Multi-asset funds vs largecaps: Why has the diversified strategy delivered better returns in 1 year?

Multi-asset funds are emerging as a core portfolio holding for many investors due to their allocation to a diverse mix of assets, with holdings spread across equity, debt, precious metals, REITs and international equities, as reported by ETBureau.

Wealth managers point out that portfolios following a disciplined asset-allocation approach tend to perform well over the long term. This means allocating across asset classes such as equity, debt, precious metals, REITs/InvITs and international equities. However, few investors can decide when to enter or exit an asset class.

The multi-asset category has returned an average of 12.77% over the last one year, with the top performer returning 23%, while the Nifty 50 returned 2.04%.

Analysts point out that the main reason for these higher returns is their allocation to gold and silver, which have seen a sharp rally during the year.

In rupee terms, silver prices have risen 93.5% over the last one year, while gold has gained 42.92%. With most multi-asset funds having a 10%-25% exposure to precious metals, they ended up outperforming equity funds.

They invest in at least three different asset classes, such as equity, debt and commodities (gold/silver), with a minimum allocation of 10% to each. Fund managers actively shift allocations across asset classes based on the economic outlook, interest rates and risk-return potential, moving more into debt or gold when they expect equities to underperform and increasing equity exposure during growth phases.

In the case of equity-oriented multi-asset funds that invest 65% or more in Indian equities, with the balance in fixed income and precious metals, an investor pays short-term capital gains tax of 20% if the units are held for less than a year, and long-term capital gains tax of 12.5% if the units are held for more than a year, with an annual tax exemption of Rs 1.25 lakh

Non-equity-oriented multi-asset funds that have between 35% and 65% in equities are treated differently. Here, short-term gains are taxed according to the investor’s income-tax slab, while long-term gains are taxed at 12.5% after a holding period of more than 24 months.