Home Investment Are multi-asset funds the right product in a soaring market?

Are multi-asset funds the right product in a soaring market?

by Clarence Jones

Multi-asset funds have become a popular investment option in recent months, with several fund houses launching new offerings. These funds allow investors to diversify their portfolios across various asset classes, including equity, debt, gold, silver, commodities, international equities, futures & options, real estate investment trusts, and infrastructure investment trusts.

Diversification is often referred to as the only free lunch in investing, as it helps reduce risk by spreading investments across different assets. Nobel Prize-winning economist Harry Markowitz is known for his work on modern portfolio theory, which emphasizes the importance of diversification.

When it comes to multi-asset funds, not all are the same. Some funds invest in international equities, while others do not. Some have low equity exposure, while others have higher exposure. It’s essential for investors to understand the specific characteristics of each fund before investing.

One factor to consider is past performance. The top-five multi-asset funds in terms of assets have delivered three-year rolling returns of 12% on average between January 2016 and September 2023. However, it’s important to note that past performance is not indicative of future results.

One advantage of multi-asset funds is that they can help reduce overall volatility on investments. During the 2008 financial crisis, a multi-asset portfolio comprising 50% equity, 25% gold, and 25% debt saw a drawdown of 27%, compared to a 59% drawdown for the Nifty Total Return Index (TRI). Similarly, during the COVID-19 crisis, the Nifty TRI had a drawdown of 38%, while a multi-asset portfolio had a drawdown of 18%.

Multi-asset funds can also be a convenient way for investors to rebalance their portfolios. By investing in a multi-asset fund, investors can rely on the fund manager to make adjustments to the fund’s exposures, without facing any tax liability.

However, investors should not solely rely on multi-asset funds for their asset allocation needs. The fund’s asset allocation may not always match the investor’s requirements, and linking multiple financial goals within one investment may not be effective. Investors should also be cautious of funds that offer extreme returns, as this could be a reflection of a high-risk strategy.

Taxation of multi-asset funds depends on the fund’s asset allocation. For example, if the fund maintains 65% equity exposure, it will be treated like an equity fund for taxation purposes. Long-term capital gains of more than ₹1 lakh will be taxed at 10% after one year of holding, while gains below ₹1 lakh will be tax-free. Short-term capital gains will be taxed at 15%.

When considering a multi-asset fund for your portfolio, it’s important to choose a fund house with experience and a track record in managing different asset classes. Consider whether the fund’s asset allocation meets your risk and return expectations, and analyze how the fund’s asset allocation has performed in the past, particularly during turbulent periods.

Overall, multi-asset funds can be a valuable tool for investors looking to diversify their portfolios and manage risk. However, careful consideration and research are necessary to find a fund that aligns with your investment goals and risk tolerance.

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