How multi asset funds can help with your diversification goals?

In India, for a large group of investors, the gamut of investing has been confined to the realm of risk-free investment instruments. The older generations in India perceived asset classes that carried any element of risk with a pinch of mistrust. While those investment strategies may have borne results to varying degrees, more and more investors, especially from younger age groups, are acknowledging that diversification is vital for a successful investment journey. Portfolios, where weightages are heavily tilted towards one or two assets, can find it difficult to withstand the undulations of the market.

While asset allocation is considered the cornerstone of a successful investment journey, decoding the right formula can be confusing for many investors, especially those who are new to the game. Investing in multi-asset mutual funds has emerged as a convenient way to fill in this gap. As a class of hybrid funds, multi-asset funds invest in at least three asset groups with a minimum allocation of 10% in three asset classes. The underlying rationale is that different asset classes respond in different ways to macroeconomic stimuli which reduce risks in the long run. Here is how investment in multi-asset funds can help you achieve your diversification objectives:

Overcoming human bias
Irrespective of the experience you may have as an investor, we are all prone to biases. It is these biases that make us lean towards certain asset classes and stay invested in them and if those asset classes are performing well, it compounds the confirmation bias. However, holding on to asset classes owing to the expectation that the crests will continue is a mistaken approach. Markets move in cycles and no investor can predict those trends even for a short period, let alone for a few years. With multi-asset funds, your investment will be systematically diversified across different assets as opposed to a haphazard distribution that may arise out of human bias. Thanks to SEBI’s guidelines mandating allocation in three assets, your portfolio will have a representation of each asset class and it will provide a disciplined structure to your portfolio too.

Making rebalancing an easier task
Simply picking asset classes and investing in them is not enough for portfolio diversification. Rather, it is a constant endeavor wherein you will have to keep rebalancing your portfolio as your asset allocation can change with market conditions. However, rebalancing portfolios and executing a multi-asset strategy requires serious time and effort which can be challenging for new investors. Retail investors may not be as well-versed in the market dynamics as fund managers and this lack of financial knowledge make it hard to enter and exit the markets.

By investing in a multi-asset fund, you can avail the expertise of a financial advisor. Multi-asset funds are managed by professional fund managers whose investment decisions are backed by a research team. They have hands-on experience with managing assets in the face of changing market and economic scenarios which a retail investor may not be able to comprehend. Also, rebalancing which entails booking profits in one asset class and investing in another is a more tax-efficient exercise with the multi-asset fund route.

Long-term wealth creation through strategic asset allocation
Multi-asset funds are ideal for investors looking for avenues for long-term investments. The equity component helps in capital appreciation while the debt component acts as a buffer during times of market volatility. The commodity element in the fund acts as a hedge against inflation. This way your portfolio can have exposure to a diverse range of assets all through one product which can aid your wealth creation objectives in the long run. Multi-asset funds allow you to invest in equities across market capitalizations which also add variety to the portfolio without concentrating risks. What’s more, with many new-age multi-asset funds, you can dabble with international equities which provide geographical diversification.

Action points
#The investment strategy of a multi-asset fund should be aligned with your risk appetite otherwise the investment may not help you achieve your financial goals.
#As is the case with any active mutual fund, the performance of these funds is strongly affected by the fund manager. Pay attention to the fund manager and their management team before investing.

Disclaimer: This article is a part of an Investor education and awareness initiative of Aditya Birla Sun Life Mutual Fund.
All investors have to go through a one-time KYC (Know Your Customer) process. Investors to invest only with SEBI registered Mutual Funds. For further information on KYC, list of SEBI registered Mutual Funds and redressal of complaints including details about SEBI SCORES portal, visit link: https://mutualfund.adityabirlacapital.com/Investor-Education/education/kyc-and-redressal for further details.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.