Do you have money to invest? Ask around and you will get varied suggestions. Some will say invest in equities, others will point out equities are risky and debt instruments are low-risk and, therefore, better. Indians have found gold attractive as an investment option that could come in handy on a rainy day.
Some smart guys at a mutual fund thought, why not package all these into one? As a result, most fund houses now have multi-asset allocation funds. These funds typically have to invest in at least three asset classes with a minimum allocation of 10 per cent in each.
These funds may invest in a number of traditional equity and fixed income strategies, index-tracking funds, financial derivatives as well as commodities like gold or silver. Some may invest in instruments like real estate investment trusts or infrastructure investment trusts. And, some may invest in foreign securities or funds that invest in global markets. In comparison, hybrid funds typically invest only in equity and debt.
“Multi-asset allocation funds aim to strike a balance of risk and returns through diversification across asset classes,” said Ashish Naik, fund manager at Axis Mutual Fund.
He pointed out that the three asset classes―equity, debt and gold/silver―are not highly co-related and hence provide a relatively better balance.
Over the last two-three years, equity has given strong returns. Three-year returns of large cap funds average between 15 per cent to 20 per cent. Three-year returns of small cap funds have ranged between 25 per cent and 30 per cent or more. This has made equity investments attractive.
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But, equity investing also comes with high risk; they can fall sharply and provide low to negative returns for a long period. This is something many investors may not be able to digest.
In this backdrop, fund managers and investment advisers feel asset allocation becomes necessary and products like multi-asset funds help here.
“Many investors get swayed by the recent performance of asset classes to make their investment allocation decisions,” said Harshad Patwardhan, chief investment officer at Union Asset Management. “For instance, the superlative performance of equities in recent times has led to investors getting carried away while making their choices, often ignoring the words of caution from their own investment advisers.” The fund house had launched its multi-asset allocation fund in August.
Of late, we have seen a lot of volatility in the equity market. Market experts have been stressing on valuations being expensive in various corners of the market for some time now and point to a lot of uncertainties, be it from the geopolitical turmoil in West Asia or slowing demand in certain areas like automobiles.
Fund managers say multi-asset funds are well suited during such times of volatility.
“The three in one approach of this fund ensures relatively steady returns,” said Naik. “Investing in pure equity funds involves an element of risk while investing purely in debt is typically for investors who are risk averse. Multi-asset allocation funds blend all the three asset classes in one and provide a cushion to market volatility.”
Timing the market has always been a difficult proposition. Therefore, fund managers say products like multi-asset allocation funds may be a good choice for first-time investors or even for those who are looking at investments with low-risk and lower volatility.
“Multi-asset funds offer a one-stop solution for investors seeking a diversified portfolio without the need for constant monitoring or rebalancing of individual investments,” said Ihab Dalwai, fund manager, ICICI Prudential Asset Management Company. “By holding a mix of assets, these funds aim to provide a better risk-adjusted return.”
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What one must remember is that not all multi-asset allocations are the same. They may differ in terms of their allocation in each asset class and also in terms of their risk-return profile. One fund may have a higher exposure to equity, another may have more exposure to debt. Therefore, their returns may differ vastly. Data from Value Research shows that over the past one year some multi-asset funds have delivered 47-48 per cent returns, while others have only managed 15-20 per cent.
The idea behind pushing such multi-asset funds is that different asset classes perform differently during various market cycles. Dalwai said that since professional fund managers make allocation decisions, such funds reduce the burden on individual investors.
But, Vidya Bala, co-founder of Primeinvestor.in, a research solutions platform for retail investors, noted that multi-asset funds can give negative returns when equity markets fall and, therefore, for someone to think that such funds will reduce risk completely is not right.
How then should multi-asset funds be used?
“Multi-asset funds are useful for investors who are looking at a lower risk profile, equity-like fund, in addition to equity or debt that they may already have,” said Bala. “For instance, they have already built a portfolio consisting of large cap, mid cap and so on and now they still want to have sufficient exposure to an equity-like asset class but with a slightly lower risk, there multi-asset comes into play.”
She feels that in an ideal scenario, an investor should invest in asset classes like equity, debt and commodities separately as then the investor could have a choice of the best in each category.
“Supposing this (multi-asset) fund is 10 per cent of your portfolio and it holds 20 per cent in gold, you only get 10 per cent of 20 per cent, which is 2 per cent,” she said. “Whereas, if you would have taken gold yourselves, you would be holding 5 per cent or 10 per cent.”
At the end of the day, asset allocation depends on risk profile. For risk-takers and more savvy investors, a diversified approach may well work. While those who are risk averse maybe better served by a more conservative approach.