Unlocking Investment Potential: The Case for Multi-Asset Allocation Funds

By VINOD KUMAR of PERPETUAL INVESTMENTS

With the conflict raging in the Middle East, the equity markets in India and world over has turned volatile as investor sentiment has dampened over the past few weeks. You, too, might have pondered over the question, ‘How should I protect the value of my investments, or how can I reduce the erosion in portfolio value?’ The answer could lie in Multi-Asset Allocation Funds. These funds have been gaining traction and are increasingly becoming a go-to option for both seasoned and new investors.

Multi-Asset Allocation Funds, a sub-category of hybrid funds, are a distinct type of mutual funds. These funds are specifically designed to invest in a diverse range of asset classes, which can include equities (stocks), debt (bonds), commodities like gold and/or silver, real estate investment trusts (REITs), etc. The primary aim of this offering is to combine these asset classes in a way that optimizes returns while mitigating risk.

One of the most compelling reasons to consider Multi-Asset Allocation Funds is the ease of diversification they offer. Diversification is the investment strategy of spreading your money across various assets to reduce risk. With Multi-Asset Funds, you don't need to agonize over creating the perfect asset mix. The fund manager does that for you. They dynamically allocate assets based on market conditions, aiming to balance the risk-reward trade-off. This simplifies your investment journey and ensures that your portfolio is well-rounded.

Additionally, asset classes can be volatile, with each having its market dynamics. Equity markets can soar to great heights, but they can also experience severe downturns. Debt provides stability but might not offer substantial growth. Multi-asset funds harness the potential of different assets during various market cycles. For instance, when equities are down, investments in debt and gold can provide stability. Conversely, when equities are bullish, they can drive higher returns. This dynamic approach can help reduce portfolio volatility and enhance risk management.

Finally, multi-asset funds are managed keeping tax efficiency in mind. Depending on the fund's stated asset allocation, they can be structured to be treated as equity funds or as non-equity funds with indexation benefit.

The meaning of tax treatment as equity fund means that they can offer you favourable tax benefits, such as only long-term capital gains tax at 10% and short-term capital gains tax at 15%. Plus, you don't have to worry about capital gains taxes when the fund rebalances its assets, which is a cost you might otherwise incur when managing asset shifts independently.

After the Lok Sabha Budget of 2023, there was an introduction of non-equity funds where at least 35% equity investment has to be maintained so that the fund receives indexation benefit.

Now let us consider two portfolios. Portfolio A is a 65:25:10 annually rebalanced portfolio spread across equity, debt and gold respectively. In case of Portfolio B the allocation ratio is 50:30:20.

Source: MFI 360; Equity -Nifty 50; Debt -ICRA Composite Index; Gold-Gold prices as per MFI 360; This is only for illustrative purposes; Past returns may or may not sustain in future.

Looking at Table-1, whether a fund employs equity taxation or non-equity taxation with indexation benefits, the multi-asset fund has a much lower standard deviation as a whole. Especially in 2015, 2020 and 2022, when the market volatility was significantly higher, at such times a multi-asset approach emerges as a superior investment strategy.

Multi-asset funds also offer time efficiency. With these funds, you can free yourself from the constant monitoring and rebalancing that managing a diverse portfolio of individual assets would require. The fund manager takes care of the nitty-gritty details, ensuring your investments are well-maintained and aligned with market conditions.

With rising geo-political uncertainties, high inflation, and increased market volatility in today's landscape, multi-asset allocation funds are positioned to offer a more stable and rewarding investment experience. In such an environment, having a well-balanced portfolio that spans equities, debt, commodities, real estate investments etc. is a prudent strategy for 2023 and beyond.

In conclusion, Multi-Asset Allocation Funds are a versatile and efficient way to harness the potential of various asset classes while minimizing the complexity and risks associated with managing them individually. These funds simplify diversification, enhance risk management, and offer favourable tax treatment. For investors looking for a well-rounded and resilient investment strategy, Multi-Asset Allocation Funds have emerged as a promising choice in today's dynamic financial landscape.

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