Set Your Diversification Goals: Multi-Asset Allocation Funds

For an investor considering a lump sum investment, multi-asset allocation funds is a category of hybrid funds, which could be an ideal choice.

A multi-asset allocation fund is a type of hybrid fund investing in at least three asset classes with a minimum allocation of 10% to each. These could be equity, debt and gold, or real estate, among others. 

An investor gains from the diversified portfolio of equity, debt and gold, which can combine the capital appreciation offered by equities along with the stability and risk mitigation extended by debt and gold. 

So, in a way, multi-asset allocation funds give an investor access to multiple asset classes. The fund keeps changing the mix based on certain rules to offer the optimal mix of different asset classes. It is for this reason that these funds are ideal for an investment horizon of at least five years.

The allocation of multi-asset allocation funds depends on which asset classes the fund will invest in. The percentage allocation to each of these asset classes is also decided by the fund and also the threshold that will trigger the movement of money from one asset class to another.

Multi-asset allocation funds have on average delivered 11.01% per annum returns in the last five years. In the case of three and 10 years, the annualised returns are 15.31% and 9.05% annually.

Before investing in multi-asset allocation funds, an investor should check if these funds are truly and optimally balanced between the three asset classes and not overtly biased towards any particular asset class, especially equities. 

Multi-asset allocation funds with more inclination to equity allocation may give good returns when markets are on the rise but will suffer more than truly diversified funds in a down phase. This defeats the whole purpose of investing in a multi-asset allocation fund.