- It is well known that portfolio allocation to multiple asset classes like equity, debt, gold and others cannot be over-emphasised and there is wide fluctuation in returns, every year, in the various asset categories like domestic equity, international equity, gold, and to a lesser extent in debt. In certain years, equity gives phenomenal returns and, in some others, the returns are in the negative. The same is the case with gold.
- Hence, the only way to address the impact of the volatility in these various investments is to focus on allocation and still earn optimum returns. Your returns will be optimum over a long holding period as the asset classes will perform as per market movement and the overall volatility also would be lower. The allocation can be done broadly in two ways.
- One is to allocate specialised funds. Examples, large-cap equity or flexi-cap equity, debt funds of appropriate maturity, gold ETFs, etc. However, any correction in allocation to adjust to the changes in market or risk profile may have tax implications, if the holding period is less than that required for tax efficiency.
- The other way to do it is to go through multi-asset funds (MAFs), where the fund invests in three or more asset classes, as per the mandate of the fund and the fund manager’s view on the respective asset classes. When the fund transacts in securities, there is no tax implication as mutual funds are tax-free entities.
- As per regulation, a multi-asset fund has to have an allocation to at least three asset categories and have at least 10% allocation to each category. To interpret it further, beyond three asset classes, it is optional for the fund to invest in more categories. They will do it if the offer document of the fund allows it and the fund manager has a positive view on other assets.
The advantage of doing your allocation through MAFs is that exposure being to various assets in the same fund, the varying performance of equity, debt, gold, etc. balance out each other and the fund delivers optimum returns. Here one should ensure that the asset allocation pattern of the fund matches your risk profile and investment objectives. Otherwise, you may do the adjusting allocation through other specialized funds.
- Let us say your MAF allocates to equity in the range of 65% to 75%. You may be interested to make your overall portfolio more defensive or have a short-term goal and hence you may put that much component in a debt fund. Or, if you want to take enhanced exposure to equity over a long horizon, you may play it through focus funds or theme funds as the MAF is likely to be large-cap oriented.
- Let us look at the funds in this category and their performance. In terms of corpus size, which shows the extent to which investors have reposed faith and confidence in that fund. For example, ICICI Prudential Multi-Asset Fund is the leader of the pack with a corpus size of 12,509 crore as of 31 October 2021. Launched in 2002, the fund was repositioned as Multi-Asset Fund in April 2018 when SEBI norms for fund categorization came into effect. It is among the top performers in this category delivering returns higher than the category average.
In the last one year, till 12 November 2021, it has delivered 55.79% in the regular plan and 56.72% in direct plan against the category average of 32.99% and 34.84% respectively.
- The fund with the second-highest corpus size is Axis Triple Advantage Fund with Rs 1,612 crore. Over the last one year till 12 Nov 2021, Axis has delivered 36.9% and 39.17% in regular and direct plans.
- To understand the composition and strategy of MAFs, let us take one fund as an illustration. ICIC Prudential MAF maintains equity allocation at more than 65% for the equity taxation character; it was 70% as on end-October 2021. Allocation to debt was 24% as on that date. Apart from gold, the fund also takes exposure to Real Estate Investment Trusts, Infrastructure Investment Trusts, and covered calls (an equity derivative) for yield enhancement, to a limited extent of the portfolio.
Net-net, at the current level of equity market valuations, exposure to multiple assets is better as it balances out the volatility in one asset class. Equity can continue to be your major exposure as it provides a higher return upside over an adequate holding period. Debt, gold and other asset classes e.g. REITs, InvITs, etc., provide the cushion in your investment journey.