Multi-Asset Funds: Your Gateway to Diversified Investing

Every few months, someone asks me whether they should buy gold, equities, or debt. My answer is usually the same: why are you picking one? Multi-asset funds exist precisely for people who don't want to play the allocation guessing game every quarter. But like everything in Indian finance, the devil is in the details, and most people buy the wrong fund for the wrong reasons.

Let me break down what multi-asset funds actually do, when they make sense, when they absolutely don't, and which traps to avoid in the Indian context.

What Multi-Asset Funds Actually Are

A multi-asset fund invests across at least three asset classes, typically equity, debt, and gold (or sometimes real estate through REITs). The fund manager shifts money between these based on market conditions, valuations, and the fund's mandate.

Think of it like a thali. Instead of ordering one dish and hoping it's good, you get a bit of everything. If the dal is bad today, the paneer makes up for it. That's the core idea: different assets perform well at different times, and combining them smooths out your ride.

In India, SEBI requires multi-asset allocation funds to invest a minimum of 10% in at least three asset classes. Most funds keep 50-70% in equities, 15-25% in debt, and 10-20% in gold or commodities. Some of the popular ones include ICICI Prudential Multi-Asset Fund, SBI Multi Asset Allocation Fund, and Nippon India Multi Asset Allocation Fund.

The Indian Fund Categories You Should Know

SEBI has created a whole taxonomy of hybrid funds, and people constantly confuse them. Here's the quick breakdown:

Multi-Asset Allocation Funds invest in 3+ asset classes with minimum 10% each. This is the true multi-asset category.

Balanced Advantage Funds (BAFs) dynamically shift between equity and debt based on valuation models. These are hugely popular in India, with funds like HDFC Balanced Advantage and ICICI Prudential Balanced Advantage managing massive corpuses. But here's the thing: BAFs are not multi-asset funds. They toggle between two asset classes, not three or more. People conflate these constantly.

Aggressive Hybrid Funds keep 65-80% in equity and 20-35% in debt. These get equity taxation (which is favorable), making them tax-efficient but not truly diversified.

Conservative Hybrid Funds are the opposite, 75-90% debt with 10-25% equity. Essentially debt funds with a sprinkle of equity.

The tax treatment matters enormously here. If a fund maintains 65%+ equity allocation, gains are taxed at equity rates (12.5% LTCG after 1 year). Below that threshold, debt taxation applies (taxed at your income slab rate). Many multi-asset funds deliberately stay above 65% equity for this reason, which somewhat defeats the purpose of being truly multi-asset.

When Multi-Asset Funds Make Sense

You're within 5-10 years of a major goal. If you're saving for a house down payment or your kid's college in 7 years, going 100% equity is too risky and 100% debt won't grow enough. A multi-asset fund gives you growth with a cushion.

You're the kind of person who panics during crashes. Be honest with yourself. If you saw your portfolio drop 30% in March 2020 and your first instinct was to sell everything, you need the stabilizing effect of debt and gold in your portfolio. Multi-asset funds force this discipline.

You have a lump sum to deploy and no idea about timing. Rather than trying to figure out if equity is expensive right now, a multi-asset fund handles that allocation call for you.

You're retired or near retirement. Capital preservation with some growth is exactly what these funds are designed for.

When Multi-Asset Funds Are the Wrong Choice

Here's where I get opinionated, and where most content about multi-asset funds fails you.

If you're in your 20s or early 30s with a 15+ year horizon, you probably don't need a multi-asset fund. Your biggest advantage is time. A 25-year-old putting money into a multi-asset fund earning 10-11% annually when a pure equity index fund might return 12-14% over 20 years is leaving serious money on the table. The compounding difference between 11% and 13% over 20 years on a 1 lakh monthly SIP is over 1 crore rupees. That's not nothing.

Young investors should be equity-heavy. Take the volatility. You can afford it. The drawdowns that scare retirees are just buying opportunities for someone with decades ahead.

If you already have a well-structured portfolio with separate equity, debt, and gold allocations, a multi-asset fund adds a redundant layer of management fees. You're paying an expense ratio for something you've already done yourself.

If you're chasing recent returns. Multi-asset funds look great in mixed markets but will always underperform pure equity in a raging bull run. If the Nifty is up 20% and your multi-asset fund returned 14%, that's not a failure, that's by design. But many investors don't understand this and switch out at exactly the wrong time.

The Expense Ratio Trap

This is where the Indian mutual fund industry gets a bit sneaky. Multi-asset funds tend to have higher expense ratios than pure equity or debt funds, typically 0.5% to 1.5% for regular plans and 0.3% to 0.8% for direct plans.

The justification is that managing three asset classes requires more expertise. Fair enough. But here's the comparison you should run: what would it cost you to hold a Nifty 50 index fund (0.1-0.2% expense ratio), a short-duration debt fund (0.2-0.4%), and a gold ETF (0.1-0.5%) separately?

Often, the DIY approach costs less than half of what a multi-asset fund charges. The difference is convenience. You're paying for someone else to do the rebalancing. Whether that convenience is worth 0.3-0.5% annually depends on how hands-on you want to be.

Over 20 years on a 50 lakh corpus, a 0.5% expense ratio difference compounds to roughly 12-15 lakh rupees. That's the real cost of convenience.

Passive vs Active Multi-Asset: My Take

In pure equity, I lean toward index funds for most people. The data is clear that most active equity fund managers underperform indices over long periods, especially after fees.

But for multi-asset allocation, I actually think active management earns its keep. The value of a multi-asset fund isn't stock picking, it's the asset allocation decision. When to shift from equity to debt, when to increase gold exposure, how to handle the transition. This is where a skilled fund manager adds genuine value.

That said, you can replicate this with a simple rule-based approach. Here's a basic framework:

• Age up to 35: 80% equity, 10% debt, 10% gold
• Age 35-50: 65% equity, 20% debt, 15% gold
• Age 50-60: 50% equity, 30% debt, 20% gold
• 60+: 35% equity, 40% debt, 25% gold

Rebalance once a year. This isn't perfect, but it's better than what most people do, which is 100% equity in bull markets and 100% panic in bear markets.

The Bottom Line

Multi-asset funds are a solid tool for a specific job. They're not the best way to grow wealth aggressively, and they're not the safest way to preserve capital. They sit in the middle, which is exactly where a lot of Indian investors should be but refuse to be because everyone wants to be the next Rakesh Jhunjhunwala.

If you decide to go with a multi-asset fund, buy direct plans (not regular), check that the fund actually invests meaningfully across three or more classes (not just 10% token allocation to gold), and understand that you're optimizing for risk-adjusted returns, not maximum returns.

The boring middle path doesn't make for exciting Twitter threads, but it's where most people's money should actually live.