Investing in multi-asset funds can reduce reliance on equities, particularly when benchmark indices have reached all-time highs. These funds offer diversification and risk management by allocating investments across equity, bonds, commodities and real estate.

Multi-asset fund managers employ models to optimise asset allocation based on prevailing market conditions and economic indicators. These models enable managers to dynamically adjust portfolios, balancing risk and return to align with the investor’s objectives and risk tolerance. This ensures that the portfolio is not overly reliant on any single asset class, particularly equities, which can be volatile.

Balancing risk and return

The multi-asset category had approximately 71% exposure to equities in May 2021. But as of May 2024, the equity exposure is around 62%. Some funds even have a lower allocation to equities, demonstrating that fund managers are adapting to the current market environment to better protect investments.

Pankaj Pathak, senior fund manager, Quantum AMC, says multi-asset funds can be beneficial in current times when there is some nervousness about equity valuations. “These funds should be seen as a long-term asset allocation solution rather than just another investment product. With this strategy, investors can easily obtain a well-diversified, professionally managed and tax efficient saving and wealth building solution,” he says.

Similarly, Nirav Karkera, head, Research, Fisdom, says, by investing in multi-asset funds, an investor benefits from a strategic approach that mitigates the risks associated with high equity market levels and enhances the potential for more consistent and stable returns. “Investing in multi-asset funds could reduce your dependence on equities. This diversification is crucial when equity markets peak, as it spreads risk and mitigates the impact of any potential market corrections on your overall portfolio,” he says.

Asset allocation strategy

Investments should be based on a strategic asset allocation rather than being fixed at a portfolio level. An asset allocation strategy involves distributing investments across  asset classes, such as equities, fixed income, and commodities, based on an investor’s risk tolerance, investment goals, and market conditions.

Soumya Sarkar, co-founder, Wealth Redefine, an AMFI registered mutual fund distributor, says multi-asset funds allow investors to capitalise on growth opportunities while maintaining a balanced risk profile. “The success of multi-asset funds in delivering superior returns compared to pure equity funds highlights the effectiveness of a well-structured asset allocation strategy in achieving long-term financial objectives,” he says.

In multi-asset funds, bonds provide more stable returns and can counterbalance the volatility of equities. Real estate and commodities often exhibit low correlations with the stock market, adding an extra layer of protection against downturns. Manish Bhandari, CEO and co-founder, Vallum Capital Advisors, says a multi-asset fund will have very low correlation with equities and spread assets across various asset classes. “This strategy will help in reducing volatility and risk in the portfolio and serve the purpose of asset allocation,” he says.

Stay invested for long

The ideal investing period for a multi-asset fund is five years. “This timeframe allows the fund to navigate various market cycles, smoothing out short-term volatility. It maximises the power of compounding over time, enhancing potential returns,” says Karkera and adds that it reduces the impact of poor performance in any single asset class through diversification.
Before investing in such a fund,  ensure that the fund aligns with your long-term investment goals such as retirement or education funding, and also assess the risk tolerance.

Most investors rely on the past performance to evaluate the future potential. Pathak says as investors mature, focus will shift from returns to risk-adjusted returns. “Multi-asset funds can stand out based on risk-adjusted performance and create appeal among investors,” he says.