Multi-asset allocation fund: Invest for a diversified, low-risk portfolio

But steer clear of them if you desire complete control over asset allocation

There is buzz around the Multi-Asset Allocation (MAA) Fund category. Kotak Mutual Fund’s new fund offer (NFO) for an MAA Fund is underway and the one by Shriram Asset Management Company has just ended. Bank of India and Quantum’s NFOs are in the pipeline. As many as 13 funds in this category manage Rs 35,601 crore. These funds garnered only 6.8 per cent average return in 2022 but are up 11.9 per cent year-to-date.

Investment approach

According to the Securities and Exchange Board of India (Sebi), these funds must invest in a minimum of three asset classes, with at least 10 per cent allocation to each. MAA funds generally invest in equities, debt, commodities (gold and silver) and real estate, and sometimes also hold real estate investment trusts (REITs) and infrastructure investment trusts (InvITs).

Most funds invest 10-20 per cent in commodities and allocate the rest of the portfolio to equities and debt. “Each fund house has its own model for allocating to equities and debt, which usually depends on earnings, valuation, and so on,” says Alekh Yadav, head of investment products, Sanctum Wealth. Equity allocation can be as low as 20-30 per cent and go as high as 70-80 per cent.

An MAA Fund provides investors with the convenience of a diversified and professionally managed portfolio. “The fund house decides the asset allocation and handles the rebalancing,” says Gautam Kalia, senior vice president and head–super investors, Sharekhan by BNP Paribas.

Investors are saved from potential tax liabilities and exit load when the fund house carries out the rebalancing.

Yadav says the portfolios of these funds are less volatile and suffer limited drawdowns during market slumps.

One-size-fits-all portfolios

In an MAA Fund, investors delegate control over asset allocation to a fund manager. This can be problematic for those who want greater control over investment decisions, says Kalia.

The asset allocation of these funds can be dynamic. “Since these funds’ equity and debt allocation keeps changing, the investor’s task of sticking to a specific asset allocation at the overall portfolio level becomes difficult,” says Yadav.

In these funds, the investor relies on one fund house to generate alpha in multiple asset classes. “By investing in three separate funds, she could choose a good fund manager from each asset class,” says Yadav.

These funds offer a one-size-fits-all solution. A customer owning a lot of physical gold may not want the yellow metal in her portfolio. An aggressive investor may want high exposure to equities while a conservative one may not want. These funds can’t offer tailor-made portfolios to each of them.

Target investor

If you have a moderate risk profile, want a long-term and diversified portfolio, and are comfortable delegating decisions to the fund house, MAA funds are worth considering.

“New entrants in equity funds, who are not familiar with the volatility of equities, or non-savvy investors who can’t decide their asset allocation, may go for these funds,” says Nehal Mota, co-founder, Finnovate.

The funds are also suitable for investors who don’t want to manage their portfolios actively, don’t want to quit equities entirely, and are looking for capital protection with some amount of growth, she says.

Investors who don’t have access to a financial advisor or can’t make their asset allocation decisions themselves may also opt for these funds.

According to Mota, aggressive investors who want their capital to grow rapidly should avoid these funds.

Understand portfolio composition

Don't pick a fund from this category by just comparing rolling returns and risk parameters. That is because one fund may have 70 per cent allocation to equities while another may have only 40 per cent. The two funds are not directly comparable. “Do an analysis of the fund’s portfolio and see if its composition is suited to your risk profile and goal,” says Mota.  

When a particular asset class, especially equities, does well, these funds will lag behind due to their diversified nature. Avoid quitting this fund in a huff in such an environment.