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Tata Capital > Blog > Wealth Services > Should I Invest in Multi Asset Allocation Funds in a Volatile Market?

Wealth Services

Should I Invest in Multi Asset Allocation Funds in a Volatile Market?

Should I Invest in Multi Asset Allocation Funds in a Volatile Market?

You will find the answer to this question upon examining the term multi-asset allocation funds. Multi-asset allocation mutual funds allocate the investible surplus into different asset classes rather than focusing on one. These classes are equity, debt, gold, real estate, and more.

Since these funds allow investors to diversify their portfolio across 'multiple' asset classes with appropriate exposure to each of them, they shield you from market volatility. Why? When one asset class is underperforming, you have other asset classes outperforming or performing per usual. This ensures smooth investment journey , even in a volatile market scenario.

Percentage Distribution in Multi Asset Allocation Funds

As per SEBI laws, fund houses investing your corpus in multi-asset allocation funds must invest a minimum of 10% in at least three different asset classes. Therefore, these mutual funds feature a melange of debt, equity, gold, real estate, and other types of investments.

As for the remaining percentage of investible surplus, it is a well-researched call by fund managers as to where they want to allocate it. For instance, if the market is on a bull run, your fund manager may decrease the asset exposure to equity asset class as it is relatively riskier than debt and gold but also offer higher returns.

On the other hand, if the market is experiencing a bear run or it's fluctuating significantly, as was happening during the peak of the Ukraine-Russia conflict, your fund manager may increase exposure to gold or other safer asset classes. They do this to hedge the risk in the portfolio.  

Who Should Invest in Multi-Asset Allocation Funds?

If you have a low to moderate-risk appetite but want to gain steady returns on your investments, you should consider investing in multi-asset allocation funds. This is because multi-asset allocation funds help you balance the risk associated with investing in a single asset class. So, even when the markets are volatile and some of your assets are underperforming, you will still enjoy steady returns!

Moreover, if you are a new investor who wants to try their hand at investing in market-linked instruments or do not have the expertise to maintain a diversified portfolio by yourselves, may consider including multi-asset allocation funds in your portfolio. Even investors who can stomach a substantial amount of risk can have some exposure in this instrument for improved portfolio stability.

2 Key Factors to Consider Before Investing in Multi-Asset Allocation Funds

If you have decided to diversify your portfolio via these mutual funds, here are two things you must consider before investing.

1. Check fund manager track record

Multi-asset allocation funds are actively managed. This means that the fund manager plays a significant role in how they perform and how much you earn. In fact, the role of the fund manager becomes crucial in these types of funds because they do not have a fixed investing style.

For example, a fund manager can choose to invest 40% of the total corpus in equity-related instruments. However, since the investing style isn’t rigid, they can choose to invest in any sector and select companies with varying levels of market cap.

Some schemes are transparent about the investment style and may declare these aspects in the scheme-related documents. But you should know that the fund manager has the final call and may make changes in the portfolio when they deem necessary. Thus, it is important to check the track record and performance of the fund manager before you invest your hard-earned money.

2. Study the Asset Allocation

Before investing in a particular multi-asset fund, study its asset allocation in detail. For example, what percentage has the AMC allocated in gold, equity, and debt? How high is the exposure to volatile asset classes, such as equities?

It is important for you to understand the fund strategy, especially in terms of asset allocation and your choice of a multi-asset fund must always align with your investment objectives and risk appetite. You must study the asset allocation of the fund in various market cycles and also observe the fund's historical performance. After all, such mutual funds primarily benefit from the asset-class allocation expertise of the fund manager.

3. Taxation of multi-asset funds

There is no mandate that requires multi-asset allocation funds to maintain more than 65% of their holdings in debt or equity and the allocation of these funds also changes dynamically. Thus the taxation of these funds varies and depends on the asset allocation for a particular scheme. Funds investing at least 65% in domestic equities are subject to equity taxation. While, for ‘non-equity-oriented’ funds with an equity weightage less than 65% are subject to debt taxation.

Before investing, you should understand the positioning of equity in the scheme to gauge your tax liabilities.

In The End

Want to invest in multi-asset allocation funds but not sure where to start? Turn to Tata Capital Wealth. Our seasoned financial experts can help you decide which instruments to invest in, including multi-asset allocation funds.

We are masters at tailoring your investments as per your risk appetite, investment horizon and liquidity needs. Get in touch with the latest market insights and investment trends with our help.

To grow your wealth through sound financial advice, visit our website or give us a call today.

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