Should you invest in multi-asset allocation funds?

Rather than focus on what a multi-asset alloction does, it is vital for you to know what difference the fund can make to your portfolio allocation and returns. If you don’t, you only end up adding funds to your portfolio without making any meaningful difference.

Whenever the returns of any category tops equity fund returns, investor interest in such a category goes up. It’s the turn of multi-asset allocation funds now. And going by the number of queries we have received, we know many of you want to know whether to invest in this category.  The queries have revolved around the following:

multi-asset allocation funds
  1. Why we have not rated the multi-asset category
  2. Why we do not have a buy/hold/sell call on these funds in our review tool
  3. Whether the new funds from Motilal or Nippon are options to consider

I will quickly respond to these questions first but go on to substantiate the same through the limited performance and portfolio data that we have.

  1. Most of the funds in the multi-asset allocation category do not have a track record. They are either new or shifted to this category (from an entirely different mandate) when SEBI introduced new categories effective June 2018. For example, SBI Magnum MIP Floater became SBI Multi Asset. HDFC Multiple Yield re-categorized itself as HDFC Multi Asset. ICICI Pru Dynamic became ICICI Pru Multi Asset and so on. This was not just a change in name but a change in mandate – in terms of adding gold and changing individual asset allocation limits. Hence, most of them do not even have a rolling 3-year return record for us to test them quantitatively. We do not rate funds without a minimum 3-year record in equity and hybrid categories.
  2. For the same reason, we do not have an opinion on these funds.
  3. We think NFOs, unless unique or showcase tremendous promise, can be avoided or watched for performance. There need be no rush to invest in them. In the case of Nippon or Motilal Oswal, the addition of international equity differentiates them from the rest and yet, there is nothing too unique that cannot be achieved through your own portfolio diversification.

What you may not know about multi-asset allocation funds

#1Taxation status could be equity or debt

Not all multi-asset allocation funds have a minimum 65% equity as mandate. Of the 11 multi asset funds (2 of which are either recent or an NFO), only 5 (Axis, HDFC, ICICI Pru, Tata and UTI) have stated that they will hold a minimum 65% in equity.

The rest, as it should rightfully be, can go far lesser in equity. That essentially means that you may not get equity taxation in some of the multi-asset funds. Many of you are unaware of this and as far as our interactions with you go, most of you are very ‘sensitive’ to taxation and are reluctant to handle a long-term product with equity but with debt-like tax status.

There are also about at least 5 FoFs from Franklin, IDFC, Quantum, Aditya Birla Sun Life, and HSBC which have an option to use gold. Of these, Franklin and Quantum are the ones that steadily use all 3 asset classes. Here again, as FoFs their tax status irrespective of how much equity they hold, will be that of debt.

#2 A multi-asset allocation fund may not necessarily be diversified

In their urge to capture equity returns adequately and maintain equity tax status, some of the multi asset funds do try to hold higher equities. For example, Axis Triple Advantage has its mandate to invest at least 65% in equities and hence always seeks to maintain it. As a result, its average gold holding is lower than say SBI Multi Asset, which has held far lower equity. This means that the fund is not actually changing allocations much based on market cycles and that it then becomes very close to an equity-oriented hybrid fund in terms of performance.

So, if you believed that your fund will dynamically shift between asset classes to contain falls or capture upside, that may not happen. Likewise, other than Franklin and Quantum Fund of Fund, the other fund of funds that have the option of taking exposure to gold, have hardly done so.

#3 Holding a multi-asset fund may hardly diversify your portfolio

A multi asset fund is unlikely to meaningfully diversify your portfolio unless it accounts for a majority of your portfolio. For example, if a multi-asset fund, on an average held 15% to gold, and this fund accounts for say 15% of your portfolio, your gold allocation is 2.25%! You are hardly hedging your portfolio with gold if that was your idea nor will dynamic asset shifts within this fund make any meaningful contribution to your returns.

This is an important point that most of you miss. Rather than focus on what the fund does, it is vital for you to know what difference the fund can make to your portfolio allocation and returns. If you don’t, you only end up adding funds to your portfolio without making any meaningful difference.

Added to this, it is important to know that you don’t achieve style diversification (growth or value, focused or diversified, large or midcap) by holding such hybrid funds.

How multi-asset allocation funds fare

While multi-asset funds do not have much of a track record, we thought we could still show data comparing similar investments that you may have in your portfolio. Please note that it is pointless for us to compare longer periods of returns as most of these funds were not multi-asset funds earlier.

For this purpose, we studied the average holding of equity, debt and gold holding in these funds over the past year. On an average, this came to 58% equity, 27% debt and cash and 15% in gold. We simply tried to replicate this with 3 funds – A Nifty index fund (UTI Nifty Index), gold mutual funds india (we took the ETF from Quantum given its longer record than the FoF and lower cost) and a banking & PSU debt (Axis) from our recommended list.

We took the rolling 1-year return since June 2018 to date. We did not want to compare returns before June 2018, when multi-asset allocation funds had vastly different attributes.

You will see a steady outperformance of the asset allocated portfolio compared with the average returns of multi-asset funds. Of course, there are 2 limitations to this analysis: data points are insufficient and second with newer multi-asset funds having international mandate, they might behave differently.

We also looked at 3-year rolling returns for at least 2 funds that we know had a steady allocation to all 3 assets and ran the multi asset mandate well before the SEBI category came in. The data for that, with our portfolio of 60:25:15 in equity/debt/gold gave the following:

The Franklin fund fell by the wayside as its debt holding has one of the closed debt funds. But even the Axis fund comparison suggests that an asset allocated portfolio would have delivered higher.

Needless to say, rebalancing, if done regularly to your own asset-allocated portfolio, would have yielded even better. To compare the post-tax returns here would not be correct since your asset allocation to debt and gold will not be the same if you simply invested in the multi-asset fund – whether with a 15/20/25 percent allocation. The idea here is to see fund performance alone and, on this count, the performance thus far has not been too inspiring.

This is one primary reason why we feel, based on current data, your own asset allocated portfolio can deliver better.

Where they stand with other hybrid categories

We also compared multi-asset funds with other relevant hybrid categories. Here too, given the limited record that multi-asset allocation funds have, we took the rolling 1-year returns from June 2018 to August 2020. The performance looks like this:

It is noteworthy that a chunk of the above period was volatile and hence any high-equity allocation would have suffered more.

The above data suggests a few things:

  • Both conservative hybrid and equity savings do a good job of containing volatility better, with hybrid conservative also delivering better average returns.
  • Multi-asset allocation funds are not very different from balance advantage/dynamic asset allocation as far as their performance go. Their volatility is similar and so is the average return. The presently higher returns compared to the balanced advantage category are primarily on account of gold.
  • While the above period may be too short to compare them with aggressive hybrid, for the long haul clearly aggressive hybrid scores, the near-term volatility notwithstanding.

What are we trying to say through the above data? You should be clear in your objective of what you want your fund to achieve in your portfolio. For example, if you had a dynamic allocation fund, then there may be little need to add a multi-asset fund, as things stand. Or for that matter, if you had a gold fund, besides separate allocation to debt and equity, not much is achieved by adding 10% or even 20% to a multi-asset fund.


In summary, if the above article comes across as being too negative about multi-asset funds at this juncture, we have our reasons:

  • One, data thus far suggests that you can do well with your own asset allocation and may not even need any dynamic asset managing fund if you can rebalance. Please read our article on rebalancing here.
  • Two, we see this as a category that AMCs took to, only because SEBI introduced it as a category. And that would mean adding one more scheme to an AMC’s basket. A new category allows garnering more AUM from a business perspective.
  • Three, we have seen funds jump from entirely different categories to multi asset or even close the category after having created a fund. We already gave examples of such changed categories earlier. Another example would be Edelweiss Prudent Advantage fund, a diversified equity fund that became Edelweiss Multi Asset Allocation fund after SEBI’s new categorization. In July 2019, the same fund became Edelweiss Aggressive Hybrid fund.

So what is the takeaway?

  • We are not undermining the importance of asset allocation. But we would like you to question yourself as to whether it is best served with a multi-asset fund or kept simple with good funds from each asset class put together – providing you the flexibility to change one if it is not doing well for you and preventing any concentration to a single fund. You could look at our Prime Funds to build your own asset-allocated portfolios or pick one from our ready-to-use portfolios.
  • We think only few fund houses are serious about providing a hybrid product that is of value to investors rather than being an additional scheme to garner AUM.

We do find some individual funds – like Quantum or SBI promising. We will continue to watch this space and will rate the category once track record is achieved.

Even so, you must ask yourself – ‘what value does this fund add to my portfolio’, rather than be lured by returns or the fanciness of the theme.  

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22 thoughts on “Should you invest in multi-asset allocation funds?”

  1. emailsubcriptions9

    Isn’t ICICI Prudential Multi Asset fund an old one and has performed well with good returns over more than a decade – any particular reason of not having used in your comparisons and analysis and also not mentioning about it?

    1. Hello Sir, We have very muh mentioned about the fund – that ICICI pru Dynamic asset (which was not multi asset then) became multi asset post SEBI’s new category in 2018. Hence it did not have sufficient record as a multi-asset (less than 23 years) when the article was written). We took the ones that were multi asset since their inception for illustrative purpose. ICICI 5-year performance etc will be irrelevant. We have included multi asset in our rating and MF review tool. You an check the fund there. thanks, Vidya

  2. Dear Vidya
    I have been investing in aggressive hybrid funds of HDFC & ICICI for past many years now, and I am really disappointed with their returns, and their downside protection. While I agree with the eye-opening points you have raised about multi-asset funds, would it make sense to shift from these aggressive-hybrid funds to multi-asset funds, so that there is better downside protection (due to gold, reit, etc) ?

    1. You can have a mix of equity, debt and gold as seprate funds instead. More flexibility and option to choose the best in class in each! thanks, Vidya

  3. Thanks for this very important analysis. Can you clarify if the funds considered for rolling returns were direct or regular plans? And in your opinion would that make a difference? I have this question especially after seeing the other piece on expense ratios where there’s 1%-point difference between regular and direct multi asset funds.

    On a side note, I have been curious about all-weather portfolios popularised by the likes of Ray Dalio, which are also multi asset portfolio though with only 30% in equities, 40% long-term gilt, 15% short or medium duration bonds and 15% gold. I tested them using basic tools on VR. Returns were better (about 11% consistently over any duration) and volatility also appeared lower (March 2020 drawdown less than 10%) than multi asset funds. It would be great if you guys can do an analysis of such a portfolio with standard deviation and rolling returns which is hard to do with tools available to amateurs.

    On yet another side note, conservative hybrid funds seem really good option for consistent returns.. why are they not popular? Aggressive hybrids seem very pointless – if I have to wait 5 years or more for returns then I might as well go 80% equity or 100% into a largecap-dominated elss or multicap (old definition).

    1. Data is for direct. No it hardly makes any difference. The illustration we have given is a all-weather index portfolio. quality funds will better that. Hybrid conservative are not only expensive but mask credit risk and this came to light in the late 2018 and 2019 credit risk fallout. thanks, Vidya

  4. This will be avg return and for conservative investors only,if you are thinking of risky buy better returns then defineately equity funds only..i feel next couple of years active fund gonna shine as it can generate alpha better than passive fund but if you are modest risk taker then can eye on low beta passive equity index fund..multi asset return gonna be in line with fd in long run as per me..
    Dont opt any multi asset..always returns are averaged because if gold high equity will be down n when gold falls stocks shine… Strategically can opt for short to medium term on calculative basis..with a caution

  5. If some one wants to allocate a single multi-asset fund to goal, so that he doesnt need more asset classes and rebalancing process nil. Please let us what is the disadvantages of keeping single multi-asset fund for one goal.

    At the same time if we go by Single Nifty index fund + Liquid fund, Is any issue related to too much concentration on single AMC/Fund. Just curious to understand Is it harmful to use single Fund per goal

    1. We have stated the disadvantages – one, concentration in an active fund. Two, this class has so far underperformed an asset allocated portfolio by a good proportion. Three, no style mix to ensure you have some style performing at all times. Four, you are assuming the equity and debt will be managed well by a single fund.
      When you follow an index, where is the question of active management? If there is no active management, there is risk of underperformance. There will be lack of styles but that is ok and that is the conscious call of passive investing. Liquid fund – can have 1-2 to avoid any outlier scenario. I think we have discussed this with you more than a few times 🙂 Vidya

  6. Sunil Hareendran

    I see this in the following light :-
    Covid-19 has thrown up many questions about asset allocation, and as investors we rethink our portfolios will have to weigh up whether exposure to multi assets will protect, or erode, wealth. Current analysis with historical data to be looked into from that perspective as well ?

    1. Sir, The key takeaway is in point 3 and I am reproducing it here:
      Holding a multi-asset fund may hardly diversify your portfolio
      A multi asset fund is unlikely to meaningfully diversify your portfolio unless it accounts for a majority of your portfolio. For example, if a multi-asset fund, on an average held 15% to gold, and this fund accounts for say 15% of your portfolio, your gold allocation is 2.25%! You are hardly hedging your portfolio with gold if that was your idea nor will dynamic asset shifts within this fund make any meaningful contribution to your returns.

      This is an important point that most of you miss. Rather than focus on what the fund does, it is vital for you to know what difference the fund can make to your portfolio allocation and returns. If you don’t, you only end up adding funds to your portfolio without making any meaningful difference.

      Added to this, it is important to know that you don’t achieve style diversification (growth or value, focused or diversified, large or midcap) by holding such hybrid funds.

  7. Hi,

    Excellent article. If one looks at FD beating returns with modest capital gains then only one fund comes to mind i.e Quantum Multi Asset Fund. The fund is truly balanced as exposure is capped at Equity 40%, bond 40% and Gold 20% unlike other Balanced Funds which have equity upto 65% and hence fell more in the recent crash. True its taxed like a debt fund but if held over 3 years and internal rebalancing (being pass through) at very low cost I think this fund cannot be compared to peers and should be viewed stand alone one of a kind for conservative investors/ retirees.

    1. Hello Vidya,
      I am thinking of investing a fair part of my DEBT portfolio in the MO Multi asset fund in a staggered manner. As the back testing of this fund by the fund house suggests it will give more or less steady high single digit returns with less volatility. This fund will invest more in debt compared to the other balanced/ multi asset funds which have 65% or more in Indian equities. Asset allocation between Indian equity and debt will be rule based by MOVI .
      10% in S&P 500 index which is a solid US large cap Index and 10% in Gold ETF is a good combo. Each asset class will do well or poorly in different market cycles. The YTM in debt funds and bank FD rates have dipped sharply, this type of fund may come handy to some extent for part of the debt portion of the portfolio.

      I know it is contrary to your article, but my personal experience is otherwise. People are generally very skeptical when a new product is introduced and write it off quickly with some data points. It happened when Benchmark MF came out with Gold, Nifty and Junior Nifty ETF’s in mid 2000’s. Same was the case when MO Nasdaq 100 ETF was launched around 2012. Every magazine and financial experts in those days wrote it off. I kept investing in all these 4 products. It gave me a good experience all these years. After 15 years people are slowly accepting these as a good products. In fact you are having a webinar about these ETF shortly. Same I feel will be the case will be with MO Multi asset type of products. It is easier to talk about asset re-balancing etc in theory, but in reality it is very difficult and rarely happens. Honestly I find it very difficult. The drop and gain happen quickly and is volatile like the current last 4-5 months. There is always a hesitation to sell one asset class or sometimes not having time to do all the necessary course correction. Asset re-balancing may also have Income Tax implication and we will end up paying unnecessary LTCG or STCG tax which is again leakage of profits earned in other asset class . The other option is topping up money in the asset class which has fallen down, adding capital may or may not be possible at the given time. In these type of MF’s asset allocation will rule based, without human emotion and since MF is pass through vehicle it will have no impact of Income Tax to the individual. Looking at the above I will be more inclined to invest in it.

      1. Hello Sir, When Benchmark came, I too invested in ALL their ETFs 🙂 But it is not the NFO that made me money…it is the investing/averaging through the years 🙂 When NAsdaq 100 came, we were (in our earlier role) among the first to give it when it become a fund of fund (the ETF suffered from terribly low liqudiity) . So the problem is not about the NFO alone. it is about how unique it is and what value it adds to your portfolio. Please ask yourself by holding 15 or 20% of your portfolio in a multi asset fund, what dynamic allocation really happens to your portfolio? (I have given the example in the article) And if you hold 50% isn’t that excessive concentration to an active fund? (it is ok with index) Second, why should we be obsessed with ‘dynamically managing’ and timing, really? We have explained in our rebalancing article (linked in this article too), that all you need to look at is your own portfolio. if a 60:40 has become 70:30, you shift back. And please remember, in reality such rebalancing need will arise only once in 2-5 years, depending on market rallies. Otherwise, there is little need to dynamically manage your portfolio like a fund. SO there really is no tax inefficiency there. These are needs that are ‘created’ when it really is not a need 🙂 The data we shared shows that multi-asset with all that shifting hasn’t yielded desired results. How can back tested data be trusted when you an cange the methodology to suit the outcome? 🙂 Nobody, really nobody is adept at timing the market and that is why it doesn’t pay off for most people 🙂 You stated very good products like BEnchmark ETFs and a great gateway to the high growth Nasdaq but we should also distinuish between those value adds and seeming value adds (call them gimmics) right? 🙂 Having worked with the industry closely, it is not too difficult to know the difference 🙂 Time will tell of course and we have acknowledged that there couol be 1 or 2 promising ones but there is no rush to participate through NFO, in our limited view 🙂 If you want to remove the human bias, there are simple index funds. And remember, only asset allocation is rule based in multi asset. Stock and debt instrument pick is far from rule based.

        As for investing your ‘debt’ portfolio in this fund, I have no doubt this fund will be singificantly higher in its volatility (we have also shown you the Std Dev in our data of simialr funds) and I am not sure it is a substitute for debt at all.
        thanks, Vidya

        1. Hello Vidya,

          Thank you very much for your detailed reply. I do not want to comment any further and prolong it. From my analysis and experience the MO Multi asset fund will do well in the long haul. It will not be block buster fund but it will give decent debt fund plus returns. Other funds can’t say as they will have 50-65% Indian equities and will behave more like the other hybrid funds. Let us revisit this after 3 years!!

          1. Hello Sir, you are free to have your style of investing. I think my point that having 15-20% allocation to a single fund won’t achieve any diversification or asset allocation in a portfolio was not clear. Also, the idea of using debt is to hedge. When a multi-asset has equity and international equity – it cannot be ‘equivalent’ to debt in a portfolio. That was the only point I tried to make. As for performance etc, the fund has to necessarily deliver higher than debt as its overall allocation to equity (domestic plus intl.) is quite high 🙂 To each unto their strategies 🙂 regards, Vidya

  8. Dear Vidya

    Perfect answers to all the possible queries.

    Sharing my personal experience to add just one point. For a long time in my investment journey, (the erstwhile) Balanced funds made the core of my portfolio – till the time I realized I was getting the worst of both worlds. The equity portion of the leading balanced funds was managed worse than the average equity funds – and the debt portion did not even dish out returns matching liquid funds. In the laziness of letting someone else do the re-balancing and asset allocation for you, one tends to get complacent on what actually is going on with the equity or debt portions of the hybrid funds. All the nuances of MF investing including ‘Investing style in Equity’ and ‘Credit/ Duration risk in Debt’ goes completely beyond the investors control or choice.

    Even today I fail to find a single hybrid fund whose Equity portion is managed as well as any of the top 5 Multicap/ LargeCap equity funds – OR whose debt portion is managed as well as the top 5 debt funds across the spectrum.

    I can safely extrapolate my thought process to the multi-asset funds as a good 70-80 % would still be ‘debt+equity’. The balance would be (a) Gold – which just gets it head out of the water once in a few years and then goes back to sleep (b) International equity- well you have much better options to have that exposure through MO Nasdaq-100 or PPFAS.


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