Common Mistakes Investors Make While Selecting Multi-Asset Funds

Common mistakes while selecting Multi-Asset Funds include treating all schemes as similar, assuming diversification automatically lowers risk, and choosing without understanding how the fund may behave within your wider portfolio.

Because allocation styles can differ widely, selection requires more than a quick category-level comparison. A careful review can help investors avoid decisions based on incomplete or misleading signals.

Choosing a Multi-Asset Fund Based Only on Past Returns

Recent performance is often the first factor investors notice. However, choosing a fund solely because it has generated the highest recent return can lead you to overlook the level of risk taken to generate that performance. SEBI also advises investors not to make investment decisions based only on past performance. (SEBI Investor)

Consider a hypothetical example. Fund A generated 18% over one year, while Fund B generated 12%. However, Fund A maintains a higher equity allocation and experiences greater volatility. An investor with a relatively shorter horizon or lower risk tolerance may therefore find Fund B's allocation more suitable, despite its lower one-year return.

Also read: Benefits of Adding a Multi Asset Allocation Fund to Your Portfolio

Ignoring the Fund's Asset Allocation Strategy

Two multi-asset fund schemes can follow very different portfolio strategies. One fund may maintain comparatively higher equity exposure, while another may allocate more to debt, gold or other permitted assets.

Since asset allocation influences both risk and return potential, investors should understand the fund's permitted allocation ranges and how the portfolio is managed within them. Multi-asset allocation funds need to invest across a minimum of three asset classes, with a minimum 10% allocation to each. (SEBI)

Overlooking Risk and Investment Horizon

Investing across multiple asset classes does not automatically make a fund low risk. Equity, debt and commodity exposures carry different types and levels of risk.

SEBI needs mutual fund schemes to show a Riskometer to indicate their level [RS1.1]of risk, ranging from low to very high. Investors can use it as one factor when assessing whether a scheme aligns with their risk appetite. Investors are requested to refer the latest Riskometer of the scheme.

Not Comparing Asset Allocation and Performance Across Funds

Comparing funds purely by returns can be misleading when their asset allocations differ considerably. For example, a fund carrying a higher equity allocation may behave very differently from one that holds relatively more debt or gold.

Performance should also be assessed against the relevant benchmark rather than viewed in isolation. SEBI requires mutual fund schemes to disclose benchmark-related performance information so investors can evaluate performance in context. (SEBI – Master Circular for Mutual Funds)

Ignoring Expense Ratio and Other Fund Costs

The expense ratio represents the recurring expenses charged to a mutual fund scheme. Exit load may also apply when units are redeemed before a specified period, depending on the scheme. (SEBI Investor – Exit Load)

While costs should not be considered in isolation, they can affect the amount ultimately available to investors.

Assuming More Asset Classes Always Mean Better Diversification

Diversification is not simply about increasing the number of asset classes in a portfolio. The proportion allocated to each asset and the way those assets respond to different market conditions also matter.

For example, adding an asset class with a very small allocation may have only a limited effect on the portfolio's overall behaviour.

Overlooking Portfolio Overlap with Existing Investments

A multi-asset allocation fund may hold equity, debt or commodity exposure that is already present elsewhere in an investor's portfolio.

Adding another fund without examining the overall portfolio can therefore increase existing exposure rather than meaningfully improving diversification.

Chasing Recent Performance or Market Trends

Investors may be tempted to increase exposure to a fund because one of its underlying asset classes has recently performed well. However, market conditions change, and past performance cannot be assumed to continue.

Similarly, exiting or switching a fund solely because of short-term volatility may not be appropriate if its investment strategy still matches the investor's goal and risk profile.

A Simple Multi Asset Fund Selection Checklist

Before selecting a multi-asset fund, consider the following sequence:

Goal → Category → Risk → Horizon → Performance → Benchmark → Portfolio → Cost → Fund Management → Overall Portfolio Fit

This approach helps investors move beyond recent returns and assess whether the fund's overall strategy fits their investment needs.

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 as 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.