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Multi-asset allocation funds – A simple solution for portfolio diversification


What is a multi-asset allocation fund?

SEBI, also known as Securities and Exchange Board of India, defines a multi-asset allocation fund as one that invests in at least three asset classes with a minimum allocation of at least 10% each in all three asset classes. As an investor, investing in these mutual fund schemes can provide exposure to equity, debt as well as commodity classes such as gold.

Why did asset allocation come into the limelight?

There are a number of mutual fund investment aspirants who may not be as well-versed with the markets as a fund manager. The novelty or lack of financial knowledge makes it quite a task to enter and exit the markets. This is applied to mutual fund schemes as well. Many novice investors would find it difficult to decide whether they want to invest in an equity mutual fund or a debt mutual fund. One of the reasons may have been the lack of assessment of an investor’s financial goals, risk appetite and time horizon.

Another layer of complexity was added to mutual fund investment decisions when many investors attempted to invest in a tax efficient manner. In order to help investors make prudent investment decisions, mutual fund companies might have introduced the hybrid mutual funds category. This is where asset allocation came into the limelight with mutual fund schemes that invested across asset classes. Asset allocation could be seen as a practical decision especially during the pandemic. For instance, when the equity class experienced downside and debt classes were unstable, the gold asset class was seen to be at an advantage in terms of growth. This prompted many to maintain diversification in their portfolio.

Understanding asset allocation

As you might already be aware, the term ‘asset allocation’ refers to an investment strategy that invests across different asset classes based on the investors risk appetite and goals. The addition of a mutual fund scheme like the multi-asset allocation fund to your portfolio may help with asset allocation, thereby evening out the overall risk in the long term through diversification.

If you’ve noticed the way financial markets function through
volatility
(i.e., cyclical upward and downward trends), you might be able to identify that different asset classes perform differently at various intervals of time and through varied phases of the country’s economy. In such a scenario, a multi-asset allocation fund can be considered as a good solution for all asset allocation needs that an investor may have.

A number of mutual fund companies offer multi-asset allocation fund schemes to their investors. The main aim of these schemes is to try and work towards creating a balance between risk and reward in an investor’s portfolio. For instance, if the equity asset class is facing a downward trend, then the part of a portfolio that invests in the debt asset class may perform the function of capital protection. Moreover, multi-asset funds also invest across market capitalisations. This may allow the investor to get exposure to companies that come under small, medium and large market caps.

While first-time and novice investors may often be advised to invest in multi-asset fund schemes, it is prudent to consider the following pointers before moving ahead:

In addition to the above, it can help to identify one’s risk appetite in relation to the financial goals and time horizon, before choosing to invest.

Disclaimer

An investor education initiative.

Visit www.icicipruamc.com/note to know more about the process to complete a one-time Know Your Customer (KYC) requirement to invest in Mutual Funds. Investors should only deal with registered Mutual Funds, details of which can be verified on the SEBI website http://www.sebi.gov.in/intermediaries.html For any queries, complaints & grievance redressal, investors may reach out to the AMCs and / or Investor Relations Officers. Additionally, investors may also lodge complaints on https://scores.gov.in if they are unsatisfied with the resolutions given by AMCs. SCORES portal facilitates you to lodge your complaint online with SEBI and subsequently view its status.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.



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