Benefits of Adding a Multi Asset Allocation Fund to Your Portfolio

Holding several investments does not always mean a portfolio is well diversified. If most holdings react similarly to changes in equity markets, interest rates or other economic factors, the portfolio can still carry concentrated exposure.

A multi asset allocation fund addresses this by combining different asset categories within one scheme. Under the current mutual fund framework, this category maintains exposure to at least three asset classes, with each accounting for a minimum of 10% of the portfolio. (Source)

The value of this approach lies in how different asset classes can play different roles within an investment portfolio.

What Is a Multi Asset Allocation Fund?

A multi asset allocation fund falls under the hybrid mutual fund category and maintains exposure across multiple types of assets rather than relying mainly on one.

Depending on the scheme mandate, the portfolio can include equity, fixed-income investments and assets such as gold, along with other permitted instruments. AMFI also notes that multi-asset funds can provide exposure across traditional equity, fixed income, derivatives and commodities such as gold. (Source)

The actual asset mix differs across schemes. Investors should therefore assess the allocation strategy and scheme documents instead of assuming that all multi asset allocation funds follow the same approach.

Why Is Asset Allocation Important for an Investment Portfolio?

Asset allocation determines how portfolio exposure is distributed across investments with different characteristics.

Equities can provide participation in the long-term growth of businesses but are exposed to market fluctuations. Debt investments can face potential risks linked to interest-rate movements, credit quality and liquidity conditions. Assets such as gold can be influenced by a different set of economic and global factors.

Combining these exposures can reduce dependence on any single asset category. However, diversification cannot eliminate potential risks or ensure positive returns.

How Does a Multi Asset Allocation Fund Build a Diversified Portfolio?

A multi asset allocation fund creates diversification by assigning different roles to different asset classes within one portfolio.

Equity for Growth Participation

Equity exposure allows the portfolio to participate in the growth potential of listed companies over the long term. At the same time, changes in equity markets can cause fluctuations in the fund’s NAV.

Debt for a Different Risk-Return Profile

Debt and fixed-income exposure can behave differently from equities under changing market conditions. These investments can still carry potential risks related to interest rates, credit quality and liquidity.

Gold and Other Permitted Assets for Broader Exposure

Some schemes may include gold or other permitted asset categories as part of their overall allocation. These exposures can introduce portfolio drivers that differ from those affecting conventional equity and debt investments.

Rebalancing Across Asset Classes

Market movements can change the relative weight of each asset in the portfolio. The fund manager can adjust allocations within the limits stated in the scheme documents, reducing the need for investors to rebalance each asset-class investment separately.

What Are the Key Benefits of Multi Asset Allocation Funds?

• Broader Diversification: The portfolio gains exposure to different asset categories instead of depending primarily on the performance of one market segment.

• Releatively Lower Dependence on a Single Asset Class: Different assets may react differently to market and economic conditions, which can reduce concentration within the overall portfolio.

• Professional Asset Allocation: The fund manager determines and manages the allocation within the investment limits and strategy specified for the scheme.

• Easier Portfolio Management: Investors can access multiple asset classes through one scheme instead of separately tracking and managing several investments.

• Multiple Portfolio Return Drivers: Equity performance, interest-rate movements and commodity trends are influenced by different factors, giving the portfolio exposure to more than one source of potential performance.

• Ongoing Rebalancing: The asset mix can be adjusted as portfolio weights and market conditions change, subject to the scheme’s stated investment framework.

These benefits do not remove the potential risks associated with the underlying investments. Multiple asset classes can decline at the same time, and allocation decisions can also influence fund performance.

How Can a Multi Asset Allocation Fund Complement an Existing Investment Portfolio?

The usefulness of a multi asset allocation fund depends on what is already present in the investor’s portfolio.

For instance, an investment portfolio dominated by equity may gain exposure to other asset categories through a multi-asset strategy. However, an investor who already holds dedicated equity, debt and gold investments should assess whether another scheme would simply add overlapping exposure.

The focus should therefore be on whether the fund improves the overall asset mix rather than adding another scheme only for the sake of diversification.

Who May Consider Multi Asset Allocation Funds?

These funds may be considered by investors who:

• want access to different asset classes through one mutual fund scheme;

• prefer professional allocation and rebalancing;

• want to reduce excessive concentration in one asset category; and

• have a risk profile and investment horizon that align with the scheme.

Before investing, it is important to review the investment objective, asset-allocation framework, Riskometer, costs and Scheme Information Document.

Blog Disclaimer

The information herein is meant only for general reading purposes, and the views being expressed only constitute opinions and therefore cannot be considered as guidelines, recommendations or a professional guide for the readers. The document has been prepared on the basis of publicly available information, internally developed data, and other sources believed to be reliable. Recipients of this information are advised to rely on their own analysis, interpretations & investigations. Readers are also advised to seek independent professional advice in order to arrive at an informed investment decision.

SEBI Registration No. MF/020/94/8

Mutual Fund investments are subject to market risks, read all scheme related documents carefully.