Unlocking investment potential: The case for multi-asset allocation funds

55-Vinod-Kumar Vinod Kumar

WITH THE CONFLICT RAGING in the Middle East, the equity markets in India and world over has turned volatile as investor sentiment has dampened over the past few weeks. You, too, might have pondered the question, “How should I protect the value of my investments, or how can I reduce erosion in portfolio value?” The answer could lie in multi-asset allocation funds. These funds have been gaining traction and are increasingly becoming a go-to option for both seasoned and new investors.

Multi-asset allocation funds, a sub-category of hybrid funds, are a distinct type of mutual funds. These funds are specifically designed to invest in a diverse range of asset classes, which can include equities (stocks), debt (bonds), commodities like gold and/or silver, and real estate investment trusts (REITs). The primary aim of this offering is to combine these asset classes in a way that optimises returns while mitigating risk.

One of the most compelling reasons to consider multi-asset allocation funds is the ease of diversification they offer. Diversification is the investment strategy of spreading your money across various assets to reduce risk. With multi-asset funds, you do not need to agonise over creating the perfect asset mix. The fund manager does that for you. They dynamically allocate assets based on market conditions, aiming to balance the risk-reward trade-off. This simplifies your investment journey and ensures that your portfolio is well-rounded.

Additionally, asset classes can be volatile, with each having its market dynamics. Equity markets can soar to great heights, but they can also experience severe downturns. Debt provides stability but might not offer substantial growth. Multi-asset funds harness the potential of different assets during various market cycles. For instance, when equities are down, investments in debt and gold can provide stability. Conversely, when equities are bullish, they can drive higher returns. This dynamic approach can help reduce portfolio volatility and enhance risk management.

Finally, multi-asset funds are managed keeping tax efficiency in mind. Depending on the fund’s stated asset allocation, they can be structured to be treated as equity funds or as non-equity funds with indexation benefit.

The meaning of tax treatment as equity fund means that they can offer you favourable tax benefits, such as only long-term capital gains tax at 10 per cent and short-term capital gains tax at 15 per cent. Plus, you do not have to worry about capital gains taxes when the fund rebalances its assets, which is a cost you might otherwise incur when managing asset shifts independently.

In the Union Budget 2023, there was an introduction of non-equity funds where at least 35 per cent equity investment has to be maintained so that the fund receives indexation benefit.

Whether a fund employs equity taxation or non-equity taxation with indexation benefits, the multi-asset fund generally has a much lower standard deviation as a whole. In 2015, 2020 and 2022, when the market volatility was significantly higher, a multi-asset approach emerged as a superior investment strategy.

Multi-asset funds also offer time efficiency. With these funds, you can free yourself from the constant monitoring and rebalancing that managing a diverse portfolio of individual assets would require. The fund manager takes care of the nitty-gritty, ensuring your investments are well-maintained and aligned with market conditions.

With rising geopolitical uncertainties, high inflation, and increased market volatility, multi-asset allocation funds are positioned to offer a more stable and rewarding investment experience. In such an environment, having a well-balanced portfolio that spans equities, debt, commodities and real estate investments is a prudent strategy for 2023 and beyond.

In conclusion, multi-asset allocation funds are a versatile and efficient way to harness the potential of various asset classes while minimising the complexity and risks associated with managing them individually. These funds simplify diversification, enhance risk management, and offer favourable tax treatment.

Kumar is founder, Perpetual Investments.