Multi-asset allocation funds: What is driving fund houses to launch new schemes?

The dynamics of the investment environment are continually evolving, and even experienced investors are challenged to keep abreast of the changes. While the prospect of large profits is appealing, it is important to keep in mind that such potential comes with inherent risks.

Growth in certain major global economies is expected to slow in 2024 compared to the previous year. This slowdown can be attributed to several factors, including the implementation of tight monetary policy with higher interest rates to combat inflation, persistent geopolitical tensions, and prolonged supply chain disruptions. Taken together, these factors point to continued turmoil in the global economy throughout this year.

Although inflation is showing signs of easing in some regions, it remains a major concern. Central banks find themselves in the precarious position of carrying out the delicate task of controlling inflation without inadvertently pushing the economy into recession.

Transitioning funds to multi-asset allocation

Adapting to the evolving global scenario, mutual funds are adjusting their investment strategies. Many asset management companies (AMCs) encourage investors to allocate their funds to multi-asset strategies, rather than just focusing on stocks or specific sectors.

Take, for example, the Bank of India Multi-Asset Allocation Fund, which was introduced on February 7 this year, or the HSBC Multi-Asset Allocation Fund, which was recently launched the next day. The latest addition to this category is the Mahindra Manulife Multi-Asset Asset Allocation Fund, which was launched on February 20 this year, intensifying competition among fund companies to a whole new level.

For those unfamiliar, multi-asset allocation in mutual funds involves an approach that invests in different asset classes within a single fund. This includes, but is not limited to:

• capital: Stocks in a company represent ownership and offer the potential for appreciation in capital value.
• fixed income: Government and corporate bonds provide a stable source of income and are less volatile than stocks.
• alternative investments: Assets such as real estate, commodities, and even cryptocurrencies can contribute to diversification, but they also come with increased risk.

How does multi-asset allocation work?

In mutual funds, multi-asset allocation involves allocating money to different asset classes within a single fund. This strategy is designed to diversify your portfolio and enhance risk management. Here’s how it works:

• Asset class blending: All multi-asset funds come with a predetermined allocation strategy that outlines the proportions invested in different asset classes such as equity, debt, and alternative investments.
• Diversify your portfolio: The aim is to achieve diversification by spreading investments across a variety of asset classes with different risk profiles. Therefore, even if one asset class underperforms, the potential gains in other asset classes may offset it and reduce the risk of the overall portfolio.
• Specifying asset allocation: All funds are assigned separate target allocations for each asset class. This may include a prudent mix with a primary focus on debt, a balanced blend with equal attention to equity and debt, or a dynamic mix with a higher proportion of equity.
• flexible changes: The fund manager consistently assesses market conditions and periodically changes the asset allocation within the fund’s predefined objectives. For example, you may reduce your exposure to stocks during a market downturn and increase your exposure during a bullish trend.

Why is asset allocation important?

Many investors are interested in the growing popularity of multi-asset allocation funds. To understand the reasons behind this trend, understand the concept of asset allocation and maintain stability in your investments, whether investors lean toward aggressive or moderate strategies. need to recognize its importance in

Understanding asset allocation is a fundamental principle in investing and plays a key role in making informed decisions about your portfolio. Diversifying your investments across different asset classes can reduce your overall risk. This is because different asset classes often react differently to market conditions. For example, bonds may rise when the stock market falls, and vice versa.

Asset classes that offer greater potential returns generally involve a higher degree of risk. For example, stocks typically offer the greatest potential return, but also the greatest risk. On the other hand, cash equivalents, such as money market accounts, have the lowest risk but the lowest potential returns.

Nevertheless, determining the best asset allocation for you will depend on your situation, including factors such as age, risk tolerance, investment goals, and time horizon. For example, younger investors with long-term investment horizons may be better able to tolerate risk than retirees who rely on their funds to sustain themselves after retirement.

There is no doubt that asset allocation is an important foundation for wise investing, but there are certain common misconceptions surrounding it. Some people misinterpret this as a capricious tendency to move between assets without considering their effectiveness or other factors such as risk tolerance, financial goals, or investment horizon.

Additionally, a fund’s historical performance is important. Evaluating your chosen fund against other funds in terms of returns and considering other types of mutual funds that invest in stocks, bonds, or specific sectors is the best way to protect your financial future. Help you decide on a fund.