Are Multi-Asset Funds A Good Option For You?

Asset allocation is an integral part of your investment process as it not only allows you to diversify your investments across different asset classes, but also helps in determining the kind of returns you can expect from the portfolio. Remember, when you invest in two different asset classes that tend to go in opposite directions in different market conditions, the combination is likely to have a stabilising effect on your portfolio. [EasyDNNnews:PaidContentStart]

For example, the stock market does well during an economic boom, and loses ground during recessionary times. The bond market, however, goes in the opposite direction. Gold’s correlation with traditional financial assets improves portfolio efficiency. 

Needless to say, for an asset allocation strategy to be successful, it must be flexible enough to accommodate the changes in your financial circumstances as well as the changes in the economic cycle. It is important because the economic environment has a direct impact on the behaviour of the financial markets. While the benefits of asset allocation are well established, it can be quite tricky for common investors to decide the right allocation for different asset classes such as equity, debt and gold. Even more challenging can be a situation wherein you may have to rebalance the asset allocation when one or more asset classes perform better than others. 

This is where multi-asset class funds can be the right solution. As the name suggests, these funds invest in different asset classes such as equity, debt, gold, silver and even international equities. These funds invest in at least three asset classes with a minimum allocation of 10 per cent and usually cap the maximum exposure to each of these asset classes. 

Since the fund managers are required to maintain these limits, they keep rebalancing the holdings through strategic and tactical asset allocation from time to time. It makes rebalancing a disciplined as well as a Tax-efficient exercise. Besides, since the money remains invested in different asset classes, investors do not miss out on sudden gains in an asset class. Of course, you may miss out when a particular asset class does well for prolonged periods, but then the key to investment success in the long run is to maintain the right balance between risk and reward. 

There are certain limitations too when you invest in multi-asset class funds. While someone looking to invest in these asset classes separately has the option of choosing from a number of quality funds for each of the asset classes, for an investor in a multi-asset class fund, the choice gets limited. 

Besides, a fund house managing a multi-asset class fund may not have the same level of expertise for different asset classes. Moreover, an investor loses the flexibility to change the asset allocation when his personal circumstances may require him to do so. That’s why, you must have a close look at the proposed asset allocation in a multi-asset class fund before investing in it. 

The taxation of multi-asset allocation funds depends upon the average equity allocation over the financial year. Multi-asset funds can be taxed under three different scenarios, unlike equity or Debt Funds, which are based on their equity exposure. As is evident, the taxation of returns from multi-asset allocation funds can be a little complex, depending on their equity allocation over time. 

Clearly, there are pros and cons of investing in multi-asset class funds. The key, therefore, is to assess your own ability to decide asset allocation and rebalance it from time to time. If you are not sure about it, you will be better off opting for a multi-asset class fund. This will ensure that you do not end up making haphazard changes in the portfolio, which may either make a significant dent in your portfolio returns or expose you to unnecessary risk.

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