Multi-Asset Funds: A Comprehensive Solution For Diversified Investing

The Indian mutual fund industry has experienced remarkable growth, mirroring the nation’s economic expansion and the corresponding transition of savings into financial assets. As of March 31, 2024, data published by the Association of Mutual Funds in India (AMFI) shows more than a twofold increase in the assets under management over the past five years with AUM surging from ₹23.80 lakh crore to ₹53.40 lakh crore. Among the myriad investment avenues tailored to diverse risk appetites and financial objectives, multi-asset allocation (MAA) funds have emerged as a compelling choice, poised to potentially dominate the market in the coming years. 

Understanding Multi-Asset Allocation Funds A type of Hybrid Funds, multi-asset allocation funds represent a category of mutual funds that invest across a spectrum of asset classes. Unlike equity funds or Debt Funds, which concentrate on a single asset class, MAA funds diversify their investments across equities, debt instruments, international equities, and commodities such as gold and silver. The Securities and Exchange Board of India (SEBI) mandates that MAA funds should allocate at least 10 per cent of their corpus across three different asset classes. This diversification forms the bedrock of MAA funds, offering investors several advantages. 

Advantages 
1. Diversification — The primary advantage of MAA funds lies in their inherent diversification. By spreading investments across various asset classes, these funds aim to mitigate the impact of volatility in any single asset class. For instance, during equity market downturns, the debt component of the fund can help cushion the overall portfolio decline, providing investors with a smoother investment journey and reduced risk.
2. Professional Asset Allocation and Rebalancing —These funds are actively managed by seasoned fund managers who determine the optimal allocation across different asset classes based on factors such as market conditions, risk tolerance and investment horizon. Additionally, fund managers employ rebalancing strategies to maintain the desired asset allocation over time, ensuring that the portfolio does not deviate significantly from its intended risk profile due to market fluctuations.
3. Convenience and Reduced Investment Expertise Requirement — MAA funds offer a convenient ‘one-stopshop’ for investors seeking a diversified portfolio. Investors are relieved of the need to research and invest in individual asset classes, streamlining the investment process. This convenience is particularly beneficial for novice investors who may lack the expertise to construct and manage a diversified portfolio independently. 
4. Potential for Capital Appreciation and Income Generation — Depending on the specific asset allocation strategy, investors can potentially benefit from both capital appreciation through equity exposure and regular income generation through debt exposure. This versatility caters to investors with diverse financial goals, whether it involves wealth creation or generating a steady stream of income.
5. Tax Efficiency — Funds with at least 65 per cent invested in equities are treated as equity-oriented funds, enjoying long-term capital gains (LTCG) tax benefits on equity holdings after one year. Nevertheless, some MAA funds may not adhere to the minimum 65 per cent equity exposure and opt for an unconstrained strategy, thus forfeiting the equity taxation advantage. 

Rising Dominance of MAA Funds 
Several factors have contributed to the potential dominance of MAA funds. 

1. Investor Risk Aversion — Traditionally, investors have favoured the stability of fixed deposits and gold due to their risk-averse nature. However, with increasing financial literacy, investors are seeking investment options that offer a balance between risk and return. MAA funds address this need by providing diversification and potentially delivering smoother returns compared to equity funds.
2. Evolving Market Dynamics — The Indian financial market is characterised by increased volatility or uncertainty, making diversification essential for investors to navigate market fluctuations successfully. MAA funds aid with this inherent diversification, serving as a hedge against such volatility, thus enhancing investor confidence.
3. Product Innovation and Wider Choice — The Indian mutual fund industry is witnessing a surge in product innovation, with a diverse array of MAA funds catering to different risk profiles and investment goals. This proliferation of choice enables investors to select a fund that best aligns with their specific needs and financial objectives. 

Choosing the Right MAA Fund
While MAA funds offer significant advantages, selecting the right fund is crucial. The duration of your investment significantly influences the level of risk you can tolerate. Investors with longer investment horizons typically have the capacity to withstand higher equity allocations within their MAA fund. So, when selecting a fund, enter with appropriate risk expectation and time horizon in mind. 

The writer is Founder & CEO - Germinate Investor Services LLP
■ Email : santosh@germinateinvestor.com ■ Website : www.germinateinvestor.com