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What is a Multi-Asset Passive Fund? How will it benefit you?

ICICI Securities 16 Mar 2022 0 COMMENT

Market volatility is not a rare phenomenon in recent times. Unexpected spikes and dips in financial markets may keep you on the edge of your seat. You would be at ease if only you knew that your money was parked in suitable asset classes, isn't it? But it is hard to say that a particular asset would always perform well. Hence, financial experts believe diversification is the solution to keep volatility at bay. And what better way to diversify investments than Mutual Funds!

Mutual Funds are an investor's best friend. Among the hundreds of Mutual Fund offerings, there is a particular product that can meet your need to diversify your funds effectively across asset classes – A Multi-Asset Mutual Fund. Read on to find out more about this wonder product that can create a good enough hedge through one vehicle to safeguard your wealth from volatility.

What are Multi-Asset Funds?

A Multi-Asset Mutual Fund is a hybrid offering where the scheme's investments lie across several asset classes such as equity, debt instruments, gold, and international equity. There are a minimum of 3 asset classes involved in such a fund. And the representation of each asset class is determined based on the market opportunity. The upper limit of the fund allocation per asset depends on the scheme's objectives. Capital appreciation over a long duration is one of the benefits of a Multi-Asset Fund. You can have different assets in your portfolio through the convenience of just one investment vehicle with a Multi-Asset Fund. It not only cuts volatility risks significantly but also gives you the benefits of exposure to multiple tools. This instrument may offer better risk adjusted returns if you stay invested for a longer time period.

Like all Mutual funds, Multi-Asset Funds also have an Active and Passive investing variant.

Active Multi-Asset Funds

The active variant tries to beat the market benchmark returns by deploying its asset allocation strategy. Since the fund manager has a hands-on take on this investment strategy, the cost associated with this fund is also high.

Passive Multi-Asset Funds

In the passive Multi-Asset Fund variant, the fund manager tries to extract returns precisely in line with the market benchmark indices of different asset classes. As the fund manager's role is limited here to only to decide the asset allocation, the cost associated with a Multi-Asset Passive Fund is relatively low.

Additional Read: Passive mutual funds - All you need to know!

Why choose Multi-Asset Passive Funds?

Stable Returns

Equity is known to deliver high returns over a long period. Debt-based instruments come with low but stable returns while Gold holds a reputation of providing a hedge against inflation. However, these asset classes may not necessarily perform well simultaneously. Yet, in case of a Multi Asset Fund you can expect relatively stable returns as even though one or more of the asset classes maybe be pulling down your returns due to unfavourable markets, there will be some asset class that rides your returns high. Hence, if you invest in a scheme that invests in multiple asset classes, you can expect steady returns over time.

Diversified Offering

It is difficult to pinpoint one asset category that outperforms across time. Each category has its highs and lows. Investing in multiple assets in one go allows you to even out these highs and lows considerably. Moreover, the multi-asset tactical exposure that this scheme offers, ensures that you do not worry about missing out on the outperformance of any asset.

Tax Efficiency

Passive Multi-Asset Funds employ a long-term holding strategy. Hence, you do not have to worry about facing hefty capital gains taxes. A crucial factor that you must know before setting your eye on a Multi-Asset Fund passive scheme is that it will be more tax efficient than investing in the individual asset class. If you invest in any asset class, any churning in the portfolio is subject to capital gain tax, while in the case of these funds, the tax will be payable only on the redemption of the fund. Longer tenure for such diversified products results in better tax efficiency and overall returns.

Low-Cost

Passive Multi-Asset Funds are cautious and relatively safe investments. Being an ETF does not require much security selection. The low involvement of the Fund Manager lends the low-cost factor to this category.

Conclusion

A Multi-Asset Passive Fund is a great way to smoothly ride the market waves. The low-cost diversified tool not only protects your capital but gives you market-linked returns. One of its USPs is that you do not have to fret over the analysis and selection of asset allocation for your portfolio. It gives you a wide enough coverage to include all the right assets. This explains the rising popularity of such instruments, especially in turbulent markets.

However, having said this, you must also be sure to not over-diversify your investments as it can dilute your returns. Create a delicate balance to achieve your investment goals without any adverse impact from the markets or your investment strategy.

Additional Read: Mutual funds vs ETFs - Know the difference

Disclaimer – ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100.  AMFI Regn. No.: ARN-0845. We are distributors for Mutual funds. Mutual Fund Investments are subject to market risks, read all scheme related documents carefully. Please note, Mutual Fund related services are not Exchange traded products and I-Sec is just acting as distributor to solicit these products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest.  I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. The contents herein mentioned are solely for informational and educational purpose.