Unlocking the Right Diversification in Your Portfolios with Multi Asset Allocation Fund

Multi Asset Allocation fund is a unique category of mutual funds given its composition as mandated by SEBI. It allows the fund manager to take exposure across asset classes such as Equity, Debt & Commodities (such as gold & silver). In other words, it allows the investor a single fund which diversifies the portfolio strategically, wherein each asset class serves a different purpose. For e.g. Equity gives an opportunity for growth, debt aims to bring stability and commodities endeavour for diversification.

Asset allocation is nothing but a method of distributing the capital available across different asset classes rather than employing all in a single asset class. It mainly helps the investor in portfolio diversification which is important method of hedging the overall risk of the portfolio. Now, why is asset allocation important? Reason lies in the fact that the markets are always volatile. Because of this, nobody can predict which asset class will perform better than the others in a given year.

Hence when the capital is allocated across asset class it can potentially take benefit from diversification and negative co-relation between asset classes.

Let us look at some data to understand the reasons better-

Reason 1: It is difficult to predict asset class behaviour

Each asset class behaves differently under different market conditions. For example, when the equity markets are booming, gold may not. And when the debt market is helping in capital appreciation, equity may be down. Consider the below table-

Calendar Year	Returns from highest to lowest
	1	2	3	4
2022	Gold	Domestic Equity	Debt	Overseas Equity
2021	Domestic Equity	Overseas Equity	Debt	Gold
2020	Gold	Overseas Equity	Domestic Equity	Debt
2019	Overseas Equity	Gold	Domestic Equity	Debt
2018	Gold	Debt	Domestic Equity	Overseas Equity
2017	Domestic Equity	Overseas Equity	Gold	Debt
2016	Overseas Equity	Gold	Debt	Domestic Equity
2015	Debt	Overseas Equity	Domestic Equity	Gold
2014	Domestic Equity	Debt	Overseas Equity	Gold
2013	Overseas Equity	Debt	Domestic Equity	Gold

Data for the last 10 Calendar Years: Past performance may or may not be sustained in future and the same may not necessarily provide the basis for comparison with other investment.
Note: 1) Gold Futures prices from MCX 2) For Domestic Equity, S&P BSE 100 TRI returns are considered; 3) For Debt, CRISIL Short Term Bond Fund Index returns are considered; 4) For Overseas Equity, returns of MSCI World Net Return Index (in INR terms) are considered; Source: Bloomberg, MFI Explorer
The scheme will invest in Gold ETF/ETCD/Sovereign Gold Bonds. Investors are requested to note that investment into physical gold is neither envisaged nor is part of the core investment strategy in the scheme.

You see the winners in the market keep changing. Without profound experience/knowledge of the markets, it is impossible to predict what will happen next. Hence, diversifying your investment across asset classes can prove to be a winning strategy.

Reason 2: It takes knowledge to pick the right asset category

Every asset class also comes with its ups/downs and risk-return profiles.

Add to that we, as humans, are prone to emotional biases towards different assets. All these factors together may result in an asset allocation, possibly skewed towards one or two asset classes.

Reason 3: It can help you optimise your risk-return ratio

Do you know that data suggests that gold and equities are said to mostly exhibit an inverse correlation? This effectively means that they complement each other’s performances. Hence, when you invest in asset categories of low correlation, your portfolio can benefit from the performances balancing each other out to a certain degree. For example-

Source: Bloomberg, MFI Explorer
Note: 1) For Equity, S&P BSE 100 TRI returns are considered; 2) For Debt, CRISIL Short Term Bond Fund Index returns are considered; 3) For Overseas Equity, returns of MSCI World Net Return Index (in INR terms) are considered; 4) For Commodities, returns of Thomson Reuters/Core Commodity CRY Commodity Index (in INR terms) are considered. Correlation has been arrived based on 1-yr rolling return for last 10 yrs (January, 2013 – December, 2022) rolled on a daily basis.

Allocating capital to assets as diverse as above and having low correlation can benefit your portfolio.

Now that we know the benefits of thoughtful asset allocation, let’s come to the part of achieving it. How about we tell you that it can be possible via just a single mutual fund scheme?

How Can Multi Asset Allocation Mutual Funds Help You?

Multi-asset allocation funds are one of the types of mutual funds designed to provide investors with a diversified portfolio spanning various asset classes. These include equities, debt, commodities etc. Their primary objective is to balance risk and return, thereby catering to a wide range of investors with different risk profiles and financial goals. The SEBI mandates that the fund manager must invest a minimum of 10% in each of the three or more asset classes at all times.

Here are some other key characteristics of multi-asset funds:

● Allocation access asset class

The funds aim to reduce the impact of poor performance in one asset class on the overall portfolio by holding a mix of assets. For example, hypothetically, let us assume that your multi asset fund has a composition of: 35% equity, 35% debt and 30% commodities. Assuming, it is a bear run and the equity markets are not performing very well. Now, had your portfolio been solely concentrated on equity, this would have been a huge blow. But in the case of a multi asset allocation fund, the commodities’ returns, for example, may compensate the -10% growth with a +8% growth of the overall portfolio. Thereby reducing your overall capital loss.

● Suited for all age groups

Irrespective of your age group or life stage, multi asset funds can have something for everyone. Consider this. Usually, when an investor is younger, their risk tolerance is perhaps higher, and they invest more in equity. As you grow older and your risk appetite declines, your focus is likely to shift more towards debt for the want of lower risk. Now, with multi asset funds, you need not choose an asset class. At any stage of life, a part of your portfolio can be invested in a fund that aims to achieve a balanced asset allocation for you. So, you need not rebalance or change your asset allocation from time to time. These funds can also be a decent way of entering into the world of mutual funds, with relatively lower risk than an equity fund.

● Reduces the need to time the market

As said above, asset classes can be unpredictable. With busy lives and a lack of the right expertise, investors may find investing decisions harder. With your hard-earned money, you may not want to experiment. Investing in a multi asset fund reduces your need to time the markets because, like it was explained in the previous section- the asset classes the fund invests in tend to have a low correlation. The upturn in another market may compensate the downturns in one market.

In conclusion

With its well-crafted allocation strategy, Multi-Asset mutual funds can simplify diversification, balance risk, and open the door to a brighter financial future for you all.