HEDGE YOUR BETS

MULTI-ASSET ALLOCATION FUNDS MAY BE A GOOD CHOICE FOR FIRST-TIME INVESTORS OR EVEN FOR THOSE WHO ARE LOOKING AT INVESTMENTS WITH LOW-RISK AND LOWER VOLATILITY

- NACHIKET KELKAR

Do you have money to invest? Ask around and you will get varied suggestions. Some will say invest in equities, others will point out equities are risky and debt instruments are lowrisk and, therefore, better. Indians have found gold attractive as an investment option that could come in handy on a rainy day.

Some smart guys at a mutual fund thought, why not package all these into one? As a result, most fund houses now have multi-asset allocation funds. These funds typically have to invest in at least three asset classes with a minimum allocation of 10 per cent in each.

These funds may invest in a number of traditional equity and fixed income strategies, index-tracking funds, financial derivatives as well as commodities like gold or silver. Some may invest in instruments like real estate investment trusts or infrastructure investment trusts. And, some may invest in foreign securities or funds that invest in global markets. In comparison, hybrid funds typically invest only in equity and debt.

“Multi-asset allocation funds aim to strike a balance of risk and returns through diversification across asset classes,” said Ashish Naik, fund manager at Axis Mutual Fund.

He pointed out that the three asset classes—equity, debt and gold/silver—are not highly co-related and hence provide a relatively better balance.

Over the last two-three years, equity has given strong returns. Three-year returns of large cap funds average between 15 per cent to 20 per cent. Three-year returns of small cap funds have ranged between 25 per cent and 30 per cent or more. This has made equity investments attractive.

But, equity investing also comes with high risk; they can fall sharply and provide low to negative returns for a long period. This is something many investors may not be able to digest.