Should retail investors use multi-asset funds or invest separately in each asset class?

Their diversification helps in lowering risks compared to pure equity funds. Hence, while investing in multi-asset allocation funds, it is recommended to have a long-term investment horizon.

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One needs to smartly invest in a mix of assets.

Multi-asset funds are a category of Mutual Funds that offer a ready-made diversified portfolio of different asset classes to invest in. They invest at least 10 per cent of the money in 3 or more asset classes such as equity, debt, real estate and gold. Investments in different asset classes help manage risks from individual asset classes.

Abhinav Angirish, Founder, of Investonline.in, points out, “Some of the features of this category of mutual funds include – Risk diversification from risk from each asset class, long term capital appreciation, stable and consistent returns from investments, and 7-years plus horizon.”

What are the benefits and drawbacks of using multi-asset funds?

These funds don’t usually contain risk. Their diversification helps in lowering risks compared to pure equity funds. Hence, while investing in multi-asset allocation funds, it is recommended to have a long-term investment horizon.

Additionally, these funds not only reduce the risk but also gives a stable return and are flexible to fluctuate between asset classes. For instance, Angirish adds, “historically, equities have not done well every year. In 2010 and 2011 gold was the best-performing asset class, while in 2013, 2014 and 2015 equities performed the best. In 2016 it was debt that came out on the top, while it was equities again in 2017. However, gold did the best in 2018, 2019 and 2020.”

Hence, if one is investing in any one asset class, the investor is bound to face high volatility. Angirish explains, “One needs to smartly invest in a mix of assets. Since most investors do not have the time and expertise for it, it is recommended to consider Multi-Asset Allocation Funds, because such funds take care of one’s portfolio allocation.”

“On the other hand, as these funds are a readymade portfolio, they might not go parallel to one’s investment strategy. Also, the return expectation is comparatively lower than other equity funds,” he adds.

Along with Multi-asset funds following a portfolio allocation strategy, there are other funds that are also based on this strategy. For instance, Balanced advantage funds (BAFs) – these funds change their debt and equity allocation based on stock valuations. When markets rise they sell equities. When the market falls, they invest more in stocks. Each fund house has a model that dictates how much equity should be added or sold. Angirish points out, “In comparison to multi-asset funds, due to restricted investments in debt and equity, balanced advantage funds might be a better option.”

It is also possible to profit from the market’s volatility by investing in a multi-asset fund, which enables one to take advantage of the market’s upside potential while protecting one’s capital during market declines. This is one way in which it is possible to profit from the volatility of the market.

How have multi-asset funds performed in the short, medium and long term?

Multi-asset funds have performed differently. If short term performance is analysed, then in six months, ICICI Prudential Multi-Asset Fund has outperformed its peers. In one year period, ICICI Prudential Multi-Asset Fund has outperformed its peers delivering 19.79 per cent returns. However, for 5 years, Quant Multi-Asset Fund is the winner. It has delivered 17.63 per cent returns respectively. The category average returns stood at 7.82 per cent for one year, 14.79 per cent for 3 years and 10.33 per cent for five years. The multi-asset portfolio has outperformed bonds. Moreover, it has also routinely outperformed gold.

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