What are multi-asset allocation funds?

As 2023 moved into summer, Shiksha, who had been investing religiously over the last two years, realised that the market volatility which had started in 2022 was showing no signs of easing up. Triggered by aspects such as rising inflation, increasing geopolitical risk, and an uptrend in interest rates the equity market, as well as equity-linked mutual funds she invested in, were indicating negative returns on a monthly basis, prompting her to consider other investment options in the mutual fund realm. This is when she ventured upon multi-asset allocation funds, an option which was slowly gaining popularity amid the uncertain market. While her portfolio already consisted of a hybrid fund, debt fund, equity fund, and passive debt funds she needed an addition which would help her portfolio manage volatility optimally and this is where multi-asset allocation funds came into the picture.

Understanding multi-asset allocation funds

A multi asset allocation fund is a type of mutual fund that invests in a mix of equity, debt, and gold or other commodities. The multi asset allocation fund meaning lies in its design—to offer investors a balanced approach to wealth creation, by spreading investments across diverse asset classes for risk-adjusted returns.

As the name suggests, these schemes involve a combination of asset classes under a single umbrella, with the distribution of assets and their composition varying in line with individual investor requirements. More specifically, these funds invest in at least three asset classes with a minimum allocation of at least 10% in each of the three asset classes. With a focus on optimal asset allocation, multi-asset allocation funds are designed with the aim of providing a steady income and capital appreciation to investors like Shiksha, by facilitating a well-balanced portfolio of investments. Through such a scheme, Shiksha, and investors like herself, would be able to invest in an array of assets, from equity and debt instruments to equity-oriented schemes as well as gold and gold-oriented assets. She had the ability to invest up to 80% of her corpus in either of the asset class, helping her tailor it to match the market scenario. These funds are further divided into risk tolerance funds, which are focused on your underlying risk appetite and target-date funds, which are aligned with the underlying time horizon.

Purpose of multi-asset allocation funds

The key purpose of a multi asset allocation fund is to provide diversification, reduce volatility, and help investors achieve steady long-term growth subject to market ups and down. By investing in multiple asset classes, these funds aim to balance risks and rewards, making them a stable choice for Indian investors seeking consistent performance across market cycles.

Multi-asset allocation funds have a number of purposes and can offer you various benefits, as indicated below.

• Enhanced diversification: Such schemes can help you enjoy enhanced portfolio diversification since they act as a single window for asset allocation. The scheme’s ability to diversify in line with market scenarios and investor profiles empowers you to park your funds in highly a personalised and diversified instrument, without needing to invest in multiple schemes.
• Compelling risk-return potential: Since multi-asset allocation funds invest in diverse asset classes, in line with your requirements, they can potentially unlock a compelling risk-return ratio for you. The underlying diversification enables you to enjoy better hedging against risks, while also allowing you to participate in the growth of various asset classes.

Advantages to consider

• Risk diversification through asset mix
• Simplified investment under one umbrella
• Tax efficiency depending on asset composition
• Reduced volatility compared to single asset exposure
• Automatic rebalancing ensures portfolio discipline

These benefits make the multi asset allocation fund a compelling choice for both new and seasoned investors.

Multi-asset allocation is a strategy that enables you to invest in a variety of asset classes with different levels of risk and reward, thus helping to reduce risk and achieve consistent returns over different market cycles. These funds are capable of offering automatic portfolio rebalancing to help you navigate market volatility and adjust your investments accordingly, making it a suitable option for volatile markets. For those who cannot afford to create a custom investment portfolio with a professional, investing in multi-asset allocation funds is a convenient option as these schemes offer a well-balanced investment option consisting of a variety of asset classes.

Taxation Of Multi-Asset Allocation Funds

Multi asset allocation fund taxation depends on the dominant asset class. If equity comprises 65% or more, it is taxed like an equity fund. Otherwise, it is treated as a debt fund. Here's a quick reference:

Understanding multi asset allocation fund taxation is crucial to managing post-tax returns effectively.

How Multi Asset Funds Work?

1. Investment is made across three or more asset classes—equity, debt, and commodities.
2. Fund managers dynamically adjust allocations based on market outlook.
3. Multi asset fund portfolios are rebalanced periodically to maintain desired ratios.
4. Investors benefit from professional management and diversification.
5. Income and capital gains are distributed or reinvested.

This mechanism enables multi asset allocation funds to provide stable, risk-moderated returns across varying market conditions.

Key Factors To Consider Before Investing In Multi-Asset Allocation Funds

• Risk profile: Ensure the multi asset fund aligns with your financial goals and appetite.
• Past performance Compare historical multi asset allocation fund returns across different timeframes.
• Expense ratio: Lower costs can boost net returns.
• Fund strategy: Check how the fund allocates and rebalances assets.

Quick Tip: Choose a fund with a consistent track record and transparent rebalancing policy.

How To Invest In Multi Asset Allocation Funds?

1. Select a trusted fund house offering a multi asset allocation fund.
2. Complete your KYC online or via an investment platform.
3. Choose to invest via SIPs or lump sum, based on your cash flow.
4. Monitor the multi asset mutual funds regularly for performance and alignment with your goals.

How Long Should I Stay Invested In Multi Asset Allocation Mutual Funds?

To optimise returns, consider staying invested in a multi asset allocation fund for at least 3–5 years. This timeframe allows the fund to adjust to market movements and take full advantage of asset diversification. Long-term investing also supports tax efficiency, especially under multi asset allocation fund taxation norms.

What Kind Of Returns Can I Earn From Multi Asset Allocation Funds?

Multi asset allocation fund returns vary depending on the fund’s asset mix and market performance. Historically, these funds have delivered moderate returns by balancing equity growth and debt stability. It has been observed that while not aggressive, multi asset allocation fund returns offer steadiness over the long term.

Where Do Multi Asset Allocation Mutual Funds Invest?

Multi asset mutual funds allocate capital across equities, debt instruments, and gold or other commodities. The asset distribution is dynamic and may vary based on market conditions. This diversified approach helps the multi asset allocation fund reduce volatility and maximise opportunities from multiple sectors simultaneously.

Risks Of Investing In A Multi-Asset Allocation Fund

Though diversified, a multi asset allocation fund is not risk-free. It carries exposure to market fluctuations in all asset classes. Interest rate changes, equity downturns, or commodity price volatility can impact performance. Moreover, changes in multi asset allocation fund taxation can also affect post-tax returns.

What Is The Difference Between Multi-Asset Allocation Funds And A Balanced Funds?

A multi asset allocation fund must invest in at least three distinct asset classes, including equity, debt, and commodities. In contrast, balanced funds typically invest only in equity and debt. The broader diversification in a multi asset allocation fund can potentially offer better risk management than traditional balanced funds.

What Is The Difference Between A Multi-Cap And Multi-Asset Fund?

A multi-cap fund invests only in equities across various market capitalisations—large, mid, and small. In contrast, a multi asset allocation fund spreads its investments across different asset classes like equity, debt, and gold. Therefore, multi asset allocation fund includes both asset-type and risk diversification, unlike multi-cap funds where diversification of risk is restrict to equity only.

Should you invest in multi-asset allocation funds?

Yes, if you seek moderate risk with long-term stability and consistent returns subject to market votality. A multi asset allocation fund is ideal for investors who want exposure to equity, debt, and commodities without the hassle of managing each separately. It suits first-time investors, retirees, or those looking to weather market fluctuations with a balanced portfolio.

As an investor, your investment decisions are based on your personal profile. You should consider investing in such schemes if you are looking to diversify your portfolio by creating exposure to multiple asset classes through a single investment. Further, the diversification offered by multi-asset funds can also help you potentially lower the overall risk of your portfolio. This is especially true for volatile times such as the one we are currently experiencing, since the underperformance of certain assets will be evened out by the good showing indicated by the other assets in the portfolio.

With these aspects in mind, Shiksha decided to augment her portfolio with a multi-asset allocation fund. If you feel that your profile matches the features described here, you should also consider boosted diversification through this option.

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