With the Indian economy showing little sign of turning the corner and the world careening from one crisis to the next, investors find themselves in a bind. Should they increase their allocation to equity and benefit when the economy improves or go the debt way and lower the risk in the portfolio, or seek safety in gold till the uncertainties die down? In such a situation, multi-asset allocation funds, which bring together different asset classes and manage allocations in view of the changing economic cycles and market movements, may look attractive. But should investors consider them?
Multi-asset funds
Multi-asset funds, which fall in the hybrid category, invest a minimum of 10% of their portfolio in at least three asset classes.
These funds are expected to have portfolios that are better diversified than those of traditional hybrid funds that invest in varying combinations of equity and bonds. With the returns from financial assets like equity and bond markets seeing greater co-movement and, therefore, lower diversification benefits, adding asset classes such as gold, real estate and international equity whose returns have a lower correlation with those of traditional asset classes is expected to bring a true multi-asset class flavour. The good performance of any one asset helps cushion against the poor performance of others.
But the downside is that a fund diversified across asset classes will not be the best performing category in any given year. The purpose of diversification is to protect it from high volatility and not to give the highest returns. Consider multi-asset funds if you are looking for exposure to important assets and a smoother ride. “This category fits into the asset allocation framework very well. It can be a good option for an investor looking at a long-term strategic allocation to different asset classes," said Sankaran Naren, chief investment officer, ICICI Prudential Asset Management Co. Ltd.
The differentiators
Equity, debt and gold find a place in multi-asset funds. But the management of allocations is the key differentiator between schemes.
After the Securities and Exchange Board of India’s classification exercise, most multi-asset funds have chosen to be equity-oriented with at least 65% allocation to equity, with the remaining in fixed income and gold. “Our fund is designed to hold a minimum of 65% in equity. The allocation has remained more or less static at these levels," said Naren. This allows them to be taxed as equity-oriented funds, with short-term capital gains (STCG) being taxed at 15% and long-term capital gains (LTCG) at 10%. The more or less static allocations give better visibility on how the funds will invest, but they may not be positioned to take full advantage of the changes in economic factors and take meaningful exposure to the asset that is expected to do well.
Some funds like SBI Multi-Asset Allocation allow the risk and return profile of the assets and the macroeconomic variables to drive the portfolio composition. In 2019, for instance, its equity allocation went up from 22% in January to 50% by December. The allocation to long-term debt in the fund was led by expectations of rate cuts by the Reserve Bank of India and gold allocations were led by global and domestic uncertainties. The fund makes the decisions on allocation based on an objective model.
These funds are taxed as debt funds if their equity allocations do not meet the 65% limit, with STCG being taxed at the investors’ tax slab rate and LTCG being taxed at 20% with benefits of indexation.
Look at the sub-asset classes and how the portfolio is constructed and managed to understand the risk and returns better. For example, ICICI Prudential Multi-Asset fund follows a value style of stock picking. It takes higher exposure to a few stocks even though it holds a large equity portfolio. Axis Triple Advantage fund, on the other hand, holds a smaller portfolio but with exposure spread more equally across the top picks. Most of the funds have a combination of corporate bonds and government securities in their debt allocation and it is important to evaluate the credit quality of the debt portfolio.
The performance
How have these funds scored relative to other hybrid funds and single-asset class funds?
The SBI Multi Asset Allocation fund has a standard deviation, which measures the volatility in returns, of just 3.24% but others such as Axis Triple Advantage fund and the ICICI Prudential Multi-Asset fund have higher standard deviation of around 8%. These funds have higher equity allocation that is more or less static. In comparison, the equity funds in the large-cap space have a standard deviation of around 11.5% at the lower end of the scale, which goes as high as 17%.
Well-performing dynamic bond funds that can invest in any segment of the bond market like the bond allocation in multi-asset funds have standard deviation of 2.5-3.5%. Gold funds have a high standard deviation of around 12%, while aggressive hybrid funds that invest in equity and debt have standard deviations in the range of 8-15%. These funds have, therefore, delivered on the expectation of managing volatility better than other categories. On the return front, funds with greater equity exposure did well when equity markets were up. Axis Triple Advantage was an outperformer in the one-year period with returns of 19% and gave 7.07% over five years. SBI Multi Asset Allocation with returns of 10.99% and 7.83% over one and five years, respectively, was a steady performer. ICICI Prudential Multi-Asset Allocation was another good performer with 8.07% and 8.12% returns in the same horizons.
Should you invest?
There are practical advantages to multi-asset funds. A professional fund manager makes the reallocation decisions for you. It may be difficult for you to identify the signals and replicate the allocations by investing in distinct equity, debt and gold schemes on your own. Also, every time you rebalance the portfolio, you will bear taxes and costs, which the multi-asset fund does not incur.
But there are drawbacks too. The allocations to different asset classes may not reflect your risk and return preference. “Using a multi-asset scheme to fund multiple goals with different horizons may mean that the investor may have to withdraw money at a time when a sharp fall in equity has eroded the returns. I would rather have money meant for short-term goals invested in debt funds where I will not have to worry about negative returns," said Deepali Sen, founder partner of Srujan Financial Advisers LLP.
If you are a DIY investor who is unclear about your goals, multi-asset funds may be a good start to holding a diversified portfolio. “It may be a good option to introduce investors to equity," said Sen. It may also work if you are saving for goals that are three years away. They will also be suitable if you have long-term goals but low risk appetite.
Funds like Axis Triple Advantage, HDFC Multi-Asset, SBI Multi Asset Allocation and Quant Multi-Asset have not given negative returns in any two-year and above holding periods. The taxation, whether as equity- or debt-oriented funds, should not matter if you are able to take advantage of indexation benefits on capital gains with a minimum three-year holding period.
However, if you have an adviser on board who can help with asset allocation and rebalancing decisions, sticking to pure asset class funds aligned to your goals may be a better option.
