Ideas often sound simpler than the effort required to execute them. Take, for example, the desire to benefit from exposure to multiple assets such as domestic stocks, overseas stocks, fixed income and gold. While this approach does bring good portfolio diversification and potentially delivers optimal risk-adjusted returns, DIY investors also face many practical challenges during implementation viz. selection of appropriate assets, assigning weights to each asset, regular review and rebalancing complications, and last but not the least, achieving tax-efficiency.
From that perspective, multi-asset allocation mutual funds offer a simple one-stop solution to a host of these problems, thus making investing easy. ICICI Prudential MF has launched a new fund offer, ICICI Prudential Passive Multi-Asset Fund of Funds, open for subscription during December 27-January 10 period. The product has been designed as a fund of funds (FoF) that will invest across asset classes through exchange traded funds (ETFs) and index funds, with active involvement in identifying asset class and mix.
About the fund
A multi asset allocation funds, as per norms, has to have investment in at least 3 asset classes with a minimum allocation of at least 10 per cent in each. In the industry, there are broadly two types of such funds. One, the fund directly invests in various asset classes. Two, it is a FoF structure that invests in a combination of equity, debt and other-asset focussed mutual funds/ETFs/index funds. ICICI Prudential Passive Multi-Asset Fund of Funds belongs to the FoF segment, where in the recent past we have seen launches from HDFC and Motilal Oswal etc. ICICI Prudential Passive Multi-Asset FoF will provide allocation across a wide range of asset classes such as domestic equity ETFs and index funds (25-65 per cent), debt ETFs and index funds (25-65 per cent), gold ETFs (0-15 per cent) and global equity ETFs and index funds (10-30 per cent). Domestic equity exposure aims to provide growth via India story. Debt allocation will try to provide stability. Global equities exposure seeks to provide diversification benefit and investment in mega trends. Gold can act as a potential hedge against inflation.
For domestic equity allocation, the FoF can choose from ICICI Pru’s 25 products (such as market cap, sector/theme or factor based) or any other scheme launched in India. For debt/fixed income, the universe comprises liquid, gilt ETFs with varied maturity and target maturity products. Given the interest rate situation, the fund-house views intermediate duration as the segment with most risk. Hence, it will lean more towards low and high duration. Gold ETFs will be the tool of choice for playing bullion. For global equities exposure, the FoF will choose from 30 ETFs (from stable of iShares, ProShares, VanEck, Invesco, etc.stable) that invest across globe/country-specific and theme-specific ETFs.
The FoF will adopt the VTT (valuations, triggers, technicals) investment approach. Valuation will ascertain whether an asset class is expensive or cheap based on various indicators. In terms of triggers, the FoF tracks macro parameters, investment indicators, business and consumer sentiment and global factors. These triggers help identify the various asset classes and subsequently allocation is decided. Technicals will be used to select ETFs/index funds based on their performance.
According to IPru, Nifty 50 forward P/E valuation is inching nearer +1SD (standard deviation) above 10-year mean and Market Cap to GDP remains higher than the average, even as India continues to enjoy a demand premium vs global markets. Overall, asset allocation will be actively managed, and monthly rebalancing will be done; however if there are specific triggers that occur, interim rebalancing can happen.
Our take
To construct a multi-asset portfolio on one’s own and then dynamically manage it based on market conditions may not be easy for all investors. Hence, these products may offer a ready-made solution for them. That said, with each fund house following its own methodology to trigger the switch from one asset class to another, how much investors will benefit depends on right asset allocation decisions of the fund manager at the right time. Returns of existing asset allocation FoFs fall in a broad one- and three-year returns range of 5 to 56 per cent and 5 to 29 per cent (CAGR), respectively. While the new fund is exposed to fund manager risks, it is not unduely high compared to other products.
ICICI Prudential AMC has, over the years, built a reputation for managing various asset class and thematic mandates such as ICICI Pru Balanced Advantage (4 stars in BL Star Track Rating), ICICI Pru Equity & Debt Fund (5 stars), ICICI Pru Value Discovery (5 stars), ICICI Pru All Seasons Bond Fund, etc. To control the risks from sector and thematic ETFs, the fund-house will have soft limits
FoFs are taxed as debt funds. While expense ratio (regular) of multi asset funds is in 50- 150 bps range, the total cost of the new fund will be 100 bps.
Fundas
FoF will allocate across a wide range of asset classes
It will adopt the VTT (valuations, triggers, technicals) investment approach
Do note that FoFs are taxed as debt funds