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Business News/ Mutual Funds / Multi-asset allocation funds: What is prompting fund houses to launch new schemes?
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Multi-asset allocation funds: What is prompting fund houses to launch new schemes?

2024 forecasts a global economic slowdown due to inflation, geopolitical tensions, and supply chain disruptions. Central banks navigate inflation risks cautiously. Mutual funds advocate multi-asset strategies for diversified investments. Asset allocation is key for managing investment risks.

The right asset allocation matters while deciding your investments.Premium
The right asset allocation matters while deciding your investments.

The dynamics of the investment terrain are continually evolving, posing a challenge for even seasoned investors to stay abreast of the changes. While the prospect of substantial returns is enticing, it is essential to bear in mind that such potential is accompanied by inherent risks. 

Anticipated in 2024 is a deceleration in the growth of certain significant global economies compared to preceding years. This slowdown can be attributed to several factors, including the implementation of tighter monetary policies involving higher interest rates to address inflation, persistent geopolitical tensions, and lingering disruptions in the supply chain. These factors collectively indicate a sustained state of disruption in the world economy throughout the current year.

While inflation is exhibiting signs of alleviation in certain regions, it remains a substantial concern. Central banks find themselves in a precarious position, navigating the delicate task of curbing inflation without inadvertently pushing economies into recession.

Shift to multi-asset allocation in funds

Adapting to the evolving global scenario, mutual funds are adjusting their investment strategies. Rather than concentrating solely on equities or specific sectors, numerous asset management companies (AMCs) are advocating for investors to allocate their funds to multi-asset strategies.

Consider, for instance, the Bank of India Multi Asset Allocation Fund introduced on February 07 of the current year, or the recently launched HSBC Multi Asset Allocation Fund on the subsequent date. The latest addition to this category is the Mahindra Manulife Multi Asset Allocation Fund, launched on February 20 this year, intensifying the competition among fund houses to a whole new level.

For those unfamiliar, multi-asset allocation in mutual funds entails the approach of investing in various asset classes within a single fund. This encompasses, but is not restricted to:

  • Equity: Shares of companies signify ownership and offer the potential for capital appreciation.
  • Fixed income: Government or corporate bonds provide a steady income stream and exhibit lower volatility compared to stocks.
  • Alternative investments: Assets such as real estate, commodities, or even cryptocurrencies can contribute to diversification but also entail increased risk.

How does multi-asset allocation work?

In mutual funds, multi-asset allocation entails distributing your funds across different asset classes within a singular fund. This strategy is designed to diversify your portfolio and potentially enhance risk management. Here's how it works.

  • Blend of asset classes: Every multi-asset fund comes with a predetermined allocation strategy, outlining the percentage invested in various asset classes such as equity, debt, and alternative investments.
  • Diversifying your portfolio: Through distributing investments across diverse asset classes with varying risk profiles, the objective is to attain diversification. Consequently, if one asset class experiences underperformance, potential gains in others may offset it, thereby mitigating overall portfolio risk.
  • Asset allocation specified: Every fund is assigned a distinct target distribution for each asset class. This may involve a cautious combination primarily focused on debt, a well-balanced blend with equal attention to equity and debt, or a dynamic mix with a higher proportion of equity.
  • Flexible modifications: Fund managers consistently assess market conditions and make periodic modifications to the asset allocation within the predefined targets of the fund. For instance, they may reduce exposure to equity during market downturns and augment it during bullish trends.

Why does asset allocation matter?

Numerous investors are intrigued by the increasing popularity of multi-asset allocation funds. To grasp the reasons behind this trend, investors, whether they lean towards aggressive or moderate strategies, need to familiarize themselves with the concept of asset allocation and recognize its significance in maintaining investment stability.

Comprehending asset allocation is a foundational principle in investing, and it plays a vital role in making well-informed decisions regarding your portfolio. Diversifying your investments across various asset classes can mitigate overall risk. This is because distinct asset classes often respond differently to market conditions. For instance, during stock market downturns, bonds may experience an increase, and the reverse may occur.

In general, asset classes that offer greater potential returns are accompanied by higher risk. Stocks, for instance, usually present the highest potential returns but also entail the greatest risk. On the other hand, cash equivalents such as money market accounts carry the lowest risk but offer the lowest potential returns.

Nevertheless, determining the optimal asset allocation for you hinges on your circumstances, including factors like age, risk tolerance, investment objectives, and time horizon. For instance, a young investor with a lengthy time horizon may have a higher capacity to endure risk compared to a retiree who relies on their funds to sustain them throughout retirement.

Although asset allocation is undeniably a vital foundation for prudent investing, certain prevalent misconceptions surround it. Some individuals misinterpret it as a capricious inclination to shift between assets without considering their efficacy and other factors such as risk tolerance, financial objectives, and investment time horizon.

Furthermore, the historical performance of a fund is significant. Evaluating your selected fund in comparison to its peers in terms of returns, and considering other types of mutual funds investing in equities, debt, or a specific sector, will aid in determining the most suitable fund to safeguard your financial future.

 

 

 

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Published: 21 Feb 2024, 01:38 PM IST
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