When it comes to investing, what works for one may not work for another. Some investors prefer the safety of deposits and longer tenure of gold or real estate while others prefer equity investments and supplement their equity portfolio through some exposure to debt instruments. Any extreme situation can be detrimental to any financial plan if the risk and investment limits are not assessed properly. The solution lies in the age-old wisdom of diversification, often summarized as ‘don’t put all your eggs in one basket’. In this case, these baskets can be equity, debt and precious metals or commodities such as gold or silver.
Ideally, a balanced investment approach is to have adequate exposure to various baskets of asset classes. In this regard, Multi Asset Allocation Funds provide a one-stop solution. These funds fall under the hybrid category of mutual funds and invest in various asset classes. Notably, Multi Asset Allocation Funds are required to invest at least 10% in all three asset classes. Equity, Debt and Gold as per the rules framed by the market regulator SEBI. This creates a well-diversified portfolio, thereby balancing out some of the risk that can arise from concentrated investments.
In general, different asset classes perform well in different economic conditions. In economic conditions experiencing good growth, equities tend to perform better. In falling interest rate scenarios, bonds tend to perform well, while in turbulent conditions of low growth and high inflation scenarios, gold is considered a classic hedge. The objective of diversification across asset classes is to hedge the portfolio in case of a negative event for any asset class. For example, if a geopolitical event results in a major drop in equity markets, it is unlikely that debt and gold will be affected to the same extent. As a result, compared to a broad equity index, it is likely that a multi asset allocation fund may have lower drawdown and relatively lower returns than an equity-oriented fund during a bull market run.
For example, in 2022, equity returns were relatively muted (S&P BSE Sensex returned 4.4%) while gold proved to be the best performing asset in India (delivering 11.9%). In contrast, in 2021, returns from gold were in the negative territory (-3.3%), while equities were the best performing asset class, delivering 22% returns. This information is based on data from BSE and World Gold Council. Furthermore, investing in a multi-asset allocation fund saves you, as an investor, the hassle of re-balancing your asset allocation as per the changing market dynamics. If an investor makes those changes by switching investments from one instrument or scheme to another, capital gains taxes come into play. This does not happen when the fund manager rebalances the portfolio. The fund manager also has the expertise required to rebalance the scheme portfolio as per the changing conditions.
When it comes to taxation for an investor on redemption, the tax treatment of multi-asset strategies depends on the equity and debt holding of the scheme in a given financial year. If more than 65% of the investments are in domestic equity, the scheme is treated as an equity scheme and the gains are taxed accordingly. Otherwise, a multi-asset allocation fund is considered a non-equity fund for taxation purposes.
It may take at least a few years for a multi-asset strategy to get underway. It is the time taken by various asset classes to go through a complete cycle. Hence, investors who want to park their funds for a short term, say less than 3 years, should avoid these funds. These schemes make a good addition to the investment portfolio of investors looking for exposure to various asset classes managed by professionals. Investors starting their investment journey can also consider multi-asset funds to get familiar with the different asset classes available.
While you should make investment decisions based on factors affecting your unique situation, it is best to consult with your financial advisor to investigate the suitability of Multi Asset Allocation Funds for your portfolio.
DP Singh is the Deputy MD & Chief Business Officer of SBI Mutual Fund.
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