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Multi-asset-allocation funds invest across asset classes such as equity, bonds and commodities (usually gold) such that each asset class has at least 10 per cent allocation. Generally, asset classes follow different cycles of performance over different time periods. For example, in 2011, returns from gold and equity (represented by the S&P BSE 100 TRI) stood at 32.5 per cent and -24.8 per cent, respectively. But in 2014, equity outperformed gold. During that period, the BSE 100 index and gold generated returns of 34.2 per cent and negative six per cent, respectively. Since second-guessing which asset class will outperform at what point in time may be tricky for investors, multi-asset funds are intended to do this job for them.
Thus, this category of funds aims to reduces the risk compared with funds that invest in one class of asset. But, yes, this diversification might also hinder potential returns.
Fund strategy
A new open-ended multi-asset fund — Nippon India Multi Asset Fund— is open for subscription till August 21.
The scheme aims to invest in domestic equity (about 50 per cent), international equity (20 per cent), debt and money market instruments (15 per cent), gold exchange-traded funds (ETFs: 10-15 per cent), and exchange-traded commodity derivatives (0-5 per cent).
The AMC will rebalance the allocation on a quarterly basis to adjust mark to market. Otherwise, these allocations are broadly fixed and the fund will not take any subjective view in increasing or decreasing the allocations to various asset classes, says Arun Sundaresan, Product Head, Nippon India Mutual Fund. Under domestic equity, the scheme will invest in the top 200 companies on BSE.
Under overseas allocation, the fund will invest in stocks of the MSCI World Net Return Index and will broadly have 65 per cent weight in US stocks, 20 per cent in European stocks including the UK, and the rest in Japan and others.
Under debt allocation, the fund house will primarily focus on the short-term accrual space.
Within this, the allocation will be predominantly in high-grade instruments (at least 85 per cent in AAA/ A1+ instruments).
Under commodity allocation, there will be a minimum of 10 per cent exposure to gold through ETFs. The fund may also invest in sovereign gold bonds (SGBs). And balance 5 per cent of the allocation will be in other commodities — silver, energy, commodity indices, etc.
The fund will be benchmarked against 50 per cent S&P BSE 500, 20 per cent CRISIL Short Term Bond Fund Index and 30 per cent Thomson Reuters - MCX iCOMDEX Composite Index.
As per back-tested data by the fund house, the average of three-year rolling returns for the last 10 years (July 2010-June 2020) from the model portfolio was 12.1 per cent.
During the same period, gold (gold futures prices from MCX), debt (CRISIL Short Term Bond Fund Index), domestic equity (S&P BSE 100 TRI) and overseas equity (MSCI World Net Return Index) delivered 4.3 per cent, 8.5 per cent, 12 per cent and 14.9 per cent returns, respectively.
Since about 70 per cent of the portfolio will be invested in equity, the scheme may not be suitable for very conservative investors.
For taxation purposes, it will be a non-equity fund.
Our take
Many of the existing multi-asset schemes in the market today were re-categorised into multi-asset funds post the issue of new categorisation norms by SEBI in 2018. So, most funds in the category don’t have a long-term track record.
Nippon India Multi-Asset Fund is different from the existing funds in two ways. One, unlike many other mutli-asset funds, the scheme’s allocation to domestic equity, overseas equity, debt and commodities is fixed and will not be revised based on the market conditions.
Two, barring the recently launched Motilal Oswal Multi Asset Fund, most of the existing schemes in the category have none or little exposure to international equity. The dollar exposure of the Nippon scheme would be about 20 per cent (overseas equity). The fund is not hedging currency risk.
For overseas equity allocation, its strategy is to invest in top-weighted stocks of the MSCI index for each of the geographies mentioned earlier.
How the strategy of opting for top-weighted stocks instead of actively choosing them will pan out needs to be seen.
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