Around a decade and a half ago, while dining with the overseas representative of a foreign collaborator of a leading Indian mutual fund house, I was intrigued by his expression of curiosity as to why the appetite for hybrid funds in India was somewhat muted, unlike in the Western world.
On returning to my office and checking the data for 7 and 10 years, I found that not only had some hybrid funds done nearly as well as many equity fund categories but also protected capital well on the downside. It was a lesson well learnt and that too from a casual conversation over a meal. I have used it as a bedrock for my portfolio, ever since and am none the worse for doing that.
The latest kid on the block, so to speak, from this category is multi-asset mutual funds (MAFs), which are increasingly becoming a preferred investment option for investors seeking diversification, stability, and long-term wealth creation.As the name suggests, these funds invest across multiple asset classes—primarily equity, debt, and commodities (like gold and silver). As per SEBI regulations, a multi-Aasset fund must invest at least 10% in a minimum of three different asset classes, which ensures true diversification.
One of the biggest advantages of multi asset funds is their ability to balance risk and return. Equity as an asset class offers growth potential but comes inbuilt with volatility. Debt instruments provide stability and regular income while commodities like gold often act as a hedge during economic uncertainty or inflationary periods. By combining these asset classes in a single portfolio, MAFs aim to reduce overall portfolio volatility while still participating inthe market upside.
Another key feature of multi asset funds is dynamic asset allocation. Fund managers actively adjust the exposure to different asset classes based on market conditions, valuations, and macroeconomic factors. For instance, during periods of high equity valuations or market uncertainty, the fund may reduce equity exposure and increase allocation to debt or gold. Conversely, when equity markets are attractive, allocation may shift more towards equities. This active allocation strategy helps in managing downside risks and capturing opportunities across market cycles.
From a taxation perspective, most multi asset funds in India are treated as equity-oriented funds if their equity allocation (including arbitrage) exceeds 65%. In such cases, a holding period of more than 12 months qualifies as long-term capital gains (LTCG) taxed at 12.5% (on gains exceeding Rs 1.25 lakh), while units held for 12 months or less attract short-term capital gains (STCG) tax at 20%. However, if the equity allocation is lower, it could be taxed as a debt fund, which may impact post-tax returns.
At the same time, investors should be aware that returns from multi asset funds may not always match pure equity funds during strong bull markets, as a portion of the portfolio remains allocated to relatively stable assets like debt or gold.
Finally, a MAF’s performance largely depends on the fund manager’s asset allocation capability, which makes fund selection that much more important.
( Ashok Kumar heads LKW India and can be contacted at ceolotus@hotmail.com )