Given the headwinds in play, the year 2023 is anticipated to be the year of multi-asset investing by industry experts. The Multi-Asset Allocation strategy will provide a cushion for your investment portfolio against the downside risk.
What Are Multi Asset Allocation Funds?
Multi Asset Allocation Mutual Funds are a combination of asset classes that are used as an investment. Typically, it comprises of more than just one asset class and intends to create a portfolio of assets. The distribution of assets and their composition tends to vary depending on an individual investor. Through a multi-asset allocation fund, an investor gets to invest in equity and debt instruments, equity-oriented schemes, and gold and gold-oriented investment instruments. An investor can invest up to 80% of capital in either of the asset classes. Mutual Fund units and stock lending up to 20% of assets can be a probable investment prospect for the said fund.
Such funds can be further categorized as
- Risk tolerance funds
- Target-date funds
In the case of Risk tolerance funds, the asset allocation depends entirely on an investor’s risk appetite. In the case of Target-date funds, the asset allocation tends to vary depending on the investor’s preferred time horizon.
Where do Multi-Asset Allocation Funds Invest?
- Equity portion: Investors with a high-risk appetite and the desire to make the utmost use of the market volatility to earn high returns prefer investing in equity instruments.
- Debt portion: Conservative investors with a relatively lower risk tolerance prefer investing in debt instruments. These funds give conservative investors the benefit of the equity and commodity classes, without investing outside their comfort zone.
- Commodities and REITs portion: Going by SEBI’s rule, these funds invest a minimum of 10% in other asset classes like gold/silver ETFs & REITs. They act as a hedge against economic uncertainty and inflation.
Purpose of Multi Asset Allocation Funds
The purpose of these funds is to enhance and diversify an investment portfolio through multi-asset allocation across several asset classes. Through such an action, the fund further aims at cushioning the risks that are associated with investing in just one class of asset. The multi-asset allocation fund is liable for taxation. If an investor holds the funds for less than 3 years, they will be liable to tax on their short-term capital gain tax, as per their predefined slab. If they hold on to their investment for more than 3 years, a rate of 20% with indexation will be levied on their long-term capital gains.
Advantages of Multi Asset Allocation Funds
- Unrestricted Entry and Exit
- Rebalancing Portfolio
- Readymade Portfolio
Risk Associated with Multi Asset Allocation Funds
The risk levels associated with these funds are on the lower side. This is because the portfolio of these funds is constituted in such a way that the fund invests at least 10% in a minimum of three different asset classes. This mitigates the risk of concentration to a greater extent and gives you the benefit of exposure to a diversified portfolio.
The equity components of these funds carry market risk, volatility risk, and concentration risk. The debt components possess liquidity risk, credit risk, and volatility risk. If the fund has exposure to gold, then the fund can be influenced by the volatility of the gold price. If the fund has invested in real estate, then liquidity risk comes attached to it. However, having a long-term investment horizon mitigates these risks to a greater extent.
Hence, by investing in Multi Asset Allocation Funds, you can achieve diversification across asset classes, which serves as a protective measure for your portfolio in the event of a negative occurrence affecting a specific asset class. This diversification helps mitigate risks and reduces the need for you to constantly readjust your asset allocation according to changing market conditions.