What are Multi-Asset Allocation Funds
The Multi-Asset Allocation Mutual Fund is a combination of asset classes
Multi-asset class investments distribute investments
Multi-Asset Allocation Fund is a well-balanced portfolio of investments that offers a steady income and capital appreciation. A multi-asset class is primarily built to reduce risk by broadening an investor’s exposure to different sectors. Let’s know more about them.
What is a Multi-Asset Allocation Fund?
As the name suggests, the Multi-Asset Allocation Mutual Fund is a combination of asset classes used as an investment. They are also known as multi-asset funds. It usually comprises more than just one asset class such as cash, equity or bonds and intends to make a portfolio of assets.
However, the distribution of assets and their composition varies as per the individual investor.
The purpose of these funds is to diversify an investment portfolio through multi-asset allocation across several asset classes like equity and debt instruments, equity-oriented schemes, and gold and gold-oriented investment instruments.
Through this, the fund further aims to cushion the risks associated with investing in just one class of asset.
How Multi-Asset Classes Work
Multi-asset class investments distribute investments throughout several classes to increase the diversification of an overall portfolio. While reducing risk (volatility) compared to holding one type of asset, it might also lower potential returns. A multi-asset class investor might have stocks, bonds, cash, and real property, compared to a single-class investor who only holds stocks.
Who should invest in Multi-Asset Allocation Funds?
If willing to enjoy steady returns on their investments, investors with a low-risk appetite may find the multi-asset allocation Mutual Funds suitable for them.
What are the different types of Multi-Asset Allocation Funds?
Risk Tolerance Funds
Many mutual fund companies design asset allocation funds according to an investor’s tolerance for risk. The funds can range between aggressive and conservative. Investors with a better risk-appetite prefer an aggressive-style fund that would have a much higher allocation to equities than 100%, while conservative investors focus on a fixed income.
Target Date Funds
Target date multi-asset funds change the allocation as per the investor’s time horizon. If an investor not retiring for more than 30 years, select one of the 2045 or later target funds. These funds are more aggressive, consisting of over 85% to 90% in equities and the remaining in fixed income or money market.
Someone retiring in five years with a significantly short time horizon would select any of the more recent maturing target-date funds with a higher level of fixed income to reduce the overall risk and focus on capital preservation.
Advantages of Multi-Asset Allocation Funds
Even-out risk
The investment made in just one type of asset class sometimes becomes risky. Multi-Asset Allocation Funds not only helps investors to even out that risk but also ensures a steady flow of income, even when some of the asset classes are not performing as usual.
Diversification
This fund enables investors to expose their portfolios to different asset classes having various risk-reward factors. It allows investors to lower their risk and earn a steady income through different market cycles.
Rebalancing portfolio
The market is such a volatile place where rebalancing portfolios and reallocating assets is the key to handle the ups and downs. Rebalancing a portfolio is essential to ensure that investments are well-distributed in asset classes that perform better than others. The option of automatic portfolio rebalancing of the multi-asset allocation mutual funds helps investors considerably.
Ready-made portfolio
Everybody cannot afford to create a tailor-made investment portfolio made by a professional. However, when investors invest in multi-asset allocation funds, they get a ready-made portfolio and a well-balanced investment option. Investors can get the benefits of different asset classes by investing in just one type of fund.
Disadvantages of Multi-Asset Allocation Funds
Lower returns
A diversified portfolio may result in lower returns because your returns might also fall when you reduce the risk. Realistically, return of high single-digit or 10-12% returns can be expected from these schemes over a long period.
No personalized solution
These schemes may invest across different asset classes, but they do not precisely offer any solution to an individual’s asset allocation requirement. Mutual funds are a standard product designed for the entire retail investors. Therefore they cannot offer you personalized solutions.
In the end, treat this fund as an equity scheme and invest with a long investment horizon and also expect a little lower return than your pure equity mutual funds over a long period. Learn from your advisor more.
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