What are multi-asset funds and are they good for your investment portfolio?

With equity valuations climbing higher and market conditions becoming increasingly stretched, investors are feeling the pressure of uncertain times. In response, market experts and wealth managers are recommending a more balanced investment strategy—multi-asset funds.
These funds, designed to diversify risk across multiple asset classes like equities, bonds, and gold, offer the stability many portfolios need in today’s volatile environment
Could this strategy be the key to managing risk while still capturing growth? Here’s all you need to know about multi-asset funds.
Multi-asset funds are schemes that invest in a combination of three or more assets, such as equities, bonds, and gold.
Some of these funds even include more niche assets like Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), or international stocks.
The main idea behind these schemes is to create a balanced portfolio that can weather different market conditions by spreading risk across multiple asset classes.
Instead of concentrating on a single asset class, such as equities, these funds allocate resources to other areas, providing a more diversified portfolio that can help smooth out volatility in turbulent markets.
One of the most significant advantages of multi-asset funds is that they offer a pre-built, diversified portfolio.
For investors who don’t have the time or expertise to manage individual asset classes, these funds provide a simple solution to asset allocation.
They are particularly attractive for those who may not have access to a financial planner but want to benefit from a well-rounded investment strategy.
Multi-asset funds are also ideal for investors looking to reduce the number of products in their portfolios.
With a single scheme, you can gain exposure to a mix of equities, fixed income, and gold, reducing the need for multiple investments across different funds.
This streamlines the investment process while maintaining a diversified portfolio.
In any investment strategy, regular portfolio rebalancing is essential to maintain the desired risk exposure.
Markets fluctuate, and asset classes often move in opposite directions.
For example, when equities rise, exposure to stocks may become too high, and a portfolio will need rebalancing by shifting some of those profits into bonds or gold.
Multi-asset funds come with an automatic rebalancing feature, meaning that the fund managers make these adjustments for you.
This ensures that your portfolio stays aligned with the intended asset allocation, helping to protect against overexposure to one asset class during market ups and downs.
Multi-asset funds that allocate 65% or more of their investments to equities are taxed as equity funds, which is advantageous for investors.
These funds qualify for long-term capital gains (LTCG) tax of 12.5% if held for more than a year, making them a tax-efficient choice for long-term investors.
In most schemes, the equity exposure is made up of a mix of stocks and arbitrage opportunities, with many funds currently holding 30-40% in equities and the rest in arbitrage or other asset classes.
Other schemes may allocate between 35% and 65% to equities, which would qualify for the same favorable LTCG rate if held for over two years.
Should you consider multi-asset funds?
For those seeking to reduce risk while maintaining the potential for growth, multi-asset funds are a compelling option.
They offer a built-in asset allocation strategy, automatic rebalancing, and tax-efficient growth, making them particularly appealing in an era of high market valuations.
With the Sensex nearing new highs and the equity market becoming more expensive, multi-asset funds could provide a balanced approach, allowing investors to tap into different market opportunities without exposing their portfolios to excessive risk.