Multi-asset allocation funds have seen a stream of launches in the last 1-2 years, with about six new contenders coming into being. The latest to throw its hat into the arena is Edelweiss Mutual Fund, which has announced the launch of Edelweiss Multi Asset Allocation Fund, an open-ended scheme investing in equity, debt, gold and silver, but seeking to generate fixed income-like returns in a tax-efficient way. The new fund offer (NFO) is open for subscription from June 5 to June 19. With over two dozen multi-asset allocation offerings in the market already, let us understand how Edelweiss Multi Asset Allocation is different.

What are multi-asset allocation funds

Investing in a diversified portfolio helps reduce risks. But diversification works best when the constituents of a portfolio do not move in tandem and are dictated by different dynamics. Different assets move based on various factors and thrive in different types of market conditions.

Multi-asset allocation funds fall into the larger hybrid fund segment. According to SEBI categorisation norms, a multi-asset fund needs to invest a minimum 10 per cent each in a minimum of three asset classes. The eligible asset classes include domestic stocks, international stocks, fixed income/ debt and commodities. Of the over two dozen schemes, there are over a dozen fund of funds (FoF) offerings having the multi-asset strategy. These invest in other mutual funds, in gaining exposure to different asset classes. In fact, the biggest multi-asset scheme is actually an FoF viz. ICICI Pru Asset Allocator FoF.

The remaining multi-asset funds are actively-managed, and fall in different subsets. The first bucket has multi-asset funds that have a minimum 65 per cent exposure to equities (to be treated as equity fund), about 10 per cent in gold/ silver ETFs and the rest in fixed income. These funds generally have static asset allocation. The second bucket comprises multi-asset funds that have a more dynamic approach in terms of asset allocation. They invest in equities, gold/ silver ETFs and fixed income. Such products usually maintain less than 50 per cent equity exposure. The third type of multi-asset funds also have dynamic asset allocation, but they also invest in REITs/ InVITS and international equities, apart from others. The fourth category is where Edelweiss Multi Asset Allocation is positioning itself. This fund will construct its portfolio with a mix of three asset classes - fixed income (45-55 per cent), equity arbitrage (30-40 per cent) and gold & silver arbitrage (10-15 per cent).

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Investors with a moderate risk appetite can consider investing in the fund as a diversifier via the SIP route with a time horizon of at least five years
Understanding Edelweiss’ offering

The fund’s primary focus will be to generate low volatile fixed-income equivalent returns by investing in fixed income, equity arbitrage, and gold & silver arbitrage. The portfolio construction, the fund house says, will prioritise mitigating volatility. This could mean it will focus more on addressing volatility, which logically means returns will come in second. Hence, Edelweiss Multi Asset Allocation is positioning itself as an alternative investment option when compared to other fixed-income products available in the market.

The scheme’s indicative asset allocation will be 10–80 per cent towards equity & equity related instruments, 10–80 per cent towards debt and money market instruments, 10-30 per cent towards commodity ETFs, Exchange Traded Commodity Derivatives (ETCDs) and 0-10 per cent towards units issued by REITs and InvITs. But as mentioned above, the portfolio construction strategy will include 35-40 per cent allocation to equity arbitrage, comprising equity cash futures with no open equity exposure. Additionally, there is a 10-15 per cent allocation to gold & silver arbitrage, employing a 100 per cent hedged strategy for gold & silver, and no open exposure to any other commodity. The silver arbitrage strategy is because silver is a volatile asset compared to gold and hence provides better arbitrage opportunities. The remaining 45-55 per cent allocation will be done to fixed income instruments with a 1–3-year Macaulay duration, including G-Sec, SDL, and AAA-rated corporate bonds.

Given the fund’s strategy, long-term capital gains (holding period of 36 months) will be taxed at 20 per cent after indexation (because equity exposure will be over 35 per cent). This should, for HNIs falling in highest tax slab, bring the effective tax rate significantly down from over 35 per cent in traditional fixed income products to around 7 per cent in this multi-asset fund, according to the fund house’s calculations. For this, they have assumed a 5 per cent indexation rate (last 23 years average cost inflation index).

The fund house has indicated an expense ratio of 35-40 bps (direct plan) and 65-70 bps (regular plan via distributors).

The scheme’s benchmark will be Nifty 500 TRI (40 per cent) + Nifty 5-year Benchmark G-Sec Index (50 per cent) + Domestic Gold Prices (5 per cent) + Domestic Silver Prices (5 per cent).

If units are redeemed / switched out on or before 30 days from the date of allotment, there will be a 0.10 per cent exit load.

Our take

Given that Edelweiss Multi Asset Allocation will be the first multi-asset fund with such a strategy, comparing returns with existing multi-asset schemes does not make much sence. Suffice to say that this fund could generate returns that are closer to debt funds (more than arbitrage funds but less than equity savings funds) given the positioning.

The different strategy of the fund means investors should be aware of the different risks. Since the new fund will look to generate returns from equity, gold & silver arbitrage, investors must note that the risk of low return when arbitrage spreads are lower. The other risk, which is not exclusive to this fund but important given the dominant exposure to fixed income, is volatility as and when interest rates swing higher. There is not much credit risk since the fund narrows allocation to AAA and Sovereigns.

Despite the distinctive approach to play multi-asset allocation, investors can wait for the Edelweiss Multi Asset Allocation Fund to build a track record before taking the plunge. But if you are confident of the fund house’s investment track record and ability to succeed in this framework, then you can consider it.