Multi-asset allocation fund or asset fund is a comparatively newer genre in the Indian mutual fund realm. They are typically called multi-asset funds; however, many financial advisors or fund managers often call them asset allocation funds. More specifically, a multi-asset allocation fund invests across several asset classes and builds a portfolio of multiple assets. The asset distribution and its composition may vary according to the investor’s capability.
One of the studies found that 93.4% of fund average return can be based on proper asset allocation. Multi-asset allocation funds offer steady income opportunities for investors while enabling them to invest in a well-balanced portfolio to appreciate their capital.
How is Multi-asset allocation good for diversification but bad for taxation?
Today’s investors invest in such funds so that they get exposure to a wide variety of assets available in the market. Diversification reduces risks since every asset class comes with their own risk-return profile while performing differently in the individual market cycle. For instance, equities are considered as one of the most volatile assets in the short term but debt is popular for stability.
Simultaneously, stock can deliver high returns in the long run but gains earned from debt would always be prone to inflation and tax while offering a moderate return. This is the reason investors invest in those asset classes that have a low correlation or negative correlation with the others. While other assets may not perform optimally, asset classes that perform well will support the portfolio overall.
One of the biggest drawbacks of a multi-asset allocation fund is tax treatment. Funds that are invested less than 65% in a portfolio is also regarded as debt fund in the taxation process. Therefore, even if you invest 40% of your funds in equities, your gains could be taxed just like those from a debt fund.
The short term gains that have been in the portfolio for less than a year are combined with income and even taxed. Long-term gains, on the other hand, are taxed at 10% with indexation and 20% without indexation. The process of indexation comprises adjustments made in purchase price with inflation. Since it lessens the gains, the tax burden increases.
Multi-Asset Allocation Funds features
The portfolio’s risk exposure
Compared to other dynamic funds, the investment portfolio of a multi-asset allocation fund is subject to a broader range of assets. Every asset in a broad portfolio has its own risk level, and profitability varies throughout market cycles. Throughout a given market phase, debt securities may score higher than equity assets. This minimises the investment portfolio’s total risk exposure.
This type of fund engages in a variety of asset classes, that advantages investors who seek to enjoy the benefits of different investments. Financial assets provide the possibility of significant returns, whilst debt securities provide stability to the total investment portfolio. In a nutshell, the total returns are much less erratic and better in comparison to debt mutual fund schemes.
Portfolio Rebalancing That Is Computerized
Multi-Asset Funds’ investment portfolio is restructured on a regular basis to reflect market sentiment. Portfolio rebalancing is conducted to capture profits from assets that are doing well and limit risk to underperforming equities.
The portfolio that is Planned
A thoroughly developed portfolio, sculpted at the hands of competent fund managers, is handed over to the investors. It is an excellent way of investing for those who do not wish to participate in a large number of funds. Multi-asset allocation funds are the best option in such situations since they provide exposure to a wide range of assets in a single investment plan.
The expense to income ratio
Multi-Asset Allocation Funds are compact, have a small market share, and have a low Assets Under Management (AUM). These funds’ expense ratios should now be greater than those of other hybrid funds.
Who should put their money into Multi-Asset Allocation funds?
Multi-asset funds are less hazardous than other funds, making them ideal for investors who do not want to dedicate their money to unpredictable funds. Nevertheless, some investors recognise that diversity may be quite beneficial, and that balanced portfolios could be costlier than they look.
Such funds may be the ideal alternative for investors who do not want to own too many funds. As a result, the varied portfolio attracts clients with precise exposure to many assets with a single investment.