Are multi-asset funds worth your money?

Multi-asset allocation funds , commonly known as MAAFs, promise the best of both worlds - stable returns and protection from market downturns. This is quite evident from the recent market correction, where these funds tumbled by just 4.2 per cent, compared to the Sensex's 11.4 per cent (from September 26, 2024 until April 1, 2025).

However, does this mean investors should embrace MAAFs? Or are they just another product on the shelf?

Understanding what MAAFs are

Multi-asset allocation funds are hybrid funds that spread their investments across at least three asset classes, dedicating a minimum of 10 per cent to each, such as equities, debt and commodities like gold and silver.

Some of these funds even have international exposure, either through direct investing or via FoF (fund of fund) structures, though this remains limited by regulatory caps.

The fact that they invest in at least three asset classes is what sets them apart from other hybrid funds, which only invest in equity and debt. This additional layer gives them a distinct defensive edge during market corrections, as seen from their recent performance.

Suggested read: Multi-asset funds 101: What you need to know

In recent years, multi-asset funds have gained plenty of traction. Of the 43 such funds (as per Value Research categorisation), 14 were launched just in the last two years, while another 14 have existed for over a decade. That said, these funds were officially embraced with defined regulations only during the re-categorisation exercise by SEBI, which came into effect in June 2018.

Currently, the net assets of these funds stand at Rs 1.4 lakh crore, of which the ICICI Prudential Multi-Asset Fund , the largest fund in the category, holds nearly 37 per cent of the assets.

While multi-asset funds are mandated to park at least 10 per cent of their money across three asset classes, beyond this, their allocation can be highly dynamic.

As of February 28, 2025, the average allocation of the category stood as follows: equities (50 per cent), debt (25 per cent), commodities (15 per cent) and cash and cash equivalents (10 per cent).

An added advantage

Besides cushioning against market swings, multi-asset funds, like other hybrid funds, possess another key advantage: tax efficiency.

In a multi-asset fund, rebalancing happens internally by the fund manager, so you don't need to pay tax whenever that happens. A short-term or long-term tax only applies when you withdraw money from the fund.

Additionally, many such funds maintain over 65 per cent equity exposure, qualifying as equity-oriented funds. This implies that long-term capital gains (above Rs 1.25 lakh) are taxed at 12.5 per cent, while short-term capital gains are taxed at 20 per cent. In contrast, debt-oriented funds are taxed at slab rates, which can be as high as 30 per cent for investors in the highest tax bracket.

Performance during bull and bear phases

To understand how multi-asset funds have performed, we looked at their average returns during bull and bear phases since 2018 (owing to the introduction of SEBI's re-categorisation rules). We compared them against their aggressive hybrid and flexi-cap peers.

From the data above, here's what we found:

• During bearish phases or when the market is in turmoil, MAAFs hold much better than aggressive hybrid and flexi-cap funds, primarily due to their moderate equity exposure, which makes them comparatively less volatile.
• However, when the market is on an upward trajectory or experiencing a bull run, these funds underperform equity-heavy categories by a sizable margin.

This highlights a trade-off between better stability during bear phases and lower returns when the bulls take charge.

It's important to know that given their limited history, we analysed multi-asset funds' three-year rolling returns (calculated daily) over the past four-odd years, ensuring that only periods after June 2018 were considered. The result? On average, multi-asset funds delivered 13.42 per cent returns, while flexi-cap and aggressive hybrid funds fared better, returning 16.29 per cent and 14.16 per cent, respectively.

So, should you embrace MAAFs?

If you aim for stability and automatic diversification, consider allocating a small portion of your portfolio to these funds. However, if you're chasing long-term wealth creation and can stomach market volatility, equity-heavy funds are a better choice.

Also read: Are multi-asset funds a smart choice for volatile markets?