Things to know before investing in Multi-asset Allocation Fund | Fusion - WeRIndia

Mutual funds make an effort to meet the requirements of a variety of different kinds of investors. As a result, many investment schemes have their own set of investing goals, risk exposure, and asset allocation methods. 

What are Multi-Asset Allocation Funds, and how do they work?

A multi-asset allocation fund invests in a variety of assets to provide diversification across different asset categories. Equity, debt, and gold are the three most popular asset types in which these plans invest their funds. When the economy and markets are doing well, the fund manager may dynamically distribute assets among various asset classes to maximize return on invested capital.

For example, suppose the share markets are hopeful. In that case, the fund manager may attempt to raise the portfolio’s exposure to equity-related instruments while decreasing the portfolio’s exposure to debt-related securities.

Additionally, suppose the country’s overall economy is looking bleak. In that case, the gold investment may see a rise since gold has a history of outperforming other asset classes when other asset classes are underperforming.

It is possible that schemes will not always be diverse.

To be considered a multi-asset allocation fund, the Securities and Exchange Board of India (SEBI) or share markets requires that it invest in a minimum of three asset classes and maintain an average weighted average allocation of at least 10% in each of those asset’s classes.

Investors will get exposure to three asset classes by participating in a single plan; however, the minimum investment restriction of 10% may reduce the element of diversity that is provided. When a fund manager is not enthusiastic about the economy, their portfolio may have a greater concentration of gold-related assets and a lower concentration of equities and debt investments.

They are not a substitute for individual portfolio diversification in the long run.

One of the most common pieces of investing advice is to build a diverse portfolio of assets that includes interests in various asset types. This is precisely what a multi-asset allocation fund is intended to do. As a result, should investors just put their money into a multi-asset allocation fund and cease worrying about diversifying their own portfolios?

When it comes to portfolio diversification, an investor’s needs vary from a mutual fund scheme. While a mutual fund, like an individual investor, tries to accomplish an investing goal by keeping risks under control, the fund manager and a dedicated team of experts work together to fulfil the objectives.

However, private investors must guarantee that their portfolios are diversified by investing in assets with a low connection to one another, as opposed to institutional investors. In this manner, even if one asset class does well, the other is not adversely affected.

The portfolio’s composition will determine the taxation of the portfolio.

Funds that are held mostly in debt or equities do not need multi-asset allocation funds to maintain more than 65% of their assets in such debt or equity; thus, their taxation differs from fund to fund. While most tax-sensitive investors favour equity funds, it is critical to carefully study the scheme-related papers to understand how the fund house plans to place equity in the scheme’s portfolio.

Investors should not make any assumptions about the tax laws and should consult with the fund house if they have any questions about the regulations.

The performance of the fund manager significantly influences the performance of these funds.

A multi-asset allocation fund’s fund manager is analogous to a mutual fund manager in any other active fund. In light of the fact that the plan does not have a specific investing strategy, this is particularly true.

For example, the plan may elect to invest about 30% of its corpus in equity-related instruments; but, since there is no predefined investment style, the fund manager is free to pick companies from whatever sector or market capitalization they choose.

In multi-asset funds, even though specific schemes may explicitly state these elements in the scheme-related papers, the fund manager still bears a significant amount of responsibility. Consequently, investors must investigate the fund’s performance and track record in the share market prior to placing an investment.

Major Advantages: –

•   Diversification: In an attempt to balance risk and reward, investors may use multi-asset allocation, which enables them to divide their portfolio into several asset classes, each with differing risk-reward characteristics. It makes it possible for investors to reduce their risk while still receiving a consistent income across several market cycles.

•   Rebalancing your portfolio: It is essential to guarantee that your assets are evenly spread across the asset classes producing higher returns than others. In a variety of different ways, investors in multi-asset allocation mutual funds may benefit from having automatic portfolio rebalancing as an option. Reallocating one’s assets (including real estate) is essential because the stock market is notoriously volatile.
•   Ready-made portfolio: Not everyone in share markets has the financial means to hire a specialist to design a customized investment portfolio for them. Investing in a multi-asset allocation fund enables investors to own a portfolio with a diverse combination of risk and return. In addition, it provides them with a pre-selected portfolio that is already set up.

By participating in a single kind of mutual fund, investors may take advantage of the advantages of several asset classes without having to diversify their portfolios.

•   The fund does not charge an investor: A fee to join or leave the scheme, and it does not charge an investor a fee to withdraw from the plan. If they redeem 10% of their investment before the end of the year, investors will be able to take advantage of free entrance and exit.

Conclusion:

In multi-asset funds, even though specific schemes may explicitly state these elements in the scheme-related papers, the fund manager still bears a significant amount of responsibility. Consequently, investors must investigate the fund’s performance and track record in the share market prior to placing an investment.

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