Things to bear in mind when investing in multi-asset funds

The popularity of multi-asset investing, as a way of building a diversified portfolio, has shown a significant rise in recent years. With more and more investors looking for outcome-focused investment approaches that are cut out for their specific needs, multi-asset funds have emerged as a convenient choice. For investors, the benefits are many, the most appealing one being the ease of maintaining healthy diversification levels in their portfolios without having to go through the laborious process of understanding market dynamics and picking individual assets, and buying and selling them.

If you are mulling over joining the multi-asset allocation fund bandwagon, here are a few things you should consider:

Clarity about risks, goals, and timeline
Multi-asset funds are better suited for investors who do not have very high-risk appetites or do not have the expertise to maintain a diversified portfolio by themselves. If you are planning to invest in a multi-asset fund, you should carefully analyse whether the fund’s asset allocation matches your goals and risk-taking abilities. For instance, a fund comprising 50% Indian equities, 15% international equities, 20% gold, and 15% debt would not be suitable for an investor who has a lower risk appetite or for an investor looking for an avenue to fund a short-term goal. Such a fund would be better suited for someone with long-term goals or investors with high-risk appetites.

Pay close attention to the asset mix
Since the Securities and Exchange Board of India requires multi-asset funds to mandatorily allocate 10 percent in at least three asset classes, this creates a lot of room for fund houses and managers to play around with the composition of the fund. As an investor, the onus lies on you to choose a composition that is appropriate for your needs. Investing in a debt-high fund when you are looking for capital appreciation in the long run and can tolerate a higher degree of risk can be counterproductive and you may be better off with a fund with more equity exposure. Thus the strategies of individual funds could vary significantly. Therefore it is important for you to understand the fund strategy, especially in terms of asset allocation and whether the fund is aligned with your investment objectives and risk-taking abilities.

Taxation of multi-asset funds
There is no mandate that requires multi-asset allocation funds to maintain more than 65% of their holdings in debt or equity and the allocation of these funds also changes dynamically. Thus the taxation of these funds varies and depends on the asset allocation for a particular scheme. Funds investing at least 65% in domestic equities are subject to equity taxation.

For ‘equity-oriented’ funds, capital gains if the holding period is less than a year is termed as short-term gains and taxed at 15% while capital gains for holding periods of more than a year are termed as long-term gains and a tax of 10% is levied on gains in excess of ₹1 lakh per annum. For ‘non-equity-oriented’ funds with an equity weightage less than 65%, capital gains in the case of holding periods up to 3 years are termed as short-term gains which are added to the income and taxed in accordance with the income slab that the investor falls in. In case the holding period is more than three years, it is labelled as long-term capital gains and is taxed at 20 percent after indexation. You will have to understand the positioning of equity in the scheme to gauge your tax liabilities.

The fund manager plays a crucial role
One of the most practical advantages of multi-asset funds is that a professional fund manager makes the allocation decisions for you. Their moves are backed by quality research and this spares DIY investors the hassle of reading market signals and tweaking allocation. Asset allocation lies at the heart of the performance of a multi-asset fund and this element is overseen by the fund managers and their teams. They closely observe market trends, economic indicators, and the performance of different asset classes and then make investment decisions accordingly. Fund managers’ expertise is vital for the performance of these funds, and investors must look into the background of the managers. Also, given that there are no specific styles of investing in the gamut of multi-asset funds, there is a lot that rides on the fund managers.

Action points
#Make sure to go through the scheme-related documents thoroughly before investing.
#It is prudent to analyse how the addition of multi-asset funds to your portfolio would affect your overall asset allocation strategy before investing.

Disclaimer: This article is a part of an Investor education and awareness initiative of Aditya Birla Sun Life Mutual Fund.
All investors have to go through a one-time KYC (Know Your Customer) process. Investors to invest only with SEBI registered Mutual Funds. For further information on KYC, list of SEBI registered Mutual Funds and redressal of complaints including details about SEBI SCORES portal, visit link: https://mutualfund.adityabirlacapital.com/Investor-Education/education/kyc-and-redressal for further details.
Mutual Fund investments are subject to market risks, read all scheme related documents carefully.