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Multi Asset Allocation Funds: Features & Limitations

Markets change all the time. During the early part of 2020, everyone’s eyes were on gold prices and international equities. And, now the equity markets are back to the pre-pandemic levels. Thus, we can see that different asset classes outperform other asset classes in different years.

In the current scenario, many investors are looking for investment options that can help them take advantage of the different assets.

In this article, we will see the different features of multi asset funds.

What is Multi Asset Allocation Funds?

Multi Asset Funds is a type of hybrid mutual fund that invest in multiple asset classes such as equities (domestic and international), debt, commodities, REITs and InvITs.

According to SEBI’s definition of Multi Asset Funds, these funds should invest in at least three asset classes with a minimum allocation of atleast 10%  each in all three asset classes.

Features of Multi Asset Funds:

Investment decision of the fund house:We have seen that multi asset funds need to invest at least 10% of their portfolio in each three assets. So, fund houses have greater freedom to decide the right mix of the assets for their investors.

Portfolio rebalancing: As the aim of the fund is to gain from the price uptick in the different assets, fund managers can rebalance the portfolio of the funds frequently. Fund managers will review the asset allocation of the fund twice a month. They can rebalance the portfolio if the allocation has deviated from their optimum levels and navigate the ups and downs in the different markets.

The allocation of the assets in the portfolio may increase or decrease because of the performance of the different asset classes.

Diversification minimises risk:

As multi asset allocation funds invest in three or more assets classes, it helps to diversify investor’s portfolio. Diversification lowers the risks associated with investing in a single asset.

Take exposure in other asset classes:

While there are many asset classes, investors are heavily invested in one asset class or other. E.g., an equity-oriented investor may have limited exposure in gold or international equities. Multi asset funds allow investors to take exposure in other assets.

Tax treatment:

The tax treatment of the fund will depend upon its asset allocation. Most multi asset schemes have the mandate to invest a maximum of 50% in domestic equities. According to the taxation policy, funds that invest at least 65% of its portfolio allocation in domestic equities are taxed like equity funds. Hence, in the above-mentioned scenario, investors will be taxed like non-equity funds.

If you redeem mutual fund units within 3 years, capital gains are added to your income and taxed as per your income tax slab.

However, if you sell the mutual fund units after 3 years of investment, capital gains are taxed at the 20% after inflation indexation benefits.

Hence, the indexation benefits make multi asset funds tax-efficient in the long run.

Things you should keep in mind before investing in multi asset funds

Investment Range:The asset allocation of multi asset funds may differ from one another by a huge margin. So, you need to check the asset allocation of the fund before investing. E.g. if we talk about the two new multi asset funds, Nippon India Multi Asset Fund and MotilalOswal Multi Asset Fund(MOFMAF), Nippon India’s fund will invest a minimum of 50% in equities and the minimum equity investment for MOFMAF is 10%.

Hence, MOFMAF will suite conservative investors than others.

No personalised asset allocation:Although multi asset funds invest in different assets, it does not personalise asset allocation. Eg. a fund will invest in assets according to their Scheme Information Document (SID) and it does not take into consideration the individual’s risk taking capacity. Hence, you can invest multi asset funds as part of your asset allocation but it shouldn’t substitute proper asset allocation. 

Conclusion:

Multi asset allocation funds invest in different asset classes. It is a good investment option for investors who can take medium risk and who have negligible to no exposure in other assets.