Multi-Asset Allocation Funds

Source: BS

Context:

Multi-asset allocation funds (MAAFs) have emerged as strong performers among mutual funds (MFs), rivalling medium-term returns from traditional equity categories while maintaining a lower risk profile.

What Are Multi-Asset Allocation Funds (MAAFs)?

Multi-Asset Allocation Funds are hybrid mutual fund schemes that invest in at least three different asset classes, such as:

• Equity and equity-related instruments
• Debt and money market instruments
• Commodities (primarily gold or silver)

Regulatory Mandate (SEBI Rule):

As per the Securities and Exchange Board of India (SEBI), MAAFs must invest a minimum of 10% in each of at least three asset classes at all times.

Key Features of MAAFs

• Diversified Asset Mix
  • Allocation across equity, debt, and commodities reduces portfolio concentration risk.
• Lower Volatility
  • Since returns come from multiple asset classes, MAAFs exhibit lower drawdowns during equity market corrections.
• Dynamic Rebalancing
  • Fund managers periodically rebalance the portfolio to capture opportunities across asset classes depending on market conditions.
• Inflation Hedge
  • Exposure to gold and commodities provides a natural hedge against inflation and currency depreciation.
• Tax Efficiency
  • If equity allocation exceeds 35%, the fund is taxed as a hybrid-debt fund (post-April 2023 norms).
  • Earlier, some funds maintained >65% equity to avail equity taxation benefits, but SEBI’s latest rules ensure clearer classification.

Why MAAFs Are Performing Well

• Equity markets have delivered solid long-term gains, boosting fund returns.
• Debt instruments have provided stability amid fluctuating interest rates.
• Gold exposure has contributed positively amid global inflation and geopolitical uncertainty.
• This tri-asset structure has resulted in steady, risk-adjusted returns over the past three years.

Comparison: MAAFs vs. Traditional Equity Funds