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Sunday, January 29, 2012

What is Multi Asset Funds (MAF)?



Let us first understand different types of Assets before jumping to this topic.
An asset is something which has some economic value and it can be liquefied to cash. Appreciation of this economic value is the capital gain at the hands of the investor and the sole purpose for the investment.
Generally Assets are of two types -debt and equity.
NCDs, Fixed Deposits, bonds, commercial papers, debentures, treasury bills etc fall under the debt category. On the other hand shares of a company, share warrants, equity-based mutual fund units all these belong to the equity category.
Some assets are hybrid in nature. The best example is the Convertible debentures which are basically debt instruments but can be converted to equity.
Apart from debt and equity a few more classes are now considered as the significant debt classes-
Commodities and Real Estate.
Investing across different classes is called diversification. Diversification is the best hedge against the macro economic situation.
In India, Sensex, the benchmark index of Indian capital market gave negative return of 25% in the CY 2011 while Gold has given 28 % return (in rupee terms).
So the basic tenet of diversification is safety of the capital. If one asset class fails to deliver the returns other asset class compensates for the same.
To address this concern Multi Asset Funds have been designed. These funds invest their corpus across various asset classes thus creating the best hedge against the unpredictable macroeconomic concerns.
Multi Asset Funds should not be confused with diversified funds where investment is done across various sectors of the same asset class while In Multi Asset Funds investment is spread across various asset classes.
MAF’s are more diversified that the hybrid funds which predominantly invests in only 2 asset classes –debt and equity.
But one should not forget the basic tenet of the investment -diversification is not the sole key for better returns and any investment if not done judiciously might results in financial disaster.
Performance of the fund depends on the theme of the fund and the stock-selection done by the fund manager. Diversification is just an approach towards the risk minimization. .
MAFs are best options for risk-averse investors especially those who had been hesitating so for to invest in equity-mutual funds.

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