For a substantial proportion of investors in India, the range of investment options has been limited to risk-free investment instruments. In India, earlier generations viewed asset classes containing any element of risk with skepticism. While such investing techniques may have yielded varying degrees of success, an increasing number of investors, particularly those in their younger age groups, recognize that diversification is essential for a successful investment journey. Portfolios with their weightage substantially skewed toward one or two assets may struggle to survive market fluctuations.
While asset allocation is considered the centerpiece of a successful investment journey, many investors, particularly those who are new to the game, find it difficult to decipher the appropriate formula. Investing in multi-asset mutual funds has come up as an easy method to address this void. Unlike multi-cap mutual funds that spread their investments across different types of equities, Multi-asset funds are hybrid funds that invest in at least three asset classes, with a minimum allocation of 10% in each. The basic logic is that different asset classes react differently to macroeconomic shocks, reducing risks in the long run. Here's how investing in multi-asset funds can help you to meet your diversification goals:
Overcoming Personal Bias
We are all biased, regardless of how much expertise we have as investors. These biases cause us to gravitate towards and remain invested in certain asset classes, and when those asset classes perform well, the confirmation bias is exacerbated. However, holding on to asset classes in the hope that the crests would continue is a bad strategy. Markets tend to move in cycles, and no investor can foresee such trends for even a few months, let alone a few years. Your investment will be methodically diversified across different assets using multi asset funds, as opposed to a haphazard distribution caused by human bias.
Because of SEBI's standards governing asset allocation in three asset classes, your portfolio will include a representation of each asset class, as well as a disciplined structure.
Make rebalancing an Easier Task
Choosing asset classes and investing in them is insufficient for portfolio diversification. Rather, it is a continuous endeavor in which you must constantly rebalance your portfolio as your asset allocation may alter due to market conditions. However, rebalancing portfolios and implementing a multi-asset strategy takes significant time and effort, which can be difficult for inexperienced investors. Retail investors may not be as knowledgeable about market characteristics as fund managers, making it difficult to enter and leave markets.
You can benefit from the expertise of a financial advisor by investing in a multi-asset fund. Professional fund managers handle multi-asset funds, and their investment decisions are supported by a research team. They have firsthand experience managing assets in the face of changing markets and economic conditions that a retail investor may not understand. Furthermore, rebalancing, which involves taking profits in one asset class and investing in another, is a more tax-efficient process when using a multi-asset fund.
Long-term Wealth Accumulation Through Prudent Asset Allocation
Multi-asset funds are appropriate for investors searching for long-term investing opportunities. The stock component contributes to capital appreciation, while the debt component serves as a buffer during market instability. The commodity component of the fund works as an inflation hedge. In this manner, your portfolio can gain exposure to a diverse variety of assets through a single product, which can help you achieve your wealth development goals in the long run. Multi-asset funds enable you to invest in equities across market capitalizations, diversifying your portfolio without concentrating on risks. Furthermore, several new-age multi-asset funds allow you to experiment with overseas shares, which gives geographical diversification.
Considerations Before Investing in Multi-Asset Allocation Funds
Before investing in a multi-asset allocation fund, consider the following:
a. Equity exposure: If you are unwilling to accept higher levels of risk, you should consider investing in a multi-asset allocation fund with low exposure to equities.
b. Taxability: You must be informed of the taxation of the fund in which you intend to invest. If you don't, you'll be in for a surprise when it comes time to redeem the units. The capital gains taxes of multi-asset allocation funds is determined by their equity exposure. If the equity exposure exceeds 65%, the scheme is taxed similarly to an equity fund. If not, it is taxed similarly to a debt fund.
c. Investment horizon: If you have a longer investment horizon than three years, multi-asset allocation funds are a good option.
Conclusion: What Types of People Should Invest in Multi Asset Allocation Funds?
Investing in multi-asset allocation mutual funds is appropriate for investors who are not prepared to take on more risk and want to receive predictable and consistent returns on their investments. If you have an investment horizon of more than three years, you should consider investing in these funds.
The diversified portfolio reduces the related risks and generates consistent returns. These funds' equity exposure enables the scheme to provide long-term capital gains. If you want to diversify your portfolio, investing in a multi-asset allocation fund is a good alternative.
Disclaimer: Mutual Fund investments are subject to market risks, read all scheme-related documents carefully
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