What exactly are Multi-Asset Funds? Should you put money into them?
Renowned financial historian and economist Peter Bernstein once emphasized the significance of risk diversification, not only as a defensive measure but also as a means to maximize returns. This approach enables investors to capitalize on a wide range of opportunities available in dynamic market cycles. Multi-Asset Funds are specifically designed to achieve this objective by diversifying investments across three distinct asset classes: equity, fixed income, and commodities.
Are Multi Asset Funds Suitable for You?
Every investor possesses a unique investing style and strategy. While some adopt a conservative and cautious approach, others are more inclined towards risk-taking and exploring new avenues. Multi-Asset Funds, with their core strategy of diversification, cater to investors of all types, allowing them to experiment with alternative investing approaches while adhering to their preferred style.
While the aforementioned reasons may seem compelling enough to invest in Multi Asset Funds, it is important to consider certain factors before making a decision.
- Diversification with Specific Conditions: In India, the Securities and Exchange Board of India (SEBI) mandates that multi-asset funds must invest a minimum of 10% in each of at least three asset groups. This requirement serves as a hidden safeguard, ensuring that investors have at least 10% exposure to three diverse asset classes that are not highly correlated. It also helps mitigate the risk of investing heavily in a single asset class, reducing potential losses during market downturns.
- Multi-Asset Funds and Individual Portfolio Diversification: It is essential to distinguish between diversification achieved through Multi Asset Funds and diversification of one’s individual portfolio. Multi-Asset Funds allocate invested capital among the three asset classes, redistributing funds to the class performing well at a given time. However, it is equally important to independently allocate funds to individual asset classes with lower correlations to each other. This approach safeguards against the negative impact on overall investments in case one asset class underperforms. It also allows investors to align their investments with their preferred styles, such as value investing or growth-oriented investing. Furthermore, allocating funds separately to different asset classes enables flexibility in risk tolerance and taxation preferences, as each asset class has distinct tax implications.
- The Role of the Fund Manager: Multi Asset Funds are actively managed mutual funds, meaning that the Fund Manager makes all decisions regarding capital allocation. The Fund Manager utilizes research on market trends and movements to allocate investment capital to equity, fixed income, and commodities. For instance, during a favourable market period like the current one in India, the Fund Manager may allocate more funds to the equity class. However, in times of market downturns, such as the Global Financial Crisis in 2008-09, commodities like gold and silver tend to perform better, warranting increased allocation to them.
Therefore, thoroughly assessing the background and experience of the Fund Manager of any multi-asset fund is crucial before making an investment. Such information can be found in the Scheme Information Document, and evaluating the Fund Manager’s past performance enables investors to select an expert manager who can optimize their investments.
Understanding the Taxation of Multi-Asset Funds
If a fund has over 65% of holdings in debt, returns will be taxed as per the regulations for debt funds. Conversely, if the holdings are primarily in equity, the returns will be taxed under the rules for equity-oriented schemes. Consequently, it is imperative to comprehend the tax implications when planning investments.
Who Should You Be Investing in Multi Asset Funds?
Investing in multiple asset classes demands extensive study and research into the behaviour of each asset class under various circumstances, particularly when it comes to uncorrelated assets. While enhancing your investing knowledge, it can be advantageous to entrust a portion of your capital to experts. For novice investors, multi-asset funds serve as a suitable stepping stone, while experienced investors may incorporate them as a core .
In an environment of global market uncertainty, diversification remains a fundamental principle. Multi-asset funds provide an excellent avenue to balance risk and seize opportunities presented by each asset class.
Disclaimer: Mutual Fund investments are subject to market risks. Please read all scheme-related documents carefully before investing.
