Multi-Asset Allocation Fund: Everything You Need to Know

Mutual funds are designed to cater to investors with different goals, risk profiles, and investment styles. One category that has gained popularity for its built-in diversification is the Multi-Asset Allocation Fund. In this article, we’ll explain how these funds work, their advantages and limitations, and what to keep in mind before investing.

What is a Multi-Asset Allocation Fund?

A Multi-Asset Allocation Fund is a type of mutual fund that invests across multiple asset classes such as equity, debt, and gold. The aim is to reduce dependency on a single asset class and generate more stable, risk-adjusted returns.

As per the guidelines laid out by the Securities and Exchange Board of India (SEBI), these funds are required to invest in at least three asset categories, maintaining a minimum of 10 percent allocation in each.

The fund manager adjusts the allocation based on market trends. For example, during a strong equity market phase, the fund may allocate more towards stocks. Conversely, in volatile times, the allocation might lean more towards gold or debt instruments.

Key Benefits of Multi-Asset Allocation Funds

• Balanced risk exposure: By diversifying across asset classes, these funds reduce the impact of volatility from any one segment of the market.
• Dynamic portfolio management: The fund manager actively manages the allocation depending on macroeconomic conditions, aiming for optimal performance.
• Convenience: Investors can access a mix of asset classes through a single investment, without the need to manage multiple individual funds.

Important Limitations to Consider

While these funds offer many benefits, investors should be aware of certain drawbacks:

• Flexibility: Even if one asset class is underperforming, the fund must maintain a 10 percent minimum in it, which may impact overall returns.
• Limited diversification: These funds do not provide style-based diversification like value vs. growth or large-cap vs. small-cap, which can limit strategic control.
• Overlapping the investments: If you already hold equity or debt funds separately, a multi-asset fund might replicate exposure instead of truly diversifying.

Role of the Fund Manager

In a multi-asset fund, the performance heavily depends on the fund manager's decisions. Since there is no fixed investment style or rigid allocation structure, the manager’s expertise in navigating market trends plays a significant role.

Therefore, before selecting a fund, you should,

• Review the fund manager’s track record
• Examine past 5-10 years of returns of the funds handled by the fund manager
• Assess the consistency and rationale behind asset allocation decisions

Taxation of Multi-Asset Allocation Funds

Tax treatment varies depending on how the fund allocates its assets. If the fund does not invest at least 65 percent in equity, it does not qualify for equity taxation.

• Equity-oriented funds (more than 65% in equity): Taxed as equity funds
• Non-equity-oriented funds are treated as debt funds and taxed as STCG

Investors are advised to read the scheme-related documents carefully to understand the tax implications before investing.

Should You Consider Investing?

Multi-asset allocation funds are suitable for investors looking for a simple, balanced approach without having to manage different fund categories individually. They can be particularly useful for new or conservative investors who prefer lower volatility.

However, experienced investors who prefer customizing their asset allocation or seeking style-based diversification may find these funds limiting.

Conclusion

A well-chosen multi-asset allocation fund can play a valuable role in building a resilient portfolio. However, due diligence is essential. Evaluate the fund’s strategy, asset mix, tax implications, and most importantly, the credibility of the fund manager.

If you're unsure about selecting the right scheme or handling tax matters, it’s best to consult a financial expert who can help align the fund with your broader investment goals.