Returns in various asset categories such as domestic equities, international equities, gold, and to a lesser extent debt fluctuate widely each year. In some years, equity gives phenomenal returns and in some others, the returns are negative. Same is the case with gold.
The only way to minimize the effects of volatility in these various investments is to focus on allocation and still earn optimum returns. Your returns will be optimal over a longer holding period as the asset class will perform according to market movements and the overall volatility will be lower.
Allocation can be done broadly in two ways. There is a special allocation of funds. Example, large-cap equities or flexi-cap equities, debt funds of suitable maturity, gold ETFs, etc. However, any change in allocation to accommodate changes in the market or risk profile may have a tax impact if the holding period is less than that required for tax efficiency.
Another way to do this is to go through multi-asset funds (MAFs), where the fund invests in three or more asset classes, according to the order of the fund and the fund manager’s perspective on the respective asset classes. When the fund transacts in securities, there is no tax implication mutual funds are tax exempt entities.
As per the regulation, a multi-asset fund should have allocation for at least three asset categories and at least 10% allocation for each category. As per the interpretation, beyond the three asset classes, it is optional for the fund to invest in more categories. They will do so only if the offer document of the fund permits it and the fund manager has a positive outlook on other assets.
The advantage of making your allocation through MAF is that the exposure to different assets in the same fund, varying performance of equity, debt, gold, etc. balance each other and the fund gives optimum returns. To keep in mind, the asset allocation pattern of the fund should match your risk profile and Investment Purpose Otherwise, you can make adjustment allocations through other specific funds.
For example, if your MAF allocates to equities in the range of 65% to 75% and you want to make your overall portfolio more defensive or have a short-term goal, you can put that much component in a debt fund. Huh. Or, if you want to take more exposure to equities over the long term, you can play it through focus funds or theme funds as MAFs are likely to be large-cap oriented.
Let’s take a look at this category of funds and their performance. In terms of corpus size, which reflects the extent to which investors have shown trust and confidence in that fund, ICICI Prudential Multi-Asset Fund is the leader of the pack with a corpus size of Rs. 12,509 crore by 31 October 2021. Launched in 2002, the fund was re-established as a Multi-Asset Fund in April 2018, when SEBI norms for fund classification came into force. It is one of the top performers in this category giving returns above the category average.
In the last one year, till 12th November 2021, it has delivered 55.79% in Regular Plan and 56.72% in Direct Plan, while the category averages are 32.99% and 34.84% respectively. The fund with the second largest corpus size is Axis Triple Advantage Fund with Rs 1,612 crore. In the last one year till November 12, 2021, Axis has delivered 36.9% and 39.17% in Regular and Direct plans.
To understand the structure and strategy of MAF, let us take a fund as an example. ICICI Prudential MAF holds more than 65% equity allocation for equity taxation character; It was 70% by the end of October 2021. The loan allocation on that date was 24%. Apart from gold, the fund also invests in real estate investment trusts, infrastructure investment trusts and covered calls (an equity derivative) to increase yields to a limited extent of the portfolio.
Net-net at the current level of equity market valuations, exposure to multiple assets is preferable as it balances volatility across an asset class. Equity may remain your principal exposure as it provides higher returns over a substantial holding period. Loans, gold and other asset classes like REITs, InvITs etc, provide cushion in your investment journey.
(The author is a corporate trainer and author. Views are his own.)