Multi-asset allocation funds are ideal for those who cannot track changing market conditions regularly and rebalance between asset classes. Experts say investors should use such funds now to reduce some exposure to equities and add a flavour of debt and gold.

Fund managers do automated allocation to equity, debt, and gold or silver based on market condition for each of these asset classes and change the weightage dynamically. As equity is near an all-time high and can witness higher volatility, investors can invest in a multi-asset allocation fund to reduce volatility and concentration to one asset class. These funds aim to deliver consistent returns with lower risk, making them suitable for retail investors with varying risk appetites.

In fact, in the current financial year till December multi-asset allocation funds have seen net flows of Rs 18,000 crore (including five new fund offers).

Alekh Yadav, head, Investment Products, Sanctum Wealth, says multi-asset allocation funds might be more suitable for retail and less sophisticated investors. “These investors may not be able to manage their own asset allocation and have limited investment options in the first place. An automated allocation to multi-asset funds can allow them to grow portfolios with reduced volatility,” he says.

Similarly, Arun Kumar, VP and head, Research, FundsIndia, says multi-asset allocation funds can be used by first-time investors who want to outsource their asset allocation decisions to the mutual fund. It is important to understand the asset classes used, asset allocation range, framework used to adjust the exposure, stock and bond selection approach, he says.

Balancing risk and reward

With the uncertainty in financial markets, investing in hybrid funds is a great way to balance risks and capture the opportunity that each of these asset classes brings. The fund managers take the call on the portfolio and weightage across asset classes which can give some more comfort to a segment of investors.

Fund managers increase the allocation to equity when they believe the markets have higher upside potential. Similarly, they increase the allocation of debt when the interest rate scenarios are in favour. Experts say retail investors are preferring multi-asset allocation funds as they provide access to a professionally managed portfolio that adapts to different market conditions.

Mukesh Kochar, national head, Wealth, AUM Capital, says since  equity has run up a lot in the last eight to nine months, investing some part in multi-asset allocation funds will reduce the risk weightage of the portfolio. “We expect gold and debt to perform well in years to come due to the peak of interest rates globally which will help the performance of this category,” he says.

Investors’ biggest dilemma is to decide on the allocation and timing as there is a fear of missing out on the market rally as well as the fear of getting trapped in falling markets. “A multi-asset fund offers an effective asset allocation with a strategic and disciplined investment approach that balances risk and reward in the investment portfolio for a well-rounded and successful investment strategy,” says Sharwan Kumar Goyal, fund manager and head, Passive, Arbitrage and Quant strategies, UTI AMC.

Investors should also keep in mind that in periods when equities do really well these funds will naturally underperform. However, they should not worry about it since  with  long-term holdings, investors can make healthy returns with much lower volatility compared to equity-only funds.

Each scheme will have its set principal as to how much minimum average equity an investor wants. If the holding is more than 65% in equity then it will be taxable as an equity fund. Investors will have to pay 10% tax on capital gains if held for more than a year. Based on one’s risk appetite and return expectations one can position themselves into the fund that suits their post-tax return expectations.