MAAFs: After sharp equity run-up, diversify with these all-weather funds

Both return and tax treatment can vary widely based on each fund's asset allocation mandate

While the Sensex and the Nifty50 are hovering near all-time highs, interest rates are set to turn downwards and precious metals are on their way up. Many investors are in a quandary currently over how to manage their money. Amid these developments, three fund houses — Sundaram, Bandhan and Mirae Asset — have launched new fund offers of multi-asset allocation funds (MAAFs). This gives rise to a pertinent question: Is it the right time to invest in MAAFs?

Altogether, 16 MAAFs managed assets worth Rs 48,634 crore as of November 30, 2024, according to the Association of Mutual Funds in India (Amfi) data.

Diversified across asset classes

MAAFs are required to invest at least 10 per cent each in three asset classes—Indian stocks, bonds and commodities. The allocation range for each asset class can vary and is specified in the scheme’s asset allocation policy.

“MAAFs offer a portfolio diversified across asset classes, which have low or negative correlations with each other, and thereby reduce the volatility associated with a particular asset class,” says Sharwan Kumar Goyal, fund manager and head – passive, arbitrage and quant strategies, UTI Asset Management Company (AMC).

Investing in an asset-allocated portfolio enables investors to avoid behavioural errors. “Asset allocation helps investors avoid behavioural pitfalls such as market timing and performance chasing, which can result in shorter holding periods, portfolio imbalances and eventually sub-optimal returns,” says Vishal Kapoor, chief executive officer, Bandhan AMC. He elaborates that no single asset class has been a winner for consecutive periods, and hence diversifying across asset classes brings greater consistency of returns.

Why MAAFs are relevant now

Investing in equities or equity mutual funds becomes unnerving when stock markets are on a roll, as they have been in 2023. In such times, investors may want to spread their bets across asset classes, which makes MAAFs attractive. With interest rates peaking, longer-term bonds could offer capital gains if interest rates move down materially in 2024.

Exposure to gold can help contain the downside if stocks turn volatile. “Negative correlation between different assets ensures that not all investments fail at the same time, giving potential stability to the portfolio. Asset allocation is a form of diversification that helps reduce portfolio risk more than it compromises returns,” says Shaily Gang, head-products, Tata AMC.

Varied tax treatment

The taxation of MAAFs can vary from one another, depending on their asset allocation. MAAFs schemes that invest a minimum 65 per cent of their portfolio in stocks are treated as equity funds for tax purposes. Gains booked on units of schemes investing between 35 and 65 per cent of the portfolio in stocks are eligible for indexation benefit, if held for three years. Schemes with lower equity allocation are treated as bond funds. Fund-of-funds (FoFs) are also treated as bond funds and their gains are taxed at slab rate.

Divergent performances

The varied asset allocation of these funds also affects their returns. Over the past year, the best-performing MAAF, UTI Multi Asset Allocation Fund, has given 30 per cent while the worst performer, Quantum Multi Asset FoF, has given only 12.7 per cent. The divergence in equity allocation is responsible for the wide variations in returns and risks associated with these schemes.

Invest for five years at least

A wide variety of investors can opt for MAAFs, given their potential to combine returns with stability. “These funds are suitable for all types of investors, including first-timers, based on the exact construct of the portfolio. Investors can consider allocating 25-30 per cent of their portfolio for a minimum holding period of five years,” says Sunil Subramaniam, managing director and chief executive officer, Sundaram Mutual.

Investing in an MAAF based purely on past returns should be avoided, especially by investors worried about volatility. Understand the scheme’s mandate. MAAFs are all-season products. “They are suitable for investment in all market environments as asset allocation balances risk and reward,” says Goyal.

According to Gang, MAAFs should be looked at as a perennial exposure. “If the overall exposure to hybrid funds is around 40 per cent, 10-20 per cent can be in MAAFs,” he says.