Proper asset allocation can be the key to the optimization of returns in mutual funds. Multi-asset allocation funds invest in a combination of asset classes. Also referred to as multi-asset funds and asset allocation funds, these are a new category among mutual funds in India. As it invests in different asset classes, these funds are diversified. Different asset classes behave differently, and as a result, multi-asset funds have a low inherent risk.
Understanding multi-asset allocation funds
Diversification – A multi-asset fund manager can invest in different asset classes, like equity, debt, gold, international equity, etc. If equities are performing poorly, the debt assets will protect the investment with a steady income. Even if both equity and debt remain low, gold may show positive performance. Notably, gold often demonstrates a negative correlation with equities. If the Indian economy is stagnating, the investments in international assets may continue to perform well. This adds diversity to the scheme.
Not a replacement for personal investment diversification – Despite its wide asset categories, multi-asset mutual funds remain a standard product. This may not be seen as a replacement for the investment diversification you seek to achieve. If the scheme portfolio matches your personal wish list, you can keep investing in its SIP. But otherwise, it may be seen as a portion of your overall investment portfolio.
Two broad sub-categories – Asset allocation mutual funds are of two types.
Risk tolerance funds consider the risk appetite of the investor and allocate funds accordingly. An investor with a low-risk appetite will have more debt assets, while an aggressive investor’s scheme investment will see a higher equity weightage. In the case of target-date funds, the investment tenure of the investor is considered, and assets are allocated depending on how short or long the investor wants to contribute to the multi-allocation SIP.
Taxation – The capital gains on the multi-asset fund investment are liable for income tax. If the investment is held for less than three years, short-term capital gain tax is attracted. The tax rate is decided as per the income tax slab of the investor. However, if the investment is held for more than three years, the long-term capital gain is charged at the rate of 20%. The benefit of indexation is available on such long-term capital gain calculations.
Rebalancing – Most multi-asset funds come with the option of automatic portfolio rebalancing. This helps fund managers to address market volatility and reallocate assets as per revised risk appetite. Rebalancing helps the scheme to generate the most return out of the investments.
It must be noted that multi-asset funds may deliver lower returns than the riskier equity mutual funds. However, investment in these multi-asset allocation mutual funds through long-term SIP can generate good returns. Tata Capital Moneyfy App provides you with information on all mutual fund categories. On the Moneyfy App, you can also check the performances of the various fund schemes available and handpick the one that is best suited for your investment.