Pick multi-asset funds if you are a risk-averse investor with a long term horizon but find out the limitations before doing so.
Most investors are confused about risk factors. Given the prevailing uncertainty the question uppermost in their minds: where should I put my money to create long term wealth? There is no obvious and easy solution to this uncertainty because there is a high degree of uncertainty in judging the assets, asset class that is likely to perform well over a given period of time. This year, a different story might play out. How can investors ensure that they end up with good returns no matter what the performance? One option is diversification. To take away the hardship of investing separately in equity, debt and gold, mutual fund houses came with a new product – multi assets funds – which were launched about a year ago. But can these funds deliver on the promise?
As the name suggests multi-asset funds are schemes that invest across different asset classes. These funds can also switch between different asset classes over time within the range fixed for each, depending on the market situation. So, if equity valuations appear stretched, the scheme may make profits by selling some shares and reinvesting the same in bonds.
By providing exposure to different asset classes in a single investment, these funds offer the benefit of diversification. Since the investors’ money is spread across many assets, volatility and risk are mitigated to an extent. It makes sense to invest across asset classes that have little correlation with one another because even if a particular asset class fails to deliver, the performance of the others can shore up the returns.
In the normal course an investor would have invested in different mutual fund schemes to benefit from the various asset classes. This would require you to maintain a diverse portfolio of funds, which will mean a larger investment. With a multi-asset fund, you can gain exposure through a single scheme and by investing a smaller amount of money. Most importantly multi-asset schemes put the onus of tactical allocation on the fund manager and the investor does not have to bother about deciding the optimum asset mix.
What are the options?
Most multi-asset funds are debt oriented in nature. For instance, Canara Robeco InDiGo Fund invests 65-90% in debt instruments and the rest in gold ETFs while Kotak Multi-asset Allocation Fund invests 75-90% in debt, 5-20% in equities and 5-20% in gold. Apart from these, a couple of monthly income plans, such as Religare MIP and Taurus MIP Advantage, also offer the benefits of three different asset classes, but with a tilt towards debt instruments. The latest entrant in this segment is Morgan Stanley Multi-asset fund an open ended debt oriented fund.
The case for multi asset funds is compelling especially for risk averse investors. It is a useful strategy during volatility because it helps deliver consistent returns. However, do not expect a spectacular performance. If equities rally in a year, a multi-asset fund won’t be able to match the returns that a pure equity diversified fund will be able to generate. Such funds will be more beneficial if a person remains invested for a reasonably long time, so that it can ride out the various cycles that impact the asset classes.
However, if you want greater control of the portfolio, a multi asset fund probably doesn’t make sense. Instead you could replicate this model by investing separately in single asset class fund. However, this will require constant monitoring and rebalancing of the portfolio on your part.
Interestingly, since these funds try in different asset classes simultaneously it requires the expertise of more than one fund manager. While having specialists for each asset class is a necessity for such schemes, it may limit an individual expert’s freedom in taking aggressive positions.
How the returns from a multi-asset fund will be taxed depends on the allocation. If the fund maintains an average allocation of 65%, or more of the corpus in equities for the year, it will be treated like an equity fund, If not the fund will be considered a debt fund. If units are sold within a year of investment the returns from equity funds will attract a capital gains tax at 15% whereas debt funds are taxed according to the tax slab. If units are sold after a year of investment, the returns from equity funds are tax-free but debt funds are taxed at 20% with indexation and 10% without indexation.