3 Best Multi Asset Allocation Funds for 2025 - Top Performing Multi Asset Allocation Mutual Funds in India

[Read: The Key Factors Behind the Recent Volatility in the Indian Equity Market]

If you are looking to protect your investment portfolio, a balanced approach now is necessary with tactical allocation to three key asset classes --- equity, debt, and gold. You can't solely depend on equities for wealth creation.

In the current market scenario, a Multi-Asset Allocation Fund is a meaningful choice now to gain tactical exposure to equity, debt and gold and reap the benefit of diversification. Diversification, as you may be aware, is the basic tenet of investing that helps balance the risk-reward. Watch this video to know which are the 3 Best Multi Asset Allocation Funds in India to invest in 2025:

In this article, I will reveal the list of some of the best Multi Asset Allocation Funds for 2025. But before that, let's understand the basics of this sub-category of mutual funds.

What are Multi Asset Allocation Funds?

Multi Asset Allocation Funds are hybrid mutual funds that are mandated to invest in at least three asset classes -- equity, debt, and gold -- with a minimum allocation of at least 10% in each.

Usually, a Multi-Asset Fund allocates around 35%-65% in equities (across market capitalisations and sectors), anywhere between 25%-55% in debt & money market instruments, and up to 20% in gold.

Note that, some Multi Asset Allocation Funds also hold exposure to Derivatives, REITs & InvITs, Silver, and Overseas equities.

The investment objective of the Multi Asset Allocation Fund is to generate modest capital appreciation/income by investing in a diversified portfolio of equity & equity related instruments, debt & money market instruments and gold, thus trying to reduce overall risk to the portfolio from a combined portfolio of low-correlated assets (i.e. equity, debt, and gold).

The fund managers of Multi Asset Allocation Funds have the flexibility to dynamically allocate investments in a mix of asset classes (i.e. equity, debt, gold, etc.) depending on the outlook for them and considering a variety of factors such as:

• Valuations in the Indian equity market: Price-to-Earnings (P/E) and Price-to-Book Value (P/BV) ratio relative to historical averages

• Fundamental attributes of the securities

• Interest rate cycle: whether rates are heading upwards or downwards

• Macroeconomic factors prevailing in India and globally

• Undercurrents for gold

The fund manager of a Multi-Asset Allocation Fund has much leeway in the portfolio construction activity while taking exposure to a mix of asset classes -- equity, debt, gold, etc. -- on evaluation of the above factors. It helps manage the risks and explore wealth-creating opportunities.

Hence, potentially, Multi Asset Allocation Funds facilitate protecting the downside risk with tactical investments and can be construed as truly balanced.

Why consider investing in Multi Asset Allocation Funds in 2025?

In the year 2024, a variety of factors have impacted the Indian equity market....

• Tensions in the Middle East following Hamas's attack on Israel

• China's military activity in the South China Sea

• The U.S. military has also been supporting Taiwan primarily through the sale of arms & ammunition for decades to keep China away

• Likewise, tensions between China and the Philippines, as well as North Korea and South Korea

• The ongoing Russia-Ukraine war

• The outcome of the general election in India and the U.S, the two largest democracies of the world

• The possibility of geopolitical tensions intensifying under the Trump 2.0 regime

• Increasing signs of geoeconomic fragmentation

• Not enough disinflation

• Foreign Direct Investment (FDI) flows redirected along geopolitical lines

• Corporate earnings entering the slow lane from Q2FY25

• Foreign Portfolio Investors (FPIs) pulling out money

• Weak rupee compared to the greenback

• Higher bond yields

• ...and more!

As a result, the Indian equity market clocked an absolute return of 8.8% in CY2024 compared to +20.0% in CY2023.

Many of these risks still persist in 2025.

Among global risks, geopolitical conflicts and geo-economic fragmentation are perceived as high risks to the domestic financial system, according to the RBI's latest Financial Stability Report.

The medium-term outlook remains challenging, with downside risks from possible intensification of geopolitical conflicts, sporadic financial market turmoil, extreme climate events and rising indebtedness, as per the RBI.

Under Trump 2.0 the geopolitical landscape is likely to change as practices his protectionist policies. As U.S. President-elect Donald Trump takes charge on January 20, 2025, uncertainty is expected to further rise. While Economies and markets have so far proven to be adaptable and resilient, the year 2025 is likely to test that resilience that saw most asset classes generating superlative returns.

A fact also is that Indian equity markets are commanding a premium when compared to the MSCI Emerging Markets Index and the MSCI World Index.

Currently, the trail Price-to-Equity (P/E) ratio of the MSCI Index is around 27x, while the MSCI Emerging Markets Index and MSCI World Index trail P/Es are around 15x each (as per the latest factsheets as of December 2024).

Even on a 12-month forward P/E, the MSCI India Index with a P/E of nearly 22x is commanding a noticeable premium vis-a-vis the world and emerging markets that are around 19x and 12x, respectively.

At present, India's market capitalisation-to-GDP ratio, famously called the Buffett indicator (named after legendary investor Warren Buffett), is also in the 'modestly overvalued' zone.

The fast run-up in the Indian equity markets has pushed up valuations.

Note that, in the case of midcaps and smallcaps, the valuations are relatively even more expensive compared to the largecaps. Despite the correction in the broader market, the froth in the mid and small segments of the market hasn't settled much yet.

Now while some may justify the premium that Indian equities command relative to global peers as India is the fastest-growing major economy (at the fifth spot in nominal GDP terms), the margin of safety, particularly in the midcaps and smallcaps, is not very comforting.

Disappointing corporate earnings currently are the biggest risks for Indian equities, as ultimately the earnings justify the valuations.

Although India's long-term economic outlook seems bright, it would be foolish to get carried away by irrational exuberance and keep irrational return expectations.

Remember, for every level of return there is a certain level of risk. And it is not always that high risk translates into high returns.

"The essence of investment management is the management of risks, not the management of returns." - Benjamin Graham (the father of value investing and Buffett's mentor).

Given the risk factors in play, it would be wise to tactically have exposure to equity, debt, and gold -- the three key asset classes -- rather than zealously investing in a single asset class.

The graph above vindicates the fact that not all asset classes move in the same direction always. There are periods and macroeconomic situations when one asset class would do very well while the other/s may fall falter on returns. For example, in 2015, 2016, 2018, and 2022, when equities disappointed investors, the other asset classes such as debt and/or gold fared better.

Hence following a tactical multi-asset approach when investing makes sense. The low correlation among assets enables Multi Asset Allocation Funds to protect the downside risk better during uncertain economic conditions and volatile markets, and generate better risk-adjusted returns, compared to investing in just one asset class.

When you tactically invest in multiple asset classes, the impact of any sharp negative movement in one asset class is usually mitigated by the possible rise in other asset classes.

Therefore, you, the investor, can potentially preserve the value of investment capital across market phases more effectively and earn a decent risk-adjusted return over the long term.

[Read: Why Investing in Multi-Asset Allocation Funds Makes Sense Now]

What are the advantages of investing in Multi Asset Allocation Funds?

Investing in Multi Asset Allocation Funds adduces the following benefits:

1. Tactical diversification across asset classes -- equity, debt, gold, etc. -- reduces the downside risk and optimises risk-adjusted gains.

2. Provides relief from timing and monitoring different asset markets (the fund manager does it for you)

3. Enables timely portfolio rebalancing based on the performance and the outlook of each underlying asset by a professional fund manager.

4. You gain from the strong research capabilities of a fund management team.

5. Possibly keep the cost of investing low

6. Reduces risks and optimises returns

7. Make portfolio tracking easy

The market, as you know, moves in cycles; it goes through bull and bear phases and sometimes even consolidates or moves flat. The return you clock is subject to these phases of the market.

In a bull market, Multi Asset Allocation Funds typically may underperform Aggressive Hybrid Funds as well as Large Cap Funds. So far, in the current bull phase, Multi Asset Allocation Funds have fared a tad better than the Aggressive Hybrid Funds, while slightly underperforming Large Cap Funds.

During bear market phases, which is a crucial test for market-linked investments, as highlighted in Graph 2 they have protected the downside risk far better.

One of the key reasons for this is that asset allocation is not static; it is dynamic. Meaning, that the asset allocation is reviewed regularly, and necessary portfolio changes are made based on the fund manager's evaluation of the influencing factors and the outlook for the respective asset classes.

The fund manager holds the mandate to make changes in the portfolio to benefit from the opportunities in the other asset classes or may even allocate to cash & cash equivalents when the margin of safety is narrow and/or there aren't enough investment opportunities.

What are the risks involved in Multi Asset Allocation Funds?

Depending on the composition of the portfolio and the dominant asset class, a Multi Asset Allocation Fund may be exposed to various risks.

The equity component may be vulnerable to market volatility, liquidity, and concentration risks, while the debt portion may be exposed to price risk, interest rate risk, credit risk, etc.

In the case of the gold component (or any other commodity), it can be affected by the underlying macroeconomic and geopolitical environment that may affect the prices of the commodity and result in volatility in the short term.

That being said, over the long run, the fund managers of a Multi Asset Allocation Fund can potentially manage risk and returns by efficiently balancing the portfolio to capitalise on the market opportunities.

Who should consider investing in Multi Asset Allocation Funds?

Multi Asset Allocation Funds are suitable for investors seeking long-term capital appreciation, have a moderately high-risk appetite, and have an investment time horizon of 3 to 5 years.

Moreover, the Multi Asset Allocation Fund can be a good starting point for beginners, offering a simplified approach to tactical asset allocation and diversification within the asset classes and mitigating the risks involved.

Watch this video to learn more about more mutual fund options for beginners:

Having said that, as an investor you need to ensure that the scheme/s being chosen align with your personal risk profile, your broader investment objective, the financial goals you are addressing, and the time in hand to achieve those envisioned goals. Also, the allocation to the scheme/s needs to conform with the broader asset allocation plan best suited for you.

How are Multi Asset Allocation Funds taxed?

The taxation of Multi Asset Allocation Funds depends on their equity exposure.

If a Multi Asset Allocation Fund maintains an exposure of a minimum of 65% in domestic equities over the past 12 months, then the scheme is taxed like an equity fund, else it is taxed like a debt fund.

The following table shows the tax treatment for different Multi Asset Allocation based on their exposure to domestic equities:

Thus, given the dynamic nature of the Multi Asset Allocation Fund, it is important that investors stay informed about the tax implications of the scheme they invest in.

Which are the best Multi Asset Allocation Funds for 2025?

As you are aware there are several Multi Asset Allocation Funds available out there for investing. Considering the selection parameters rolling returns, risk ratios and portfolio characteristics, at PersonalFN we have identified 3 best Multi Asset Allocation Funds for 2025.

The HDFC Multi-Asset Fund, ICICI Pru Multi-Asset Fund, and SBI Multi Asset Allocation Fund have outperformed the CRISIL Hybrid 35+65 - Aggressive Index on returns by managing the risks well.

Let's take a look in detail at what makes these funds the Best Multi Asset Allocation Funds for 2025...

Best Multi Asset Allocation Fund #2: ICICI Pru Multi-Asset Fund

ICICI Pru Multi-Asset Fund (IPMAF) is the erstwhile ICICI Pru Dynamic Plan that is now categorised under Multi-Asset Funds. It is one of the oldest schemes in the category with a track record spanning over 22 years.

IPMAF maintains an equity allocation of a minimum of 65% at all points in time to retain the status of equity taxation. On average, the fund has invested nearly 70% of its total assets in equities. Other than domestic equities, the fund also parks a small portion of its assets in overseas equities.

For the equity portion, IPMAF adopts the bottom-up approach to identify companies with above-average profitability supported by sustainable competitive advantages and uses a top-down discipline for risk control by ensuring the representation of companies from various industries. It also takes exposure to various equity derivatives including futures and options strategies for hedging, portfolio rebalancing, and other purposes.

To offer a cushion from the intense market volatility, the fund also actively invests in debt & money market securities. IPMAF aims to identify securities that offer an optimal level of yields/returns, considering the risk-reward ratio. The scheme carries out an in-depth credit evaluation of securities to mitigate credit risk.

Other than that, IPMAF also invests in REITs & InvITs.

IPMAF has a commendable long-term performance track record. Across time periods the IPMAF has outperformed CRISIL Hybrid 35+65 - Aggressive Index and the category average. Since its inception, the fund has registered a remarkable growth of 16.9% CAGR.

Moreover, the risk taken by the fund (as denoted by the Standard Deviation) is lower than the category average and benchmark index. Thus, on a risk-adjusted basis (as reflected by the Sharpe and Sortino Ratio), IPAF has fared impressively. Its superior performance is the key reason for attracting investors' attention, taking the AUM to over Rs 51,000 crore -- the largest fund in the Multi-Asset Allocation category.

The fund's strategy of maintaining a diverse portfolio spread across equity and debt segments and backed by strong processes led by an experienced fund management team has worked in its favour. As per its portfolio as of December 31, 2024, the IPMAF has 65.39% exposure to domestic equities, 00.5% to overseas equities, 4.65% in domestic mutual funds, around 16.77% in debt & money market instruments, 1.38% in REITs & InvITs, and the rest in cash & cash equivalents.

ICICI Pru Multi-Asset Fund has the potential to steadily generate market-beating returns over complete market cycles. The fund seems to be strategically positioned in terms of its portfolio management approach.

Best Multi Asset Allocation Fund #2: SBI Multi Asset Allocation Fund 

Launched in November 2005 initially as 'SBI Magnum Monthly Income Plan - Floater', this scheme after SEBI's mutual fund recategorization and rationalisation norms was rechristened as SBI Multi Asset Allocation Fund (SMAAF).

In the last one year, SMAAF typically held taken exposure to equities in the range of 35%-42% Around 30%-40% of the total assets have been held in debt & money market instruments (viz. corporate debt, certificate of deposits, commercial papers, and G-Secs), 3%-4% in REITs & InvITs, domestic mutual fund units in the range of 10%-15%, and the rest in cash & cash equivalents. SMAAF has tactically taken exposure to these asset classes on evaluation of a variety of macroeconomic factors in play, market dynamics (including valuations and issuer-specific factors), interest rate cycle, inflation and so on.

This asset mix and diversification within the respective asset classes has helped SMAAF in portfolio stability and performance. As seen in Table 3 above, SMAAF has outperformed the CRISIL Hybrid 35+65 Aggressive index across periods. Since its inception, the fund has clocked a decent 12.2% CAGR (as of January 15, 2025).

While over the longer time periods (3 years, 5 years, and 7 years) SMAAF's returns may seem muted compared to the category average, a fact also is that it has exposed its investors to lower risk (as denoted by the Standard Deviations) than its peers and the benchmark index. On the risk-adjusted basis, SMAAF (as reflected by the Sharpe and Sortino Ratio) has done quite well. For this reason, SMAAF today is the third largest fund with an AUM of Rs 6,983 crore (as of December 31, 2024) in the Multi Asset Allocation Funds category.

In the endeavour to provide investors an opportunity to invest in an actively managed portfolio of multiple asset classes, the fund has held a worthy portfolio. Currently, the top holdings of SMAAF comprise debt securities. It is perhaps conscious of the lofty valuations in the Indian equity market, interest rate cycle, and accordingly holding exposure to respective asset classes.

SMAAF's portfolio characteristics are appealing and thus it has the potential to outpace the benchmark over the long run. If the fund holds higher exposure to debt securities, it could lag some of its category peers but on the risk-adjusted basis is still expected to perform well.

Best Multi Asset Allocation Fund #3: HDFC Multi-Asset Fund

Launched in August 2005, the HDFC Multi-Asset Allocation Fund (HMAF) was earlier known as the HDFC Multiple Yield Fund and categorised as a Monthly Income Plan, under which it invested predominantly in debt instruments with some allocation to equities.

However, post-SEBI's recategorization and rationalisation norms for mutual funds, the scheme was reclassified as a multi-asset fund thus expanding its investment scope.

The fund now holds an equity-oriented portfolio, investing at least 65% of its assets. The fund also holds a minimum allocation of 10% each in debt and gold to reduce the portfolio volatility.

Despite a drastic change in its investment mandate in 2018, the fund has performed fairly well after the re-categorization. As seen in Table 3 above, HMAF has outperformed the CRISIL Hybrid 35+65 Aggressive index over 3 years and 5 years. In the last 5 years, HMAF's NAV has grown at a CAGR of 16.6% on a rolling return basis (as of January 15, 2025).

While over 3 years and 5 years, the returns may seem muted compared to the category average, a fact also is that with a prudent investment approach followed, HMAF has exposed its investors to lower risk (as denoted by the Standard Deviations) than its peers and the benchmark index. Thus, the risk-adjusted returns seem fair (as reflected by the Sharpe and Sortino Ratio).

HMAF appears well-placed in terms of portfolio characteristics and has the potential to outpace the benchmark and its peers over the long run.

HMAF holds a well-diversified portfolio of equity and equity-related instruments, debt instruments, gold ETFs, REITs & InvITs, and cash based on prevailing market conditions. Currently, HMAF has 66.43% exposure to domestic equities, 11.05% to domestic mutual funds, 7.45% in corporate debt, 7.34% in Government securities (G-secs), 0.61% in Certificate of Deposits (CDs), 2.25% in REITs & InvITs, and 4.88% in cash & cash equivalents.

Given the dynamic asset allocation approach, the funds manager can increase the equity exposure when market valuations are attractive and can prune down the equity exposure by increasing exposure to other assets when equity markets get expensive or experience high volatility. The strategy helps it benefit from the performance of each asset class depending on its outlook and keeps the volatility in check while faring decently on the risk-reward front. With a prudent portfolio approach, HMAF is expected to deliver respectable returns over the long run.

This completes our list of the 3 Best Multi Asset Allocation Funds for 2025.

As an investor, you can make staggered lump sum investments now that the markets have corrected from the peak. But if you are addressing long-term financial goals, consider the SIP route given that there are headwinds and the market is expected to remain volatile. SIP could potentially mitigate the risks and earn respectable returns over the long term.

Related links:

4 Best Tax Saving Mutual Funds for 2025

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3 Best Small Cap Funds for 2025

3 Best Multi Cap Funds for 2025

3 Best Large Cap Funds for 2025 - Top Performing Bluechip Mutual Funds in India

3 Best Large & Midcap Funds for 2025 - Top Performing Large & Midcap Mutual Funds in India

3 Best Flexi Cap Funds for 2025 - Top Performing Flexi Cap Mutual Funds in India

The Ultimate Guide to the Best SIP Plans for 2025

3 Best Liquid Funds for 2025 - Top Liquid Mutual Funds for 2025

3 Best Medium to Long Duration Debt Funds for 2025

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Disclaimer: Investment in securities market are subject to market risks, read all the related documents carefully before investing.

This article is for information purposes only and is not meant to influence your investment decisions. It should not be treated as a mutual fund recommendation or advice to make an investment decision in the above-mentioned schemes.