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If you want exposure to multiple assets – equity, debt and gold , you can consider asset allocation mutual fund schemes. Here, you have two options. One, multi asset allocation funds, that must invest 10 per cent or more in at least three different asset classes. Two, you can invest in an asset allocation fund of funds (FoF), that invests in a combination of equity, debt and other-asset focused mutual funds. Such schemes help investors in diversifying risk and reducing return volatility. The recently launched, Motilal Oswal Asset Allocation Passive FoF – Aggressive and Conservative – belongs to the latter category. The new fund offer closes on March 5.
About the scheme
The FoF will be managed passively and will provide investors exposure to equity (domestic and international), debt (5-year government bonds) and gold. It will invest in the Motilal Oswal Nifty 500 Fund, S&P 500 Index Fund and 5 Year G-Sec ETF and ICICI Prudential Gold ETF. The aggressive and the conservative options will have asset allocation as per the table.
Asset allocations in the Motilal Oswal FoF will be maintained at the same levels (see table) all through. . On the other hand, many existing asset allocation FOFs that are actively managed, modify their allocations periodically based on certain metrics. For example, ICICI Prudential’s Asset Allocator Fund (FoF) does a weekly rebalancing between equity, debt and gold based on metrics such as P/E, P/B, Market cap to GDP and yield gap. Nippon India Asset Allocator FoF goes for a monthly rebalancing using factors including valuations, yield curve and macroeconomic fundamentals.
Exposure to the S&P 500 Index, a broad indicator of the US equity market, should help investors in the Motilal Oswal FoF diversify their geographical investment risk of investing only in the Indian market. The scheme will also help capture the benefit of rupee depreciation. The allocation to gold, the returns from which are negatively correlated with equity, is for reducing the overall return volatility.
Interest rates are at a historic low today. A turnaround in the rate cycle can lead to an underperformance in g-secs. A rise in interest rates can lead to a fall in g-sec prices, with the resultant capital loss impacting the returns of the 5-year G-Sec ETF. While the return from the other assets in the FoF may compensate for this underperformance, the extent of compensation may not be much in the conservative option. The conservative FoF has 50 per cent allocation to the 5 Year G-Sec ETF.
FoFs are taxed as debt funds. Most existing asset allocation FoFs have generated one- and three-year returns of 1 to 23 per cent and 14 to 46 per cent.
Our take
The Motilal Oswal FoF will maintain a static allocation across the chosen assets and not adjust these tactically with changing market conditions. Investors with some knowledge can, therefore, construct an asset allocation plan on their own too. You can choose a combination of equity and debt funds, possibly two each, and one gold fund (or the less-liquid but higher-return sovereign gold bonds).
Also, asset allocation as an investment strategy applies to your entire investment portfolio. You may invest only a certain sum of money in an asset allocation fund. Unless the rest of your investment corpus too is well-distributed across assets, you may not achieve your intended diversification.
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