Money
Are multi-asset funds the right product in a soaring market?
Summary
Multi-asset funds are allowed to invest in various asset classes—equity, debt, gold, silver, commodities, international equities, futures & options, real estate investment trusts, infrastructure investment trusts, etc.
Diversification is the only free lunch," Nobel Prize-winning economist Harry Markowitz has said. But how do you define diversification? How many asset classes should you invest in and in what proportion? Domestic mutual funds seem to be thinking hard about this question. Several fund houses have come up with a solution by renewing their focus on multi-asset funds in recent months.
Edelweiss Mutual Fund (MF), DSP MF, Kotak MF, WhiteOak Capital MF have all recently launched their new fund offers. More are in the works. To be sure, multi-asset funds have been around in the country for at least 10 years.
Multi-asset funds are allowed to invest in various asset classes—equity, debt, gold, silver, commodities, international equities, futures & options, real estate investment trusts, infrastructure investment trusts, etc. They are seen as a one-stop solution for every investor’s asset allocation needs. But not all multi- asset funds are the same. Some invest in international equities; others do not. Some tend to keep their equity exposure low; some can take it much higher. Also, every multi-asset fund is taxed differently.
Here is what you need to know about these funds.
Past performance
The top-five multi asset funds in terms of assets have delivered three-year rolling returns of 12% on an average between 1 January 2016 and 14 September 2023. These funds have delivered a maximum of 30% three-year returns; the minimum is -2.4% (see graphic). Only those funds that have been in existence for more than five years have been considered for calculating the returns.
A well-managed multi-asset fund can help investors reduce overall volatility on their investments. The funds analysed showed a standard deviation of 5.7% on an average. Standard deviation is a measurement of volatility.
Ihab Dalwai, fund manager at ICICI Mutual Fund, says equity has historically delivered higher returns than other asset classes, while a multi-asset fund can help reduce the volatility risk that comes with investing in a single asset class like equity. “In the current environment, with high equity valuation and corporate profitability relative to gross domestic product (GDP), we believe our multi-asset fund should have less equity exposure than what we have maintained in the past three years," Dalwai says.
Data shows that during 2008 financial crisis, the maximum drawdown shown by Nifty Total Return Index (TRI, which captures returns and dividends) was 59%, while a multi-asset portfolio comprising 50% equity, 25% gold and 25% debt saw a drawdown of 27% over the same period (see graphic). Similarly, the Nifty TRI showed maximum drawdown of 38% during the Covid crisis, while it was 18% for a multi-asset portfolio.
“We thought this is a good time to offer a fund that can help investors diversify across different asset classes. Right now, equity valuations don’t appear that attractive and gold could potentially enter a bull market. Our analysis suggests that the dollar is likely to see a downtick or slight weakness, which can push up gold prices," says Sahil Kapoor, head of products and market strategist at DSP Mutual Fund.
Among the new multi asset funds getting launched, Kotak MF is launching a second asset allocation fund. Its first one is a fund of fund, which invests in units of equity mutual fund schemes, sector funds, gold funds, debt funds, international funds, etc.
Devender Singhal, fund manager at Kotak MF, says the new fund will be directly investing in stocks (not via other mutual funds), which will allow more flexibility and agility in managing the portfolio.
What works
According to Kavitha Menon, founder of Probitus Wealth, multi- asset funds can be a convenient way for investors to re-balance their investment portfolio.
“To reduce volatility in one’s portfolio, investors need to rebalance their portfolios at regular intervals, i.e. reduce exposure to investments that have seen significant run-up. However, selling an investment has a tax impact. In a multi-asset fund, the investor doesn’t face any tax liability when the fund manager decides to tweak the fund’s exposures," Menon points out.
“There are also operational challenges of convincing investors to change their asset allocation and get them to execute it in a timely manner," she adds.
What doesn’t
Kirtan Shah, founder and chief executive officer of Credence Wealth, says that investors should not solely rely on multi-asset funds for their asset allocation needs. “The fund’s asset allocation and investor’s requirement may not always match. Further, linking multiple financial goals within one investment also may not work. Investors should look for a multi-asset fund that behaves like one and not focus too much on how the fund’s asset allocation impacts its tax status," Shah adds.
According to Shah, investors should look for funds that are looking to offer 100-150 basis points higher returns than debt funds. “Extreme returns in such funds could be a reflection of a high-risk strategy," he says.
Taxation
The tax treatment of multi-asset funds depends on the asset allocation followed by the fund. For example, if the fund maintains 65% equity exposure (including equity derivatives), it will be treated like an equity fund for taxation purpose. So, long-term capital gains of more than ₹1 lakh will be taxed at 10% after one year of holding. Gains below ₹1 lakh will be tax-free. Short-term capital gains will be taxed at 15%.
Union Budget 2023 had removed the indexation benefit for mutual funds with up to 35% equity exposure.
So, if the fund maintains 35-65% exposure to equity, it will not get equity taxation, but still get indexation benefit. In this case, for investments held for more than three years, the long-term capital gains will be taxed at 20% with indexation benefit. Indexation is adjusting the purchase price of the investments to reflect the impact of inflation. The short-term capital gains will be taxed at investor’s slab rate.
What investors should do
As multi-asset funds involve managing investments across different asset classes, it is important to go with fund houses that have the capability and track-record of dealing with different asset classes.
“Fund houses that are good with their macro calls can typically manage the multi-asset funds well," says Ravi Kumar TV, founder of Gaining Ground Investment Services.
When considering a fund for your portfolio, check whether the fund’s asset allocation meets your risk and return expectations. For example, if you are conservative investor, a fund with high equity exposure may not be suitable. If you are a moderately aggressive investor, a fund with very little equity exposure may not work for you. Also, check how the fund’s asset allocation has moved in the past, especially during turbulent periods, and whether you are comfortable with such changes.
