How to Use Multi-Asset Funds to Achieve Optimal Portfolio Diversification

In today’s fast-changing financial landscape, investors are always looking for ways to minimise risk while maximising returns.

One of the best strategies to achieve this balance is Portfolio diversification—and multi-asset funds can help you do just that. This article will walk you through how multi-asset funds work, why they are an excellent option for diversification, and how to use them to achieve a balanced portfolio.

What Are Multi-Asset Funds?

Multi-asset funds, as the name suggests, are Mutual Funds that invest in a mix of asset classes like equities, debt, gold, Real Estate, and sometimes even international assets. The goal is to balance risk and reward by diversifying across various asset types, making your portfolio less dependent on the performance of a single Asset Class.

For example, if you hold a traditional equity mutual fund, your returns will depend solely on the stock Market. In contrast, a multi-asset fund spreads your investments across multiple asset classes, helping to reduce the impact of a market downturn in one area by providing stability from other asset classes.

Why Diversification Is Important?

Diversification is a key principle of Investing. It ensures that your investment portfolio isn’t overexposed to any single type of asset, which helps manage risk. Imagine you’ve invested all your money in one company’s stock—if the company fails, your investment could be wiped out.

Example: Suppose you have invested INR 10,00,000 entirely in stocks. If the stock market falls by 10%, you could lose INR 1,00,000. However, if you had diversified across equities, Bonds, and gold (using a multi-asset fund), the loss would likely be much less, as bonds or gold could balance out the dip in stock market performance.

How Multi-Asset Funds Achieve Diversification?

Multi-asset funds are professionally managed to maintain a specific Asset Allocation that matches the fund's investment objective. The allocation can vary depending on the market conditions and the fund's strategy.

For example, a typical multi-asset fund might invest:

• 50% in equities
• 30% in debt instruments
• 20% in gold or other assets

This approach allows the fund to benefit from the higher returns of equities while providing the stability of debt and gold during market downturns.

Types of Multi-Asset Funds

There are several types of multi-asset funds available, each designed for different risk appetites and investment goals:

• Conservative Multi-Asset Funds: These funds focus more on debt (like bonds) and less on equity. They are ideal for risk-averse investors seeking stable returns.

Example: A fund that invests 60% in debt instruments and 40% in equities. Balanced Multi-Asset Funds: These funds aim for a balance between risk and reward by equally investing in equities and debt.

Example: A fund with a 50-50 allocation between equities and bonds. Aggressive Multi-Asset Funds: For investors willing to take more risk, these funds invest a larger portion in equities for potentially higher returns.

Example: A fund that invests 70% in equities and 30% in bonds.

How to Choose the Right Multi-Asset Fund?

Choosing the right multi-asset fund depends on your investment goals, risk appetite, and time horizon. Here are a few things to consider:

• risk tolerance: If you are a conservative investor, look for funds with a higher allocation to debt. For aggressive investors, funds with more equity exposure may be suitable.

• Investment Horizon: Multi-asset funds with a high equity allocation are more suitable for long-term investments (5+ years), while funds with a higher debt allocation can be considered for short-term goals.

• Fund Performance: Evaluate the fund’s historical performance, keeping in mind that past performance doesn’t guarantee future results. However, it can give you an idea of how the fund has navigated market fluctuations.

• Expense Ratio: Check the expense ratio, which is the cost charged by the fund manager. Lower expense ratios mean more of your money stays invested and compounds over time.

Example of a Multi-Asset Portfolio

Let’s say you have INR 5,00,000 to invest and want to use a multi-asset fund for diversification. Here's a potential allocation:

• INR 2,50,000 in Equities: Equities have the potential for high returns but are also more volatile. This portion will help you capitalize on market upswings.
• INR 1,50,000 in Bonds: Bonds provide stability and regular Income. Even if the stock market takes a hit, bonds can soften the blow.
• INR 1,00,000 in Gold: Gold serves as a hedge against Inflation and market instability, adding an extra layer of protection to your portfolio.

By spreading your money across these assets, you reduce the risk of significant loss while also maintaining the potential for good returns.

Calculating Potential Returns

To understand how this portfolio might perform, let’s use a simple hypothetical example:

• Equities return 12% annually
• Bonds return 6% annually
• Gold returns 8% annually

After one year, your INR 5,00,000 portfolio might grow as follows:

• Equities: 2,50,000 * 12% = INR 30,000
• Bonds: 1,50,000 * 6% = INR 9,000
• Gold: 1,00,000 * 8% = INR 8,000

Total portfolio value = INR 5,00,000 + INR 30,000 + INR 9,000 + INR 8,000 = INR 5,47,000.

While this is a simplified example, it demonstrates how multi-asset funds diversify your returns and reduce the risk of loss from any one asset class.

Tax Benefits of Multi-Asset Funds

One of the attractive features of multi-asset funds in India is the potential for long-term Capital gains (LTCG) tax benefits. If you hold your investment for more than three years, you may be eligible for a lower Tax Rate on your gains. This makes them more tax-efficient compared to constantly moving between individual asset classes.

For example, if you sell your multi-asset fund units after three years, the Capital Gains are taxed at 20% with indexation benefits, which means your taxable gains are adjusted for inflation, reducing your overall Tax Liability.

Multi-Asset Funds vs. Creating Your Own Diversified Portfolio

You might wonder, why not just buy individual stocks, bonds, and gold on your own? The answer lies in convenience and professional management. Multi-asset funds are managed by experts who constantly monitor and rebalance the portfolio to optimize returns based on market conditions. For most investors, this level of management would be time-consuming and complex to replicate on their own.

Additionally, the costs associated with managing individual assets—brokerage fees, Taxes, and the effort required—can add up. Multi-asset funds provide a cost-efficient way to achieve diversification without the hassle of managing each asset class separately.

Top 8 Best Performing Multi-Asset Funds 2025

Why Multi-Asset Funds Make Sense for Diversification

In summary, multi-asset funds offer a simple yet effective way to achieve portfolio diversification. They help spread risk across different asset classes, reducing the impact of market Volatility. Whether you're a conservative or aggressive investor, there is a multi-asset fund designed to meet your needs.

By choosing the right multi-asset fund, you can enjoy balanced returns, tax benefits, and professional management—all of which can lead to optimal diversification and long-term wealth growth.

If you’re looking to invest smartly and balance your portfolio, multi-asset funds are a great option to consider.