Multi-asset allocation funds invest across equity, debt, and commodities to deliver diversification within a single mutual fund. Learn how they work, their benefits, risks, taxation, and how they compare with hybrid funds.
Diversification can become cumbersome when you invest through separate funds for equities, debt, and gold. Managing these allocations over time, especially as different asset classes move in different directions, often requires regular monitoring and rebalancing.
Multi-asset allocation funds approach diversification differently by investing across multiple asset classes within a single fund structure. In this blog, we explore what a multi-asset allocation fund is, how it works; the asset classes it typically invests in, its tax treatment, and how it compares with other mutual fund options.
Introduction to Multi-asset Allocation Funds
A multi-asset allocation fund is a versatile fund that doesn’t limit itself to a single asset class. This fund invests across multiple asset classes, including equity, commodities, debt, and money market instruments, providing exposure to growth, stability, and hedging in a single fund.
As mandated by the Securities and Exchange Board of India (SEBI), these funds are required to invest in at least three asset classes and allocate a minimum of 10% of their resources to each asset class.
Knowing a multi-asset allocation fund is the first step. Going forward, we have to understand what components make up this fund.
Components of a Multi-asset Allocation Fund
As per SEBI, a multi-asset allocation fund should invest in three asset classes. Here are the most common components of this fund.
- Equity: Typically holds the largest allocation for overall fund growth and capital appreciation
- Debt and money market instruments: For generating regular passive income, and parking excess funds in liquid instruments
- Commodities: For hedging against equity, as it has a negative correlation with commodities like gold and silver
While this explains what the fund invests in, the real value lies in how these assets are combined and managed over time.
How Multi-asset Allocation Funds Work
A multi-asset allocation fund is actively managed. Meaning, the manager of this fund actively seeks investment opportunities and constantly monitors market trends, asset performance across the economy, and more.
The structure of this fund gives its managers more options to explore. For instance, during a bull market, the fund manager may allocate more funds to equities. On the other hand, during uncertain and volatile times, the fund manager can reduce the fund’s equity exposure and balance risk by introducing bonds and gold.
This flexibility in allocation is made possible by the fund’s underlying structure. To understand where your money is actually deployed, it helps to look at the core asset classes that form a multi-asset allocation fund.
While this fund works to balance growth, income, and risk, the structure is not without trade-offs. Evaluating a multi-asset allocation fund requires weighing both its advantages and its limitations.
Benefits and Risks of Investing in a Multi-asset Allocation Fund
While this fund offers built-in diversity, it also comes with certain trade-offs that investors should understand before investing.
Benefits of Investing in Multi-asset Allocation Funds
- Built-in diversification: By investing across equity, debt, and commodities, these funds reduce reliance on any single asset class and help spread risk across market cycles.
- Dynamic asset allocation: Active fund management allows portfolio allocation to adjust based on market conditions, helping capture growth opportunities while managing volatility.
- Convenience and simplicity: You gain exposure to multiple asset classes through a single fund, avoiding the need to manage and rebalance separate investments.
While these benefits make multi-asset allocation funds appealing, they do not come without risks.
Risks of Investing in Multi-asset Allocation Funds
- Allocation mismatch risk: If the fund’s asset allocation does not align with prevailing market conditions, certain segments of the portfolio may underperform, affecting overall returns despite diversification.
- Fund manager dependency: Performance depends heavily on the fund manager’s asset allocation decisions, making manager skill and strategy critical.
- Complexity in understanding performance: Returns are influenced by multiple asset classes, which can make it harder for you to evaluate performance compared to single-asset funds.
Understanding these strengths and risks makes more sense when you compare this fund with its closely related categories, especially with hybrid funds, which are often considered alternatives by many investors.
Multi-asset Funds vs Hybrid Funds
While multi-asset allocation funds spread investments across three or more asset classes, people often compare them with hybrid funds, which primarily combine equity and debt. Understanding how the two differ helps clarify where each fund can fit in a portfolio.
| Aspect | Hybrid Funds | Multi-asset Funds |
| Diversification | Limited to equity and debt mixes | Broad across equity, debt, and commodities |
| Risk profile | Medium overall | Reduced to medium-low |
| Return expectations | Fairly strong growth possibilities | Steady moderate gains |
| Volatility | Less than pure equity options | Even smoother due to added asset classes |
| Expense ratio | 0.5% to 1.2% | 0.5 to 1.8% (for regular funds) |
| Exit load | 0-1% | 0-1% |
Beyond structure and risk, taxation plays a meaningful role in how returns finally shape up. This makes it important to understand how multi-asset allocation funds are taxed in India.
Taxation of Multi-asset Allocation Funds in India
The taxation of a multi-asset allocation fund depends primarily on how much of the portfolio is allocated to equity. Indian tax rules classify these funds as either equity-oriented or non-equity-oriented based on their equity exposure, and this classification directly determines how capital gains are taxed.
If a multi-asset allocation fund maintains 65% or more exposure to equity, it is treated as an equity-oriented fund for tax purposes. In this case, short-term capital gains (STCG) are taxed at 20% if units are sold within 12 months, while long-term capital gains (LTCG) exceeding ₹1.25 lakh in a financial year are taxed at 12.5%, provided the holding period exceeds 12 months.
If the fund’s equity exposure falls below 65%, it is taxed as a debt-oriented fund. Here, STCG is taxed as per the investor’s income tax slab, and LTCG is taxed at 12.5% without indexation after a holding period of 24 months.
Once tax treatment is clear, the final question is suitability. Not every diversified fund fits every investor, which makes it essential to assess who these funds are actually designed for.
Who Should Invest in Multi-asset Allocation Funds?
If you want built-in diversification without managing multiple funds yourself, multi asset allocation funds can be a good fit. You may consider them if you:
- Are looking for exposure across equity, debt, and commodities with a single investment instead of holding separate funds for each asset class
- Prefer a balanced approach to risk and return, where a professional manager adjusts allocations based on market conditions
- Want simplified portfolio construction without constantly rebalancing your own asset mix
- Seek a middle path between pure equity funds and conservative debt funds, particularly if you have a moderate risk tolerance
When viewed through the lens of structure, risk, taxation, and intent, the role of multi-asset allocation funds becomes easier to place within a broader portfolio.
Conclusion
Multi-asset allocation funds offer a structured and organized way to stay diversified. By embedding allocation decisions within the fund itself, they help you stay aligned with market realities without having to act on every economic cycle. If you believe that no single asset leads every phase, this fund’s structure offers a more realistic way to stay invested across changing conditions.
