A month ago, S. Naren, CIO Ipru Mf, created a flutter in Chennai while giving a talk to an association of IFAs. He said that investors should exit small and midcap stocks, lock, stock, and barrel.
Since then, mid- and small-cap stocks have been widely discussed and trounced in the market. In the same talk, S. Naren recommended Multi-Asset funds, which has sparked a renewed interest in them.
To recapitulate for new investors, mutual fund schemes are vehicles for pooled investments from many investors. A fund manager is designated to buy, sell, and manage the investment. The scheme profile decides what the fund is mandated to buy, and the fund manager has to stay within those boundaries. The Asset Management Company floats different schemes, markets them, and manages them.
Multi-asset funds are an interesting category introduced in 2017. These schemes invest in three different assets: equity, debt & commodity or real estate, all at once in the same schemes. They are hybrid schemes that reduce the risk and balance an investor’s portfolio.
Sebi mandates that Multi-Asset funds invest at least 10% in each asset class. The scheme may define a maximum limit internally and adhere to it. The idea might have been to diversify the risk and give the fund manager flexibility, as there are no strict rules on market cap-based stocks or industry or credit rating limits on bonds to include in the schemes.
Equity, debt, and commodities move to different data points and triggers, and they are very different asset classes whose returns are slightly uncorrelated. Another category is hybrid schemes, which invest in equity and debt in mostly predefined ratios., Balanced Advantage funds also invest in equity and debt and move between them at the fund manager’s discretion.
Multi-asset funds bought in another asset class, commodities, such as gold or silver or real estate via Reits. So these funds give an additional arm of diversification other than equity & debt. Typically, assets like equity, debt, and gold/silver do not perform simultaneously. Multi-asset funds provide diversification and can improve returns.
This category has over 20 schemes launched, but each differs in its approach to managing the schemes. Some wish to be classified as equity-oriented, some as debt, and some straddle between them. Equity-oriented schemes have a favourable capital gains tax structure: 12.5% on gains without indexation. Debt-oriented schemes (>75% in bonds) will have the same as debt funds, taxed at slab. If a fund invests between these ratios, click here for the applicable taxation.
Most fund houses, such as ICICI Prudential, Aditya Birla, Nippon, Axis, and the new White Oak, offer a Multi-Asset fund. The performances are not comparable as their allocation to different asset classes is very different. Some have an aggressive equity orientation, and some have Debt plus Commodities.
Some examples of a few funds are as follows :
- Aditya Birla Sun Life Multi Asset Allocation Fund
- Nippon India Multi Asset Allocation fund
- Kotak Multi Asset Allocation fund
- SBI Multi Asset Allocation fund
- White Oak Multi Asset Allocation fund
Verdict
I believe that if the fund manager migrates between asset classes—equity, debt, and commodities—depending on market conditions and gets it right, it would be a very useful category. The investor can optimize returns without paying tax as he doesn’t have to exit and enter the assets at different points.
These schemes are useful as a diversification tool, but as mentioned earlier, there are other options, such as Balanced advantage, equity savings, and hybrid ones.
These schemes have medium to low allocation as a commodity play, so the gains may not be significant. A small allocation by the investor to a gold/silver fund or a REIT may give a more meaningful exposure.
As things stand now, multi-asset funds have a slightly rigid allocation (based on their scheme mandate) as advisors and investors consider the scheme’s riskiness and the eventual tax on gains.
For a very long-term investor, these can be considered for stable returns after carefully selecting the scheme.
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