As an investment tool, mutual funds are pretty famous for their flexibility. These are designed to meet diverse investment goals, risk tolerance, and objectives to cater to a wide range of investors.
It is an explainer to educate investors on various aspects of investment and mutual funds, and we will discuss multi-asset funds – their definition, features, and benefits.
What are multi-asset mutual funds?
As the name suggests, a multi-asset fund invest in multiple asset classes offers portfolio diversification to optimise returns and minimise risks. The most common asset classes where multi-asset funds invest are – equities, debt, and gold.
Fund managers dynamically allocate the corpus between different assets based on economic performance to ensure the fund performs towards its objective. For example, when the share market performs well, the fund manager will allocate heavily on equity-related instruments and lower exposure on debt funds.
Similarly, when the economic growth is slow, more funds are allocated to debt instruments and gold to maintain balance.
Now you have understood the basic functioning of multi-asset funds, let’s know its features in detail.
Schemes don’t always let you diversify
According to the Securities and Exchange Board of India (SEBI), a multi-asset fund needs to invest in at least three asset classes for at least 10 per cent of the corpus. It means multi-asset funds immediately gives you exposure to three asset classes, but the minimum limit may compromise the elements of diversification. For example, if a fund manager feels bearish about the equity market, he may invest the maximum amount in gold-related investments and limit exposure in equities and debt instruments.
Hence, one must ensure the composition of the fund before investing. The minimum restriction may not allow proper diversification of funds for optimising the returns. For instance, if the fund manager is bearish about the market, he may invest heavily in gold investment and give minimum exposure to equities.
- A multi-asset fund is a mutual fund product that gives investors exposure to three different asset classes: equities, debt, and gold investment.
- The fund manager invested the pooled corpus into different asset classes depending on the market.
- It offers instant portfolio diversification while ensuring risk and return balance.
- Fund managers actively manage these funds, and they play critical roles in the fund’s performance.
- SEBI requires multi-asset funds to invest in three asset classes for a minimum of 10 per cent.
- Investors need to carefully read through the offer documents to choose funds that ensure specific exposure to specific asset classes that match their risk tolerance levels.
- Investing in multi-asset funds is, however, not equivalent to individual portfolio diversification. And, investors may still need to diversify to meet their financial goals.
Multi-asset funds aren’t the same as individual portfolio diversification
It is a common notion that investing in multi-asset funds is enough to meet portfolio diversification goals. It, however, is a myth.
Portfolio diversification is a standard for any investor. Diversification allows investors to disperse risk amid different asset classes to ensure that portfolio profitability doesn’t get impacted when one asset class performs poorly. But does investing in multi-asset funds solve the purpose?
We need to understand that portfolio diversification is not the same as mutual fund investment. Fund managers and their teams ensure that the fund meets its objective in mutual funds while keeping risks under control. While in individual portfolio diversification, investors try to invest in different asset classes with zero correlation to each other. It guarantees that even when one asset isn’t performing well, there is no negative impact on the portfolio.
Secondly, multi-asset funds don’t allow investors to achieve personalised diversification, like value or growth, or diversification based on market capitalisation.
Multi-asset funds and taxation
Since there is no 65 per cent mandate to hold funds in any one asset class, tax depends on fund allocation in each scheme. Any investor needs to read the offer documents carefully to understand the distribution of funds and tax implications from the investment. Most investors, however, prefer equity funds from a tax perspective.
Role of fund managers in multi-asset funds
Like most actively managed funds, fund managers play a critical role in managing the performance of multi-asset funds since there is no specific investment style. The fund manager has the liberty to select any investment tool, sectors, or stocks based on market assumptions. Suppose a fund puts 30 per cent of the fund into equity investment; the fund manager will still have to select sectors and market capitalisation to invest the corpus.
Multi-asset funds are excellent for investing, provided you select them carefully. These funds offer instant portfolio diversification by distributing the corpus in various asset classes. If you don’t want to pick and choose assets to diversify your portfolio, investing in a multi-asset fund is the alternative option.