The 10% Rule: Understanding SEBI’s Multi-Asset Mandate

The Securities and Exchange Board of India (SEBI) defines multi-asset allocation funds as open-ended mutual fund schemes that invests in at least three different asset classes with a minimum 10% allocation in each asset class. Most funds typically spread their investment across the following asset classes:

• Equity

• Debt

• Commodities like gold and silver

• InvITs

But you should also note that the fund manager has the power to change the ratio of allocation to asset class (subject to the minimum 10% rule) in response to the changing market conditions and economic outlook. 

SEBI’s asset allocation rule can be broken down into two parts:

1. Multi-asset allocation funds have to invest in at least 3 asset classes.

2. Multi-asset funds must maintain at least 10% allocation to each asset class. 

Here’s what this means:

• Multi-asset allocation funds can spread their investment across at least 3 distinct asset classes, typically equity, debt, and commodities like gold.

• Multi-asset funds have to maintain a minimum of 10% allocation to each asset class at all times. 

• So, if a fund invests in equity, debt, and gold, it will have to maintain 10% allocation in equities, 10% in bonds and debt products, and 10% in gold ETFs at all times. 

• Post that, the fund manager can decide how to allocate the remaining 70% of the fund’s portfolio based on the asset allocation mentioned in the Scheme Information Document, prevailing market conditions and the fund’s investment strategy. 

SEBI’s 10% allocation rule helps in the following ways:

• Create a True Multi-Asset Vehicle

  The minimum allocation threshold for each asset class like equities, debt, and commodities ensures that the fund has to maintain a multi-asset nature. If it eliminates exposure to one asset class or reduces it to below the threshold level, it will breach SEBI’s compliance guidelines. 

  This keeps the fund’s portfolio oriented towards multi-asset allocations, making it stay true to its name. It also makes these funds a true multi-asset vehicle and a distinct type of scheme, rather than simply making them just slightly varied hybrid funds. 

   

• Foster Genuine Diversification

  SEBI’s multi-asset mandate also helps ensure genuine diversification from day one. Since multi-asset funds have to invest in at least 3 asset classes, such funds have to spread their investment across assets classes like equity, debt, and commodities. 

  This means that the fund offers exposure to a broad number of asset classes, allowing you to get diversification benefits with just one fund. Moreover, the 10% rule for each asset class also ensures that this diversification is meaningful and not just nominal.

   

• Help Funds Manage Potential Risks Better

  Different asset classes tend to respond differently to market changes. So, if a fund invests across different asset classes, it may help reduce investment risks associated with concentration.

  For instance, let’s say your multi-asset fund invests in equities, debt, and gold. Now, historically, equities and gold have had an inverse relationship. So, if equities in the portfolio experience volatility, the gold exposure may act as a buffer to balance out the impact on returns. In theory, this fund may be able to handle risks better than an equity fund that has to maintain at least 65% exposure to equities.

  Moreover, the fund manager also has flexibility to change allocations based on market conditions and outlook, managing risks more dynamically.

   

• Building Potential Hedges for Stability

  The minimum 10% allocation rule in a multi-asset allocation fund ensures that the fund has at least allocated 10% to debt securities. Since debt securities tend to be less volatile than equities, having a minimum portion of the fund’s portfolio dedicated to them may add relative stability to your investment, especially when equity markets become volatile.

  Similarly, the 10% allocation to gold or silver may also help act as a hedge for your portfolio, coming in handy during periods of inflation and economic uncertainty. This way, you may not have to invest separately in a gold fund or silver fund to simply add hedges to your portfolio. 

   

By now, you may already see the key benefits of investing in multi-asset allocation funds. But here’s a quick overview to sum things up:

• Built-in Diversification: You don’t have to pick between equities, debt, or gold. This one fund gives you exposure to multiple asset classes with a single investment.

• Managed by Professionals: An experienced fund manager does the research and analysis part so you don’t have to. They take care of understanding the market outlook to change allocations. 

• Balancing Risk and Return: Equities may offer growth potential, debt instruments may offer stability, and gold can be volatility and inflation hedge. This way, the funds balances risk and return.

Multi-asset allocation funds have found favour among different types of investors, including:

• Beginner investors looking for an all-in-one diversified MF scheme

• Investors seeking to diversify their portfolios

• Investors looking for a mix of potential growth and relative stability

Simply put, SEBI’s multi-asset mandate states that multi-asset allocation funds have to invest in at least three asset classes with a minimum of 10% exposure to each. The rationale behind it is to help create a truly diversified and multi-asset based fund scheme that’s different from other types of hybrid schemes.

So, unlike equity funds that invest primarily in equities and debt funds that invest in debt securities, multi-asset funds invest in different asset classes to try to mitigate risks and balance returns with a diversified exposure. 

• An Investor Education and Awareness Initiative by Tata Mutual Fund. 

• To know more about KYC documentation requirements and procedure for change of address, phone number, bank details, etc., please visit: https://www.tatamutualfund.com/deshkarenivesh

• Please deal only with registered Mutual Funds, details of which can be verified on the SEBI website under ‘Intermediaries / Market infrastructure institutions.’

• All complaints regarding Tata Mutual Fund may be directed to service@tataamc.com and/or https://scores.sebi.gov.in/ (SEBI SCORES portal) and/or https://smartodr.in/login

• Nomination is advisable for all folios opened by an individual, especially with sole holding, as it facilitates an easy transmission process. 

• This communication is a part of the investor education and awareness initiative of Tata Mutual Fund.