Ride Market Volatility With Multi-asset Funds: Here's What You Need To Know!

The financial markets in India have been experiencing increased volatility in recent years. One of the reasons for this volatility can be the global geopolitical scenario; Russia's ongoing conflict with Ukraine has crippled the global supply chain, triggering a global food shortage and subsequently resulting in high inflation rates in countries around the world. Furthermore, a sharp spike in crude oil prices, a depreciation of the Indian rupee, and the recent Hindenburg Report might all be considered contributing factors to the market turmoil.

Several financial analysts believe that this strong market volatility, particularly in the equity markets, will last for a long time. With such uncertainty on the horizon, it may appear sensible for investors to diversify their investments across several asset types, like liquid funds, index funds, debt funds, and equity mutual funds. Furthermore, due to market volatility, it may make sense to invest in multi-asset funds.

Why Investing in a Multi-Asset Allocation Fund in a Volatile Market Makes Sense

Investors should remember Benjamin Grantham's timeless words, "There is a clear, logical relationship between the concept of a safety margin and the principle of diversification." This remark may have a modern-day interpretation in asset allocation strategies that use multiple assets. Selecting this form of plan could assist investors in gaining the necessary exposure to a variety of asset classes such as stock, debt, gold, and so on. Hence, if one of the asset classes has a decline, there are other asset classes that can provide capital protection and more or less constant returns over time. Aside from the balancing act of these mutual fund schemes, here are two other reasons why multi-asset investment via multi-asset mutual fund schemes makes sense in a volatile market:

Expertise in fund management

Due to fearful sentiments that travel quickly across the markets, market volatility may cause panic selling/buying. At a time when there is a strong likelihood that a notional loss may become an actual loss, most investors may lack the knowledge to enter or depart the markets. A multi-asset allocation fund may provide investors with the fund manager's and their team's experience. These professionals may be able to do research and select relevant stocks to rebalance an individual's portfolio based on their risk tolerance and goals.

Diversification of asset kinds

Investing in multi-asset allocation funds allows investors to diversify across asset classes such as equities, debt, and gold. This exposure may be relevant to the long-term financial aspirations of those investors who intend to continue investing. As a general rule, the SEBI (Securities and Exchange Board of India) requires multi-asset mutual fund plans to be transparent. When investors choose a multi-asset allocation investment, this variety can help them diversify their portfolio.

Multi-Asset Funds' Percentage Distribution

According to SEBI regulations, mutual fund firms that invest their money in multi-asset allocation funds must invest at least 10% of it in at least three different asset classes. As a result, many mutual funds include a mix of debt, stock, gold, real estate, and other investments.

The remaining percentage of the investible surplus is a well-researched decision by fund managers as to where it should be allocated. For example, if the market is on a tear, your fund manager may reduce asset exposure to the equity asset class, which is riskier than debt and gold but offers better returns.

If the market is in a bear market or fluctuating dramatically, as it was during the height of the Ukraine-Russia war, your fund manager may boost exposure to gold or other safer asset classes. They do this to mitigate portfolio risk.

What Kind of People Should Invest in Multi-Asset Allocation Funds?

If you have a low to moderate risk tolerance yet want to earn consistent returns on your investments, multi-asset funds are a good option. This is due to the fact that multi-asset allocation funds assist you in balancing the risk associated with investing in a single asset class. As a result, even when markets are volatile, and some of your assets underperform, you will still enjoy consistent returns!

Furthermore, if you are a beginner investor who wants to try your hand at investing in market-linked instruments or lack the expertise to manage a diversified portfolio on your own, you might consider integrating multi-asset funds in your portfolio. Even investors who can tolerate a high level of risk can benefit from exposure to this instrument in order to improve portfolio stability.

Before making investment decisions, investors should consider their financial goals, risk tolerance, and investment horizon.

Disclaimer: Mutual Funds are subject to market risks. Please read all scheme-related documents carefully before investing.