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What Is Multi Asset Allocation Funds?

Submitted by admin on August 7th, 2024

This comes as equity investors who had gained a lot within the last year are now concerned on retaining the profits in the event the stock market turns bearish.

They are keen to expand their interest to other kinds of assets that are non-equity. They have therefore in recent months become popular by the name Multi-Asset Allocation Funds (MAAFs).

Where do they invest?

Majority of the funds in the category either invest in equity and/or debt and in one or more of the asset classes like gold, real estate, international securities etc.

Says Chintan Haria, principal, investment strategy, ICICI Prudential Mutual Fund: An obvious fact about a multi-asset scheme is that by definition a multi – asset scheme is supposed to minimum invest 10 percent each across at least three asset classes.

Says Chirag Mehta, chief investment officer, Quantum Mutual Fund: ‘First-time investors remain cautious when investing in shares,’ it stated noting that, many new investors would want to approach investment gradually.

The basic idea is to switch from the conventional, rigid fixed deposits which do not fetch more than inflation rates, to the better options namely, market related products providing better returns beyond inflation rates without compromising with the higher risks. ”

Tax treatment

The treatment received by taxes depends on equity investment of every fund. If the exposure is to domestic equity up to 35%, the taxes calculated on the slab rate for STCG and LTCG are applicable.

If the domestic equity allocation is between 35 to 65 percent, STCG is charged with slab rate while the LTCG, where the holding period is more than three years shall be taxed at 20% on the fair market value having indexation benefit.

The fund with above 65 per cent domestic equity exposure attracts tax of 15 per cent on STCG and 10 per cent on LTCG exceeding Rs. 1 lakh for holding period of more than one year.

Choosing the right strategy

If you wish to opt for equity taxation and need slightly less risk than in the case of a pure equity fund, try an equity-oriented or equity intensive fund with over 65% equity content. The returns of these funds will be higher compared to what the debt-oriented peers of these funds can provide.

Nevertheless, such funds have a few drawbacks Though they tap into cheaper sources of capital, they can also lock their owners into expensive forms of finance. Says Jain: However, while the minimum percentage that fund managers are allowed is sixty-five per cent, they often invest between sixty-seven to seventy per cent in equities so as not to cross the allowed limit.

This means that the residual for allocation to debt and gold is very small which hampers diversification and elevates the fund’s equity risk exposure profoundly. ” It is again because low allocation to debt and gold indicates that the risk associated with equities does not get sufficiently hedged.

Those investors who are targeting, relatively less risk, lower risk/return fluctuation and reasonable long term compounded returns with more safety should look for those funds which have relatively more money invested in money market instruments and other non-equity asset classes.

Understand fund’s mandate

Investors should ensure they get the fund they want.

Says Vidya Bala, co-founder, Primeinvestor: “Investors particular about equity taxation could end up with debt taxation if the fund they have entered does not turn out to be equity-oriented.”

Differences in equity allocation translate into varied levels of risk.

Adding an MAAF to the portfolio may not offer adequate diversification in an evolved investor’s portfolio.

Says Bala: “If you allocate 10 per cent of your portfolio to an MAAF which holds, say, 25 per cent in debt, your debt allocation at the portfolio level will be 2.5 per cent, which is hardly adequate.”

While MAAFs are a good starting point for new entrants, evolved investors should allocate to non-equity funds directly for adequate diversification.