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Multi-asset allocation funds invest your money in a mix of equity shares, bonds and commodities (usually gold) such that each has at least 10 per cent allocation at all times. With 3-year and 5-year category average returns of nearly 14 and 9 per cent CAGR, one could argue that returns are reasonably good for investors targeting absolute returns i.e. more than bank FD. So, for investors who want lower volatility and greater predictability of returns, multi-asset offerings may be a good option to consider. Of course, the fund getting the asset allocation mix right and the optimal equity exposure for returns kicker are important factors that will determine your actual returns experience, going ahead.
Universe
We looked at the 15 schemes falling in the multi-asset allocation fund universe with at least 5-year NAV history. This space can be broadly divided into two buckets. One, actively-managed funds such as Axis Triple Advantage. Two, where the scheme, such as Kotak Multi Asset Allocator FoF, invests in other funds to achieve the desired multi-asset allocation.
Given that asset class performance is cyclical and unpredictable, investors are increasingly realising that having a balanced, structured portfolio is key for returns as well as peace of mind. Multi-asset allocation funds aim to build a portfolio that does well in different environments. Broadly, most of the multi-asset allocation funds have high levels of net equity exposure (around 65 per cent). This can partly be explained by the fact that MFs with an equity exposure of 65 per cent or more on an average are treated as an equity asset class for taxation purpose. Any fixed asset allocation strategy, especially where equity levels are anchored around rigid levels, robs the portfolio of the benefits of asset rotation, which may have been the original intent of the investor.
Strategy
Multi-asset allocation funds use various models to decide the asset allocation mix. Most of the funds first decide the equity exposure, and then go to the debt and gold. It is important to assess the kind of equity approach funds take when it comes to equity market-cap allocation. Some funds are multi-cap in approach while some tend to play it safe in large and mid-cap, limiting small-caps. Also, investors must be aligned with pro-cyclical or counter-cyclical approach that a multi-asset fund takes.
Debt exposure at 15-20 per cent in a multi-asset fund plays an important role. For those investors who consider debt strategy less important, Franklin India Multi Asset is a cautionary tale. With a few Franklin debt funds suffering from illiquid investments in 2020 leading to winding up proceedings, Franklin India Multi Asset NAV fell over 13 per cent in that year.
Gold, which also comes with its phases of consolidation and growth, acts as a good hedge and can help in protecting your portfolio against inflation and global risks. Typically, multi-asset funds keep gold exposure at 10 per cent. Some funds also aim to keep up to 10 per cent in REITs & InvITs, but that space is under-developed in India currently.
Returns
From a category average perspective, multi-asset funds have clocked 3-year and 5-year category average returns of nearly 14 and 9 per cent CAGR. Amongst actively-managed funds, ICICI Pru Multi-Asset and Quant Multi Asset have performed better than peers in both periods. In the FoF bucket, Kotak Multi Asset Allocator FoF - Dynamic stands out from the pack. From a risk viewpoint, this category of funds has lower standard deviation of 4 per cent compared to 5.88 per cent of large-cap funds based on 3-year monthly data.
Given that multi-asset allocation funds are preferred by low-risk investors, it is important to look at calendar year returns to gauge volatility. Given the high exposure to equities, investors should be prepared for years such as 2018 when NAV growth was muted. Over the past decade or so, equities have delivered negative returns only in 2011 and 2015, which can lull investors into a false belief of stocks always generating robust returns. Equity exposure can dent investor returns in multi-asset funds if stocks do not do well on an extended basis in a period of high inflation and high interest rates.
Take note
Most of the funds in the multi-asset allocation category do not have a pure-play long track record. Examples include SBI Magnum MIP Floater becoming SBI Multi Asset, HDFC Multiple Yield becoming HDFC Multi Asset, ICICI Pru Dynamic to ICICI Pru Multi Asset, etc.
Some new funds from Nippon and Motilal Oswal stable have added international equity asset class to differentiate themselves, but the jury is still out on whether international equity returns in future are actually going to be un-correlated to domestic equities.
If multi-asset funds do not hold minimum 65 per cent in equity, investor may not get equity taxation benefit.
Lastly, investors must be clear in their objective in taking a multi-asset fund. If they have products such as dynamic asset allocation or balanced advantage fund, a multi-asset fund only adds gold to the mix.
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