Importance of multi-asset allocation mutual funds in your portfolio

Diversification can be considered a key element of all portfolios. The process of distributing your assets over several different asset classes so that the risk of loss from any one asset class is reduced is called diversification. This strategy aims to help lower the overall volatility of your portfolio over the course of time.

There are multiple ways to achieve diversification. You may manually create a diversified portfolio based on your goals and risk tolerance. Alternatively, you may choose to invest in a fund with a diversified portfolio, such as a multi-asset allocation fund. But how effective are multi-asset allocation funds, and how important is it to include such funds in your portfolio? Let us learn more about diversification and see how multi-asset allocation funds help you achieve diversification.

How to diversify your portfolio?
Maintaining a healthy balance in your investment strategy is important, and a diversified portfolio may help you do just that by potentially absorbing the effects of market fluctuations. However, diversification extends not just across different investment categories or asset classes but also across different subcategories within each category.

The two most common forms of investments are stocks and debt. Debt is often considered more stable with lower returns than equities, which are considered high-risk with attractive returns. It is prudent to spread your money across these two asset classes to reduce your overall risk. The challenge lies in striking a balance between the two crucial aspects of risk and security.

Certificates of deposit, commercial papers, and T-Bills are all examples of securities traded in money markets. An important benefit of these securities is their simplicity of liquidation. Moreover, they tend to be secure investments because of the low levels of risk associated with them.

Mutual funds, too, have a reputation of being a secure and steady investment vehicle. However, mutual funds themselves provide a wide variety of investing, interest-building, and cash-out possibilities. In this light, it is imperative to review your investment portfolio regularly to ensure that your assets are well-balanced. With that being said, creating a diversified portfolio manually can often be a tough endeavor, especially if you are not a highly experienced investor. Therefore, multi-asset allocation funds could be a good alternative.

What are multi-asset allocation funds?
Multi-asset allocation funds allocate at least 10% of their assets across three or more asset classes. These asset allocation patterns of these funds often cover equities and debt market securities, gold, real estate, and other asset classes. Thus, investors may benefit from the advantages of a diversified portfolio.

In terms of return on investment, these mutual funds primarily target long-term capital appreciation. Multi-asset allocation funds can be considered a smart choice for investors seeking to enhance their portfolio diversification.

Equities, debt, and even gold may all outperform each other depending on the current state of the economy as a whole. Consequently, if you spread your investments over various asset classes, you may be able to reduce the effect of a sudden decline in one asset class while benefiting from the expected increase in the others. If history is to be believed, all asset classes do not simultaneously move in the same direction.

Who should invest in multi-asset allocation funds?

A diversified portfolio such as a multi-asset allocation fund can help to reduce risk exposure and possibly provide consistent results. The exposure of such a fund to equities is what drives its ability to potentially provide long-term wealth appreciation. Investing money in a multi-asset allocation fund is a great way to spread your risk over various asset classes.

Advantages of investing in multi-asset allocation funds

• Diversification
The most evident advantage of multi-asset allocation funds is diversification. You may be able increase your chance of earning attractive investment returns by diversifying your financial portfolio. Additionally, the best method to ensure the safety of your financial portfolio is distributing your capital across several different asset classes.

Furthermore, investing money in multi-asset mutual funds along with debt and equity-linked funds may be recommended. Such an investment strategy will expose you to a wide variety of asset classes and allow you to earn consistent returns despite changes in the market.

• Open-ended funds
Most multi-asset allocation funds are open-ended. This means that you may join the fund without incurring any fees. You may exit the plan by redeeming at least 10% of your investment within one year of enrolling, and such an exit is not only simple but also free.

In such case, the remainder of your investment must be redeemed at any point within the first year, failing which the fund will levy a penalty equal to one percent of the amount not redeemed. As long as these three basic requirements are fulfilled, there will be no fee for entering or leaving any multi-asset mutual fund you choose to invest in.

• Professional management

Creating a diversified portfolio that is tailored to your needs could be slightly difficult to do on your own. At the outset, you should conduct thorough research to identify stocks and other securities that match your investment style and risk appetite. Once this is done, you should time the market to increase the chance for growth. Even after investing, it is imperative that you regularly monitor your investment portfolio.

By contrast, when you invest in a multi-asset mutual fund, you are using the skills of an industry professional who has crafted a multi-asset fund portfolio just for you. In this case, you won't have to make decisions pertaining to asset allocation in your portfolio, for instance, what proportion to allocate to stock securities versus debt products. Your money will automatically be distributed across numerous appropriate asset types. The fund manager will also monitor the fund’s portfolio for you.

• Risk mitigation
Investing all of your money in a single asset class such as equities or debt is analogous to putting all your eggs in one basket. When you do this, you are exposing your investment to market volatilities. In such a scenario, investing in various instruments offered by mutual fund companies is a potential route to mitigate or reduce your risk exposure while still possibly generating considerable profits. This is exactly what multi-asset allocation funds aim to do. Multi-asset allocation involves investing in different asset classes such that your fund is potentially protected, and at the same time, there is a higher chance of capital appreciation.

• Beating inflation
One of the most important benchmarks is that your investment should beat inflation. In economics, inflation is defined as an overall price rise in commodities and services available in a country. Inflation decreases the buying power of money because a higher overall price level means that one currency unit can purchase fewer products and services. If your investment returns are less than the rate of inflation, your investment loses value.

Hence, it is essential to mitigate the effects of inflation when investing over the long term to ensure that your investments continue to grow in value over time. When you invest in multi-asset mutual funds, you are essentially investing in a basket of assets that together offer a better potential for returns than a single asset class can. This may assist you in beating inflation.

Moreover, you should pay attention to the risks associated with your investment. A multi-asset allocation mutual fund has relatively modest levels of risk. These funds are considered advantageous because their portfolios are structured to allocate a minimum of 10% across at least three distinct asset classes. This provides investors with the advantages of a diversified portfolio and reduces the risk of concentration.

Risks of the market, volatility, and concentration are inherent in stock holdings of these funds. Debt carries not just interest rate risk but also credit risk and market volatility. If the fund invests in gold, it may be susceptible to fluctuations in the price of gold. Moreover, the fund faces liquidity risk if it is invested in real estate. However, these risks may be mitigated considerably by investing over the long term.

Moreover, you should consider your investment horizon before investing in multi-asset allocation mutual funds. Usually, such funds work best when you stay invested for more than three years.

Lumpsum vs. SIP investments in multi-asset allocation mutual funds
You can invest in multi-asset allocation mutual funds through both the lumpsum and SIP routes. You can purchase as many or as few units as you choose all at once with a lumpsum investment. This strategy is often opted when more capital or funds are needed. Additionally, it is important to time the market when you choose to invest via the lumpsum route.

In SIPs, you commit to investing a certain amount of money at predetermined periods. This exact sum is withdrawn from your bank account on a predetermined basis. Market timing isn't taken into account here.

How to invest in multi-asset allocation funds?
Now that you understand multi-asset mutual funds, it is essential to figure out how to invest in them. There are two methods using which you can invest in any mutual fund. You can invest directly through the fund house website or through a broker.

The AMC allows direct investments through its office or website. To become a new investor, you must provide your Know Your Customer information to the AMC in person or electronically. The AMC offers direct plans with a lower expense ratio than their normal plans. You can invest in direct plans if you are a knowledgeable investor with a high-risk tolerance who is familiar with mutual fund products and the financial markets. When compared to conventional plans, direct plans may offer higher returns owing to lower fees.

Distributors approved by AMFI can assist investors with questions about mutual funds and make trades on their behalf. You will not be charged any fees by distributors because they are compensated solely through commissions from the fund house. The mutual fund units purchased through these intermediaries (regular plans) tend to be more expensive than the units purchased directly from AMCs.

Mutual funds are susceptible to market fluctuations, which you should be aware of. In the world of mutual funds, not all products are created equal in terms of risk and reward. A distributor or financial advisor can help if you need assistance finding a mutual fund that fits your risk tolerance and other investment criteria. Moreover, a financial advisor can help you determine your appetite for risk.

Conclusion
Multi-asset allocation mutual funds are a valuable addition to your mutual fund portfolio. Such funds help you achieve diversification without much hassle. Talk to a financial advisor to determine your risk horizon and invest accordingly for the best results. You can also use Axis MF's mutual fund app to explore and manage these investment options conveniently.
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