Why Invest In Multi-asset Allocation Fund

Asset allocation is known as the cornerstone for successful wealth creation. However, several investors find it challenging to get their asset allocation right. This is where asset allocation schemes come in handy. Offered by mutual fund houses, there is a category known as multi-asset allocation scheme, which provides access to various asset classes within a single fund.

As per the SEBI definition, multi-asset allocation funds are required to invest at least 10% each in a minimum of three asset classes. As a result, most of the funds offer investors exposure to a mix of asset classes such as equity, debt, and commodities. Some of the fund houses also offer overseas securities, REITs, InvITs as a part of the fund.

Thanks to the exposure to varied asset classes within a single offering, this category has been gaining traction among Indian investors since the start of this financial year. Overall, the category has attracted inflows to the tune of Rs 17,405 crore so far this year. Consequently, the AUM of the category also swelled 76 per cent to Rs 45,092 crore at the end of October 2023 from Rs 25,537 crore at the end of January this year.

Why Consider this Fund?

1) Diversification: The fund provides investors with a diversified portfolio. Fund managers have the flexibility to change allocation to various asset classes as per the changing market conditions. For example: If the equity market is volatile or in a bearish mode, then fund managers can allocate more to debt, gold, or other instruments to provide downside protection to the portfolio. On the other hand, if the market is amidst a bull run, the fund manager can consider allocating to equities. As a result, it becomes a win-win situation for investors in all market circumstances.

2) Aids in Minimising Portfolio Volatility: This investment strategy aims to provide investors with exposure to several market opportunities while mitigating the impact of volatility on any single asset. By investing in multi-asset funds, investors can spread risks and boost returns.

3) Portfolio Rebalancing: Given that the fund managers have a sound understanding of market movements, they rebalance the portfolio as and when required, a task which is otherwise very challenging for a lay investor.

4) Taxation: These offerings are taxed akin to equity funds. If the investment is held for less than a year, any gains will be taxed at the short-term capital gains rate (15 per cent). If held for more than a year, the gains will be taxed at the long-term capital gains rate (10 per cent) on gains in excess of Rs 1 lakh per annum.

According to data from Value Research, there are 31 funds available in the category offered by different asset management companies (AMCs). In the last one-year period, the category returns were in the range of 6 percent to 24 percent. Given the nature of the fund, investors looking for relative stability in returns can consider investing in the fund with an investment horizon of at least three to five years.

How to Select a Fund in this Category?

Since there are over two dozen funds to choose from, investors should watch out for the long term track record of the fund. Most often investors make the mistake of looking at the past one-year return to decide on the fund selection, which is an erroneous approach. Investors should especially check how the fund has reacted to bull as well as bear phases of the market. This will help provide an idea of the agility of the fund manager in terms of changing the allocation to various asset classes. 

Another aspect to know is if the fund house is known for its hybrid fund management capabilities. Since various asset class experts come together to decide on the allocation, if a fund house is reputed for its hybrid fund management, then one can be rest assured. Finally, try and understand the process followed by the fund of your choice and check if it inspires confidence.

One of the largest and the oldest in the category is the ICICI Prudential Multi-Asset Fund, with a 21-year track record. In terms of SIP performance, the fund has delivered a CAGR of 17.4 per cent i.e. a total investment of Rs 25.3 lakh would have grown to Rs 2.1 crore.