Multi Asset Funds, often known as Asset Allocation Funds, are a relatively new category of mutual funds in India. These funds typically invest in a combination of equity, debt, and one more asset class like gold, REIT / Inv IT, etc.

These funds differ from pure equity or debt funds and can help you diversify your investments, reduce volatility & provide optimal returns. Each asset class does well in different market scenarios and hence such funds can help you achieve optimal returns. For example, equities and debt tend to outperform at different times, similarly, when the economy’s outlook is bleak and in times of geo political uncertainty while all the other asset classes are underperforming, gold tends to outperform.

Multi Asset Allocation funds offers stability & counter-cyclicality in returns. Individuals are now opting to invest in these funds for diversification benefits as well as tax-efficient returns as a result of changes in the tax structure of Debt Funds w.e.f 1st April 2023 which eliminated the indexation benefit for funds with less than 35% allocation to domestic stocks.

As Multi-Asset Funds typically invest 65% in equities, and the remaining in debt and gold, investors are shifting their funds to such equity-heavy hybrid funds to take advantage of the tax benefits. If an investor holds these funds for less than three years, they will be subject to short-term capital gain tax as per their slab rate. For a holding period of more than 3 years they will be taxed at a rate of 20% along with indexation benefit which is now not available in case of pure debt funds.

Considering that this is a relatively new category of funds the AUM of this category is not very sizeable with cumulative AUM of ~ Rs 55000 cr as of Dec 2023. ICICI Pru Multi Asset fund is the outlier in terms of AUM (accounting for over 50% of the category) and returns.

Multi Asset Funds have delivered an average return of 16% – 17% across 3 and 5 year time horizon. Some Multi Asset Funds to look out for are ICICI Prudential Multi-Asset Fund & Quant Multi Asset Fund which have recorded healthy & consistent performance across all time horizons. While ICICI Prudential Multi Asset Fund has recorded a CAGR of ~ 25%, ~24% & ~19% in the 1 , 3 & 5 year time horizon, Quant Multi Asset fund has recorded a CAGR of ~24%, ~30% & ~26% for the same time horizon. This is quite healthy considering these funds have good amount of exposure to Fixed income and Gold and REITs as well which can cushion any potential fall in equity markets. As of Dec 2023 ICICI MAF had equity exposure excluding hedged positions of ~67%, Gold and other commodity exposure of ~13% including derivatives exposure and balance in Fixed income and cash. The Scheme has most of its commodity exposure in form of derivatives positions and hedges its equity exposure via derivatives.

All in all Multi Asset Funds seems to be garnering a lot of interest within the investor community, thanks to healthy performance, efficient taxation & capital diversification approach.