Wealth managers are recommending multi-asset funds amid volatility in equities

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MAAFs allocate their corpus across equity, debt, commodities (gold and silver ETFs), and units of real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). Many also use derivatives to hedge against market swings. A few invest in international equities as well.

Dynamic asset allocation 

As mandated by markets regulator SEBI, MAAFs invest at least 10 percent in equity, debt, and gold. These schemes aim to strike a good balance between risk and return through diversification across asset classes. Using in-house models, they adjust their allocation towards the asset classes based on economic factors, valuations, etc.

Currently, most such funds hold up to 15 percent in gold, enabling unitholders to participate in the gold rally. The yellow metal helped these funds outperform relative to the hybrid category. Bullish equity markets drove the returns of the equity portion.

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Kunal Valia, Founder, StatLane, a SEBI-registered research analyst, says “Multi Asset Funds are often considered `Goldilocks investing' through their balanced and diversified approach of investing in different asset classes under one umbrella.”

Goldilocks investing means it is an ideal option for investors when one asset class is witnessing a downturn while others are faring better, thus offering better risk management.

Fund managers can adjust the asset mix in response to market conditions, potentially capitalising on opportunities or protecting against downturns, Valia adds.

“The correlation between these asset classes is lower and the winners keep rotating on a yearly basis. Hence, a combination of these asset classes,  i.e., Multi Asset Funds, can help deliver a better investment experience by adjusting the risk-return possibilities” said Rajesh Jayaraman, Head – Products, Nippon India Mutual Fund.

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Other hybrid funds, such as aggressive hybrids, invest 65-80 percent in equities and the rest in debt, while balanced advantage funds change their debt-equity mix in a dynamic manner from 0 to 100 percent according to  prevailing market conditions.

Tax efficient

MAAFs had  equity allocations ranging between 0 to 70 percent as of September 2024. Based on the allocation towards equity and debt, these schemes can be further classified in three brackets: 1) MAAFs with equity and arbitrage of 65 percent and above; 2)  Those with equity and arbitrage between 35 and 64 percent; and 3) MAAFs with an  arbitrage 35-40 percent (0 percent in equity).

Of 25 MAAF schemes, the portfolios of 16 have at least 65 percent in equities (including arbitrage positions), making them eligible for equity taxation, where long term capital gains tax (LTCG) of 12.5 percent is applicable for units sold after 12 months.

There are eight schemes that invest between 36 and 64 percent in equities (including arbitrage positions). Here, LTCG tax of 12.5 percent is applicable for units sold after 24 months. “The Nippon Multi Asset fund  is classified as non-equity and non-debt, hence capital gains are taxed at 12.5 percent 24 months post investment,” explained Jayaraman.

Only one scheme — the Edelweiss Multi Asset Allocation Fund (EMAAF) — allocates nothing to equity but holds 35-40 percent in arbitrage positions, and the rest in debt and commodities. Here too, capital gains are taxed at 12.5 percent 24 months post investment.

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Explaining the investment approach of  EMAAF, Niranjan Avasthi, Senior Vice President and Head of Product, Marketing, and Digital at Edelweiss MF, says, “it is designed to deliver more than equity arbitrage funds. The equity portion of 35-40 percent is fully hedged. The allocation to gold and silver would be 10-15 percent, which are also fully hedged. The rest are fixed income instruments. It is targeted to deliver about 8 percent returns.”

Should you invest?

"Beyond traditional stocks and bonds, multi-asset funds offer exposure to real assets, providing a diversified foundation that adjusts to shifting economic conditions", says Ravi Kumar TV, Director, Gaining Ground Investment Services.

They enable investors to benefit from diversification without the need for constant rebalancing Kumar adds.

Multi-asset funds provide an automated solution for investors who may otherwise find it challenging to decide their allocation to different asset classes, and can therefore be part of one's core portfolio, Jayraman adds.

Such funds are suitable for investors looking for  balanced and diversified exposure to various assets under one unified approach. Investors looking for a `set it and forget it' approach can consider MAAFs,  Valia says.

MAAFs were introduced  during the MF re-categorisation exercise in 2018. Of the 25 schemes, 12 were launched in the past year and lack a track record. Though they have performed well in the current market scenario wherein all  three asset classes have performed well, investors can  choose to wait and watch till they prove themselves in all market cycles.

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