Multi-asset funds: Align fund's equity strategy with your risk appetite

A recent analysis by Ventura Securities of 25 multi-asset allocation funds (MAAFs) reveals that many of these funds have outperformed a large number of equity schemes over 1-5-year timeframes.

 

Multi-asset funds must hold a minimum of 10 per cent in three asset classes: equity, debt, and gold. Beyond this, they have the leeway to layer the fund with global equities, exchange-traded commodity derivatives (ETCDs), gold and silver exchange-traded funds (ETFs), real estate investment trusts (REITs), and infrastructure investment trusts (InvITs). By diversifying, these funds can capture gains in some assets while mitigating losses in others. Their popularity has increased as stock valuations remain high.

 

 

Returns rotate

 

The basic premise behind multi-asset funds is that asset classes perform differently depending on economic cycles and market phases. Debt yielded strong returns in 2014 and 2016, but faltered in 2022. A decade ago, gold lagged from 2013 to 2015, while equities excelled. Currently, gold is surging while equity markets face volatility. 

 

Investors often latch on to an asset class after it has moved up considerably. Even if they are not reactive in their portfolio allocation, it is not an easy strategy to implement.

 

Ihab Dalwai, senior fund manager at ICICI Prudential Mutual Fund, explains their approach: “We take valuations and earnings growth into consideration when estimating our equity exposure.” A year ago they began to get bullish on gold.

 

Switching between asset classes independently may result in tax implications for individual investors, while in a MAAF, they are taxed only at redemption.

 

A buffer against volatility?

 

Deepesh Raghaw, a Securities and Exchange Board of India (Sebi)-registered investment advisor, cautions investors to check the equity allocation of MAAFs before assuming they can offer protection against volatility.

 

The equity exposure of these funds varies, which would impact volatility. Nine have at least 60 per cent equity exposure. Within equities, the market cap allocation can vary. For instance, Nippon India MAAF excludes small caps. This meant it missed the small-cap rallies in 2020-21 and 2024, but it also avoided the hammering these stocks took in 2018-19. “The longevity potential of the investor goes up with a superior risk-return profile and controlled volatility, not with shooting out the lights periodically,” says Ashutosh Bhargava, fund manager and head of equity research, Nippon India Mutual Fund.

 

Edelweiss MAAF positions itself between an arbitrage fund and an equity savings fund, using arbitraged trades for equity and gold/silver exposure. White Oak allocates 26 per cent to equity, 11.9 per cent to arbitrage, and also holds REITs and InvITs (portfolio details are for September 2024; sourced from Ventura Securities report).

 

Selecting the right MAAF

 

If you already hold significant amounts of equity in your portfolio, avoid MAAFs with over 60 per cent equity. But if you lack equity exposure, an aggressive MAAF may be appropriate. Analyse the fund’s portfolio and the fund manager’s strategy before selecting a fund.

 

Raghaw advises investors choosing a fund-of-fund (FoF) structure to be mindful of dual expense costs.

 

Finally, remember the tax implications. Funds with an average annual equity exposure of at least 65 per cent are taxed as equity funds, with long-term capital gain (LTCG) tax at 12.5 per cent without indexation and short-term capital gain (STCG) at 20 per cent. If classified as a debt fund, both LTCG and STCG are taxed at slab rate (purchased on or after April 1, 2023).