BackInflation to tax-savings: DSP Mutual Fund expert lists out these benefits of multi-asset funds
Investing in multi-asset funds brings diversification, helps manage market cycles, and aims to beat inflation. Blended portfolios offer diversification, manage market cycles, and beat inflation, says DSP Mutual Fund SVP
PremiumBlended portfolios can be created in various ways based on risk appetite, return expectations, and tax considerations. Approaches include optimization, macro-based forecasting, and systematic strategies. In an interview with Livemint Aparna Karnik, SVP, of DSP Mutual Fund said that investing in multi-asset funds brings diversification, helps manage market cycles, and aims to beat inflation. She suggested that investors consider multi-asset funds as a lower-risk, tax-efficient allocation that beats inflation and participates in equity compounding.
Aparna Karnik, SVP, DSP Mutual Fund is the fund manager for DSP's Multi-asset Fund, Value Fund, and Quant Fund.
How do you create a blended portfolio?
You can create a blended portfolio in several ways depending upon your risk appetite, return expectations, and keeping in mind considerations relating to tax, turnover, etc. I will describe three commonly used approaches
The first is an optimisation-based approach that considers long-term returns, risk, and correlations for asset classes and arrives at an optimum asset mix that maximises returns for a given risk tolerance. This is largely based on historical data and tends to have fairly steady allocations to the different asset classes.
The second approach uses macro-based forecasting to identify the most attractive asset classes using macro trends such as GDP, inflation, earnings, policies, etc. to give large weights to asset classes that are expected to outperform, with low weights to other asset classes. This is a forward-looking approach and hinges on the accuracy of the forecasts. This approach can have very outsize allocations and its outcomes depend largely on the skill of the forecaster.
The third approach is systematic - driven by factors like value or momentum. This is based on mean reversion or trend following rules.
Practitioners may also combine approaches to try and generate higher returns or to reduce risks.
What are the key benefits of investing in multi-asset funds, particularly in the current economic and market conditions? How should investors make decisions in response to changing (market) conditions?
Multi-asset funds bring in the benefits of diversification – history has taught us not to put all eggs in one basket as this can have periods of sharp wealth destruction or financial ruin. We know that different asset classes work in different periods and that markets and economies move in cycles. We also know that it is futile to believe that every cycle can be predicted with 100% accuracy.
Thus, multi-asset funds can make the investing journey more comfortable and help investors manage the peaks and troughs better. This eventually leads to an outcome that should beat inflation over time and compound wealth.
Could you explain the risk-return profile of multi-asset funds and how they aim to provide diversification and manage risk?
The risk and return profile of multi-asset funds tends to be closer to the balanced (50:50 equity: debt) and aggressive (75:25 equity: debt) hybrid categories. The returns of these categories are usually a little lower than equities but come with much lower risk.
It is wrong to expect that these funds will have no periods of negative returns, since they do invest in growth assets such as equities which come with their associated ups and downs. However, the risks are balanced by the meaningful allocation to defensive asset classes such as debt and gold. Debt tends to do well in deflationary and recessionary periods when equities usually struggle to generate meaningful returns. Debt provides interest income and capital appreciation in an environment of falling interest rates. Similarly, gold is an asset that tends to act as a safe haven in periods of extreme uncertainty. Gold also tends to protect against currency depreciation.
What is the tax treatment of returns from multi-asset funds, and are there any tax-efficient strategies associated with these investments?
All multi-asset mutual funds are beneficial from a tax perspective for the investor, since these are taxed at the time of redemption. Therefore, no tax is paid by the investor when the fund managers periodically rebalance between asset classes. If an investor were to have three different funds for equity, debt, and gold, every time any asset class is sold – for profit booking or any other reason – to allocate to another asset class, the sale proceeds would be taxed. Thus, the multi-asset mutual fund structure allows for full compounding without tax leakage during the journey.
Individual fund taxation is dependent upon the weight of the dominant asset class in the fund as per tax laws. However, data shows that if any investor stays invested for at least 3 years, the end outcomes are not meaningfully changed due to taxation.
How should investors think about incorporating multi-asset into their overall financial plans?
Investors can consider multi-asset funds as a lower-risk, tax-efficient, fuss-free allocation that is expected to beat inflation and provide healthy participation in the compounding journey of equities over time. New investors who are worried about investing in equities when market valuations are high can allocate to multi-asset funds.
Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
Milestone Alert!Livemint tops charts as the fastest growing news website in the world 🌏 Click here to know more.
