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Optimizing Portfolio Diversification with Multi-Asset Allocation Funds

In the world of investing, the age-old saying, β€œDon’t put all your eggs in one basket,” holds true. Diversifying your investments across various assets is a prudent strategy to manage risk and potentially secure steady returns.

However, selecting the right mix of investments can be a daunting task for many. This is where Multi-Asset Allocation Funds come into play.

In this blog post, we break down what these funds are, their investment principles, benefits, limitations, and how they can simplify your investment journey.

What are Multi-Asset Allocation Funds?

Multi-Asset Allocation Funds, as the name suggests, are mutual funds designed to spread your investments across different asset classes. To qualify in this category, a fund must invest in at least three asset classes, with a minimum 10% allocation in each asset class.

These asset classes can include domestic and international equities, fixed-income securities, index funds, derivatives, commodities like gold, etc.

What is the Investment Principle?

The primary principle behind multi-asset allocation funds is to select asset classes that exhibit low or negative correlations with each other. By doing so, the goal is to diversify and reduce various risks associated with investing, such as interest rate movements, currency fluctuations, geopolitical uncertainties, business cycles, etc.

Benefits of Multi-Asset Allocation Funds

  • Risk Diversification: The diversified nature of these funds potentially balances the downside risk. When one asset class underperforms, another may outperform, helping to smoothen out overall returns. This can be particularly valuable in volatile markets.

  • Steady Long-Term Returns: Multi-asset allocation funds aim to provide steady long-term returns, making them appealing to investors seeking stable growth over time.

  • Potential for Alpha: These funds are actively managed, and fund managers make asset allocation decisions to potentially generate alpha, which refers to returns that surpass a benchmark index.


Limitations of Multi-Asset Allocation Funds

  • Returns Capped by Diversification: While diversification reduces risk, it also caps the potential returns. For instance, if the fund has investments in international equity and global markets underperform while Indian markets outperform, the overall returns get capped.
Image Source: https://www.bloomberg.com/news/videos/2023-08-31/what-s-the-main-challenge-for-investors-in-india-video

Image Source:Β https://www.bloomberg.com/news/videos/2023-08-31/what-s-the-main-challenge-for-investors-in-india-video

  • Non-Customizable Asset Allocation: Investors with specific asset allocation requirements may find multi-asset allocation funds less suitable, as the asset allocation is predetermined and cannot be customized to individual preferences.


In Summary

Multi-Asset Allocation Funds can be a valuable addition to your investment portfolio. They offer diversification across various asset classes, simplifying your investment approach by consolidating multiple investments into a single fund.

However, it’s crucial to read the scheme information document of these funds to ensure they align with your financial goals and risk tolerance.

Additionally, if you want an easy way to track all your assets and dynamically view your asset allocation, consider MProfit, it can help you manage your investments effectively, providing you with a comprehensive overview of your financial portfolio.


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