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Multi-asset allocation funds are hybrid mutual funds that invest in a mix of asset classes, ranging from equity and debt to commodities and even real estate. These schemes enable fund managers to dynamically adjust allocations based on market conditions. They offer investment diversity while mitigating risk, providing investors with a single solution that offers exposure to asset classes carrying different risk-reward profiles.
In this special series, called ‘Seekho Paiso Ki Bhasha’ (Learn the Language of Money), Kotak Mutual Fund MD Mr. Nilesh Shah simplifies complex market concepts in a candid way.
How does combining equity, debt, and commodities in a single portfolio help investors?
What makes multi-asset allocation funds an effective tool for long term wealth creation is the flexibility they offer fund managers based on market conditions. These funds allow investors to diversify their portfolios through a single product. This quality makes multi-asset allocation funds a unique and dependable wealth-building tool.
Mr. Shah explains the concept of these funds beautifully: “Think of multi-asset allocation funds as multivitamins. Just like multivitamins let you benefit from multiple vitamins for good health, multi-asset allocation funds enable fund managers to decide their preferred mix across assets like equity, debt, and commodities,” says the veteran fund manager.
Watch the full episode-
Although gold is traditionally viewed as a hedging tool, it helps boost a multi-asset allocation fund’s performance given the diversified nature of the instrument. Fund managers often rely on safe-haven assets like gold for positive returns during market uncertainties.
When gold plunged from $800/ounce all the way to $300/ounce…
Elaborating on the role of precious metals in multi-asset allocation funds, Mr. Shah says: “Many people may not remember today, but gold fell from $800-odd levels per ounce to $300 per ounce in the 1980s… Silver once pushed one of the richest Americans into bankruptcy. Many people have had a good experience with gold simply because they purchased it once and never sold or cared about mark-to-market.”
In multi-asset allocation funds, money managers try to benefit from swings across asset classes by adjusting allocations dynamically, explains Shah.
How do multi-asset allocation funds manage risk during volatility?
Using the example of, The Tortoise and the Hare, Mr. Shah says multi-asset allocation funds are like tortoises. “They perform in every kind of market. Obviously, weakness in equity is reflected in this instrument, but it is proportionate to the allocation assigned to that asset class at the time… But over time, the fall in this fund is smaller than in the equity market, given the allocation adjustment,” he says.
“The tortoise will always, slowly and steadily, lead you to your destination,” he elaborates.
Which type of investors should use multi-asset allocation funds?
Although a multi-asset allocation fund may not always align perfectly with an investor’s personal financial goals, it can ensure a smoother ride during bouts of equity market volatility. The dynamic mix of debt, equity, and precious metals helps these funds weather such storms efficiently.
The ‘Seekho Paiso ki Bhasha’ series aims to break down investment concepts into simple, relatable terms.
An investor education and awareness initiative by Kotak Mahindra Mutual Fund.
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