Multi-Asset Allocation Funds- Benefits, Risks and How It Works

Investing in single assets not only puts your investment at risk of exposure to a specific sector, but also restricts the potential for growth due to a concentrated investment area. However, if you diversify your investment into multiple assets, the risk is divided across different assets, reducing the impact of market fluctuations and other risks, with the potential to give a balanced return in the long term.
Fund houses offer various investment funds with different types of asset allocation as per the risk and reward expectations of the different types of investors. Multi-asset allocation funds are one of the investment schemes we are going to talk about here, with opinions on why and how you should invest in such funds.

What are Multi Asset Allocation Funds?

A type of hybrid investment fund or mutual fund in which at least three different asset classes, mainly equity, debt, and commodities like gold or silver, are included. As per the SEBI regulations, a multi-asset allocation fund must have a minimum of 10% allocation in each of the three asset classes. 

The multi-asset allocation funds offer investors a single investment having the combination of debt, equities, bonds etc. A combination of different asset classes within a single fund can help investors diversify their portfolio and manage exposure to different market conditions.

How Multi Asset Allocation Fund Works?

A multi-asset allocation fund is created by investing the fund across at least three asset classes, with a minimum allocation of 10% in each asset class Investing across different asset classes may help reduce the impact of volatility because different assets can perform differently under changing market conditions, like market fluctuations or during high inflation.

Apart from this, the fund manager also keeps rebalancing the allocation of assets as per the changing market conditions while considering the widespread distribution of funds across different categories. The distribution of funds into different assets and portfolio rebalancing strategy can reduce the impact of underperformance in any one asset class, although it does not guarantee a stable and risk-adjusted return in the long run.

Here’s step by step process given below:

Step 1: Investment Across Multiple Asset Classes
The fund invests across at least three asset classes.

Step 2: Portfolio Diversification
Different asset classes may perform differently under various market conditions.

Step 3: Asset Allocation Strategy
The fund manager manages the portfolio according to the scheme’s investment objective and asset allocation strategy.

Step 4: Portfolio Rebalancing
The portfolio may be periodically rebalanced to maintain the desired allocation or respond to changes in market conditions.

Multi-Asset Allocation Funds vs Hybrid Funds

Although multi-asset allocation funds and hybrid funds both offer portfolio diversification, their investment approach can differ.
The following table highlights the key differences between multi-asset allocation funds and hybrid funds.

Why Invest in Multi Asset Allocation Fund?

Investing in multi-asset allocation funds gives you the opportunity to invest your funds across various asset classes such as equities, debt, and precious metals like gold or silver. Furthermore, investing in multi-asset allocation funds comes with various types of advantages that you need to know.

Benefits of Multi-Asset Funds

• Diversification of Risk: One of the key advantages of investing in multi-asset classes is that your investment is well-diversified into different classes of assets having diverse risk and reward factors. Different assets are exposed to different types of market conditions; hence, the risk is diversified through different market cycles.
• Reduced Volatility: When you invest in a single asset, the risk of volatility in returns is very high due to uncertain market conditions. Multiple classes of assets may minimise the impact of volatility due to exposure of funds to various assets that perform differently in different market conditions.
• Potential for More Balanced Risk Exposure: The exposure of funds into different classes of assets not only diversifies the risk and reduces the volatility but also may help investors manage portfolio volatility and diversify investment risk over the long term. Combining asset classes with different risk and return characteristics may help build a diversified investment portfolio. 
• Portfolio Rebalancing: In this type of fund, maintaining the ratio of invested funds from time to time into various classes of assets is important to maintain the intended asset allocation. To ensure the same, the fund manager keeps rebalancing the portfolio by reallocating assets as per the changing market conditions.
• Potentially Lower Portfolio Concentration Risk: Investing across multiple asset classes can reduce dependence on the performance of a single market or asset category.

Risk of Investing in Multi-Asset Allocation Funds

Though multi-asset allocation funds are especially created to diversify your investment, still there are various types of risks involved in investing in such funds. Let’s talk about the risks associated with it.

• Market Risks: Various assets like equities or stocks and commodities like gold or silver in multi-asset allocation funds are subject to market risks. The returns from such assets can be affected by unfavourable economic conditions or changes in monetary policy and geopolitical events.
• Interest Rate Risk: Similarly, various assets such as debt instruments included in such funds are subject to changes in interest rates. This kind of monetary policy also affects the returns from such assets included into the fund, which can affect the overall returns from such funds. 
• Liquidity Risk: The liquidity risk of a multi-asset allocation fund depends on the underlying securities and instruments held by the scheme. Some investments may be more difficult to buy or sell quickly during certain market conditions, which could affect portfolio management.
• Fund Management Risk: The performance of a multi-asset allocation fund may be influenced by the investment decisions and asset allocation strategy followed by the fund manager. Investment decisions that do not perform as expected may affect the fund’s overall performance.
• Asset Allocation Risk: The decisions of allocating the funds while investing into various classes of assets are subject to the risk of poor allocation decisions. Fund managers need to allocate or reallocate the assets as per the scope of best returns from various assets as per the changing market conditions.

Who May Consider Multi-Asset Allocation Funds?

• Investors Seeking Diversification: Those who want exposure to multiple asset classes through a single investment.
• Moderate-Risk Investors: Investors whose risk profile aligns with the scheme’s asset allocation strategy.
• Long-Term Investors: Those investing for medium- to long-term financial goals.
• Investors Seeking Simplified Portfolio Management: Those who prefer professional management and periodic portfolio rebalancing.

Investors should review the Scheme Information Document, risk factors, asset allocation strategy, investment horizon and their own risk profile before investing.

Factors to consider before Investing in Multi-Asset Allocation Funds

Multi-asset allocation funds can offer diversification by investing across different asset classes. However, investors should evaluate several factors, including their financial goals, investment horizon, risk profile and the fund’s investment strategy, before investing.

• Investment Goals: Define your investment goals before investing in such funds. For what purpose are you going to use this fund: for children’s higher studies, daughter’s marriage or for your retirement goals?
• Time Horizon: Your time horizon should not be very short-term, as investing in such funds can give you considerable returns only with a medium to long-term time horizon.
• Allocation of Assets: Under the applicable category requirements, the scheme must maintain the prescribed minimum allocation across at least three asset classes. Investors should review the scheme’s actual asset allocation strategy to understand how the portfolio is managed.
• Rebalancing of Assets: Rebalancing of Assets: Investors should understand the scheme’s portfolio rebalancing strategy and how the fund manager manages asset allocation in response to market conditions.
• Tax Implications: The income or profit earned from multi-asset allocation is subject to tax implications as per the income tax rules. Hence, allocation of assets and time horizon of investment should be aligned to minimise the tax liability on the capital gain earned from investing into such funds.
• Expense Ratio: Investors should consider the scheme’s expense ratio, as fund management expenses can affect overall investment returns.
• Fund Strategy: Different multi-asset funds may follow different allocation and investment strategies. Investors should understand how the fund invests across asset classes.
• Riskometer: Investors should check the scheme’s SEBI Riskometer to understand the level of risk associated with the fund.
• Exit Load: Check whether an exit load applies if units are redeemed within a specified period.

Taxation of Multi-Asset Allocation Funds in India

The taxation of multi-asset allocation funds depends on the asset composition of the scheme and the applicable tax provisions. A scheme that qualifies as an equity-oriented fund may be taxed differently from a non-equity-oriented fund. Investors should check the latest applicable tax rules and the scheme’s asset composition before investing.

Conclusion

Multi-asset allocation funds offer investors exposure to multiple asset classes through a single mutual fund scheme. By combining assets that may respond differently to changing market conditions, these funds can help diversify portfolio risk.

However, they are not risk-free, and their performance can be affected by equity markets, interest rates, commodity prices and the fund’s asset allocation strategy. Before investing, investors should evaluate their financial goals, investment horizon and risk profile.

Frequently Asked Questions (FAQs)

What are the Assets included in the Multi-asset allocation fund?

Three or more classes of assets with a minimum allocation of 10% in each are included in the multi-asset allocation fund. Mainly, equities, fixed-income debt instruments, and commodities like gold or silver are included in such funds. Some funds also include real estate and international equities.

How are Multi-asset allocation funds rebalanced?

The fund manager periodically rebalances the holdings or allocation of the asset classes (equity, debt, and gold or silver) to maintain the minimum investment ratio. And the fund managers can use rebalancing methods like band-based, trigger-based, time-based as well as methods based prevailing market valuations.

How are multi-asset allocation funds different from hybrid funds?

A traditional hybrid fund typically includes a combination of two popular asset classes: equity and debt. While on the other hand, a multi-asset allocation fund includes at least three asset classes, such as equity, debt, and commodities like gold or silver, in a ratio of at least 10% invested in each asset.

Which is better: a flexi-cap or a multi-asset allocation fund?

A flexi-cap fund invests in equities mainly focused on large, mid, and small-cap stocks, with dynamic allocation within the equity market. It generally carries higher equity-market risk. A multi-asset allocation fund invests in at least three asset classes – equity, debt, and gold or silver with a minimum allocation of 10% in each. The choice depends on the investor’s risk profile, goals and investment horizon.

Are multi-asset allocation funds safe to invest?

Multi-asset allocation funds are regulated mutual fund schemes, but they are not risk-free investments. Their returns can be affected by movements in equity markets, interest rates, commodity prices and other market factors. Investors should evaluate the scheme’s risk level before investing.

Is a Multi-asset fund good for Lump Sum Investment?

Whether a multi-asset allocation fund is suitable for a lump-sum investment depends on the investor’s financial goals, risk profile, investment horizon and the market conditions. Investors should evaluate the scheme’s asset allocation and risk level before making a lump-sum investment.

Which multi-asset allocation fund is best in India?

There is no single multi-asset allocation fund that is best for every investor. The suitable fund depends on factors such as its investment strategy, asset allocation, risk level, expense ratio, investment horizon and an investor’s financial goals. 

How are multi-asset funds taxed in India?

The taxation of multi-asset funds depends on the scheme’s asset composition and whether it qualifies as an equity-oriented fund under the applicable tax provisions. If the scheme meets the prescribed conditions for equity-oriented funds, its capital gains are generally taxed under the applicable equity-oriented fund tax rates. Otherwise, the gains may be taxed under the rules applicable to non-equity-oriented funds. 

Who should invest in multi-asset allocation funds?

A multi-asset allocation fund may be considered by investors seeking diversification across multiple asset classes through a single mutual fund scheme. Whether it is suitable for an investor depends on factors such as their financial goals, risk profile, investment horizon and the scheme’s investment strategy.

How to start investing in a multi-asset allocation fund?

To start investing in a multi-asset allocation fund, investors need to complete the applicable KYC requirements and choose a scheme based on their financial goals, risk profile and investment horizon. Investors can invest through an eligible mutual fund platform, broker or other authorised investment channel.