NFO launch: Kotak's new multi-asset allocation fund, should you invest?

This Open Ended Scheme will invest in Equity and Equity related securities, Debt & Money Market Instruments, Commodity ETFs and Exchange Traded Commodity Derivatives

India's fifth-largest mutual fund house, Kotak Mutual Fund on Thursday launched a  new scheme called Kotak Multi Asset Allocation Fund (KMAAF), which will invest across different asset classes. In effect, the scheme will implement asset allocation; the most basic principle in wealth creation.

This is the second multi-asset allocation fund launch in the last two weeks. On 18 August, Shriram Asset Management Company, part of the Shriram Group, launched the Shriram Multi Asset Allocation Fund with exposure to multiple assets such as equity, debt, and gold/silver ETFs. 

Kotak's Open ended scheme will invest in equity, Debt & Money Market Instruments, Commodity ETFs and Exchange Traded Commodity Derivatives (ETCDs).

The scheme opened for public subscription on August 31, 2023, and will close on September 14, 2023. It re-opens for continuous sale and repurchase within five business days from the date of allotment of units on or before October 03, 2023.

Investors can invest under the scheme with a minimum investment of Rs 5000 per plan/option and in multiples of Re 1. There is no upper limit for investment. . They can also invest through a Systematic Investment Plan (SIP) of Rs 500 (Subject to a minimum of 10 SIP instalments of Rs 500 each) during the New Fund Offer (NFO) period.

Asset  allocation of the scheme will be as follows:

The fund will invest at least 65 per cent of the scheme’s corpus in equities at all times

The exact allocation in various asset classes and schemes would be decided based on the fund manager's outlook on prevalent market conditions and the changing business environment. To retain the equity tax advantage, it will invest at least 65 per cent of the scheme’s corpus in equities at all times. For investments in equity and debt markets, it would invest directly. But for its investments in gold and silver, KMAAF will take the ETF and mutual fund route.

Multi-asset funds, as the name suggests, have the flexibility to invest across equities, fixed income and gold (minimum of 10% in every asset class).  They are gaining popularity as investors are becoming increasingly aware of the importance of asset allocation.

Asset allocation is the process of dividing your investment portfolio into different asset classes, such as equities, bonds, and cash. This helps to reduce risk and improve your chances of achieving your financial goals.  

"The beauty of multi-asset investing is its resilience - no single asset dictates the outcome, we endeavour to tap into the potential of each asset class. We're not just selecting securities; we're building a diversified portfolio aimed at reasonable risk-adjusted returns with moderated volatility. This fund also offers dynamism with an endeavour to increase Net Equity Allocation when markets are cheap and decrease when markets are expensive," said Devender Singhal, EVP, KMAMC and Fund Manager for Kotak Multi Asset Allocation Fund.

Given that Kotak Mahindra Mutual Fund has more than 19 years of experience in managing funds, and that multi-asset allocation funds are a good fit for conservative investors, they should ideally stick with large fund houses that have a good track record.

The benefit of a multi-asset fund is that it does the allocation on your behalf

"So one fund gives you multi-asset exposure, which means you don’t have to buy those assets individually if the fund alone satisfies your investment needs. The other benefit is that rebalancing may be done within the fund, which means you don’t have the burden of buying, selling, and paying taxes on gains on isolated assets. The fund does it for you," said Adhil Shetty, CEO of Bankbazaar.

The Kotak fund aims to address the need of investors for a complete asset allocation solution that provides them access and convenience to various asset classes through a single investment vehicle.

Multi-Asset funds make investments in securities from various asset classes. As a result, investing in these funds requires a long time horizon or one of at least three years. Investors who aren’t willing to take on more risk might consider this fund. Additionally, this is for investors who want steady returns on their assets.

"An investor might get a diversified fund portfolio by investing in multi-asset allocation funds. Therefore, portfolio diversification greatly reduces associated risks while generating consistent returns. Additionally, it assists in distributing the risk associated with investing in a single asset class. Even when some asset classes are performing worse than usual, investors still receive a consistent stream of income. The equity exposure in this scheme also provides capital gains over the long term," said Gaurav Rastogi, Founder & CEO, Kuvera.in

The drawback

While multi-asset funds have been positioned as a “convenient, one-stop-shop” solution to investor needs, the current allocation to different asset classes within the multi-asset fund may or may not reflect your ideal asset allocation based on your future goals. 

"For instance, you may have two goals – your retirement, which is 25 years away and buying a car, which is 2 years away. For the former, you would ideally want to invest into a high-risk, high-return fund like a small-cap or a mid-cap fund in order to benefit the most from rupee cost averaging and compounding. For the latter, you would be better off sticking with an arbitrage fund that provides modest returns but assures the safety of your principal. For yet another goal, perhaps a debt-oriented hybrid fund would be most suitable. But by lumping all these objectives together and investing into a packaged solution like a multi asset fund, the overall “purpose” of investing gets muddled," said Aniruddha Bose, Chief Business Officer, FinEdge.

Should you invest? 

"Multi-asset mutual funds are a step in the right direction for investors but they stop way short of being a  macro top-down asset allocation strategy. By committing to invest at least 65% in equity instruments they do not protect investors from a cyclical downturn in the medium term. These funds more or less operate like balanced funds with an added 10-15% allocation to precious metals. That we believe is not good enough in a super dynamic late cycle macro backdrop that we currently find ourselves in," said Amit Goel, co-founder and chief global strategist at Pace 360.

Point to note: Each multi-asset allocation is different. For instance, HDFC Multi-Asset Fund and Axis Multi Asset Allocation Fund invest largely in large-cap stocks, while Aditya Birla SunLife Multi Asset Allocation Fund and UTI Multi Asset Fund invest a tad bit more in mid-cap stocks.
 

Returns also depend on how your fund manager invests within equity and debt asset classes. 

"Investing in multi-asset allocation funds can have varying outcomes depending on how the fund manager chooses to invest in equity and debt asset classes. These funds can serve multiple purposes in your portfolio and are particularly useful for investors who wish to minimize their portfolio risk," said Shetty.

Kotak Multi Asset Allocation Fund would be investing in equity and equity related Securities, Debt & Money Market Instruments, Commodity ETFs and Exchange Traded Commodity Derivatives and such other asset classes. Different asset class carry different types of risk. Accordingly, this scheme’s risk may increase or decrease depending upon the investment pattern.

The scheme would follow a dynamic asset allocation pattern

In a dynamic asset allocation pattern, the fund manager of a multi-asset fund actively adjusts the fund's asset allocation based on market conditions. This means that the manager can increase or decrease the fund's exposure to different asset classes, such as equity, debt, and gold, depending on their outlook for the markets.

For example, if the manager believes that the equity markets are overvalued, they may reduce the fund's exposure to equity and increase its exposure to debt. This would help to reduce the fund's risk if the equity markets decline.
 

Dynamic asset allocation is a more complex investment strategy than static asset allocation, where the fund's asset allocation is fixed. However, it can also be more effective in managing risk and generating returns.

"But Goel believes that usually asset allocation is not based on a comprehensive macro and economic cycle analysis but on shallow numerical metrics that dictate how expensive or cheap the equities are.

"We believe that these schemes are a poor cousin to genuine macro top-down strategy products which offer a lot more dynamism and flexibility to protect investors from over-valued asset classes and late-cycle investment risks," added Goel.

Disclosure: Entities controlled by the Kotak family have a significant holding in Business Standard Pvt Ltd