The Role of Gold and Silver in Multi Asset Allocation Funds for Risk Management

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Introduction

Financial markets rarely move in a straight line. There may be phases of growth, phases of caution, phases of sharp volatility, etc. Just as a car uses shock absorbers to cushion the effect of potholes on the road, portfolios may benefit from asset classes that respond differently under market stress. In this context, multi asset allocation funds may incorporate gold and silver as part of their broader allocation framework. Precious metals have, over time, shown behaviour that does not always mirror other asset classes. This difference in movement may influence how overall portfolio fluctuations are experienced. The allocation of gold and silver in multi asset allocation mutual funds is done in accordance with regulatory requirements and investment strategies. Instead of focusing only on returns, these allocations may help reduce fluctuations during different market phases. Understanding how multi asset allocation funds use precious metals for risk management may help investors see how diversification works within multi asset allocation mutual funds in different economic conditions.

What are multi asset allocation funds?

Multi asset allocation funds are mutual fund schemes that invest in at least three different asset classes and are required to allocate a minimum of 10% of the portfolio to each asset class to qualify under this category under SEBI’s mutual fund scheme categorisation norms. The asset classes include equity, debt and commodities.

The idea behind multi asset allocation funds is to spread exposure rather than concentrate investments in one segment. Different asset classes may react differently to economic developments, interest rate movements or market cycles. By holding them in a single portfolio, the fund may follow a planned allocation approach.

For investors trying to understand what are multi asset allocation funds are, it may be helpful to consider them as a means to invest in different asset classes through a single fund, while the allocation strategy is managed as per set mandates.

Why gold and silver are included in multi asset allocation funds

Gold and silver have long been observed during phases of inflation, currency shifts and global uncertainty. Their performance has, in certain periods, differed from traditional financial assets. Even today, investors may consider their movements when evaluating portfolio diversification. In multi asset allocation funds, gold and silver are included as components of a diversified asset allocation framework.

As per SEBI’s categorisation norms, multi asset allocation funds must invest in at least three distinct asset classes. Consider this- during times of market turbulence, inflation, or devaluation of currencies, gold has sometimes seen higher investor interest. In such cases, when some asset classes are likely to fall, gold may retain its value or follow a different trend. This does not eliminate risk, but it may help limit the overall impact of sharp movements in one part of the portfolio.

Silver, being a precious metal too, is driven by both investment and industrial demand. Owing to these diverse drivers, the price movements of silver may not always mirror other assets. In multi asset allocation funds, these diverse price movements may contribute to minimising the overall volatility of the portfolio during irregular market cycles.

In practice, the allocation of precious metals in multi asset allocation mutual funds is based on the scheme’s mandate and regulatory requirements. For an investor assessing multi asset allocation funds, the inclusion of gold and silver might be considered as a part of a systematic approach to fund management, where the objective is to adapt to changing market conditions through a diversified asset allocation strategy.

Role of gold in risk management

Gold may play a role in managing risk within a portfolio, particularly within multi asset allocation funds. This is because gold has a tendency to move in a different manner compared to other traditional financial assets.

When the prices of different assets do not rise or fall together, the overall portfolio value may change less sharply than if it relied on a single asset class. For instance, if the equity market is under pressure, the price of gold may remain unchanged or move in a different manner, thus possibly helping to cushion the portfolio. In multi asset allocation mutual funds, the use of gold is determined by scheme mandates and regulatory requirements.

Role of silver in risk management

Silver may be considered within multi asset allocation funds as part of a risk management strategy, along with other asset classes, because of its dual character as a precious metal and an industrial commodity. The price of silver can be affected by industrial demand as well as investment interest, which can cause price movements that dB not necessarily correlate with equities or debt securities.

In a portfolio, these differing influences may help introduce an additional layer of diversification. If one asset class is experiencing volatility, the distinct behaviour of silver may help mitigate it, making changes in the overall portfolio less extreme. While it does not reduce risk, it may bring in a degree of measured performance.

Silver may be affected by both investment sentiment and industrial demand, which can cause price movements to be linked to economic activity. In multi asset allocation funds, this may introduce exposure to economic activity linked to industries such as manufacturing and technology, thereby adding another layer to portfolio diversification.

How fund managers allocate gold and silver

In multi asset allocation funds, fund managers may consider several factors when deciding the allocation to gold and silver. These decisions are guided by the fund’s mandate, regulatory norms and the overall objective of spreading exposure across multiple asset classes. While SEBI does not mandate a fixed percentage specifically for gold or silver in the multi asset allocation fund’s portfolio, any asset class included must meet the minimum threshold SEBI specifies.

Fund managers may determine the proportion of gold and silver based on market conditions, economic trends and the performance of other assets, while adhering to regulatory and scheme guidelines.

In multi asset allocation mutual funds, these allocations may be adjusted over time to reflect changing market scenarios. This structured approach allows portfolios to maintain diversification while helping investors navigate varied market conditions, with precious metals included to complement other assets rather than drive potential returns.

Impact on portfolio risk and returns

Although no asset can remove risk completely, and while outcomes cannot be predicted, spreading investments across categories with different influences may support a more even return pattern across market cycles.

Gold vs Silver Allocation: How they complement each other

In multi asset allocation funds, gold and silver are considered together, but with different objectives in mind. Although both are precious metals, they are impacted by different market forces. Gold is usually impacted by investment demand and currency, whereas silver may be impacted by investment demand as well as demand from the industry. Due to this difference, the performance of gold and silver may not necessarily be in sync with each other. This difference can help them complement each other in a portfolio.

In multi asset allocation mutual funds, fund managers may consider these distinct traits when deciding how much to allocate to each metal. Their prices do not always change by the same degree, which can help the fund managers make changes in the portfolio as per overall requirements. Together, they can help make the portfolio more flexible.

Investment instruments used by multi asset allocation funds

Multi asset allocation funds may use various types of investment instruments to create a diversified portfolio. For equity exposure, they may invest across large, mid or small market segments. For debt exposure, they may invest in medium-term fixed income instruments. The choice depends on the fund’s objective and overall strategy.

In multi asset allocation mutual funds, gold or silver exposure is made by investing in exchange-traded funds or other approved instruments, but not in the physical metal itself. Some mutual funds may also invest in units of other mutual funds to provide investors with exposure to various asset classes in a simple and cost-effective way.

The selection of these instruments is based on regulatory rules, liquidity and ease of buying or selling. By using different investment options across asset categories, multi asset allocation funds allow investors to access multiple markets through a single fund.

Taxation of multi asset allocation funds with precious metals exposure

The taxation of multi asset allocation funds depends mainly on their equity allocation. If the equity exposure is less than 65% in Equity shares of Domestic companies listed on a recognised stock exchange in India, the scheme is considered other than equity for taxation purposes. For these schemes, long-term capital gains (held for more than 24 months) are taxed at 12.5%, while short-term gains are added to the investor’s income and taxed at applicable slab rates.

If the scheme holds at least 65% of Equity shares of Domestic companies listed on a recognised stock exchange in India, it will be considered an equity-oriented fund for taxation purposes. In this scenario, short-term capital gains (on units held up to 12 months) are taxed at 20%, while long-term capital gains are taxed at 12.5% on gains exceeding ₹1.25 lakh in a financial year.

In multi asset allocation mutual funds, the presence of gold or silver is not a deciding factor on its own for tax treatment. The asset allocation structure continues to be the deciding factor. Investors may want to check the equity portion of the scheme before assessing the potential tax impact.

Who should invest in multi asset allocation funds using gold & silver?

• Individuals who want to invest in equity, debt and commodities through a single fund may consider multi asset allocation funds. This method can help investors create a portfolio in a simplified manner while ensuring diversification.

• Investors who want to allocate their investments among various asset classes over a long period of time, instead of making regular changes to their investments, may find multi asset allocation mutual funds suitable.

• The multi asset allocation strategy may help investors avoid dependence on a particular market segment.

• These funds can be considered by investors with a high risk tolerance level, as returns can fluctuate depending on market movements in equity, fixed income and commodities.

• A longer investment horizon might help the asset allocation strategy in multi asset allocation funds to come into effect.

• Those who would like to have their investments managed by professionals, rather than monitoring their own investments, may also consider this category.

• It may be advisable to consult a financial advisor or mutual fund distributor to determine whether multi asset allocation mutual funds suit an investor’s financial objectives and overall portfolio strategy.

Risks and limitations

1. Market Risk Across Asset Classes

Multi asset allocation funds invest in equity, debt and commodities. Movements in any of these markets may impact overall returns. If multiple asset classes decline at the same time, fund performance may be affected.

2. Precious Metals Price Volatilitys

Gold and silver prices can fluctuate due to global economic conditions, currency changes and shifts in investor sentiment. Such movements may add volatility to multi asset allocation mutual funds with metals exposure.

3. Allocation Risks

Returns depend partly on how the fund manager allocates assets. If the chosen mix does not perform as expected, it may influence overall outcomes despite diversification.

4. Limited Return Potential in Certain Phasess

At times, commodities or debt may generate lower returns. During such periods, the overall performance of the fund may be affected.

5. No Guaranteed Protections

While diversification may help manage risk, multi asset allocation funds do not assure protection from losses.

Conclusion

Market movements can be unpredictable, and different assets respond to different triggers. Gold and silver are driven by global demand, currency movements, and industrial production. At times, their movements may differ from those of other segments. In multi asset allocation funds, this difference can become a factor in the overall risk management strategy.

For investors considering multi asset allocation mutual funds, the answer may lie in understanding how various influences come together within a single scheme. The role of precious metals is not to predict returns, but to add another dimension to portfolio construction. Over time, this broader exposure may impact how volatility is experienced. As with any investment, suitability depends on individual goals and time horizon.

FAQs

1. Do all multi asset allocation funds invest in gold and silver?

Not all multi asset allocation funds invest in gold and silver. Although these funds are required to invest in at least three asset classes as per SEBI norms, the specific commodity exposure can differ. Some funds may invest in crude oil, natural gas, copper or certain agricultural commodities through permitted routes. It may be useful to review the Scheme Information Document to understand the exact allocation approach.

2. How much downside protection do these funds offer?

Multi asset allocation funds may help mitigate the impact of market downturns by investing in different asset classes. However, it is important to note that they do not provide any guarantee of downside protection. The extent to which they can provide protection may differ based on investment choices and market conditions. Investors may consider their investment horizon and comfort with market fluctuations before making a decision.

3. Are multi asset allocation funds suitable for SIPs?

Multi asset allocation funds may be considered for SIPs (Systematic Investment Plans), which allow investors to invest a fixed amount at regular intervals. Since these funds invest across different asset classes, they may suit investors seeking diversified exposure through disciplined investing. However, the decision may depend on personal financial priorities and comfort with market movements. Investors may evaluate their overall portfolio approach before investing.