Category : New to Investing October 3, 20245 minutes read
Multi-asset allocation funds are a type of hybrid mutual fund scheme that are mandated to invest at least 10% of their corpus in three different asset classes such as equity, debt, and gold or silver ETFs. This diversification may allow investors to spread out risk and potentially create wealth in the long run. Investors may also benefit due to the fund’s active management and portfolio rebalancing. However, like most investments, multi-asset allocation mutual funds are subject to risks such as market risks, liquidity risks, price risks, interest rate risks, etc. Investors may also be affected by higher expense ratios due to active management, and this scheme may only be suitable for investors with a long-term investment horizon. Investors must consider their risk tolerance, investment horizon, and financial goals before investing in this scheme.
No, multi-asset allocation funds and hybrid funds are different. Multi-asset allocation funds are a type of hybrid scheme that invests in three or more asset classes.
The meaning of multi-asset allocation funds is that they invest in multiple asset classes. They are a hybrid fund that aims to diversify their portfolio across at least three asset classes. ELSS funds are a type of equity investment that invests predominantly in equities. Moreover, ELSS funds are tax-saving funds under section 80C of the Income Tax Act, of 1961. Multi-asset allocation funds do not have tax-saving advantages.
Yes, multi-asset allocation funds are actively managed. Their portfolio may be rebalanced as per market conditions.
Investors may choose a multi-asset allocation fund based on its asset allocation and risk level. Before investing in multi-asset allocation funds it is necessary to consider the fund’s past performance. While past performance does not guarantee future performance, investors may understand the potential for future performance.
Equity funds are mandated to invest a majority of their corpus in equity and equity-related securities of companies. On the other hand, multi asset funds are a hybrid scheme and are mandated to invest across multiple asset classes.
Introduction
While seeking investment options, investors may often be met with the question, “What are multi-asset allocation funds?” Multi asset allocation funds are a type of hybrid mutual fund scheme that invests at least 10% of their corpus in three or more asset classes, including equity, debt, and commodities such as gold and silver. Multi-asset allocation mutual funds are a diverse investment option and investors may benefit due to this diversification. The fund also aims to spread out risk across various asset classes.
This guide explores multi-asset allocation funds in India and elaborates on how they work. Moreover, we will explore the benefits of multi-asset funds and their drawbacks. Lastly, we will highlight some crucial factors to consider before investing in a multi-asset allocation scheme.
Multi-asset allocation funds are a type of hybrid scheme that aims to provide investors with the benefits of diversification. The asset allocation may be mandated by the Securities and Exchange Board in India, to ensure transparency and safety for the investors. Multi-asset funds are mandated to invest across three or more asset classes, mainly debt, equity, commodities (gold or silver), etc. To understand what multi asset allocation funds are we need to understand their asset allocation strategy.
Equity and Equity-Related Instruments
Multi-asset allocation funds in India are generally required to invest at least 10% of their corpus in equity and equity-related instruments. These may include stocks of large, mid, or small-cap companies. Usually, a maximum of 80% of the funds corpus can be invested in equities. Equity investments are high-risk and may be vulnerable to market volatility and fluctuations. However, in the long run, equity instruments have the potential to create wealth.
Debt Securities and Money Market Instruments
The meaning of multi-asset allocation funds is that they invest in multiple asset classes. One of these assets is debt securities. These include treasury bills, corporate bonds, government securities, etc. They are generally low-risk-return investments and can help spread out risk. Multi-asset allocation funds are mandated to invest a minimum of 10% of their corpus in debt and money market securities. This ensures the fund’s assets are diversified across asset classes. Generally, a maximum of 30%-35% of the fund’s corpus can be invested in debt and money market securities.
Commodities (Commodity ETFs and Sovereign Gold Deposit Schemes)
Investing in multi-asset allocation funds may benefit investors seeking investments in gold and silver ETFs. These commodity-based ETFs have several benefits. Gold and silver ETFs are generally low-to-medium risk investments and are highly liquid as they are traded on the stock exchange. Moreover, the price of gold is publicly available, allowing investors transparency in their investments.
Multi-asset allocation mutual funds are mandated to invest at least 10% of their corpus in commodity ETFs. Investing in commodity ETFs may diversify the fund’s portfolio and allow investors to potentially spread out risk.
Read more about the different types of asset classes.
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Multi-asset allocation funds are a type of hybrid fund. They are mandated to invest at least 10% of their corpus in three different asset classes. These asset classes may include equity and equity-related securities, debt and money market instruments and commodity based ETFs.
Now that we understand what a multi-asset allocation fund is and its asset allocation, let’s explore its potential benefits.
Diversification
One key benefit of multi-asset allocation funds is their potential to diversify an investor’s portfolio. Multi-asset allocation funds are mandated to invest in at least three different asset classes. This allows the fund to diversify its corpus across asset classes.
Portfolio diversification may help reduce the risk involved in the investment. By investing across asset classes, multi-asset allocation funds may spread out risk. The negative impact of poor performance of any one sector may potentially be reduced due to diversification.
Potential Long Term Wealth Creation
Multi-asset allocation funds have the potential to create wealth for the investors in the long run. The fund’s diverse portfolio may allow investors to potentially benefit from good performance across asset classes. By investing a significant amount in equities, multi-asset allocation mutual funds have the potential to create wealth. Returns of multi-asset allocation funds may be significant in the long run, although it is subject to market risks.
Rebalancing Portfolio
Rebalance of a portfolio is a key benefit of multi asset allocation funds. Assets may be allocated in a way to potentially benefits investors. As market fluctuations may impact fund performance, portfolio rebalance may allow the fund to reallocate assets as per the current socio-economic situation.
Ready-Made Portfolio
We know what multi-asset allocation funds are, and we understand that they create a diverse portfolio for the investor. This may be beneficial and convenient as all investors may not have the time or knowledge to create a balanced portfolio. Through multi-asset allocation, investors can potentially benefit by investing in various asset classes.
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There are several benefits of investing in a multi-asset allocation fund. These funds allow investors to diversify their portfolio and potentially spread out risk. Multi-asset allocation funds have the potential to create wealth in the long-term. Moreover, these funds are actively managed, and the portfolio may be rebalanced as per market conditions. Lastly, these funds may provide investors with a ready-made, diversified portfolio.
We understand what are multi-asset allocation funds, their features, and their benefits. Although this investment scheme offers several benefits, like most investments, there may be certain drawbacks as well. Investors must consider the potential disadvantages and risks of any scheme before investing.
High Risk
Although there are several benefits of multi-asset allocation funds, one key drawback is its high-risk nature. The fund invests across asset classes, making it vulnerable to several risks. Multi-asset allocation mutual funds may be subject to the following risks:
Risk Related to Equity Investments
- Market volatility and fluctuations
- Concentration risk in a specific market capitalisation or sector
- Liquidity risks
Risk Related to Commodity ETFs
- Market liquidity
- Tracking errors
- Macro-economic factors such as inflation, government policies, production of the commodity, foreign exchange rates, indirect taxes, etc.
- Regulatory risks
Risks Related to Debt & Money Market Instruments
- Price Risk
- Interest rate risk
- Credit risk
- Reinvestment risk
Although this scheme diversifies its investments to potentially reduce risk, all investments have some associated risks. Investors must consider their risk appetite and the risk level of the scheme before investing.
Long Term Investment Horizon
Multi-asset allocation funds have a long-term investment horizon ranging from 3-7 years. This may not be suitable for investors seeking short-term returns. Due to this long-term investment horizon, the fund may be relatively less liquid.
Expense Ratio
Multi-asset allocation funds are actively managed across various asset classes. This active management strategy may impact the expense ratio, increasing the fees. A higher expense ratio may impact the overall returns of the fund in the long run.
Lack of Flexibility for an Individual Investor
Multi-asset allocation mutual funds may be beneficial for beginner investors with minimal financial knowledge or investors seeking convenience. However, investors looking to manage and maintain their portfolio as per their analysis may not benefit from this scheme. The asset allocation is managed by the AMC, and individual investors do not have control over it.
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Like most investments, multi-asset allocation funds have certain drawbacks as well. They are a high-risk investment. As they invest in multiple assets, they may be vulnerable to various risks associated with each asset class. These risks may include interest-rate risk, credit risk, settlement risk, liquidity risk, market risks, risk due to regulations etc. Additionally, multi-asset allocation funds have a long-term investment horizon, making them unsuitable for investors seeking liquidity or short-term investments. As they are actively managed, they may have a higher expense ratio; this may impact long-term returns. Lastly, individual investors cannot manage the fund’s asset allocation, making this a relatively less flexible investment.
We understand what is a multi-asset allocation fund in India, its benefits and drawbacks. However, there are some crucial points investors must consider before investing in this scheme.
Risk Tolerance
Investors must always analyse their risk tolerance before investing in any scheme. Multi-asset allocation funds are a high-risk-return scheme. Although the fund aims to minimise the impact of risk by investing across various assets, it may be subject to several risks including, market risk, interest rate risk, liquidity risk, regulatory risk, price risk, etc. Investors with a high-risk appetite, seeking wealth creation may benefit from this scheme.
Investment Horizon and Goals
Multi-asset allocation funds may be a suitable long-term investment. They aim to aid long-term wealth creation. Investors seeking to achieve long-term goals such as planning for retirement, buying a house, etc. may potentially benefit from this scheme.
This scheme may not be suitable for investors seeking to achieve short-term goals or make short-term optimal returns.
Diversification in Asset Classes
Investors seeking to diversify their portfolio across asset classes may potentially benefit by investing in multi-asset funds in India as they are mandated to invest in at least three asset classes. However, the fund is not mandated to diversify across market caps or sectors, which may lead to some concentration risk. Nevertheless, investors seeking a hybrid scheme with a diversified portfolio may benefit by investing in multi-asset funds.
- What are multi-asset allocation funds? Multi-asset allocation funds are a type of hybrid mutual fund that is mandated to invest at least 10% of their corpus in three asset classes such as equity, debt, gold, and/or silver ETFs.
- The fund’s main aim is to diversify an investor’s portfolio and potentially benefit from the performance of several different asset classes.
- The main benefits of multi-asset allocation funds are diversification, potential long-term wealth creation, portfolio rebalancing, and providing investors with a ready-made portfolio.
- However, this scheme may be vulnerable to risks such as market risks, credit risks, price risks, interest rate risks, liquidity risks, tracking errors, and regulatory risks
- Moreover, the fund may not be suitable for investors with a short-term investment horizon. Due to active management, the fund may have a higher expense ratio, which may impact long-term returns. Lastly, investors cannot manage their individual portfolios by investing in this fund.
- Investors must consider their risk tolerance, investment horizon, and goals before investing in multi-asset funds. Moreover, while this scheme may be suitable for diversification, investors must note that it diversifies investments across asset classes only. Investors seeking diversification across market caps and sectors may not benefit from this fund.
