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What are multi asset funds?

A Multi Asset Fund is a type of a mutual fund which invests in at least 3 asset classes. As per the SEBI, such a scheme has to invest in at least three asset classes with a minimum allocation of at least 10% each in all three asset classes (E.g. Equity, Debt, Gold etc). Such funds help investors to diversify their portfolio.

What is asset allocation and why is it needed?

Asset Allocation refers to distributing your investible surplus across various asset classes according to risk tolerance, risk appetite and investment time frame.

Importance of asset allocation

  • Different asset classes have different risk return profile and outperform each other at different points in time.
  • It’s practically impossible to predict asset class outperformers consistently.
  • From FY99 to FY20, Equity has been the best performing asset class in 11 years while Debt and Gold have been the best performing asset classes in 5 and 6 years respectively. Historical returns tend to bias investors towards the asset class that has performed well recently. Such preference for recent outperformers could result in investors chasing momentum and picking an asset class at an inopportune time. Asset Allocation helps investors to mitigate the risk arising from volatility of asset class returns
  • It reduces dependence on a single asset class to generate returns
  • Asset allocation decision is the most important factor for long-term wealth building

Why invest in multi asset fund?

  • It provides investors an avenue to diversify their investment across asset classes.
  • Multi Asset Funds invest in a combination of asset classes with low/negative correlation of returns. This helps to cushion the portfolio from downturn in a particular asset class.
  • Professional Fund Managers are better equipped to make asset class reallocation decisions as compared to individual investors. Also, Individual Investors generally prefer to invest in recent outperformers. As no asset class can outperform other asset classes in every given year, such preference for recent outperformers can prove detrimental to investors looking to achieve asset allocation on their own.
  • Multi Asset Funds are suitable for investors having long term horizon >3 years