Multi-asset funds spread investments across a minimum of 3 asset classes with at least a 10% exposure in each.
They may commonly invest across equity, debt, and commodities like gold and silver.
Commodities may help diversification and offer potential downside protection as they tend to move differently from equities.
Commodities like gold and silver may also add an inflationary hedge to the portfolio and help tackle market volatility.
However, there is no guarantee that commodities will perform their intended role, as multi-asset fund performance still depends on how allocation happens and market movements.
Multi-asset allocation funds are mutual fund schemes that invest in at least 3 different asset classes, maintaining a minimum of 10% allocation in each class. These asset classes usually include equity, debt, and commodities. Multi-asset allocation funds have one key goal: To spread investment exposure across asset classes rather than concentrate investments in only one segment.
But what role do commodities play in a multi-asset fund portfolio? They essentially act as a potential shock absorber when equity and debt markets turn volatile. In this article, we assess the role of commodities in multi-asset allocation mutual funds in more detail.
Table of Content
What Commodities Can Multi-Asset Mutual Funds Invest In?
Multi-asset allocation funds can invest in a wide variety of commodities, including:
Precious metals like silver and gold through ETFs (most common)
As per SEBI, mutual funds are permitted to participate up to set limits in exchange-traded commodity derivatives (ETCDs) in India, except in derivatives on “Sensitive Commodities”.
The exact commodity exposure can vary from one multi-asset mutual fund to another based on the fund's investment mandate and portfolio construction strategy.
Why Do Commodities Matter in Multi-Asset Funds: Understanding the Role of Commodities as a Hedge
Commodities play a crucial role in multi-asset allocation funds:
Role in Risk Management
Commodities like gold and silver may serve as a potential volatility hedge for multi-asset funds. That’s because:
Commodities like gold typically have a low correlation with traditional asset classes like equities. This means price movements may be in opposite directions.
When the stock market is falling or unstable, commodities may potentially retain their value or not fall as drastically as stocks.
In other words, commodities may offer some downside protection and potentially preserve some of the multi-asset fund returns when equity and debt markets are unstable. However, this is not guaranteed protection, as there are times when both equities and gold/silver fall simultaneously.
Upside Potential
Apart from volatility management, commodities are also added in multi-asset allocation funds to capture their own potential upside. For instance, driven by macroeconomic uncertainty, gold has given returns of about 18.5% in the last 10 years
(Source: Economic Times).Here, gold is just one example. Commodity prices can react to factors like supply shortages, higher global demand, and geopolitical events. By allocating a portion to commodities, multi-asset fund returns may benefit when these asset classes perform well.
Creating a Potential Inflation Hedge
Multi-asset allocation funds also use commodities as a potential hedge against inflation. This is because commodity prices often move alongside the cost of living. When inflation rises, the prices of raw materials such as metals, energy products, and agricultural commodities may increase as well.
By maintaining some exposure to commodities, multi-asset funds may be better positioned to navigate periods of rising inflation compared to portfolios that rely solely on traditional asset classes.
Why Are Gold and Silver Preferred in Multi-Asset Funds?
While multi-asset funds can invest in a wide range of commodity derivatives, most allocate a portion to precious metals like gold and silver.
Role of Gold in Multi-Asset Funds
Gold is often included in multi-asset funds because:
It tends to behave differently from traditional asset classes such as equities and debt.
It is seen as a safe-haven asset.
It is seen as a reliable store of value and purchasing power.
Role of Silver in Multi-Asset Funds
Silver brings a different type of exposure to multi-asset funds because:
It is both a precious metal and an industrial commodity.
Its price can be influenced by investment demand as well as activity in sectors such as manufacturing, electronics, and technology.
As a result, silver may add another layer of diversification to the portfolio.
Considering a Multi-Asset Fund? You May Look At the Tata Multi Asset Allocation Mutual Fund
If you are thinking about adding a multi-asset allocation fund to your portfolio, you may consider the Tata Multi Asset Allocation Fund. Here are the details on the scheme:
Scheme Type | The Tata Multi Asset Allocation Fund is an open-ended scheme investing in equity, debt, and exchange traded commodity derivatives. |
Investment Objective | The investment objective of the scheme is to generate long-term capital appreciation. However, there is no assurance or guarantee that the investment objective of the scheme will be achieved. The scheme does not assure or guarantee any returns |
Exit Load |
|
Benchmark | 65% BSE 200 TRI + 15% CRISIL Short Term Bond Index + 20% iCOMDEX Composite Index |
Asset Allocation | Under normal circumstances, the asset allocation of the scheme may be:
|
Scheme Riskometer | Very High Risk |
Benchmark Riskometer | Very High Risk |
Conclusion
Commodities play an important role in multi-asset allocation funds by:
Adding a source of diversification beyond equities and debt.
Potentially managing volatility.
Providing exposure to different return drivers.
Potentially offering protection during periods of rising inflation.
However, you should remember that nothing is guaranteed. Ultimately, the exact role they play depends on the fund's investment approach and portfolio construction.
FAQs
What are the risks associated with multi-asset mutual funds?
There are several risks associated with multi-asset funds, including:
Multi-asset fund returns may depend on how the fund manager allocates to different assets.
If different asset classes fall simultaneously (eg. gold and equities falling), multi-asset fund returns may suffer.
Precious metal prices can fluctuate due to geopolitical factors, currency changes, and investor sentiment.
At certain times, commodities and debt may underperform, impacting overall fund performance and multi-asset fund growth.
There is no guarantee that diversification will ensure downside protection in multi-asset mutual funds.
Do all multi-asset allocation funds invest in silver and gold?
No. As per SEBI’s mandate, multi-asset funds are supposed to invest in a minimum of 3 asset classes with at least a 10% exposure in each. However, they can choose:
Whether to invest in commodities or not
Which type of commodities to invest in
Are multi-asset funds suitable for SIPs?
Yes. Multi-asset mutual funds may be suitable for SIP investments. You can invest a fixed sum of money at regular intervals if that suits your investment preferences and budget. SIPs may also help average out the investment cost over time and manage volatility better through rupee cost averaging.
*Mutual Fund Investments are subject to market risks, please read all scheme related documents carefully.
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