Are multi asset funds safe? Learn the hidden risks in equity, debt maturity, taxation bias, and why blindly investing in them can be dangerous.
Over the last few years, multi asset allocation funds have become extremely popular among Indian investors. They are marketed as a simple solution that gives exposure to equity, debt, and commodities like gold — all within one fund. The promise sounds attractive: diversification, professional management, and convenience, all bundled together.
However, behind this simplicity lies a set of risks that many investors either do not understand or completely ignore. Blindly investing in multi asset funds without understanding how they actually work can be dangerous — especially when you are depending on them for specific financial goals.
Let us understand why.
Are Multi Asset Funds Safe? Hidden Risks Every Investor Must Know
Why investors are attracted to multi asset funds
Nearly 90% of investors who buy multi asset funds do not hold them as their only investment. They buy them either with the hope that this fund will outperform their other funds, or due to a fear of missing out (FOMO).
Distributors and fund houses promote these funds heavily by stressing on “diversification” and by reminding investors that no single asset class has consistently performed better than others in the past. While that statement is true, the way it is used in marketing often creates a false sense of safety.
The focus shifts from diversification as a concept to the idea that a multi asset fund itself is diversification — almost like a ready-made solution or a panacea. This is where the problem begins.
The taxation bias forces equity dominance
One of the biggest structural issues with multi asset funds is taxation.
To qualify for equity taxation, a fund must hold at least 65% in equity. Since equity taxation is more attractive than debt taxation, most multi asset funds deliberately maintain equity exposure at or above this 65% level.
This means that irrespective of market conditions, investor risk profiles, or investor time horizons, the fund remains largely equity-heavy.
Now assume that you are holding only one multi asset fund and your financial goal is just five years away. Ideally, your portfolio should gradually reduce equity exposure and move towards safer assets. But the fund manager will not do this for you — because their priority is not your goal, but maintaining the fund’s structure and tax status.
This creates a serious risk for investors who depend on one multi asset fund for near-term goals.
SEBI definition gives wide flexibility — and wide risk
SEBI defines a multi asset allocation fund as:
“A fund that invests in at least three asset classes with a minimum allocation of at least 10% each in all three asset classes.”
Beyond this rule, the fund manager has almost complete freedom:
- Freedom over where to invest in equity
- Freedom over what type and quality of bonds to hold
- Freedom over average maturity and duration in the debt portion
- Freedom over how aggressively or conservatively to position the portfolio
This means that two funds in the same category can behave very differently and carry very different levels of risk.
Example: Debt maturity differences across funds
Let us look at a simple example from the three largest multi asset allocation funds in India (based on AUM):
- Kotak Multi Asset Allocation Fund — Average maturity of debt portfolio: 18.54 years
- ICICI Prudential Multi Asset Fund — Average maturity: 3.58 years
- SBI Multi Asset Allocation Fund — Average maturity: around 4 years
(Source: Value Research)
These are massive differences.
A debt portfolio with an 18.5-year maturity is highly sensitive to interest rate changes and carries significant volatility. A portfolio with 3–4 year maturity is far more stable.
Yet, all these funds fall under the same “multi asset” category.
An investor who believes that the “debt portion is safe” without checking maturity and credit quality may unknowingly take on risks they never intended to take.
Equity portfolio risks are equally hidden
The same problem exists on the equity side.
There is no mandatory benchmark that a multi asset fund must follow. Fund managers are free to construct their own equity portfolios, which may include varying proportions of large-cap, mid-cap, and small-cap stocks.
An investor who believes they are getting “balanced equity exposure” may unknowingly be exposed to high mid-cap or small-cap volatility — something they may not be psychologically or financially prepared for.
The dangerous illusion of “one fund for everything”
Many investors believe:
- Only 65% is in equity, so it must be safe
- The rest is in debt and gold, so downside is protected
- The fund manager will handle asset allocation, so I don’t need to worry
This belief creates a dangerous illusion that multi asset funds are low-risk and suitable for everyone.
In reality:
- The equity portion can be aggressive
- The debt portion can be long duration or credit risky
- The asset allocation does not change based on your personal goals
- The fund is designed for the fund house’s structure, not for your life situation
Conclusion: Understand before you invest
Multi asset funds are not bad products. But they are also not magical solutions.
They are complex products with flexible mandates, taxation-driven structures, and hidden risks — especially for investors who blindly invest in them without understanding what they actually hold.
Instead of chasing multi asset funds just because they sound diversified and convenient, investors must ask:
- What is the equity style and risk?
- What is the debt maturity and credit quality?
- Does this fund suit my time horizon and risk tolerance?
- Am I using this fund as a complement, or as a replacement for planning?
Diversification is not about owning many asset classes. It is about owning the right assets, in the right proportion, for the right goal, at the right time.
Blind investing replaces thinking. And in personal finance, that can be very expensive.
Note – There are few Multi Asset Passive Funds in the market also. Read my opinion on those also here – Are Multi Asset Allocation Passive Funds Truly Passive?
