Should you invest in various assets via multi-asset funds?

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The importance of portfolio allocation to multiple asset classes like stocks, debt, gold and others cannot be overstated, and the case for it has already been made.

There is a large fluctuation in returns each year across different asset classes such as domestic stocks, international stocks, gold and, to a lesser extent, debt. Some years, stocks give phenomenal returns and others the returns are negative. It is the same for gold.

The only way to smooth out the impact of the volatility of these different investments is to focus on allocation and always achieve optimal returns. Your returns will be optimal over a long holding period, as asset classes will behave according to market movements and overall volatility would also be lower.

The distribution can be done globally in two ways. One is to allocate specialized funds. Examples, large cap stocks or flexible cap stocks, debt funds with an appropriate maturity, gold ETFs, etc. However, any adjustment of the allocation to accommodate changes in the market or risk profile may have tax implications if the holding period is less than that required for tax efficiency.

The other way to do this is to go through multi-asset funds (MAFs), where the fund invests in three or more asset classes, in line with the fund’s mandate and the fund manager’s perspective on the asset classes. ‘respective assets. When the fund trades in securities, there is no tax implication because mutual funds are tax exempt entities.

According to regulations, a multi-asset fund must have an allocation to at least three asset classes and have an allocation of at least 10% to each class. By interpretation, beyond three asset classes, it is optional for the fund to invest in several categories. They will do so if the fund’s offering document allows it and if the fund manager has a positive opinion about the other assets.

The advantage of making your allocation via MAFs is that the exposure being to various assets in the same fund, the varying performance of stocks, debt, gold, etc. balance and the fund offers optimal returns. To be supported, the fund’s asset allocation model must match your risk profile and investment objectives. Otherwise, you can proceed with the regulatory allocation through other specialized funds.

As an example, if your MAF allocates stocks in a 65% to 75% range and you want to make your overall portfolio more defensive or have a short-term goal, you can put that share in a debt fund. Or, if you want to take increased exposure to equities over a long-term horizon, you can play it through targeted funds or thematic funds, as MAF is likely to be biased towards large caps.

Let’s take a look at the funds in this category and their performance. In terms of corpus size, which shows how much investors have trusted this fund, ICICI Prudential Multi-Asset Fund leads the pack with a corpus size of Rs. 12,509 crore as of October 31, 2021. Launched in 2002, the fund was repositioned as a multi-asset fund in April 2018 when the SEBI standards for fund categorization came into effect. It is one of the top performers in this category with returns above the category average.

In the last year, until November 12, 2021, it delivered 55.79% in regular mode and 56.72% in direct mode against the category average of 32.99% and 34.84% respectively. The fund with the second largest corpus size is Axis Triple Advantage Fund with Rs 1,612 crore. In the last year until November 12, 2021, Axis delivered 36.9% and 39.17% in regular and direct plans.

To understand the composition and strategy of MAFs, let’s take a fund as an illustration. ICIC Prudential MAF maintains an allocation in shares of more than 65% for the fiscal nature of the shares; it was 70% at the end of October 2021. The debt allocation was 24% at that date. In addition to gold, the fund also takes exposure to real estate investment trusts, infrastructure investment trusts and covered call options (an equity derivative) to enhance performance, to a limited extent from the portfolio.

Net-net, at the current level of stock market valuations, exposure to several assets is better because it balances the volatility of an asset class. Stocks can continue to be your main exposure because they offer a higher return over an adequate holding period. Debt, gold, and other asset classes like REITs, InvITs, etc. are the cushion in your investment journey.

(The writer is a corporate trainer and an author. The opinions are his own.)


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