Multi-asset funds

A multi-asset fund is a hybrid that goes beyond equity and debt. Where a plain hybrid holds two things, this holds three or more, on the idea that assets which do not move in lockstep steady the whole when any one of them has a bad year.

What SEBI means by multi-asset

SEBI defines a multi-asset allocation fund as one that invests in at least three asset classes with a minimum of 10 per cent in each. Equity and debt are two; the third is most often gold, and some funds add others such as overseas equity or units of real estate trusts. The defining feature is the count of asset classes, not the exact proportions, which vary from fund to fund.

Why hold more than two asset classes

The case for a third asset is that it often does not move with the first two. Gold, for instance, has sometimes held up or risen when equities fell. When the pieces do not all fall at once, the whole fund moves less than its most volatile part, and that smoother ride is the entire point of the category.

Be careful with the word “often”. Assets that usually drift apart can fall together in a sharp shock, when almost everything drops at the same time. So the steadying effect is a tendency, not a rule, and it is strongest in ordinary years and weakest in exactly the panics people most want protection from.

It still carries risk and can fall

Spreading across assets lowers how much the fund swings; it does not make the fund a low-risk or protected product. Each piece carries its own risk — equity carries market risk, debt carries interest-rate and credit risk, gold’s price swings on its own — and the combined fund can and does fall. Nothing here is fixed, and the mix narrows the range of outcomes without removing it.

Tax depends on the mix

How a multi-asset fund is taxed turns on how much equity it holds, and the rules change. A fund that keeps its equity above the threshold the rules set is taxed as an equity fund — see how equity funds are taxed — while one below it can be taxed on a different basis. Because two multi-asset funds can sit on opposite sides of that line, confirm your own case with a tax adviser.

Read what it actually holds

“Multi-asset” is a container, not a recipe. One such fund can be mostly equity with slivers of debt and gold; another can be gold-heavy. They will behave very differently, so the stated allocation in the scheme document — not the category name — is what tells you what you are actually holding.