Is it time to rethink your strategy with multi-asset funds? (2024)

FAQs

What are the disadvantages of multi-asset funds? ›

It's essential for investors to understand that multi-asset allocation funds are not immune to market fluctuations. While diversification helps spread risk, it does not guarantee protection against losses, especially during extreme market downturns.

It helps mitigate risks while aiming for steady returns, ensuring that your portfolio remains resilient. By considering a multi-asset fund, you can enjoy the benefits of diversified growth and stability, making it a valuable addition to your investment strategy.

Investing in a small number of funds can also be cost effective, since many investing platforms charge a dealing fee each time you buy or sell an asset. If you invest on a regular basis, these charges can eat into returns. Equally, having a low number of funds makes it easier to keep track of your portfolio.

By buying into a number of different companies or industries, or investing in different managed funds, you can still create a portfolio that doesn't leave you too exposed if one or two of your choices don't perform as well as you were expecting. Don't be put off if you're only starting with a small amount.

Investor Profile: Multi-asset allocation funds are suitable for investors seeking a diversified portfolio with a long-term investment horizon, while balanced advantage funds may appeal to those looking for a more flexible approach to asset allocation with active risk management.

Where do millionaires keep their money? High net worth individuals put money into different classifications of financial and real assets, including stocks, mutual funds, retirement accounts and real estate.

Of the passive multi-asset funds, the Vanguard LifeStrategy range is the clear leader. Its balance of sensible asset allocation, consistency, low cost, and long-term returns make it a great choice.

Direct ownership—Investors in SMAs own the individual securities in their portfolio, providing the opportunity for enhanced tax planning and customization. Fees can be lower—SMAs have a more efficient underlying structure that may be less expensive than mutual funds.

Bottom line. Ultimately, the decision to have multiple brokers should align with your investment goals, preferences and the specific benefits each platform offers. If you're comfortable managing multiple accounts, you could leverage the benefits of different brokers to maximize your investment strategy.

What percentage of your portfolio should be in mutual funds? ›

A widely accepted guideline is the 50/30/20 rule. Allocate 50% of your income to necessities, 30% to discretionary spending, and reserve 20% for savings and investments. Within this 20%, your mutual fund allocation can be further optimised based on your risk tolerance and investment goals.

There isn't a strict rule, but between five and 10 funds is usually a good idea. That lets you allocate money to different types of funds and markets without doubling up too much. It's also a manageable number to monitor and won't cost you too much in trading fees. But, size does matter.

These blended funds can give advisers and their clients access to hundreds or even thousands of equities and bonds in a single investment. This means they can spread their money across a wide range of securities to achieve a high level of diversification.

Generally, when you look at mutual fund performance over the long run, you can see a trend of actively-managed funds underperforming the S&P 500 index. A common statistic is that the S&P 500 outperforms 80% of mutual funds. While this statistic is true in some years, it's not always the case.

Over-Diversification of Mutual Funds

The aim of diversification is to spread risk. If you invest too much in one company's stock, you are at great risk. If something happens to that company, a significant portion of your money could get wiped away.

If you sell such funds after holding them for more than 3 years, then you have to pay income tax at the rate of 20 per cent on the profit made on it. But if you make profits after holding such funds for less than 3 years, then you will have to pay tax on the profits as per the income tax slab.

If you have a particular strategy or want diversification within your portfolio, then investing in multiple mutual funds can be a good idea. Diversification implies spreading your investments across different asset classes, industries, and geographical regions to reduce your overall risk.

Multi-asset class investments increase the diversification of an overall portfolio by distributing investments throughout several classes. This reduces risk (volatility) compared to holding one class of assets, but might also hinder potential returns.

Besides an extra layer of fees, the downside of investing through a multi-manager is that performance may be diluted, as underperforming constituents of the fund-of-funds portfolio reduce the positive impact of the top performers.