Are Multi-Asset Funds Your Best Investment Option? Know Here

At their core, multi-asset funds are mutual funds that invest in a variety of asset classes

Not all funds invest in REITs, InvITs, or global equities. If you’re expecting exposure to such assets, you’ll need to dig into the fund’s details to confirm.

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By Chakrivardhan Kuppala

Investors today face a maze of choices, especially during uncertain times when markets fluctuate, interest rates vary, and global events create ripples. One option gaining popularity is multi-asset funds. They promise to simplify investments by offering a mix of assets like equities, debt, and gold. But are they really the ultimate solution for your portfolio? Let’s dig deeper into what they are and what you need to consider.

What Are Multi-Asset Funds?

At their core, multi-asset funds are mutual funds that invest in a variety of asset classes. Typically, these include:

• Equities: For growth potential.
• Debt Instruments: For stability and steady returns.
• Gold: As a hedge against inflation.
• Other Assets: Some funds also invest in global equities, real estate investment trusts (REITs), infrastructure investment trusts (InvITs), and commodity derivatives.

Regulations ensure that these funds invest at least 10 per cent in three different asset classes, giving fund managers the freedom to tweak allocations based on market conditions. This flexibility is a big draw for many investors, but it also introduces complexities.

Why Are Multi-Asset Funds Popular?

Multi-asset funds have become appealing because they seem to offer a simple solution to the tricky problem of diversification. The idea is that you don’t need to worry about managing different types of investments — one fund does it all for you. It’s particularly attractive for beginners or those who want to avoid the hassle of tracking multiple asset classes.

But here’s the catch: just because a fund invests in multiple assets doesn’t mean it will align with your financial goals or risk tolerance. Multi-asset funds can be as varied as their names suggest.

The Real Picture: Do They Handle Asset Allocation Perfectly?

The assumption that multi-asset funds will take care of all your asset allocation needs is misleading. Here’s why:

1. Dynamic Allocations Can Change the Game
   Fund managers have the flexibility to shift allocations based on market conditions. For example:

• Some funds maintain over 60 per cent in equities, while others bring it down to as low as 26 per cent.
• Gold, often seen as a stable component, may not even be held directly in some funds but instead managed through arbitrage trades.

1. Not All Funds Are Equal
   While all multi-asset funds must invest in at least three asset classes, the actual diversification can differ drastically. For instance:

• Aggressive Funds: Some funds lean heavily on equities, making them riskier during market downturns.
• Conservative Funds: Others focus more on debt and avoid small-cap equities, aiming for stability.

1. Hidden Limitations in Variety
   Not all funds invest in REITs, InvITs, or global equities. If you’re expecting exposure to such assets, you’ll need to dig into the fund’s details to confirm.

How Do Multi-Asset Funds Differ?

A study of 25 multi-asset funds by Ventura Securities shows just how diverse these funds can be:

• Equity Exposure: Nine funds maintained over 60 per cent equity, while others went as low as 26 per cent.
• Gold Allocation: Some funds avoided direct gold investments altogether.
• Diversification: Funds like ICICI Prudential Passive Multi-Asset Fund invest globally, while others, like Edelweiss Multi-Asset Allocation Fund, rely heavily on arbitrage strategies.

This variability means you can’t assume all multi-asset funds will meet your needs. Understanding their strategy is key.

When Do Multi-Asset Funds Work Well?

These funds can be a good choice in certain situations:

• If You’re Starting Out: For beginners, multi-asset funds offer exposure to multiple markets without requiring deep expertise.
• When You’re Unsure About Markets: They can act as a convenient option for parking money across assets when you’re uncertain about market conditions.
• For Risk-Averse Investors: Conservative funds with lower equity exposure can provide stability for those who prioritize safety over high returns.

What Are the Risks?

Despite their appeal, multi-asset funds have their downsides:

1. You Lose Control
   The fund manager decides the allocation, which might not align with your financial goals or risk tolerance.
2. Performance Can Vary Widely
   Funds with high equity exposure might perform poorly during bear markets, while conservative funds may lag in bull markets.
3. Higher Costs
   Multi-asset funds often have higher expense ratios than single-asset funds, which can eat into your returns over time.

How to Evaluate Multi-Asset Funds

If you’re considering a multi-asset fund, here's what you should do:

• Look Under the Hood: Check the fund's current allocation and past performance.
• Align It With Your Goals: Does the fund’s strategy match your financial objectives?
• Compare Costs: Higher expense ratios might not be worth it if returns are average.
• Understand the Risks: Be clear about how flexible allocations could impact your portfolio.

The author is the co-founder and executive director at Prime Wealth Finserv Pvt Ltd.

[Disclaimer: The opinions, beliefs, and views expressed by the various authors and forum participants on this website are personal and do not reflect the opinions, beliefs, and views of ABP News Network Pvt Ltd.]