How do multi-asset allocation funds balance exposure between equity, debt, and gold, especially when gold prices rise?
A. Multi-asset allocation funds in India typically maintain a structured approach to asset allocation, ensuring exposure to at least three asset classes—most commonly equity, debt, and gold—with a minimum of 10% in each, according to Sebi guidelines. During phases of rising gold prices, such as the rally seen in 2024-25, fund managers rarely allow gold to dominate the portfolio. Instead, they adhere to a strategic asset mix, occasionally making marginal tactical adjustments to benefit from favourable trends without compromising the fund’s diversification principles. Most funds keep gold exposure between 10% and 20%, rebalancing periodically to ensure that gains from one asset class are not offset by excessive concentration risk.
With gold prices rallying in 2024-25, how significant is the role of gold allocation in these funds in driving overall returns?
A. Gold has played a valuable role in boosting returns for multi-asset allocation funds in the past year, with the asset class delivering strong double-digit gains in rupee terms. However, given its relatively limited allocation within most multi-asset portfolios, the absolute impact on overall returns remains moderate. For example, certain multi-asset funds have exposure to gold & silver of more than 20% in their portfolios and have outperformed the Nifty50 over a year and continue to outperform in periods of volatility. Gold serves as both a performance enhancer and a downside cushion, supporting the fund’s risk-adjusted return profile. However, for investors looking to allocate more than 20-25% of their overall portfolio to gold, multi-asset funds may not be the most suitable vehicle as they will limit their allocation and may often rebalance it.
Are multi-asset allocation funds more resilient to market volatility when compared to pure equity or debt funds?
A. Yes, multi-asset allocation funds tend to exhibit greater resilience in volatile market environments compared to pure-play equity or debt funds. This is largely due to their diversified nature, which spreads investment risk across uncorrelated asset classes. When equity markets correct sharply, gold often acts as a hedge, while fixed income investments provide stability through predictable coupon flows. This balanced exposure allows these funds to absorb market shocks better, resulting in shallower drawdowns and steadier recovery paths. For investors seeking lower portfolio volatility without sacrificing growth potential entirely, multi-asset funds offer an appealing middle ground.
From a risk-reward perspective, is this a favourable time to enter multi-asset allocation funds, or should investors wait for a correction in gold or equity markets?
A. Rather than trying to time corrections in individual asset classes, investors can use these funds to gain broad-based exposure without taking concentrated bets. Their structure allows them to automatically reallocate gains and underperformance among asset classes, thereby smoothing out entry-point risks. For investors unsure about market direction or valuations, a phased investment approach, such as via SIPs or STPs, into multi-asset funds can offer participation and protection.
What is the long-term strategy for investing in multi-asset allocation funds?
A. Multi-asset funds are best suited for moderate-risk investors or those who prefer a hands-off approach to asset allocation. The long-term strategy behind multi-asset allocation funds is rooted in achieving consistent, risk-adjusted returns while reducing portfolio volatility. Over time, they aim to deliver annualised returns in the 9-11% range, with lower drawdowns compared to pure equity funds. By outsourcing the complexity of market timing and asset class selection to professional fund managers, investors can stay invested and benefit from compounding over the long run.