Allocation to equities, debt and gold depends on the fund manager’s views on the economy and growth potential of each asset class.
Given the volatility in the equity markets, multi-asset funds can help investors diversify and lower their portfolio risk. Multi-asset portfolios invest across less than perfectly correlated assets, rather than exposing an investor to the risks of a single asset class. This improves the risk-reward potential of the portfolio and provides for a less volatile investment experience.
Multi-asset funds are dynamically managed hybrid funds and ideal for those who do not want to risk investing in one particular asset which is volatile and instead look for steady long-term returns. In these funds, fund managers rebalance the portfolio depending on the market movements by booking profits from the performing assets and reducing exposure to the underperforming ones. Multi-asset funds will always have a common portfolio for all investors.
Diversification tool
Diversification is at the core of the asset-allocation approach. Dhaval Kapadia, director, Investment Advisory, Morningstar Investment Adviser (India), says, diversification is an important aspect to look at while building your portfolio, as it cushions the portfolio against any adverse movements in a single asset class/security. “Asset classes—equities, fixed-income, gold, commodities, real estate and even securities within an asset class—respond differently to the same set of economic drivers, and hence the benefits of diversification owing to their less than perfect correlation,” he says.
Harshad Chetanwala, co-founder, MyWealthGrowth.com, says the fund’s allocation to equities, debt and gold will depend on its views on the economy and growth potential of each asset class. “Investors with a low/ moderate risk appetite who want to generate marginally higher returns than debt or fixed deposits, and also limit their risk, prefer to invest in multi-asset funds. These funds can be an alternative to long-term fixed deposits (three years and above) for those ready to take some additional risk as there will always be some allocation to equity in multi-asset funds,” he says.
Factors to consider before investing
Before investing in multi-asset funds, investors must evaluate the allocation of the fund across asset classes like equity, debt, gold. Exposure to volatile asset classes such as equities should be in line with their risk appetite. Investors should also assess how the fund’s allocation across asset classes has moved across time to gauge suitability in line with their risk appetite and market cycles. The fund’s information document will indicate the range that allocation to various assets could move within. The funds may either follow a view-based or a rules-based approach for managing asset allocation. A view-based approach additionally incorporates a fund manager’s forward-looking opinion, rather than merely re-balancing based on quantitative metrics.
Kapadia says investors should evaluate the impact of the allocation to such funds on their overall portfolio, since the aim is to primarily benefit from the asset-allocation expertise of the fund manager concerned, apart from security selection. “Low allocations would not serve the purpose as the overall allocation could drift from the recommended allocation,” he says.
SIPs or lumpsum investment?
That will depend on the needs and plans of the investors. In multi-asset funds where asset allocation is actively managed, investors may go for lumpsum and those funds where asset allocation is relatively static, systematic investment plans (SIPs) will be preferred as the fund managers may not take active calls on the asset allocation.
Chetanwala says SIPs can work for those who want to build a corpus in the fund over a period of time. “Considering the nature of the fund and if the idea is to invest the fixed deposit money or retirement corpus, then investing in a lump sum could be a better route. This lump sum investment can be done in a staggered manner over some time depending on market conditions,” he says.