What are multi-asset allocation mutual funds?
A multi-asset allocation fund is a mutual fund scheme that diversifies investments across different asset classes such as equities, fixed income (debt), and gold. This diversification helps minimise reliance on a single asset class, aiming to offer more stable and risk-adjusted returns over time.
According to SEBI regulations, such funds must invest in at least three different asset classes, with a minimum allocation of 10% in each category.
The fund manager actively manages the portfolio by adjusting allocations based on prevailing market conditions. For instance, in a bullish equity market, the fund may increase exposure to stocks. In contrast, during market uncertainty, it may shift preference towards safer assets like debt or gold.
Features of Multi-Asset allocation of fund
Characteristics of Multi-Asset Allocation Funds
1. Risk mitigation
Multi-asset funds offer security by spreading risk across multiple asset classes, reducing the potential impact of volatility associated with any single asset class.
2. Impartiality
Multi-asset allocation funds maintain neutrality towards any specific asset class, ensuring a balanced approach to investment.
3. Consistent income and growth
These funds provide a steady income stream by diversifying across asset classes, shielding against disruptions in any one class and maintaining a steady growth trajectory.
4. Diversification
Multi-asset funds enrich portfolios with a variety of assets, such as gold, known for stable returns, counterbalancing the volatility often associated with equities.
5. Volatility control
Through strategic allocation, multi-asset funds help mitigate portfolio volatility by managing price fluctuations across different asset classes.
6. Adaptability to market conditions
The portfolio composition of multi-asset allocation funds can be adjusted in response to prevailing market conditions, ensuring flexibility and potential optimization of returns.
How does a multi asset allocation fund work?
Multi asset allocation funds work by investing across different asset classes to balance return potential with risk control. Their investment approach is built on three core principles:
Asset diversification
These funds spread investments across equities, debt instruments and commodities. This diversification helps reduce dependence on any single asset class. While equities support long-term growth, debt adds stability and predictable income, and commodities help hedge against inflation and market volatility.
Dynamic portfolio rebalancing
Fund managers actively adjust asset allocation based on market movements, economic indicators and valuation levels. When equity markets appear attractive, exposure to stocks may be increased. During periods of uncertainty, allocations may shift towards debt or gold to protect capital.
Risk mitigation
By combining asset classes that react differently to economic cycles, multi asset allocation funds aim to smooth portfolio performance and reduce overall volatility during market fluctuations.
How does a multi asset allocation fund work?
Multi asset allocation funds work by investing across different asset classes to balance return potential with risk management. Their investment approach is guided by three core principles:
1. Asset diversification
These funds spread investments across equities, debt instruments and commodities. This diversification helps minimise the impact of poor performance in any single asset class. Equities support long-term growth, debt adds stability to the portfolio, and commodities help protect against inflation and market uncertainty.
2. Dynamic portfolio rebalancing
Fund managers actively adjust the allocation between asset classes based on market conditions, economic indicators and valuation levels. When equity markets are strong, exposure to stocks may be increased. During volatile or uncertain phases, the allocation may shift towards debt or gold to preserve capital.
3. Risk mitigation
By combining assets that behave differently across economic cycles, multi asset allocation funds aim to reduce overall portfolio volatility. This approach helps maintain resilience and smoother returns across changing market conditions.
Purpose of Multi-Asset Allocation funds
The fund seeks to optimise portfolio diversification by allocating investments across various asset classes. This strategy mitigates risks inherent in single-asset investments.
Regarding tax implications, short-term capital gains (held for less than 3 years) are subject to ordinary income tax rates. Long-term capital gains (held for 3 years or more) are taxed at a concessional rate of 20% with indexation benefits.
Types of multi asset allocation funds
Equity-dominant multi asset funds
These funds allocate a larger share to equities while maintaining limited exposure to debt and commodities. They suit investors seeking higher growth with controlled risk.
Debt-focused multi asset funds
Such funds prioritise debt instruments for capital preservation and income stability, while keeping some exposure to equities and commodities for incremental returns.
Balanced multi asset funds
Balanced funds maintain relatively equal exposure across equity, debt and commodities, offering a well-rounded approach to risk management and wealth creation.
Commodity-driven multi asset funds
These funds invest significantly in assets like gold, silver or REITs, making them suitable for investors looking for inflation protection and portfolio stability during economic uncertainty.
Benefits of investing in multi-asset allocation mutual funds
There are several benefits of investing in multi-asset allocation mutual funds, including:
1. Diversification
Multi-asset allocation mutual funds invest in a minimum of three asset classes, which helps diversify your portfolio and reduce overall risk. Investing in a diversified portfolio can help you achieve your financial goals while minimising risk.
2. Stable returns
These funds offer may stable returns as they invest in a combination of equity, debt, and other asset classes. These funds are suitable for investors who are looking to take lower risks.
3. Professional management
Multi-asset allocation mutual funds are managed by professional fund managers who have expertise in managing different asset classes. These fund managers use their knowledge and experience to make informed investment decisions that can help maximise returns and minimise risk.
4. Diversification and risk mitigation
By spreading investments across various asset classes (stocks, bonds, real estate, etc.), these funds help reduce overall portfolio risk. When one asset class experiences a downturn, others may perform better, cushioning the impact. This diversification creates a more balanced and resilient portfolio.
5. Flexibility and adaptability
Unlike traditional funds focused on a single asset class, multi-asset funds allow for adjustments. Investors, in consultation with a financial advisor, can modify the asset allocation based on their risk tolerance, changing market conditions, and evolving investment goals. This flexibility ensures the portfolio stays aligned with your financial objectives.
6. Simplified portfolio management
Multi-asset allocation funds provide a pre-built, diversified portfolio, eliminating the need for individual investors to actively manage numerous asset classes. This can be particularly beneficial for those who lack the time, expertise, or resources to create and maintain their own investment portfolios.
7. Automatic rebalancing
These funds often feature automatic rebalancing, which helps maintain the target asset allocation over time. As market fluctuations cause the weightings of different asset classes to drift, rebalancing brings the portfolio back into alignment with the desired risk profile. This helps capture potential returns and manage risk more effectively.
8. Accessibility and convenience
Multi-asset allocation funds generally offer easy entry and exit options, often with low or no entry/exit loads depending on the specific fund and holding period. This allows for greater liquidity and flexibility in managing your investment.
Who should invest in a multi-asset allocation fund?
Whether you are a first-time investor or a seasoned one, a multi-asset allocation fund is considered to be a good way to invest in the market. This is due to its diversification factor that allows to dilution of the risks of investing in the market.
If you are a first-time investor, you can experiment by investing in a multi-asset allocation fund as it will allow you to understand how different assets perform and pick your preferred asset for further investment.
Apart from new investors, investors who have a low appetite for risk can also find multi-asset allocation funds beneficial since they will get a diverse portfolio along with the diluted risk factor.
For investors who are more inclined towards having long-term financial goals, multi-asset allocation funds can be useful with their growth potential and lower-risk factor.
When you invest in a multi-asset allocation fund, your funds are managed by professional portfolio managers who, with their knowledge of the market, help your portfolio grow.
How to invest in multi asset allocation funds?
Investing in multi asset allocation funds follows a simple, step-by-step process that helps investors gain exposure to equity, debt and commodities in a balanced manner.
Step 1: Choose the right fund
Begin by comparing different multi asset allocation funds based on parameters such as past performance, asset allocation strategy, risk profile and expense ratio. Understanding the fund’s objective, portfolio mix and investment style helps ensure it aligns with your financial goals.
Step 2: Open an investment account
To invest, you need a mutual fund account or demat account with a SEBI-registered broker or asset management company. Completing the KYC process, including identity and address verification, is mandatory for all investors.
Step 3: Decide the investment mode
You can invest through a lump sum if you have surplus funds or opt for a Systematic Investment Plan (SIP) to invest regularly. SIPs encourage disciplined investing and help manage market volatility.
Step 4: Make the investment
Investments can be made using net banking, UPI or other online payment options through mutual fund platforms or mobile apps.
Step 5: Monitor and review regularly
Track fund performance periodically to ensure it remains aligned with your goals. Rebalancing or switching may be considered if market conditions or objectives change.
Limitations of the multi-asset allocation funds
While multi-asset allocation funds offer diversification and professional engagement, they have their own limitations as well. They usually have higher management fees as compared to single-asset funds. This can reduce your returns, especially in low-yield environments. Since these funds are diversified, for a common man, it might be difficult to understand the nuances of the assets in which your funds are invested.
Since multi-asset funds are managed by market professionals, you, as an investor, give up control over the funds if you wish to alter them as per your preference. This additionally increases the dependability on the skills and judgement of your fund manager, which might not always be fruitful.
Additionally, while the risk is lowered with diversification, investors of multi-asset fund allocation might miss out on the high-return potential of single-asset allocation.
Multi asset allocation fund taxation
Multi-Asset Allocation Funds exhibit varying equity exposures, leading to diverse tax treatments on their returns. The 2020 Budget amendments introduced specific tax regimes based on the fund type.
Fund Type
|
Short-Term Capital Gains Tax
|
Long-Term Capital Gains Tax
|
Equity-Linked Scheme
|
15% irrespective of income tax slab (holding period less than 12 months)
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Tax-free up to INR 1 lakh. Anything above INR 1 lakh is taxed at 10% (holding period more than 1 year)
|
Debt-Linked Scheme
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Added to your overall income and taxed as per the income slab that you fit in (holding period less than 36 months)
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20% with indexation (holding period more than 36 months)
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How asset allocation works in multi-asset funds?
Multi-asset allocation funds employ a strategic approach to capital deployment, diversifying investments across various asset classes. The fund manager's decisions are informed by rigorous market analysis and the fund's specific investment objectives.
In periods of market turbulence, for instance, the manager may strategically increase the fund's allocation to bonds, known for their relative stability compared to equities. This adaptability is a cornerstone of multi-asset allocation strategies. Asset allocations are not fixed but rather dynamic, adjusting in response to economic indicators, market forecasts, and regulatory developments.
This dynamic approach enables the fund to optimize returns while mitigating risk, as the portfolio can be tailored to navigate diverse economic cycles and market conditions.
List of multi-asset allocation mutual funds
Key takeaways from Multi-Asset Allocation Fund
1. Highlight flexibility and risk management
These funds cater to a wide range of investors by offering a spectrum of risk profiles. They can be conservative during volatile markets and more aggressive during growth periods. This flexibility allows investors to choose a fund that aligns with their specific risk tolerance and investment goals.
2. Emphasise all-in-one solution
These funds offer a comprehensive investment solution, combining diversification, convenience, customisation options, and active management. Investors can benefit from a well-rounded portfolio tailored to their needs without the hassle of managing individual assets.
3. Focus on benefits for different investors
Looking for diversification and convenience? These funds offer a one-stop solution. They cater to both conservative and growth-oriented investors by adjusting their strategy based on market conditions. Additionally, you can often customize your investment within the fund to further align with your goals.
Should you consider investing?
Multi-asset allocation funds can be a good choice for investors seeking a simplified, well-balanced investment strategy without the need to manage separate equity, debt, or commodity funds. They are especially helpful for beginners or risk-averse investors who prefer relatively lower market volatility.
On the other hand, seasoned investors who like to tailor their portfolio or follow specific investment styles might find the preset allocation of these funds somewhat restrictive.
Conclusion
In conclusion, understanding various investment options is crucial. Multi-asset allocation mutual funds, combining equity, debt, and other assets, seek to generate capital appreciation by lowering risk by diversification across asset classes. With professional management, they provide a strategic choice for long-term financial success.
If you are interested in investing in multi-asset allocation mutual funds, Bajaj Finserv offers a wide range of funds to choose from. Begin securing a prosperous future by investing in mutual funds on Bajaj Finserv.
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