Every investor’s dream is to have a portfolio that will perform irrespective of the market conditions. Yet, building an all-weather investment portfolio appears complicated due to multiple asset classes, various sub-segments within them, and the different taxation rules that comes into play with each churn and so on.

Multi-asset allocation funds do solve these difficulties with a single-window offering. But, such funds when actively-managed, potentially cost more while the propensity of asset allocation calls going wrong if not fully eliminated. Could a fund of funds (FoF) that invests in ETFs and index funds across asset classes be a better solution?

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Aditya Birla Sun Life AMC certainly seems to think so. The premier fund house has launched a ABSL Multi-Index FoF, which will invest across passively managed domestic and international equity, debt, gold and silver. Here is a low-down on the offering, whose new fund offer period closes on October 10.

Nuts and bolts

Markets are dynamic. Manually shifting from one asset class to another is fraught with danger. Executing asset class calls on your own is another big task. At the end of it all, the investing experience is anything but smooth.

ABSL Multi-Index FoF aspires to provide reasonable returns with higher consistency and manage downside risks across the market cycles. Like many multi-asset allocation funds, the plan, at least on paper, is to deliver reasonable long-term returns, in line with markets while providing relative stability of fixed income.

To achieve optimal asset allocation, the fund will use a rule-based in-house model that will guide in investing across various themes and passively-managed schemes across the asset classes.

The function of growth will be achieved only with equity (20-80 per cent) through ETFs and index funds, and international equity exposure (up to 20 per cent) through ETFs. For stability and liquidity, debt (10-60 per cent) and gold/silver (up to 20 per cent) will be used. In case of debt exposure, the fund will use ETFs, index funds and money market funds. In case of gold/silver, ETFs are the preferred way to play.

In terms of indicative investment universe, equity exposure can be market-cap based, sectoral/thematic and factor-based. On global stocks, Nasdaq, S&P 500, developed and emerging markets are the choices. For debt, liquid assets and target maturity strategy is the preference.

Given that ABSL Multi-Index FoF will put money in funds, it is important to understand the fund selection toolkit. This will comprise regular performance review, tracking error, liquidity management, market making, dealing efficiency and cost of investment (TER).

The indicative TER of the fund will be 15 bps for direct investors and 1 per cent (100 bps) for other investors.

Existing products with similar mandate

The hybrid multi-asset allocation funds space has 28 different schemes. In the last three years, more than eight schemes have been launched. Some of them are ICICI Pru Passive Multi-Asset FoF, HDFC Asset Allocator FoF, Motilal Oswal Asset Allocation Passive FoF, and Nippon India Asset Allocator FoF.

As the passive investing theme picked up, fund-houses explored the multi-asset allocation FoF space.

Overall, the multi-asset allocation fund space, including active and passive-styled investment options has delivered 1.05 per cent return in 1 year, 12.4 per cent CAGR in 3 years, 7.6 per cent in 5 years and 8.9 per cent in 10 years.

While the domestic stocks markets have tanked 5 per cent in the last one year, pure-equity index (Sensex) returns are higher than multi-asset allocation funds by 100 bps in three years, 700 bps in five years and over 250 bps in five years. Such funds cannot match 100 per cent equity returns, but do display lower volatility.

Our take

Constructing a multi-asset portfolio on their own and dynamically managing them based on market conditions is no mean task for any type of investor. Hence, these products may offer a ready-made solution for them.

DIY investors will face many practical challenges during implementation, viz. selection of appropriate assets, assigning weights to each asset, regular review, rebalancing complications and achieving tax-efficiency.

Each fund house has its own methodology to trigger the switch from one asset class to another. Consequently, how much investors will benefit depends on the proper asset allocation decisions of the fund manager at the right time.

Investors who invest in this new fund should pay attention to ABSL AMC's track record in running multi-asset funds and the team's ability to take calls on asset allocation. For instance, ABSL Asset Allocator FoF ranks higher than the category-average across short- to long-term periods.

Similarly, ABSL Fin. Planning FoF (aggressive, moderate and conservative) schemes have done reasonably well. But note that the rate of return can change depending on the market scenarios.

Being a passive fund in terms of investments in index funds and ETFs, the new fund is less exposed to fund manager risks. However, the risks that come from sub-optimal decisions taken by active asset allocation/valuation model do exist. Do note that the FoFs are taxed as debt funds.