Multi Asset Allocation Funds are back in fashion. Fund managers are busily recommending these schemes to their investors who want to proceed cautiously in this turbulent market. Many mutual fund advisors are also promoting these schemes saying they can offer better returns than debt and other available schemes. Reflecting the newfound enthusiasm for multi asset schemes, these schemes also attracted whopping inflows in December.
What are Multi Asset Allocation Funds
A combination of asset classes that are used as an investment is known as Multi Asset Allocation Mutual Funds. Multi asset allocation funds invest in three asset classes- equity, debt and one more asset class like gold, real estate etc. These are hybrid schemes that are mandated to have a minimum of 10% in each of the three asset classes. The distribution of assets and their composition tends to vary depending on an individual investor and stick to a particular pattern once decided.
Why should one invest in these?
The recent couple of years has witnessed magnified volatility with regard to the financial markets in India. Apart from the pandemic, Russia’s invasion of Ukraine, the steep rise in crude oil prices, the weakening of the Indian rupee and the second wave of COVID-19 could be seen as a few contributors to this market upheaval. Many financial experts are of the opinion that this intense market volatility, especially in the equity markets may continue for a considerable time period. With such times of uncertainty looming over the horizon, it may seem to increase their allocation to fixed income securities. However, the bull run of 2020 and 2021 provided a good opportunity to reduce fixed-income allocation and increase their exposyre to equities. It is there prudent for investors to spread their investments across multiple asset classes. This is where it might make sense to opt for a multi asset investment owing to the market volatility.
Choosing this type of scheme could help investors get the required exposure to multiple asset classes such as equity, debt, gold and so on. So, in case one of the asset classes faces a downward trend, there are other asset classes that might help an investor with capital protection and more or less stable returns over time.
Taxation
Multi asset mutual funds usually do not follow a strict allocation between equity and fixed income. These funds change their allocation dynamically on several factors, like the market condition, etc. Here we take the annual average of the monthly average allocations to equity to derive whether at least 65 per cent of the fund is invested in equities or not. They are then taxed accordingly.
Equity-oriented funds are taxed just like any other equity fund. If they are held for more than one year, it qualifies as a long-term capital gain. But if the gain is above Rs 1 lakh, it is taxed at the rate of 10 per cent. If the holding period is one year or less, it is termed a short-term capital gain and is taxed at the rate of 15 per cent.
In the non-equity-oriented fund, the holding period is less than three years, the gain is termed a short-term capital gain and is added to the income and it is taxed as per the investor’s income slab. But if the holding period is more than three years, it is counted as a long-term capital gain and is taxable at 20 per cent after indexation.
Ideal Investors
Fund managers and mutual fund advisors agree that this product is best suited for those investors who do not or can not manage their asset allocation mix. Investors starting with a small amount and seeking diversification in one product can start with these funds. Additionally, it ensures a steady flow of income for the investors even at a time when some asset classes are underperforming than usual.
However, an informed investor or someone with help of a financial planner or an investor with a decent-sized portfolio should look at diversifying according to her risk profile and investment strategy.
Periodic Rebalancing
Rebalancing a portfolio is quite important to ensure that investments are well-distributed in those asset classes that are generating more returns than others. Usually, multi asset allocation Mutual Funds come with the option of automatic portfolio rebalancing that helps investors in all sorts of ways. Since the market tends to be a volatile place, rebalancing portfolios and reallocating assets is the key to tide through the ups and downs.
Bottom Line
Even though the multi asset allocation fund has not been through a full market cycle, significant returns can be earned in a short period. Investors with experience in asset allocation and portfolio rebalancing may be able to earn the full benefit from such funds.
