Multi-Asset Allocation Fund | Purpose, Factors, Advantages and Disadvantages - GeeksforGeeks (2024)

What is Multi-Asset Allocation Fund?

Multi-Asset Allocation Fund can be described as an approach to investing in a variety/combination of asset classes. Here, the composition of the portfolio will not be based on one asset, rather it will be divided among more than one asset class. Multi-asset allocation funds are the solution available for those investors who want to divide their risk among different classes of assets/ funds so that their investments do not suffer huge market dips and maintain growth even when one asset class suffers as holdings will be divided. This also allows the investor to have a steady income and growth, as they have opted for a balanced composition of assets.

Key takeaways from Multi-Asset Allocation Fund:

• The multi-asset allocation has gained a huge volume of investment recently, as it is better than the traditional hybrid model in terms of risk adaptability.
• Investing across a combination of an asset class that is uncorrelated helps in mitigating the risk and also provide decent returns in the long term as each of the asset class performs differently in different economic condition, and their returns vary.
• As per SEBI guidelines, the multi-asset allocation of funds needs to be invested in a minimum 3 asset classes with at least a minimum investment of 10% in each class, of asset, an investor can choose the proportion between these 3 asset classes in any way they find suitable but minimum criteria of 10% is required to be followed.
• Investors have different options in asset classes, which could be equity, debt, gold, digital assets, etc. Some popular multi-asset allocation funds in India are Quant Multi Asset Fund, ICICI Multi Asset Fund, HDFC Multi Asset Fund, SBI Multi Asset Fund, etc.

Purpose of Multi-Asset Allocation Fund

1. To Manage Risk: Risk is the biggest factor of investing. If the investor does not use proper investing techniques and is not able to read the market risk and translate the analysis into their portfolio, the portfolio might face huge losses.

2. Divide the Portfolio into Asset Classes: Financial markets are extremely volatile and experience both market booms and busts. Any asset class can suffer in the long run, and if the portfolio is based on only one asset class, the portfolio might not survive during the changing market environments. To achieve profits, investors should plan their investments in a way that can be averse to risk, and the chances of risk can be overcome by making proper asset allocation decisions addressing a balance between returns and risk among diversified asset classes.

3. Diversification: A high degree of asset diversification makes sure that an investor gets a better risk-adjusted return than a single asset class, as an investor can adjust portfolio positions according to the prevailing market condition. Investors who like to explore different markets but can not invest due to information and other constraints get better opportunities in multi-asset allocation of funds.

Features of Multi-Asset Allocation of Fund

1. Mitigation of Risks: Multi-asset funds are secure as they mitigate the risk that is potentially present in investing in one asset class.

2. Not-Biased: Multi-asset allocation funds are not biased regarding any asset class.

3. Constant Income and Growth Rate: Multi-asset funds provide a constant income stream as any financial malfunctioning in one asset class will not affect other classes of assets, and there will be a continuous growth rate.

4. Diversification: Multi-asset funds give you a mixed character for your portfolio. For example, Gold has shown a constant character in the past few years. It gives 5-6% returns, whereas you will see equity has shown a highly volatile character.

5. Volatility: Multi-asset allocation funds temper the portfolio volatility as they adjust the price fluctuations.

6. Market Conditions: The portfolio of the multi-asset allocation fund can be changed according to the prevailing market condition.

Who should invest in Multi-Asset Allocation Fund?

Multi-Asset Allocation Fund is suitable for investors who are ready to diversify their portfolio and do not want to remain invested in only one asset class or those who are not very well versed with equity investing and are extremely cautious of fluctuations. Even those investors who want to enjoy stable and consistent growth of their portfolio but do not want to assume higher risk associated with their investment can also invest in the Multi-Asset Allocation Fund. In the long run, Multi-Asset Allocation of Funds provides regular returns and also secures the portfolio at the same time.

Factors required to be considered for Multi-Asset Allocation Fund

1. Diversification: Multi-asset allocation funds are managed by fund managers, and every fund will have its own set of parameters and composition of different asset classes. So, the investor needs to study the individual composition that fits his investing parameter.

2. Time Horizon: If an investor has a long time horizon, only then he/she should consider Multi-asset allocation funds, as they have proved to be beneficial in the long run, i.e. more than three years. If investors have short-term goals, and they are looking for a fund, Multi-asset allocation funds might not be the right choice for them.

3. Tax Implications: Investor need to ascertain the tax implication of the fund, if he/she is ignorant about the tax implication, they might not get the fruitful return out of it.

4. Risks: Investors should consider his/her risk appetite before investing. Although Multi-asset allocation funds are less prone to risks, if the investor wants to minimise the risk, he/she should approach a fund that has a lower dependence on equity.

Advantages of Multi-Asset Allocation Fund

1. Diversification of Capital: As multi-asset allocation funds invest capital among the different asset classes, this gives exposure of different asset classes to the investor and balances the portfolio.

2. Mitigation of Risk: Under a multi-asset allocation fund, the capital is divided among different asset classes, and every asset performs differently, as per their different characteristics. So, even if one asset class suffers other asset class remains unaffected.

3. Steady returns: Multi-Asset Allocation Fund, being diversified in nature has the main advantage of gaining returns even in the volatile market condition. Investors who have low risk-bearing capability, prefer multi-asset allocation funds for steady returns.

4. Taxation Benefit: Long-term capital gains up to 1 lakh per year are exempted and if the multi-asset allocation fund is equity-based then any gain above 1 lakh will be taxed at 10% without indexation benefit. If a multi-asset allocation fund is debt-based then long-term capital gain over and above 1 lakh will be taxed at 20% with indexation benefit if held for a period longer than 3 years.

5. Flexibility: Multi-Asset Allocation Fund has a high degree of flexibility associated with them, as at any time investor can manage his/her holding between selected asset classes if the prevailing market condition is not favourable to his/her portfolio.

6. Expert Opinion: A multi-asset Allocation Fund being managed by an experienced fund manager gives investors the best choice of asset class, Investors can avail the benefit of different classes of assets by selecting only one fund.

Disadvantages of Multi-Asset Allocation Fund

1. Taxation on Short-Term Holding: If an investor holds a Multi-Asset Allocation Fund for a short-term duration, say 1 year, he/she shall be liable to pay tax as per their applicable income tax slab rates, and no benefit of indexation will be available.

2. No Guarantee of Success: The allocation of assets in a multi-asset allocation fund stands different between different fund managers or AMC, so the returns will also differ as per the allocation. The portfolio by nature gives the investor an element of discretionary exposure due to the ability that the fund manager possesses to change the mix of assets in the fund.

3. Higher Cost: Multi-asset funds charge much higher fees than traditional single-asset class funds as additional management is required to manage the portfolio across multiple asset classes.

4. No Customisation: The dynamics of investment can not be controlled by investors, as it depends upon the asset management company they are investing in. The investor does not directly invest in the asset rather they invest in the fund, which contains different asset classes, and an investor can not customise his investment in the asset class.

Conclusion

Overall, Multi-Asset Allocation of funds is a category of mutual funds introduced in India. An investor should secure his investments and reduce the risk associated with them, as compared to traditional funds. Investors can enjoy a steady flow of return under multi-asset funds. However, due consideration shall be given by the investor to his risk-taking capabilities. The investor shall go through the asset allocation provided by the respective fund manager and then invest in funds accordingly.