Expect high single-digit or low double-digit return in MAAFs over long term

Instead of hiking allocation steeply or exiting these funds altogether after the recent run-up, go for partial rebalancing

Multi-asset allocation funds (MAAFs) have emerged as the best-performing category among hybrid schemes over the past year, with a category average return of 21.5 per cent. Factors such as reasonably strong equity market performance (Nifty 50 has delivered about 11 per cent over the past year), firm gold prices, and the sound allocation strategies of these funds have supported their performance. Asset under management (AUM) of these funds climbed from ₹1.04 trillion to ₹1.75 trillion over this period.

Why have MAAFs performed so well?

MAAFs must invest at least 10 per cent of their portfolio in each of three asset classes, typically equity, debt and gold. These funds performed well over the past year because equity and gold performed well, and fund managers had the flexibility to shift money between assets to capture gains and limit risk. “MAAFs benefited from synchronised gains across asset classes. Equities delivered strong returns led by earnings growth, while gold performed well amid global uncertainties. The flexibility to rebalance allocations helped optimise returns,” says Aparna Shanker, chief investment officer (equity), The Wealth Company Mutual Fund.

 

Equity markets rallied over the past year as corporate earnings improved and investor participation remained strong. Gold prices rose on the back of geopolitical tensions and global central bank buying. Debt allocations provided stability when markets witnessed intermittent volatility.

 

Fund managers also used valuation signals to adjust exposure and protect gains. “The strength of multi-asset strategies lies in dynamic allocation. When equity valuations became stretched, managers trimmed exposure and added to debt or gold. That discipline helped contain downside and capture upside,” says Abhishek Tiwari, chief executive officer of PGIM India Asset Management.

Are such returns sustainable?

While past returns look attractive, experts expect returns to moderate over the long term. Gold prices have seen a sharp run-up, and equity markets trade at elevated valuations in certain pockets.

 

Investors should not assume that last year’s high returns will repeat every year because markets move in cycles. “Over a full market cycle, MAAFs may deliver high single-digit to low double-digit returns, depending on market conditions,” says Tiwari.

 

These funds focus on reducing volatility. “They aim to smoothen volatility rather than chase peak returns. Over time, they can offer more stable outcomes compared to pure equity funds,” says Shanker.

What advantages do MAAFs offer?

MAAFs offer built-in diversification. Investors do not need to choose and rebalance separate equity, debt and gold funds on their own. Professional managers handle allocation decisions.

 

“For investors who want exposure to multiple asset classes but lack the time or expertise to manage them separately, MAAFs provide a simple solution,” says Shanker.

 

Another key benefit lies in risk management. When one asset class underperforms, another may compensate. This reduces portfolio swings compared to pure equity investments.

 

Disciplined asset allocation prevents emotional decisions such as buying at peaks or selling during panic. “Asset allocation drives a large part of long-term returns. A disciplined multi-asset approach removes emotional decisions during market extremes,” says Tiwari.

Who should invest in MAAFs?

MAAFs suit investors who seek moderate growth with controlled volatility. They also suit first-time investors who feel uncomfortable allocating money across asset classes on their own.

 

“These funds work well for investors with a balanced risk appetite and a three to five-year investment horizon,” says Shanker.

 

“They also suit investors who want equity participation but prefer some cushion during market corrections,” says Tiwari.

What are the associated risks and disadvantages?

Despite diversification, MAAFs carry risks. If equity and gold decline simultaneously, returns may suffer. Debt allocations may also face interest rate risk.

 

“Investors often assume that diversification eliminates risk. It reduces risk but does not remove it,” says Alekh Yadav, head of investment products, Sanctum Wealth.

 

Performance may also vary widely across schemes. Some funds maintain static allocations, while others follow aggressive tactical strategies, due to which risk levels can vary.

 

MAAFs also differ in their allocation models, risk profile and investment philosophy. Some maintain near-equal exposure to equity, debt and gold. Others tilt heavily towards equity. Two funds in this category can behave very differently during volatile markets, depending on how much they allocate to each asset class. “Investors must examine the mandate and historical allocation pattern of the fund,” says Yadav.

 

Investors should review asset allocation limits, rebalancing frequency and risk metrics before investing.

Who should avoid these funds?

These funds may not suit aggressive investors who seek maximum equity returns. They may also not suit conservative investors who want capital protection similar to fixed income products.

 

“If an investor has a very high risk appetite and long horizon, a pure equity allocation may deliver better outcomes over time,” says Anand K Rathi, co-founder, MIRA Money.

Minimum investment horizon

Experts recommend a minimum investment horizon of three to five years. This allows the asset allocation strategy to play out across market cycles.

 

Short-term investing may not give the strategy enough time to deliver results. “Short-term investors may feel disappointed if markets correct soon after entry,” says Rathi.

 

Advice for existing investors

After a year of high returns, investors may feel tempted to either add to their allocation or book profits. Experts advise against impulsive decisions.

 

“Investors should review their asset allocation rather than react to one year of performance,” says Yadav.

 

If the allocation has drifted beyond comfort levels, partial rebalancing may help restore balance.

Advice for new investors

New investors should avoid investing solely based on recent returns. They should assess risk tolerance and long-term goals first.

 

New investors should also tone down their return expectations. “Enter with realistic expectations. MAAFs aim for consistency, not spectacular short-term gains,” says Rathi.