Multi-Asset Funds: A blend of stability and returns

Do you you look for stability in financial markets without compromising returns?

If you do, you should know more about a particular type of fund known as multi-asset fund.

Multi-asset funds offer exposure to various asset classes—such as equity, debt, and commodities—within a single fund. 

What Are Multi-Asset Funds?

Multi-asset funds are mutual funds that invest across at least three asset classes, with the condition that no single asset dominates the portfolio. 

Typical multi-asset funds include a mix of equity, fixed income (debt), and commodities, like gold. 

By diversifying across asset types, these funds aim to provide smoother returns, reducing volatility often associated with single-asset investments.

Benefits of Multi-Asset Funds

1. Diversification and Risk Reduction

The main advantage of multi-asset funds is their ability to balance risk through diversification. 

While equity can offer high returns, it comes with market volatility. 

On the other hand, debt instruments provide stability but may have lower returns. 

By combining these, multi-asset funds reduce overall portfolio risk while aiming for steady returns over time.

2. Active Allocation for Changing Markets

Multi-asset funds are managed dynamically, allowing fund managers to shift allocations based on market trends. 

For example, if equities are underperforming but commodities are rising, fund managers can increase commodity exposure to capitalize on that trend. 

This flexibility helps in protecting and even growing the portfolio in volatile markets.

3. Stable and Consistent Returns

With a diversified portfolio, multi-asset funds generally offer more stable returns than pure equity funds. 

For example, a particular multi-asset fund from one of the oldest fund houses has delivered a 13.1% annualized return since its launch, proving to be a stable performer even during market downturns. 

Many funds in this category have shown returns between 15-20% in recent years, appealing to investors with a moderate risk tolerance.

4. Tax Efficiency

Tax treatment varies based on the fund’s equity allocation. 

Funds with over 65% equity exposure are taxed as equity funds, offering benefits under long-term capital gains tax. 

Other multi-asset funds are taxed as debt funds, with favorable rates if held for over three years, making them tax-efficient for long-term investors.

How to Evaluate Multi-Asset Funds

When considering multi-asset funds, focus on these factors:

• Historical Performance: Look at returns over multiple periods (1, 3, and 5 years). This helps gauge the fund’s consistency.

• Expense Ratio: High fees can erode returns over time. Some funds maintain low expense ratios around 0.15%, offering cost-effective exposure to diversified assets.

• Fund Manager Expertise: Multi-asset funds require active management, so the fund manager’s skill in timing asset allocations is crucial. 

Funds with seasoned managers tend to outperform those where there is too much of chopping and changing.

• Asset Allocation Strategy: Each multi-asset fund has a different strategy. 

Conservative funds may limit equity exposure, while others may heavily invest in high-return but volatile assets like gold and emerging market stocks.

Who Should Invest in Multi-Asset Funds?

Multi-asset funds are ideal for investors looking for balanced risk and return. They are suitable for medium- to long-term investors (3-5 years or more) who want exposure to equities but need a cushion during downturns. 

New investors who may not be comfortable with the volatility of pure equity funds can benefit from the stability provided by the debt and commodity components within multi-asset funds.

Current Trends in Multi-Asset Funds

The multi-asset category has seen increasing popularity among Indian investors, especially as global economic conditions remain uncertain. 

In 2024, funds with a focus on commodities like gold performed well, as gold prices remained robust. 

Meanwhile, equity components have benefited from India’s strong economic outlook. 

With potential shifts in market conditions, fund managers are increasingly using dynamic rebalancing techniques to navigate these changes effectively.

Pros and Cons

Pros:

• Reduced portfolio volatility

• Flexibility to shift allocations based on market conditions

• Potential tax efficiency for long-term holdings

Cons:

• Expense ratios can be higher than single-asset funds

• Requires understanding of how different asset classes interact

• May underperform pure equity funds in a bull market

Key takeaways:

Multi-asset funds offer an appealing blend of stability, tax efficiency, and flexibility, making them well-suited for investors seeking moderate growth without excessive risk. 

As we move through 2024, these funds are likely to remain attractive, especially as global market uncertainties and rising inflation challenge traditional investment strategies. 

For investors aiming for a stable, diversified portfolio with steady returns, multi-asset funds are a prudent option to consider.

Recommendation: Consider including a multi-asset fund as part of your core portfolio if you seek balanced growth with lower volatility. 

Regularly review the fund’s performance and make adjustments as necessary, keeping your financial goals and risk tolerance in mind.