Multi-Asset Funds vs Asset Allocation Funds: Which Is Better for Investors?

 Planning to build a diversified investment portfolio? There are various categories of mutual funds in India designed for a well-diversified portfolio. Multi-asset funds and asset allocation funds are the two categories that specifically focus on diversification by spreading their investments across different asset classes. Multi-asset funds invest in at least three different asset classes (equity, debt, and commodities) simultaneously. While alternative asset funds shift asset allocation dynamically depending on the market conditions. The better of the two ultimately depends on your overall investing strategy, risk tolerance and diversification needs.

What are Multi-Asset Funds?

Multi-asset funds are mutual funds that invest across multiple asset classes, such as equity, debt instruments, and commodities (gold and silver), at least in three of them simultaneously. As per the regulations of the Securities and Exchange Board of India (SEBI), multi-asset allocation funds must allocate a minimum 10% of their portfolio into the three asset classes.

The structure of the multi-asset funds offers built-in diversification to the investors. As each of these asset classes performs differently across the market cycles, it balances the risk and return within the portfolio. 

What are Asset Allocation Funds?

Asset allocation funds are the mutual funds that actively adjust the portfolio between the asset classes such as equity, debt, cash and gold. However, there is no fixed structural diversification requirement in this fund. Hence, these funds adjust the investment mix based on economic conditions, market fluctuations and risk-return outlook. 

Asset allocation funds take a dynamic approach to managing market risk through dynamic asset allocation decisions. 

Multi-Asset Funds Vs. Asset Allocation Funds: Key Differences

The following are the main differences between multi-asset funds and asset allocation funds based on various factors:

This comparison table highlights how multi-asset funds rely on structural diversification, while asset allocation funds focus on tactical allocations, actively shifting the investment mix based on market conditions. 

How Diversification Differs Between the Multi-Asset Fund and the Asset Allocation Fund?

Multi-asset funds expose the portfolio to multiple asset classes like equity, debt and gold simultaneously. As each of these asset classes reacts differently to the economic conditions and market sentiments, overall portfolio volatility is well managed through a diversified structure. For example, when the equity market is bearish, debt instruments or gold may provide stability to the fund’s portfolio.

Asset allocation funds may sometimes focus on fewer asset classes depending on the opportunities in the market and the fund manager’s strategy. This lack of consistency in diversification can lead to concentration risk despite having the flexibility to allocate assets to enhance the return in a favourable market. 

Example of a Multi-Asset Allocation Strategy

Multi-asset funds create a diversified portfolio by investing in multiple asset classes simultaneously using a tactical asset allocation strategy. For example, a fund manager may decide to allocate 50% to 70% in equity for long-term capital appreciation, 10% to 30% into debt securities for stability and 10% to 20% in gold/silver for a hedge against inflation. 

ICICI Prudential Multi Asset Fund is one of the examples of a well-diversified fund that focuses on a balance of long-term capital appreciation, stability and inflation protection. Its investment strategy aims to capture better opportunities in the market while managing the volatility through diversification without having to manage multiple investments separately.

When Multi-Asset Funds May Be Better?

Multi-asset funds may be better in the following scenarios:

• 1. Scenario: Investors seeking broad diversification may invest in multi-asset funds as they spread investment across multiple (at least three) asset classes and do not concentrate risk in single asset classes.
• 2. Scenario: Suitable for investors seeking a single diversified investment, as it is an all-weather fund that simplifies portfolio management.
• 3. Scenario: Investors looking for commodities (gold and silver) exposure as the fund invests a minimum 10% into commodities.
• 4. Scenario: Suitable for long-term investors with a moderate risk outlook as the fund focuses on diversification and managing risk.

When Asset Allocation Funds May Be Better?

Asset allocation funds may be better in the following scenarios:

1. Scenario: Investors seeking an active and tactical approach with a dynamic portfolio as the fund changes its investment mix based on market conditions, risk outlook and economic indicators.

2. Scenario: Investors preferring market-driven asset allocation changes instead of a fixed structure.

3. Scenario: Investors seeking a tactical asset allocation strategy to capture the market opportunities to optimise returns and are comfortable with higher ‘timing risk’. 

Multi-Asset Fund and Asset Allocation Fund – Which One is Better for Investors?

There is no universal answer to which is the ‘better’ one. The choice between a multi-asset fund and an asset allocation fund may largely vary based on your financial goal, portfolio preference, and risk tolerance.

Multi-asset funds may look lucrative for investors seeking consistent diversification across various asset classes, with a balanced strategy for the long term. An asset allocation fund may appeal to investors who seek an active and tactical approach to portfolio management to capitalise on market opportunities.

Conclusion

To sum up, multi-asset funds offer consistent diversification through simultaneous exposure to various asset classes, balancing the portfolio risk. Meanwhile, asset allocation funds rely on tactical allocation strategies and adjust investment mix based on economic conditions and market fluctuations. One offers structural diversification, while the latter prioritises tactical flexibility. Investors should consider their diversification needs and assess what suits them the best – stable diversification offered by multi-asset funds or market-driven allocation shifts of asset allocation funds. Ultimately, the right choice depends on individual investment objectives and risk tolerance.

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