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What Are Multi-Asset Allocation Funds?

By Bindisha Sarang
Last updated on: February 21, 2024 11:51 IST
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Since MAAFs invest across multiple asset classes, they offer diversification.

Illustration: Dominic Xavier/

After the run-up in equities over the past year, investors are worried about losing their gains due to a reversal in the market's direction.

They are keen to diversify into non-equity assets. Multi-Asset Allocation Funds (MAAFs) have, hence, become popular in recent months.

Where do they invest?

Most funds in the category invest in equity and debt and in one or more asset classes, like gold, real estate, international equities, etc.

Says Chintan Haria, principal, investment strategy, ICICI Prudential Mutual Fund: "A multi-asset scheme, by definition, is mandated to invest at least 10 per cent each across three or more asset classes."


Varied strategies

Various AMCs offer diverse strategies within this space. ICICI Prudential Multi-Asset Fund, for instance, invests in equity, debt, commodities, REITs, InvITs, etc.

On January 31, its equity allocation stood at 57.5 per cent.

WhitOak Capital MAAF invests in domestic equity (14 to 45 per cent), gold (10 to 40 per cent), fixed income (10 to 55 per cent), foreign equity (0 to 10 per cent), etc.

Quantum Multi-Asset is a fund-of-funds (FoF) with dynamic allocation across equity, debt, and gold.

Thus, while some schemes are equity-heavy, others are more debt-oriented. Some have a dynamic bent while others operate within rigid allocation ranges.


Reap diversification benefit

Since MAAFs invest across multiple asset classes, they offer diversification.

Says Manuj Jain, co-head of product strategy at WhiteOak Capital AMC: "Each asset behaves differently during various economic phases and has different correlations with one another."

For example, gold tends to have a negative to very low correlation with all the other three asset classes. Debt has a negative correlation with Indian equities and a low correlation with US equities.

As Haria points out, a specialist fund manager decides how much to allocate to each asset class, tracks the investments, and rebalances the portfolio periodically.

They also offer a good entry point to new investors.

Says Chirag Mehta, chief investment officer, Quantum Mutual Fund: "Many first-time investors prefer a measured approach to investing.

"The underlying principle is to transition from traditional fixed deposits, which often fail to beat inflation, to market-linked instruments offering superior returns over the long term without taking excessive risk."


Tax treatment

Tax treatment varies based on each fund's equity allocation.

If the domestic equity exposure is up to 35 per cent, taxation is at the slab rate for both short-term capital gain (STCG) and long-term capital gain (LTCG).

If domestic equity allocation is between 35 and 65 per cent, then STCG is taxed at slab rate while LTCG (for a holding period of more than three years) is taxed at 20 per cent with indexation benefit.

A fund with above 65 per cent domestic equity exposure is taxed at 15 per cent on STCG and 10 per cent on LTCG (holding period more than one year) above Rs 1 lakh.


Choosing the right strategy

If you are seeking equity taxation and want slightly lower risk than in a pure equity fund, go for an equity-heavy fund with over 65 per cent equity allocation.

The returns of these funds will be higher compared to what their debt-oriented peers can offer.

Such funds have a few downsides, however. Says Jain: "Even though the minimum requirement is 65 per cent, fund managers typically allocate up to 67 to 70 per cent equities to avoid breaching the threshold.

"This leaves minimal room for allocation to debt and gold, limiting diversification and increasing the fund's equity risk profile significantly."

Low allocation to debt and gold means the volatility inherent in equities does not get adequately hedged.

Investors who prioritise risk-adjusted returns, lower volatility, and reasonable long-term performance should go for funds having a higher allocation to non-equity assets.


Understand fund's mandate

Investors should ensure they get the fund they want.

Says Vidya Bala, co-founder, Primeinvestor: "Investors particular about equity taxation could end up with debt taxation if the fund they have entered does not turn out to be equity-oriented."

Differences in equity allocation translate into varied levels of risk.

Adding an MAAF to the portfolio may not offer adequate diversification in an evolved investor's portfolio.

Says Bala: "If you allocate 10 per cent of your portfolio to an MAAF which holds, say, 25 per cent in debt, your debt allocation at the portfolio level will be 2.5 per cent, which is hardly adequate."

While MAAFs are a good starting point for new entrants, evolved investors should allocate to non-equity funds directly for adequate diversification.

Disclaimer: This article is meant for information purposes only. This article and information do not constitute a distribution, an endorsement, an investment advice, an offer to buy or sell or the solicitation of an offer to buy or sell any securities/schemes or any other financial products/investment products mentioned in this article to influence the opinion or behaviour of the investors/recipients.

Any use of the information/any investment and investment related decisions of the investors/recipients are at their sole discretion and risk. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Opinions expressed herein are subject to change without notice.

Feature Presentation: Ashish Narsale/

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Bindisha Sarang
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