As per a study, 91% performance of a portfolio is linked to asset allocation. Selection of securities, timing and others account for the rest 9%. Right asset allocation is important as every asset goes through different cycles of boom and bust and has a different risk-return profile.
Debt, for instance, gives returns in the form of yield and capital appreciation. Also, it is less volatile and has a low correlation with equities. Gold offers stability and shares a negative correlation with equities. It provides safety if either of the other two assets performs badly. Stocks, on the other hand are risky ,but have the potential to provide good returns over the long run.
Multi-asset funds are all-in-one funds with exposure to three asset classes—equity, debt and gold. The typical fund in this category is conservative in nature with high exposure to debt (50-90%), and some exposure to equities (up to 40%) and gold (up to 35%). Some funds in this category are also equity-oriented with small exposure to debt and gold while some give nearly equal weightage to all three categories.
The biggest plus point of multi- asset funds is diversification. Since they are diversified over three asset classes, they tend to be less volatile, ensuring a smooth ride over the long term for the investor. Secondly, asset allocation and rebalancing, which lie at the heart of financial planning, are taken care of by an expert—the fund manager.
As per the present tax rules, multi-asset class funds are considered as debt funds. Therefore, one has to remain invested for three years to claim long-term capital gains benefits. Any gains on units redeemed before three years is treated as short term capital gains and is taxed at one’s nominal tax rate.
Since multi-asset funds are blended products, their returns will always be lower than that of the best-performing asset class of the day. This is the price investors pay for the lower volatility.
When choosing a fund from this category, it is best to go with one whose asset allocation is in sync with your risk profile and investment horizon. Conservative investors, for instance, should not invest in a fund with high equity exposure. Your investment horizon in these funds should be at least five years. Only when you have invested across market cycles will the benefit of rebalancing be reflected in portfolio returns.