Multi-asset funds are made up of a combination of asset classes, including equities, bonds and cash, and are designed with different asset allocations to create a range of low-to-high risk offerings. For example, a low-risk or conservative fund might invest heavily in bonds, while a more aggressive fund might focus on shares or property.
They’re looked after by fund managers who review and rebalance the asset mix regularly and employ a range of strategies that aim to manage risk and optimise growth.
What’s the difference between asset classes?
Equities (also known as shares) are issued by a public limited company and traded on the stock market. When you invest in an equity, you buy a share in a company and become a shareholder. Equities aim to create profit through capital growth (when the share price increases), or you can build income via dividends.
Bonds (also known as fixed income) are issued by companies and governments as a way of raising money. It’s an I.O.U effectively, that aims to provide a regular income stream, over a fixed period. It also comes with a promise to return investor capital on a set date in the future.
Cash is usually held in a bank account where interest can be gained. To optimise growth, cash funds use market power to get better interest rates than bank accounts typically offer. They can also invest in very short-term bonds lasting one year or less.
Why choose multi-asset funds?
The key objectives of multi-asset funds are to increase diversification and reduce risk, creating balance and avoiding the volatility that can come from having all your eggs in one basket.
For example, a multi-asset investor might hold a mix of bonds, cash and property, while a single-class investor might only hold stocks. As a result, the benefit or loss of any market movement for the single-class investor can be amplified, while the multi-asset investor might experience more moderate gains and managed losses, by spreading risk and aiming to reduce the impact of any major downward turn.
Of course, no investment comes with a guarantee, making it even more important to choose funds and strategies that take account of your appetite for risk and aim to keep you within your comfort zone.
Avoid the trap of trying to time the market
A single-asset class might outperform during a particular period, but no asset class will outperform every period. The diversification of a multi-asset fund helps with timing too, removing the impossible task of trying to guess which way the market will go and when, helping investors ride out peaks and troughs with more shelter.
What is volatility?
Volatility is a measure of the extent that returns on a fund, a company share, or equity market index moves up and down relative to the average return over a period of time. To make the most of long term investing you should get comfortable with volatility.
Risk: what type of investor are you?
Before investing, you should decide:
- What you want to achieve with your investment.
- What levels of investment risk you're comfortable with.
- How long you're happy to invest your money for.
We have many different types of funds you can invest in, and so deciding what you want to achieve with your investment is important because it will help you make decisions about where to put your money.
Lower risk and reward investors
1 - 'Very low risk' investors: unwilling to accept any significant risks, accepting the prospect of low returns to achieve this.
2 - 'Low risk' investors: likely to accept limited risks and want to try to avoid large fluctuations in the investment value, accepting the prospect of more modest returns to achieve this.
3 - 'Low to medium risk' investors: likely to accept some risk in return for the potential of higher investment gains over the long-term. Try to avoid large fluctuations in the investment value, but accept there will be some fluctuation, particularly over the short-term.
Medium risk and reward investors
4 - 'Medium risk' investors: likely to accept significant risk in return for the potential of good investment gains over the long-term. Accept significant fluctuations in the investment value, particularly over the short-term, but want to limit the amount of money held in more risky investments.
High risk and reward investors
5 - 'Medium to high risk' investor: likely to understand that the investment can go down and up sharply with the potential for greater returns over the long-term.
6 - 'High risk' investor: likely to aim for high possible returns and accept higher levels of risk, recognising that the investment value may fluctuate very sharply, particularly over the short-term
7 - 'Very high risk' investor: likely to aim for the highest possible returns and accept the highest levels of risk, recognising that the investment value may fluctuate very widely, particularly over the short-term.
European securities and Markets Authority (ESMA)
The European Securities and Markets Authority (ESMA) is an independent European Union (EU) Authority that contributes to safeguarding the stability of the EU's financial system by enhancing the protection of investors and promoting stable and orderly financial markets.
ESMA achieves its objectives by: assessing risks to investors, markets and financial stability; completing a single rulebook for EU financial markets; promoting supervisory convergence; and directly supervising credit rating agencies, trade repositories and securitisation repositories.
ESMA, as well as fostering supervisory convergence amongst Member States’ national competent authorities (NCAs) with responsibility for securities and capital markets supervision, it aims to do so across financial sectors by working closely with the other European Supervisory Authorities competent in the field of banking (EBA), and insurance and occupational pensions (EIOPA).
Whilst ESMA is an independent Authority, it is accountable to the European Institutions including the European Parliament, where it appears before the Economic and Monetary Affairs Committee (ECON) at their request for formal hearings, the Council of the European Union and European Commission. The Authority reports to the institutions on its activities regularly at meetings and also through its Annual Report.
Understanding your risk/reward profile
If you're not sure what sort of investor you are, our handy risk profiler tool can help you understand more about investment risk and what levels of risk you feel comfortable with.
Based on your answers it will also suggest some funds that are suited to you.