Stay diversified with multi-asset funds, invest with 5-10 years in mind

But investors who want the flexibility to alter their asset allocation may avoid these 3-in-1 funds

Multi-asset allocation funds — which invest in three asset classes (equities, debt and gold) — have enjoyed a good run over the past year. The category is up 11 per cent on average, with the best-performing fund fetching a return of 16.79 per cent (see table).

This category — which generally offers rather sedate returns (the five-year average return stands at 7.07 per cent) — has done well this year because all three asset classes have contributed.

Gold is up 25.82 per cent. With interest rates declining over the past year — the benchmark 10-year government bond yield is down 112 basis points — funds that followed a duration strategy in the debt portion have seen handsome gains.

The equity markets have been very polarised in recent times. The large-cap indices are up. The returns of those indices have been driven by a few select stocks (only 15 stocks have delivered most of the returns of the Nifty). Managers of multi-asset funds who had invested in those stocks have generated alpha.

“The multi-asset allocation category has managed to capture returns from all the three asset classes this year. In our fund, we managed to generate alpha in equities, the duration strategy did well on the debt side, and gold is also up this year,” says Ashwani Patni, head-products and alternatives, Axis Asset Management Company.

The primary advantage these all-in-one funds offer is diversification. “Investors can enjoy growth from equities, stability and regular income from debt, and protection against economic shocks from gold,” says Patni. He adds that diversification across the three major asset classes enables these funds to offer sound risk-adjusted returns over the long term.

Many investors fail to rebalance their portfolios periodically. By investing in these funds, they can delegate this responsibility to the fund manager. They also enjoy favourable tax treatment. “Since most multi-asset allocation funds maintain an average equity exposure of above 65 per cent, they enjoy tax treatment on a par with equity funds,” says Arnav Pandya, a Mumbai-based financial planner.

Investors should not, however, make the mistake of regarding these funds as being very low-risk. “Since the equity exposure is quite high in many of them, a downturn in the equity markets could affect their performance,” says Pandya. Rising interest rates and negative returns from gold in certain years would also have the same effect.

Source: mutualfundindia.com

To be truly diversified, an investor should spread her money across fund houses. By investing in these funds, she gives all her money to a single fund manager. If his strategies don’t work, the investor could suffer heavily.  

Investors with a conservative to moderate risk profile, who do not want excessive turmoil in their portfolios due to high exposure to one asset class, may opt for these funds. They are also suited for investors who lack the time or ability to carry out their own asset allocation and rebalancing.

However, these funds tie down the investor to a specific asset allocation. They may not be suited for more evolved, larger-ticket investors, who may want the flexibility to alter their asset allocation to take advantage of market conditions.

Equity allocation of these funds varies from 49-72 per cent. When selecting one, make sure its asset allocation matches your risk profile and investment horizon. Also, check whether the fund manager runs a diversified or concentrated strategy in the equity portfolio. On the debt side, check how much duration risk he takes. These factors will have a bearing on the fund’s volatility. Also, give weight to the fund’s long-term track record.  

Finally, treat them as a long-term allocation. “Enter these funds with a horizon of 5-10 years,” says Patni.