When it comes to investing, there are multiple options out there. Each with its own set of pros and cons. One such option that often piques the interest of beginners is the Multi-Asset Fund, also known as the All-Weather Fund.
But what exactly is a multi-asset fund, and is it a good fit for your financial goals? Let’s discuss.
Estimated read time: 3 minutes and 59 seconds
Buckle up. Here we go!
What is a Multi-Asset Fund?
Multi-asset funds are hybrid funds that must invest a minimum of 10% in at least 3 asset classes. These funds typically have a combination of equity, debt, and one more asset class like gold, real estate, etc.
In simple terms, a multi-asset fund is like a financial toolbox filled with a variety of investment instruments. The goal is to provide investors with a diversified portfolio, reducing risk while aiming for better returns in all market conditions.
How does a Multi-Asset Fund work?
Multi-asset funds are designed to adapt to maintain a balance between safety and potential returns. Here’s a simplified breakdown of how they work:
1. Asset allocation
Multi-asset fund may begin with an initial allocation of assets between equity, debt and gold (min. 10% in each). This allocation can vary among different funds and depends on the fund manager’s strategy.
2. Dynamic rebalancing
The fund manager continuously monitors market conditions, economic trends, and other relevant factors. Based on this analysis, they adjust the fund’s asset allocation. For example, if the equity market seems bullish, they might increase the equity portion; contrarily, if it looks uncertain, they may shift towards debt or gold instruments.
3. Risk management
Multi-asset fund aims to manage risk by diversifying the fund into multiple assets and automatically adjusting exposure to assets based on market conditions to protect investors’ capital.
4. Regular reviews
These funds undergo periodic reviews and rebalancing, typically at predefined intervals, to ensure that the asset allocation aligns with the fund’s objectives.
Historical performance of Multi-Asset Fund in India
To understand whether the multi-asset fund is a good fit for your portfolio, it’s essential to examine its historical performance. Keep in mind that past performance is not indicative of future results, but it can provide some valuable insights.
As of September 26, 2023, multi-asset funds have on average delivered 14.78% p.a. returns in the last 5 years. Their 3 and 10-year annualized returns are 19.00% and 12.74% p.a. (Source – AMFI)
And, as multi-asset funds are actively managed funds, their expense ratios are high. The expense ratio charged on direct plans is in the range of 0.3 to 1% and 1.6 to 2.3% on regular plans. (Source – AMFI)
Historically, multi-asset funds in India have shown promise. They’ve often delivered steady returns with lower volatility compared to pure equity funds. This can be appealing to those who don’t want to bear the full brunt of stock market swings.
However, it’s essential to remember that past performance doesn’t guarantee future results. Market conditions are ever-changing, and what worked well in the past may not be as effective in the future.
Also, you should know that a fund’s performance shouldn’t only be analysed based on its returns alone. You should also consider a few other factors, such as volatility and risk-adjusted returns. Learn how to analyse and pick the best active mutual fund here.
Pros of investing in Multi-Asset Fund
By spreading your investments across various asset classes, you reduce the risk associated with putting all your eggs in one basket.
2. Professional management
You benefit from the expertise of skilled fund managers who make strategic asset allocation decisions, saving you the hassle of making frequent investment choices.
3. Risk mitigation
The flexibility to adjust asset allocation helps to reduce downside risk during market downturns. This can protect your capital during turbulent times.
Multi-asset funds simplify investing for beginners, as they don’t require extensive knowledge or constant monitoring.
5. Tax efficiency
Many multi-asset funds are structured as equity funds (minimum 65% of funds invested in equity) for tax purposes, which means long-term gains (held for over one year) are taxed at a lower rate than debt funds.
Cons of investing in Multi-Asset Fund
These funds typically have higher expense ratios because of active management, which can affect your returns over time.
2. Market timing risk
While they aim to lower risk, multi-asset funds are not immune to market fluctuations. The effectiveness of a fund relies heavily on the fund manager’s ability to time the market correctly. If the manager makes incorrect calls, it can impact returns negatively.
Your returns depend on the fund manager’s decisions, which may not always align with your expectations. Also, drastic changes in the fund’s asset allocation may not align with your risk tolerance and goals.
Should you invest in a Multi-Asset Fund?
The decision to invest in a multi-asset fund depends on your financial goals, risk tolerance, and investment horizon.
On paper, if you’re a beginner looking for a well-rounded investment option that offers diversification and professional management, a multi-asset fund could be a great fit.
However, the reality is different. The execution of these multi-asset funds is different.
The problem is that each fund in the multi-asset fund category is unique. After meeting the primary requirement of investing at least 10% of the fund in 3 asset classes, the manager has complete flexibility to invest in any asset class.
This leads to different risk levels for each fund. One fund can invest 80% in equity, and another fund can invest 80% in debt. Both have different risk and return levels, and they can’t be compared together.
Before investing in a multi-asset fund, you need to have enough knowledge to analyse the asset allocation of each fund separately. And then analyse whether the fund matches your risk tolerance.
All this makes it difficult to suggest this fund to beginners.
And if you have good knowledge about markets and investments, you are better off diversifying your investments on your own. You can have more control over your investments and save on the fund expense fees.
That’s it for today, buddies. In a previous blog, we discussed Balanced Advantage Funds. Check it out if you missed it.
Share these insights with your buddies. Until next time!
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