi-asset allocation funds?

Some key benefits of multi-asset funds include broader diversification, lower volatility, professional rebalancing, etc. This way, a new or risk-averse investor can get exposure to multiple market segments from a single scheme with potentially steady growth over a medium- to long-term horizon.

6. What is the difference between multi-asset and multi-cap funds?

Multi-asset funds invest across at least three or more asset classes to focus on asset-based diversification with potentially stable growth. Multi-cap funds concentrate on the equity market and invest in a strategic mix of small, mid and large-cap companies.

7. How are multi-asset allocation funds taxed?

Multi-asset allocation funds which invest more in equities generally attract STCG and LTCG based on holding period. Those which are non-equity oriented may attract tax based on your income tax slab rate or other applicable tax norms.

8. Who should invest in a multi-asset allocation fund?

Beginners, retirees or investors who seek potentially steady growth over a longer horizon may find this fund type suitable.

9. Can multi-asset allocation funds provide guaranteed returns?

No, similar to any other fund, a multi-asset fund does not guarantee positive returns. This is because it has market-linked instruments as underlyings whose performance varies with market dynamics.