In the realm of investments, risk and return are interconnected aspects. Elevated potential returns usually correlate with increased levels of risk. This implies that investments providing the opportunity for significant gains also entail the risk of experiencing larger losses. On the flip side, investments with lower risk typically come with lower potential returns. While these investments offer increased stability, the trade-off is a slower growth of your money. This underscores the significance of asset allocation.
Lately, investors have observed a surge in the launch of multi-asset allocation funds by various asset management companies, urging individuals to allocate and reallocate their funds across diverse asset classes.
Relying on different asset classes
Contemporary investors who remain skeptical about the necessity of effective asset allocation should recognize the importance of diversifying their investments across various asset classes. This strategy diminishes the impact of fluctuations in any single market on your portfolio, adhering to the principle of not putting all your eggs in one basket.
Distinct asset classes come with varying levels of risk. Customizing your asset allocation allows you to align your overall risk exposure with your tolerance. Optimization is crucial as well; strategic asset allocation enables you to maximize potential returns within the risk level that aligns with your comfort. The primary asset classes that attract investors encompass:
Equities (Stocks): Stocks offer the possibility of long-term growth, albeit with higher volatility. Additionally, certain stocks issue dividends, offering a consistent source of income.
Fixed income (Bonds): Bonds typically provide greater stability compared to stocks. Additionally, bonds pay interest at regular intervals.
Gold: Gold functions as an ideal safeguard against inflation, as it has the potential to retain value during periods of inflation. Moreover, the precious metal can demonstrate strong performance during times when other asset classes face challenges.
Real estate: Property values have the potential to appreciate over time, elucidating the inherent value of this asset. Real estate can also serve as a generator of rental income.
How do multi-asset allocation funds help?
Investing in multi-asset allocation funds provides a convenient method to attain diversification and a balanced risk-return profile through a single investment. Here are some essential aspects to consider:
Hybrid framework: Categorized as hybrid mutual funds, these funds blend assets from diverse categories such as equity, debt, and potentially other sources like real estate or gold.
Minimum allocation: By SEBI (Securities and Exchange Board of India) regulations, these funds are required to allocate a minimum of 10% of their assets to each of at least three different asset classes. This mandated diversification is aimed at effectively managing risk.
Fund management: The fund manager determines the specific asset allocation within the fund, relying on their market outlook and the investment objective of the fund.
Apart from the two commonly preferred asset classes, fixed income, and equity, these schemes possess the flexibility to venture into diverse asset classes like gold, silver, real estate investment trusts (REITs), infrastructure investment trusts (InvITs), international equities, and additional options. The fund manager establishes the allocation proportion for each asset class by considering current market conditions, striving to strike a balance between risks and returns.
Why invest in a multi-asset allocation fund?
Investors can take note of the enduring wisdom of Benjamin Grantham, who stated, “There is a close logical connection between the concept of a safety margin and the principle of diversification.” The contemporary interpretation of this statement can be seen in the context of asset allocation carried out through multi-asset allocation schemes. Below are some of the primary reasons why you may contemplate investing in multi-asset allocation funds:
Diversification and risk mitigation: The key benefit lies in the diversification they provide. Through investments in various asset classes such as equity, debt, gold, and potentially others, you distribute your risk across different market segments. This aids in minimizing the impact of a downturn in any single asset class.
Reduced portfolio volatility: Given the distinct responses of individual asset classes to market fluctuations, their combined influence within a multi-asset fund can yield a more consistent overall portfolio performance, showcasing diminished volatility when contrasted with a focus on a single asset class.
Ease of use and expert management: Multi-asset allocation funds provide a convenient means to accomplish diversification without the requirement to actively oversee and invest in individual assets from various categories.
Fund manager expertise: The fund manager assumes the responsibility of selecting and allocating assets within the fund, guided by their market outlook and the fund's investment objective. This can be especially advantageous for investors who lack the time or expertise to independently manage their portfolios.
Who benefits from investing in multi-asset funds?
Investing in multi-asset allocation funds offers unique advantages, particularly for specific investor groups that struggle to differentiate between deliberate and undesired risks while seeking growth in their investments with minimal volatility. The subsequent investor categories gain the most advantages by allocating their funds to this particular type of fund.
- Investors with a lower risk tolerance can reap the benefits of the built-in diversification and potentially reduced volatility provided by multi-asset allocation funds, as opposed to concentrating solely on equities.
- Individuals with limited time or resources to actively supervise their portfolio can find these funds a convenient and effective method to achieve their investment goals.
The optimal asset allocation for you is entirely contingent on your circ*mstances. Elements such as your age, investment objectives, time horizon, and risk tolerance all play a vital role. In general, multi-asset allocation funds can serve as a beneficial instrument for investors seeking a comprehensive and diversified approach to investing, particularly for those with lower risk tolerance or limited time for active portfolio management.
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First Published:
29 Feb 2024, 04:28 PM IST
