Multi-asset funds are the second-most popular choice today. Should you invest?

Just like a cricket team isn't all bowlers or batters, your investment strategy can't rely on a single asset class. You need to spread your money across different asset classes to reduce risk.

This is where multi-asset allocation funds can step in. These hybrid funds invest at least 10 per cent of the money in at least three asset classes, such as equity (domestic and international), debt, commodities (gold, silver, etc.), arbitrage or even real estate. Some of these funds also use derivatives to hedge against market mood swings.

Given their utility, over a dozen multi-asset funds have hit the market in the last couple of years. They've received the second-highest inflows in the hybrid funds category, after arbitrage funds.

But do you need to add this fund to your portfolio? Let's crunch some numbers.

Performance

Multi-asset funds have had lady luck on their side lately. Most asset classes have been on a good run. Global jitters boosted gold prices, rising interest rates benefited the debt allocation, and the general bullish markets surged equity returns.

As a result, not only have they matched the returns typically expected from pure equity funds over five years, but they also look eye-to-eye with some of their prominent hybrid fund cousins.

Tax efficiency

Multi-asset funds offer tax advantages as well. For starters, since they do asset rebalancing for you, you do not pay taxes whenever the fund manager moves money from one asset class to another.

Second, if a multi-asset fund keeps at least 65 per cent of its money in equity or related instruments, it gets treated like an equity fund come tax time. Many multi-asset funds play this card, potentially giving you the more favourable tax treatment enjoyed by equity funds while, at the same time, offering exposure to other asset classes (debt, gold, etc.).

That said, about a third of these funds are fund of funds (FoFs). (These are funds that invest in other mutual funds). Gains from these funds are taxed differently. If you hold FoFs for over two years, you will be taxed like regular multi-asset funds. However, gains will be taxed at your applicable tax slab rate if you sell them before two years. This applies from April 1, 2025. For now, gains from such FoFs are taxed at your applicable slab rates.

Our take

It is difficult to say if multi-asset funds will keep delivering stellar returns in future. That said, they can be a solid option to spread your money across different asset classes, especially if you are a beginner.

However, we at Value Research are more comfortable with funds that don't try to time the market. That's because it's a risky strategy.

Instead, we prefer funds that change their asset allocation within a narrow range for greater predictability and transparency. Such funds also eliminate the risk of accurately forecasting market movements.

Also read: These mutual funds are turning cautious despite market's amazing bull run