Multi-asset funds prove their mettle in 2025; what should your investment strategy be for 2026?

Mutual funds in 2025: Despite sharp swings and frequent reversals in capital markets during 2025, investor confidence in mutual funds stayed intact. Assets under management of open ended schemes climbed from Rs 67 trillion to Rs 80.5 trillion by the end of November. Holdings in gold exchange traded funds more than doubled as bullion prices touched successive record highs. Equity fund inflows continued through market volatility, with investors sticking to their systematic investment plan commitments. Passive investment approaches gained additional traction, while multi-asset funds emerged as the standout choice in many portfolios. Newly introduced income plus arbitrage funds also attracted significant interest during the year, alongside regulatory changes that reshaped mutual fund norms, according to an ET analysis.Multi-asset funds hold groundWith equities seeing an extended subdued phase, multi-asset funds showed their strength. Investors who shifted to these schemes saw first hand the benefits of asset allocation as a shield against equity market uncertainty. The category delivered returns of close to 16%, far ahead of flexi cap funds, which managed around 3%. Only gold, silver and overseas focused funds performed better.The logic behind the strategy is straightforward. It is only in hindsight that the best performing asset classes become obvious, the ET analysis said. By spreading investments across assets that do not move in tandem, weakness in some segments can be offset by gains in others. In the current cycle, strong rallies in gold and silver have worked in favour of multi-asset portfolios.Gold rose 74.5% during the year, while silver jumped 138%, based on December 19 closing prices, even as broader equity indices declined or delivered modest single digit gains. “Multi-asset funds have taken centre stage largely because of their exposure to precious metals,” Vivek Banka, founder of GoalTeller told ET. Atul Shinghal, founder and chief executive officer of Scripbox, noted that the structure of these funds has appealed to investors. “In a year when gold and silver generated exceptional returns, the idea of one fund powered by multiple asset classes has resonated, especially with long term investors who want diversification without the complexity of managing several schemes,” he said.While such funds may not always top performance charts, disciplined asset allocation helps make portfolios sturdier and better positioned to navigate market cycles over time.Income-plus-arbitrage fundsA new hybrid segment, income plus arbitrage funds, gained traction this year as investors looked for options that are more tax efficient than conventional debt schemes. In these funds, less than 65% of the portfolio is invested in fixed income instruments, while the balance is deployed in arbitrage strategies. Arbitrage typically involves simultaneously buying and selling the same security in the cash and futures markets to capture price differences.“Income plus arbitrage strategies are generally designed to provide more stable returns by blending a carry focused component, often short term accrual, with an arbitrage component that limits exposure to market direction,” said Atul Shinghal.The tax treatment under this structure is a key attraction. When held for over 24 months, gains are taxed at 12.5%. In contrast, returns from standard debt funds are now taxed at the investor’s applicable income slab, regardless of how long the investment is held. This has made traditional debt schemes less appealing for investors in the 20% or higher tax brackets. For instance, an investor in the 30% tax bracket earning an annualised return of 8% from a debt fund over two years would be left with a post tax return of about 5.7%. A debt plus arbitrage fund generating the same pre tax return would instead deliver roughly 7% after tax, making it a more attractive choice. Archit Doshi, senior vice president at PL AMC, said, “By pairing debt like returns before tax with equity style taxation, these funds significantly enhance post tax results for investors with holding periods beyond two years, positioning them as a strong alternative to traditional debt products and fixed deposits.”While some asset managers have restructured existing debt schemes into this format, others have introduced entirely new funds. At present, around 20 such schemes are in operation, collectively managing assets of about Rs 24,500 crore. The category has found favour among investors seeking a relatively safe avenue to deploy surplus cash in a tax efficient way. For investors in the highest tax bracket, income plus arbitrage funds delivered an average post tax return of 5.95%.What to expect in 2026Precious metals such as gold and silver are expected to remain strong performers, reinforcing the case for asset allocation and hybrid funds in investment portfolios. With interest rates unlikely to see sharp cuts, duration oriented debt funds may struggle to deliver attractive returns. Investors should also keep an eye on potential regulatory tweaks to the investible universe, including market capitalisation limits that apply to different equity fund categories.(Disclaimer: Recommendations and views on the stock market, other asset classes or personal finance management tips given by experts are their own. These opinions do not represent the views of The Times of India)