Enhancing Portfolio Stability With Multi Asset Allocation Funds

As someone who came from humble beginnings, Satish has always been concerned about saving money and accumulating wealth for his retirement period. While his children have begun working, he is keen on financing his golden period while also fulfilling the ambitions of his wife Savita. The couple wish to travel the world while also setting up a small organic farm in their native place, and for the same, Satish has been saving and investing for the last 15 years. Now, as his retirement inches closer, he is looking for a stable portfolio which will not cause him unnecessary heartache. Accordingly, his financial advisor urged him to consider multi-asset allocation funds, as these schemes, which combine a number of unrelated asset classes, which over the long term tend to offer stable and reasonable returns.

What are Multi-Asset Funds?

Multi-asset allocation mutual funds are investment vehicles that blend various asset classes. The selection and proportion of assets in these funds will vary as per market conditions. Most funds in this category typically allocate at least 10% of their corpus to three or more different asset classes, with the common ones being usually equity, debt and gold. The objective of these schemes revolves around providing investors with both steady income and potential capital growth by facilitating investment in a balanced mix of assets. Therefore, through multi-asset allocation funds, you can attain optimal diversification through a single route, making it an excellent option for investors like Satish, who wish to enjoy stable returns. Further, these schemes can also facilitate better portfolio performance, given that the findings of a Brinson study state that 93.4% of a fund's average returns are attributable to effective asset allocation.

Benefits of Multi-Asset Funds

First and foremost, the biggest benefit of a multi-asset allocation fund lies in its ability to offer you the advantages of multiple asset classes like equity, debt, gold, commodities, real estate investment trusts (REITs), infrastructure investment trusts (InvITs) etc. through a single window. You no longer need to worry about undertaking multiple investments to diversify your portfolio. With this scheme at hand, you can ensure optimal diversification in one fell swoop.

Secondly, these schemes enable investors to expose their portfolios to different asset classes encompassing dissimilar risk-reward factors, ensuring stability even when one asset class may face volatility. For instance, you may have noticed how safe haven asset like gold tend to inch upwards when equities witness a downturn. Given that a multi-asset investment fund comprise all these unrelated assets, your portfolio is likely to remain stable and provide superior downside protection during volatile scenarios.

Why Multi-Asset Funds Are a Good Bet

As you have seen, choosing multi-asset allocation fund offers several key advantages for investors looking to optimise their portfolios. Further, these schemes also offer the potential to achieve better alpha, or excess return over a benchmark, with reduced equity risk. Another significant reason why multi-asset funds are a good bet revolves around their ability to spread risk. By investing in a mix of assets such as equities, bonds, commodities and several other asset classes, such type of fund decreases the impact of poor performance in any single asset class on the overall portfolio. This trait is crucial in volatile markets. The blend of different assets often leads to more stable and potentially enhanced returns over the long term.

Given the importance of effective portfolio allocation in garnering robust returns, multi-asset allocation funds offer investors like Satish and yourself the benefit of rebalancing across various asset classes. Professional fund managers regularly review and adjust the asset mix, ensuring the portfolio remains aligned with the changing market conditions. This rebalancing is vital in responding to market changes and capitalising on emerging opportunities and helps in maintaining a consistent risk profile over time, which can be challenging for individual investors to achieve on their own.

Given that 2024 is an election year in India, equity market is likely to be volatile. Investors can consider adding multi-asset allocation funds to their portfolio with a long-term view. Even for lumpsum investment, investors can consider this category of fund given their diversified portfolio and the fund manager’s flexibility to rebalance the portfolio as and when required.