Multi-asset allocation funds have emerged as the new favourite among mutual fund investors. Multi-asset funds received the highest inflows of ₹8,476 crore in February, per Association of Mutual Funds in India (Amfi) data.
In an interview with Mint, Deepak Shenoy, chief executive officer (CEO) of Capitalmind AMC, explains how these funds work, who they are suitable for and whether investors risk chasing yet another market fad. Edited excerpts
Why are investors suddenly flocking to this category? Where do such funds fit in a portfolio?
Multi-asset funds were created for a certain type of investor. These funds invest across , fixed income and a third asset class such as commodities. Commodities usually mean gold and silver, but can also include oil, natural gas, copper and other industrial metals.
Because all these assets are traded through financial markets and derivatives, a single product can give exposure to multiple asset classes. The fund manager can decide how much to allocate to each. If one asset class is struggling while another is doing well, the portfolio balances itself.
Historically, investors ignored multi-asset funds when equities were booming because the debt and commodity portions limited upside. Today, the situation is different—equities have been volatile, debt is relatively stable, and commodities such as gold and silver have rallied. That balance is now visible in .
Another key advantage is taxation and convenience. If you manage asset allocation yourself, say between equity funds, debt funds and gold ETFs, you must rebalance periodically. Every rebalance may trigger taxes. In a multi-asset fund, the fund manager handles allocation internally, without tax consequences for the investor.
These funds are attractive to investors seeking diversification and lower volatility without actively managing their own asset allocation.
Can these replace DIY asset allocation and serve as core of an investment portfolio?
For many investors, yes. Especially for those who don’t want to manage asset allocation themselves.
Some investors believe they can time entry and exit across asset classes better than a fund manager. But for many people, managing allocations between equity, debt and commodities can become cumbersome over time. For such investors, a multi-asset fund acts as a core portfolio holding.
It also suits investors who are uncomfortable with pure equity volatility. They might say that I’m okay with a 10% decline, but I cannot handle my portfolio falling 30%.
Multi-asset portfolios can still fall, but historically their volatility tends to be lower than that of pure equity portfolios. They may not rise as much during equity bull markets, but they usually fall less sharply during downturns. That makes them a reasonable core allocation for conservative investors.
Much of the recent returns have come from the rally in gold and silver. Are investors entering the category with unrealistic expectations?
Whenever investors chase a category after strong performance, timing is often wrong. People often enter towards the end of a cycle. However, we cannot confidently say whether gold or silver have peaked.
For instance, in 1979 silver rose nearly 483% in a year. In the current cycle, prices may have doubled from the bottom, but that doesn’t necessarily mean the rally is over.
At the same time, there are risks. Gold and silver have partly risen because of geopolitical tensions and industrial demand. If tensions ease, demand could soften. Higher prices may also encourage new mining discoveries, especially for silver, which could increase supply and pressure prices.
The point of multi-asset investing is not to rely on one commodity. Even if gold or silver retreat, the can reduce exposure and allocate more to equities, debt or other commodities.
Many investors assume commodities in these funds mean only gold. What other exposures might investors get?
It depends entirely on the fund. Each multi-asset fund has its own strategy. Most funds limit commodities to gold or gold and silver. But the category actually allows exposure to a broader commodity universe through exchange-traded derivatives.
Apart from gold and silver, there are industrial metals such as copper, aluminium, zinc and nickel. Then there are energy commodities such as crude and natural gas. In our multi-asset fund, we will hold between two and four of these commodities at any given time.
These are all globally traded commodities with liquid markets. So investors should always check a fund’s mandate to understand which commodities it intends to use.
Much of the interest in this category is driven by strong returns in the past one to two years. How can investors tell whether it deserves a place in their portfolio or is just a passing fad?
The key factor is flexibility that this category offers. In a multi-asset fund, if commodities are performing well, the manager can increase commodity exposure. If equities are doing better, allocations can shift toward equities. If both struggle, the portfolio can move toward fixed income. That flexibility is what makes the category useful for long-term asset allocation rather than a short-term trend.
If investors already hold other equity or debt funds, should they monitor the asset allocation within their multi-asset fund closely?
Not necessarily. If you start tracking allocations daily and trying to combine them with your other funds, you defeat the purpose of owning a multi-asset fund.
You are essentially outsourcing asset allocation to the fund manager. If you still want to manage allocations yourself, it may be simpler to invest directly in separate equity, debt and commodity funds.
Many investors instead use multi-asset funds to align with financial goals. For example, long-term goals, 10 years or more, might still be served by pure equity funds. Medium-term goals, say three to five years away, could be suitable for multi-asset funds because they offer lower volatility.
Short-term needs, such as expenses within a year, may be better served through arbitrage funds or other low-risk options.
What should be the exit strategy when investing in a multi-asset fund?
There are three main reasons to exit any investment.
First, you need the money for a specific goal. In that case, you shift the funds into a safer instrument as the goal approaches. Second, the fund’s strategy changes in a way you don’t agree with. For instance, if the fund alters its investment framework significantly, you may reconsider your investment. Third, your overall asset allocation may change. Perhaps the fund becomes too small or irrelevant within your portfolio.
Avoid exiting purely based on short-term performance. Trying to time commodity peaks or market cycles is extremely difficult and often backfires.