Navigating volatility: Why multi-asset funds offer stability and growth

Multi-asset funds: Investing in a diversified portfolio of asset classes with low to negative correlation helps reduce downside risk

In today's climate of global uncertainty, the broader macroeconomic environment remains fragile. The International Monetary Fund (IMF) has downgraded its Global GDP growth forecast for 2025 to 2.8 per cent, attributing the revision to rising trade frictions, policy unpredictability, and subdued consumer confidence.

 

Despite these global headwinds, India's economic fundamentals continue to show strength. The government's adherence to fiscal prudence and a growth-supportive monetary policy has helped maintain macroeconomic stability. The Indian economy is projected to grow at 6.5 per cent in the financial year 2026 (FY26), driven by resilient rural demand, improving urban consumption and sustained investment momentum. 

   

Inflation has eased to 2.8 per cent as of May 2025, the lowest level since February 2019, aided by easing food prices and a favourable monsoon outlook.  

 

In 2024, the equity market’s strong upward trend limited the relative advantage of diversification, but with volatility returning and sectoral performance diverging, diversified approaches are gaining renewed relevance. While equities may offer the potential of outperforming inflation over the long term, hybrid funds may provide optimal risk-adjusted returns with relatively lower downside risk, an attractive trade-off for investors prioritising capital preservation and portfolio stability.

 

Hybrid funds like Multi Asset Allocation Funds present a favourable investment case in the present scenario. These funds benefit from the distinct risk-return characteristics of different asset classes, making strategic allocation essential. Their flexibility to shift between equities, fixed income, and commodities enables them to manage risk effectively while capturing growth opportunities. With equity valuations on the higher side and bond yields stabilising, commodities, particularly gold, are vital in multi-asset portfolios, offering effective hedges against inflation, geopolitical risk, and market volatility. 

 

Their low correlation with traditional assets supports diversification, while gold's enduring safe-haven status, supported by central bank buying and a cautious geopolitical backdrop, makes it a strategic allocation in today's uncertain environment.  Multi-Asset Allocation Funds are, therefore, well-positioned to deliver optimal risk-adjusted returns in a complex macroeconomic setting.

 

Investing in a diversified portfolio of asset classes with low to negative correlation helps reduce downside risk. Negative correlation implies that when equity market declines due to economic or geopolitical concerns, other asset classes like debt and gold may appreciate as investors seek relative safety. Multi-Asset Allocation Funds are able to capture the upside of these negatively correlated assets during volatile times, thereby reducing downside risk for investors. 

 

Multi-Asset Allocation Funds can dynamically manage their allocations across asset classes. However, by maintaining gross equity allocations at a minimum of 65 per cent, the capital gains arising from redemptions in these funds could attract equity taxation for investors instead of being taxed at slab rates. These funds are able to take hedged equity allocations by use of derivatives to reduce portfolio volatility while qualifying for equity taxation. (As per existing tax laws. The taxation law is subject to change in future.)

 

Investors seeking tax-efficient avenues for their long-term investment goals can consider multi-asset allocation funds. These funds combine the benefits of long-term growth potential with near-term downside protection and tax efficiency, making them a suitable option for investors. 

(Disclamier: This article is by Rajasa K. Vice President & Portfolio Manager – Emerging Markets Equity-India, Franklin Templeton. Views expressed are his own.)