Are Multi Asset Allocation Passive Funds Truly Passive?

Multi Asset Allocation Funds seem passive but act like active funds due to flexible equity-debt ranges. Learn why they may not suit you.

Over the past few years, Indian investors have fallen in love with index investing.
Anything that has the word “index” or “passive” immediately earns investor trust. It’s seen as simple, low-cost, and free from fund manager bias.

This growing enthusiasm has given rise to a new trend — AMCs launching funds branded as “passive solutions” even when the underlying strategy is not truly passive.

One such example is the rising popularity of Multi Asset Allocation Funds that claim to offer the convenience of passive investing across equity, debt, and gold. But if you dig a little deeper, you’ll realize that these funds are “passive” only in appearance — not in practice.

Let’s examine this closely using the Motilal Oswal Multi Asset Allocation Funds of Funds (Aggressive and Conservative), backed by data from their Scheme Information Document (SID) and September 2025 presentation.

Are Multi Asset Allocation Passive Funds Truly Passive?

What Are Multi Asset Allocation Funds?

Under SEBI’s classification, Multi Asset Allocation Funds are hybrid funds investing in at least three asset classes, such as equity, debt, and gold, with a minimum 10% allocation to each.

They are marketed as simple “all-in-one” portfolios that automatically balance across asset classes. Some fund houses even call them passive, claiming they only invest in index funds or ETFs.

However, there’s a subtle but critical difference:

While the instruments inside these funds may be passive, the allocation decisions are very much active.

The Motilal Oswal Example – What the SID Says

Motilal Oswal offers two such schemes:

1. Motilal Oswal Multi Asset Allocation Fund of Fund – Aggressive
2. Motilal Oswal Multi Asset Allocation Fund of Fund – Conservative

According to the Scheme Information Document (SID, dated September 2025) and the official presentation (September 2025), both funds aim to provide long-term capital appreciation by dynamically allocating among Motilal Oswal’s own ETFs — equity, debt, and gold.

Here’s the asset allocation pattern disclosed in the SID:

(Source: Motilal Oswal Multi Asset Allocation Fund of Fund SID, Page 27 & 28, September 2025; and Product Presentation, September 2025)

Point 1: Why These “Passive” Funds Are Actually Active

At first glance, it seems like a balanced approach. But notice the range — the fund manager can move equity from 65% to 100% in the Aggressive variant or from 30% to 60% in the Conservative variant.

That’s a 35%–40% discretionary swing, which is massive.

The SID clearly mentions (Page 11):

“The asset allocation will be dynamic and may change from time to time depending on the fund manager’s outlook, valuation models, and market conditions.”

Similarly, the product presentation explicitly highlights:

“Dynamic Asset Allocation based on Valuation models and Market outlook.”
“Tactical allocation between equity, debt, and gold depending on relative attractiveness.”

This means the fund manager (or model) actively decides how much to invest in each asset class based on market views — exactly what active management means.

So, while these funds use passive ETFs as building blocks, the strategy itself is active.

They are best described as “Actively Managed Asset Allocation Funds using Passive Instruments.”

The Illusion of Simplicity

Investors assume that “passive” means no market timing, no human interference, and hence safer. But here, that assumption fails.

The passive element is only in the ETFs. The active element lies in the decision-making process.

If the fund manager’s model signals equities are overvalued, they might reduce equity to 65%. If markets fall, they might increase equity to 90% or more.

That’s tactical asset allocation — not passive replication.

In short, these funds are active in disguise — capitalizing on the current investor obsession with anything “passive” or “index-based.”

Point 2: Long-Term vs. Near-Term Goal Suitability

Now, let’s evaluate whether such funds are suitable for long-term or near-term financial goals.

Suitable for Long-Term Investors

If your financial goal is 10 years or more away, and you’re comfortable with tactical changes in asset allocation, these funds might serve your purpose.

Over long durations, short-term allocation changes have minimal impact, and the automatic balancing can even protect against volatility.

You get:

• Diversification across multiple asset classes,
• Tactical rebalancing based on valuation signals,
• The simplicity of managing one fund.

Hence, for long-term investors who don’t want to actively rebalance portfolios themselves, these funds can be convenient.

Unsuitable for Near-Term or Goal-Based Investing

However, for investors whose goals are near (within 3–5 years), these funds are not appropriate.

As you get closer to a goal, the standard financial planning principle is to gradually reduce equity exposure and increase debt allocation to protect capital.

But in these funds, you have no control over equity levels. The manager could still hold 70–80% in equity when your goal is just 2 years away — because their valuation model says “equities are attractive.”

This defeats the purpose of goal-based de-risking.

Hence, for near-term or fixed-goal planning, it’s far better to separately manage equity and debt funds, where you can control your own glide path.

Point 3: Equity Taxation Trap — The Hidden Design Bias

Here’s the most overlooked point.

Most Multi Asset Allocation Funds — including Motilal Oswal’s — are structured to qualify for equity taxation.

Under current tax laws:

• Funds with 65% or more in equity qualify as equity-oriented, and
• Those with less than 65% are treated as non-equity (debt) and taxed accordingly.

To ensure investors enjoy the lower equity tax rates (10% LTCG and 15% STCG), fund houses design their portfolios to always keep at least 65% in equity — even if market conditions don’t justify it.

That means even during volatile or expensive market phases, the fund might still maintain a minimum 65% equity allocation just to retain its tax advantage.

The consequence:

While it helps from a taxation standpoint, it increases market risk — making the fund unsuitable for short- or medium-term goals.

So, while AMCs pitch these products as “multi asset” and “balanced,” in practice, they’re equity-heavy funds wearing a diversification badge — mainly to enjoy equity taxation status.

Additional Concern – Behavioural Risk

These funds can also create behavioural confusion.

When markets fall, the fund might move into debt, reducing equity exposure. When markets rebound, investors might compare returns with pure equity funds and feel disappointed — leading to premature exits or switching.

Hence, unless you fully understand that the allocation inside is dynamic, you might misinterpret performance.

Cost Angle – Passive Is Not Always Cheaper

Because these funds are Fund of Funds (FoFs), they bear:

1. The expense ratio of the underlying ETFs, and
2. The additional expense ratio of the FoF itself.

Even though both may appear low individually, combined they often match or exceed actively managed hybrid funds.

For instance, as per the latest factsheet (September 2025), the Motilal Oswal Multi Asset Allocation FoF Direct Plan TER stands at around 0.47%, while the underlying ETFs add another 0.1–0.2%, bringing total cost close to 0.6–0.7% — not much lower than some actively managed hybrids.

So, before assuming “passive = cheaper,” always check the Total Expense Ratio (TER) in the SID and factsheet.

Final Thoughts – Passive Label, Active Reality

The biggest takeaway is this:

Not every fund labeled as “passive” is genuinely passive.

The Motilal Oswal Multi Asset Allocation Funds of Funds — and several similar schemes from other AMCs — are actively managed in terms of allocation, despite using passive instruments.

They are marketed smartly, taking advantage of the current investor bias toward index funds. But in practice, they function much like tactical hybrid funds.

Suitable for:

• Long-term investors (10+ years),
• Those comfortable with fund manager-driven shifts,
• Investors seeking convenience in a single diversified fund.

Not suitable for:

• Short-term or near-goal investors,
• Those who prefer fixed or predictable equity-debt splits.

In Summary

Conclusion

The rise of Multi Asset Allocation Funds shows how AMCs are cleverly riding the “passive investing wave.”

While the underlying ETFs are passive, the decision-making process remains active — based on fund manager discretion or valuation models.

For long-term investors who want simplicity and can accept this active layer, these funds may fit well.

However, if you prefer control, transparency, and goal-specific asset management, it’s wiser to create your own equity-debt mix rather than relying on such “passive in name, active in reality” products.

Always read the Scheme Information Document (SID) carefully — especially the Asset Allocation Pattern and Investment Strategy sections — before assuming that a fund labeled “passive” truly behaves like one.

Disclaimer

This article is meant purely for informational and educational purposes. It should not be construed as investment, tax, or legal advice. Mutual fund investments are subject to market risks, and asset allocation decisions should be made considering one’s individual financial goals, risk tolerance, and time horizon. Readers are advised to consult a SEBI-registered investment advisor before taking any investment decisions based on the information discussed in this post.