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Multi-asset allocation mutual funds: Should you invest in one scheme instead of three?

Learn about multi-asset mutual funds and where to invest them? Learn more about multi-asset mutual funds, benefits, limitation & performance.
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Asset allocation: Multiple asset classes with regular review

Asset allocation requires an investor to diversify their investment portfolio among various asset classes such as domestic equity, fixed income, gold, international equity, real estate, etc. It means an investor will have to invest in 3-5 different financial products to get the required diversification. Also, if an investor wishes to diversify within each asset class, that will add even more financial products to the overall investment portfolio. Managing so many financial products can be a challenge. Add to that, the challenge of regular review of each financial product which can be overwhelming for an investor. What if an investor can get exposure to multiple asset classes with a single financial product where the regular review and rebalancing are also taken care of? Yes, that is what multi-asset allocation mutual funds can do. In this article, we will understand multi-asset allocation mutual funds, their benefits, returns, taxation, and whether investors should invest in them.

What are multi-asset allocation mutual fund schemes?

A multi-asset allocation mutual fund scheme is an open-ended scheme that invests in at least three asset classes. The minimum allocation to each of the three asset classes is at least 10% of the total assets. SEBI has classified multi-asset allocation schemes under the broader category of hybrid schemes. 

A multi-asset allocation mutual fund scheme can give you exposure to at least three asset classes within a single scheme. So, that will take care of your asset allocation. The fund manager will do the regular review and the required rebalancing. The best part is, as an investor, there will be no capital gain tax implications for you for the rebalancing done within the scheme.

Why should you follow asset allocation?

Different asset classes move in different directions as they have little to no correlation. So, while equity may be the best performer in a particular year, it will be gold in some other year. As an investor, you don’t know which asset class will outperform next year and the following years. Hence, you should follow asset allocation to benefit from whichever asset class outperforms.

Table: 10-year performance of asset classes

The above table shows the performance of equity, debt, and gold in the last ten years:

  1. Equity has been the best performer for four years
  2. Gold has been the best performer for four years
  3. Debt has been the best performer for two years

Within an asset class also, the performance of categories varies.

Table: 10-year performance of large, mid, and small-cap equity 

Role of asset classes

Benefits of investing in multi-asset allocation funds

When you invest in a multi-asset allocation fund, you get the following benefits:

  1. Diversification: The first and foremost benefit is that you get exposure to at least three asset classes and diversification within each asset class.
  2. Optimum risk-adjusted returns: A multi-asset allocation fund has a relatively lower risk profile than a pure equity fund and the potential to provide optimum risk-adjusted returns.
  3. Portfolio rebalancing: An experienced fund manager does the regular portfolio rebalancing of asset classes and within the asset class. Since the rebalancing is done at a scheme level, the investor has no capital gain tax implication.
  4. Convenience: It is convenient for an investor as they have to invest in and track only one scheme rather than multiple schemes. The time and effort required to manage and monitor multiple schemes are saved.

Multi-asset allocation fund returns

Let us look at the returns of the top five multi-asset allocation funds in the last five years.

Note: The above returns are as of 1st September 2022. The returns are for direct plans with growth option. The one-year returns are absolute. The three and five-year returns are CAGR. The funds are ranked based on five-year returns.

The above table shows how the top five multi-asset allocation funds have given five-year returns in the range of 10 to 19% CAGR. These are good returns.

Taxation of multi-asset allocation funds

The taxation of a multi-asset allocation fund will depend on the equity allocation. If the equity allocation is maintained at 65% or higher at all times, it will be taxed as an equity fund. If the equity allocation is lower than 65%, it will be taxed as a debt fund.

Should you invest in a multi-asset allocation mutual fund scheme?

As an investor, do you want to follow asset allocation by diversifying in different asset classes such as equity, debt, commodities, and real estate? A multi-asset allocation mutual fund scheme is ideal if you want to do this through a single mutual fund scheme. Apart from diversification, you will get the benefit of regular rebalancing done by an expert fund manager. Also, since the rebalancing is being done at the scheme level, you will have no capital gains tax implications. These funds are suitable for investors with a moderate to high-risk profile. However, the scheme risk is relatively lower than a pure equity scheme. An investor should invest with a minimum time horizon of five years and through the systematic investment plan (SIP) route.

Investing in mutual funds with the Glide Invest App

In this article, we have learnt about multi-asset allocation mutual fund schemes, their benefits, returns, taxation, and whether you should invest in them. You can partner with the Glide Invest App for your financial planning journey to get recommendations for the appropriate mutual fund schemes based on your risk profile. You will get advice on planning and systematically investing towards your financial goals

With Glide Invest, you will get guidance for:

  1. A personalised risk profile assessment
  2. Identifying your financial goals
  3. Appropriate asset allocation
  4. Making a financial plan for each goal
  5. Automating the financial plan
  6. Review and analysis of your financial plan 
  7. Hand holding you till your financial goals are achieved

To start investing towards your financial goals, download the Glide Invest App from Google Play Store or Apple App Store and get started.

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