Why multi-asset allocation funds make sense in the current market cycle

Given the Indian market cycle, with rich equity valuations in certain segments and debt yields showing signs of stability, multi-asset allocation funds (MAAFs) deserve consideration, say experts.

These hybrid funds invest minimum 10 percent in at least three asset classes — typically, equities, debt, and gold. They can also allocate their corpus across units of real estate investment trusts (REITs), infrastructure investment trusts (InvITs), and international equities.

In a country like India where gold holds both cultural and financial relevance, this tri-asset structure works well, especially during uncertain times.

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“Multi-asset funds follow a dynamic investment strategy, adjusting their mix of assets depending on prevailing market conditions. These are well-suited for investors looking for a balanced approach, offering moderate risk without the high volatility often associated with direct equity investments,” said Aakanksha Shukla, Assistant Vice President, Wealth Management, Master Capital Services.

Need for MAAFs

According to Juzer Gabajiwala, Director, Ventura Securities, not only are Indian equity markets volatile, valuations are also elevated as we have had three-four years of a bull run.

Further, debt instruments are offering attractive yields as interest rates have peaked, and precious metals such as gold continue to be a strong hedge amid global tensions and inflation worries.

“We are currently in an environment where the equity markets are extremely volatile due to geopolitical risks, the US tariff war, and shifting interest rate trends,” said Gabajiwala.

Sorbh Gupta, Senior Fund Manager, Equity, Bajaj Finserv Mutual Fund, also believes that MAAFs are a good bet in a volatile market.

“These funds diversify across asset classes, thereby bringing relative stability to the mutual fund portfolios of investors,” said Gupta.

Taxation also plays an important role and investors should be mindful of their post-tax returns. One of the biggest advantages of MAAFs is that there is no tax incidence when there are shifts within the fund across different asset classes.

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However, an investor trying to move between different asset classes himself will be subject to tax.

How MAAFs are designed

Multi-asset funds generally follow two main approaches. Dynamic asset allocation — where funds actively adjust their asset mix based on market conditions; and fixed asset allocation — where funds maintain a predetermined mix of assets, and are thus more consistent and predictable.

As of March 2025 end, there was a huge variation in the equity allocation of these funds,  with Kotak MAAF having the highest domestic equity allocation of 71 percent, while Samco had the lowest at 21 percent, per ACE MF, a mutual fund research platform.

As for debt allocation, Edelweiss MAAF had the highest allocation of 55 percent, while Bandhan had the least, 8 percent.

Some funds also had decent overseas allocation,  for example Invesco India MAAF, which has allocated around 17 percent to overseas equities and mutual funds. Some had good exposure to silver as well, such as Edelweiss (10 percent).

“Multi-asset funds are more complex as the fund manager is required to make an asset allocation call first — i.e., where to be overweight. In equities, they would need to decide the allocation between different sectors, large-, mid-, and small-caps, and then individual stocks. For debt, they have to decide whether to be in long or short-duration instruments, etc,” explained Gabajiwala.

MAAFs have on average delivered 7.61, 13.93, and 19.80 percent returns on one, three, and five-year timeframes, respectively.

Picking the right fund

“Some multi-asset funds are designed to offer a base potential yield via their allocation to debt and higher dividend yield companies. Further, precious metal allocation brings in much-desired diversification as precious metals, especially gold, have a negative correlation with equities in a falling market,” said Gupta.

MAAF portfolios can vary from depending on the asset classes included, the underlying allocation strategy, the fund manager’s style, etc.

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“If you are a new investor and exploring different asset classes, then you can begin by allocating some of your portfolio to multi-asset funds. With time, you can decide what asset mix is best for you  and apportion accordingly,” said Jiral Mehta, Senior Research Analyst, FundsIndia.

According to Ratish Gupta, Director, Wealth Wisdom India, funds with a flexible and dynamic allocation — especially those with a strong track record of managing the downside — are well-positioned today.

“I particularly like those that don’t stick to fixed allocations but move based on market opportunities and risks,” said Ratish.

While pure equity investing is central to long-term wealth creation, MAAFs play a strong supporting role — by smoothening the ride and making portfolios more resilient. They’re not a one-size-fits-all solution, but for the current environment, they strike a good balance between participation and protection.