Multi-Asset Class - Explained
What is a Multi-Asset Class?
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Table of ContentsWhat is a Multi-Asset Class?How Does a Multi-Asset Class Work?Risk Tolerance FundsTarget Date FundsAdvantages of Multi-Asset Class Funds
What is a Multi-Asset Class?
A multi-asset class or a multi-asset fund consists of an amalgam of various asset classes including cash, bonds and equity, in which a person invests. As the name suggests, a multi-class asset comprises at least one asset class, and therefore, results in building a portfolio of given assets. Different investors have different investment objectives, and assign a different weightage to a preferred form of asset class.
How Does a Multi-Asset Class Work?
The investments in multi-asset class makes the investors portfolio more diversified. Instead of sticking to only one asset class, the allocation of such investments in various classes of assets lessens the risks and makes them less volatile. However, it may hurt future returns or earnings too. For instance, while a multi-asset class investor may invest in a pool of securities such as bonds, stocks, real property, and cash, and a single-class investor may tend to hold a single type of securities, say stocks. It is possible that one specific class of asset may offer awesome returns during a specific time period. However, there is no possibility that a specific asset class will continue performing amazingly in a consistent manner.
Risk Tolerance Funds
There are mutual fund organizations who provides its investors with asset allocation funds considering how much risk the investors want to take. Such funds are created keeping in mind how conservative or aggressive the investors are. Funds designed for aggressive investors will consider investing in equities more. A good example for aggressive funds will be of The Fidelity Asset Manager 85% fund (FAMRX) that allocate 85% funds in equities and the remaining chunk in cash and fixed income assets. In case of conservative investors, the majority of funds will be allocated to fixed income considering the stability factor. For example, the Fidelity Asset Manager 20% Fund (FASIX) allocates half of its funds in fixed income, 30% in short-term money market investments, and the remaining 20% in stocks.
Target Date Funds
Target Date Funds refer to the multi-asset funds that allocate funds as per the time horizon of the investor. The target fund that represents the personal time horizon of the investor will be investors first preference. For instance, if Mr. C has no retirement plans for the next 30 years should prefer going for the target funds of 2045 and beyond. The longer the time horizon, the more aggressive the target fund will be. However, a target date fund of 2050 will have 85% to 90% allocated to equities, and the remaining chunk either in short-term money market or fixed income securities. Investors who prefer short-time horizon would prefer more recent maturing funds. A person who is retiring in the next 5 years will be resistant to risks, and will prefer investing more in a target date fund with fixed income. His objective will revolve around capital preservation, instead of appreciation. Investors who don't consider selecting a specific asset allocation go for target date funds. The risks associated with target date funds as well as the time horizon reduce with the investors age. With the passage of time, the fund naturally shifts from equities to money market and fixed income.
Advantages of Multi-Asset Class Funds
While balanced funds emphasize on achieving a set standard, multi-asset class funds consist of a specific investment outcome, say, to exceed inflation. With too many options of making investments in categories such as securities, real estate, industries, and different types of securities, investors get a flexible approach to accomplish their objectives. They offer a more diversified portfolio rather than balance funds which is a mere amalgam of equities and fixed income. An expert or a group of experts can help managing multi-asset class funds so as to enhance returns and minimize risks.