Diversify Your Investments with One Mutual Fund

by Hardika Thakkar Manager

'Balance' is a highly desired quality in many parts of life, from balancing our job and personal lives to balancing our families and friends to balancing our incomes and costs. Balance is unquestionably one of the most important mantras for living a happy and successful life!

As investors, too, we continually seek balance - the balance of returns vs risk, the balance of asset classes, the balance of investing time periods, and so on. This is where a multi-asset fund comes in. A multi-asset allocation fund is a unique hybrid fund; it is a single mutual fund that has the potential to be a straightforward answer for your diversification needs. This fund invests in at least three asset classes, ensuring that the portfolio is well-diversified across stock, debt, commodities, and so on. Basically, a one-stop shop for portfolio diversification!

What precisely is a multi-asset allocation fund?

SEBI, or the Securities and Exchange Board of India, defines a multi-asset allocation fund as one that provides exposure to equity, debt, and commodity classes such as gold with an allocation of at least 10% in each asset class.

Why was asset allocation thrust into the spotlight?

A percentage of potential mutual fund investors may not be as knowledgeable about the markets as a fund manager. Entering and exiting the markets is difficult due to the novelty or lack of financial expertise. This also applies to mutual fund programmes. Many inexperienced investors would struggle to decide whether to invest in equity mutual funds or debt funds. One of the reasons could have been a failure to appraise an investor's financial goals, risk tolerance, and time horizon.

When many investors attempted to invest in a tax-efficient manner, they added another degree of complexity to mutual fund investment selections. Mutual fund firms may have launched the hybrid mutual fund category to assist investors in making safe investment decisions. This was when asset allocation became popular, thanks to mutual fund schemes that invested across asset classes. Asset allocation may be viewed as a practical decision, particularly when we consider that the markets are always fluctuating. For example, when the equity and debt markets were volatile, the gold asset class was perceived as having an advantage in terms of growth. This motivated many people to keep their portfolios diverse.

Recognising asset allocation

As you may be aware, the word "asset allocation" refers to an investing strategy that invests across several asset classes based on the investor's risk tolerance and goals.

The addition of a mutual fund scheme, such as the multi-asset allocation fund, to your portfolio may aid in asset allocation, hence reducing overall risk over time through diversification.

Suppose you've observed how financial markets function in terms of volatility (i.e., cyclical upward and downward tendencies). In that case, you may have noted that different asset classes perform differently at different points in time and during different stages of the country's economy. In such a case, a multi-asset allocation fund may be an appropriate answer for all asset allocation requirements that an investor may have.

Several mutual fund firms provide their investors with multi-asset allocation fund plans. The fundamental goal of these schemes is to strive to balance risk and return in an investor's portfolio. For example, if the equity asset class is declining, the portion of a portfolio that invests in the debt asset class may serve as capital protection. In addition, multi-asset funds invest across market capitalisations. This may help the investor to gain exposure to companies with small, medium, and big market capitalisation.

While first-time and inexperienced investors are frequently recommended to invest in multi-asset fund schemes, it is prudent to consider the following considerations before proceeding:

A multi-asset fund's investing strategy should align with your risk tolerance or risk profile. Unless that is the case, the investment may not assist you in meeting your financial objectives.
Because these schemes are handled by a team of financial professionals and fund managers who monitor the economy and asset classes, you may choose to invest in them even if you are unfamiliar with how financial markets operate.

In addition to the foregoing, assessing one's risk tolerance in relation to one's financial goals and time horizon can be useful before deciding to invest.

Disclaimer: Mutual Funds are subject to market risks. Please read all scheme-related documents carefully before investing.