Asset allocation has long been considered the fundamental principle of smart investing, but it’s only recently that multi-asset allocation funds have captured the spotlight. Six multi-asset funds have already been launched this year and more are on the horizon, awaiting the regulatory green light.
The recent emergence is not without reason. In 2022, the two critical asset classes—equity and debt—saw tepid returns, and commodities, such as gold proved to be beacons of hope, providing a sanctuary to the investors.
On the equity side, the broader tracked equity indices, Sensex and Nifty, posted lower single-digit returns with 4.44 per cent and 4.32 per cent, respectively, while on the debt side, Crisil Composite Bond index posted merely 2.46 per cent. In comparison, gold gave 14 per cent return over the same period.
With investors noticing immediate gain in assets other than equity and debt, the multi-asset strategy became the flavour of the season, and as expected, mutual funds weren’t left far behind. Multi-assets funds, which can diversify across multiple asset classes such as equity, debt, gold and others, and promised to safeguard investments in unfavorable market conditions became a favourite with investors.
It may be noted that though experts consistently extol the virtues of asset allocation, it’s not always that the strategy catches the fancy of investors.
Rise Of Multi-Asset Funds
In 2020, when the market was going through heightened volatility during the Covid-19 pandemic, three multi-asset schemes—Tata Multi Asset Opp Fund, Motilal Oswal Multi Asset Fund and Nippon India Multi Asset Fund—were launched after a gap of 10 years. Before that, merely six multi-asset funds were in existence.
Almost two-and-a-half years after the last fund in the category came out, Baroda BNP Paribas Mutual Fund launched Baroda BNP Paribas Multi Asset Fund in November 2022. In 2023, six other fund houses followed suit.
Though there are only about 16 multi-asset funds in the industry currently, the concept is not new. They have been in existence for more than two decades in India.
Earlier, the multi-asset strategy did not garner much attention because debt instruments were the most trusted cushions for investors. Barring 2021 and 2022, debt has always given returns in the range of 7-10 per cent. So, investors relied heavily on a combination of debt and equity for their asset allocation. This made balanced advantage funds (BAF), which primarily invest in equity and related instruments (arbitrage) and debt, more popular among investors (see Multi Asset Vs Balanced Advantage Funds).
However, the tumultuous market conditions of 2022 triggered a significant paradigm shift in the investment landscape. In response to the prevailing volatility and the evolving needs of investors, fund houses started recalibrating their strategies, transitioning from a two-asset class approach to a more diversified one, encompassing multiple asset classes.
What Differentiates Them?
Multiple Exposure: Multi-asset funds fuse various asset classes, such as equities, debt instruments, commodities, and even alternative investments, into a single investment vehicle.
They have the flexibility to switch from one asset category to another depending on the market condition. This allows investors to capitalise on the strengths of each asset class while mitigating the risks associated with individual market fluctuations.
Says D.P. Singh, joint CEO, SBI Mutual fund: “By investing in multi-asset allocation funds, investors automatically get exposure to multiple asset classes through one fund.”
The main benefit of the risk return framework that the category provides is that investors need not try and time the market. Multi-asset funds bring objectivity to the asset allocation process on a dynamic basis. Fund managers do the asset allocation on your behalf as per the market conditions. Adds Singh: “These funds not only help in automating the asset allocation, but also do it optimally as allocation to each asset class is dynamically managed based on the fund manager’s view of the economy and market cycles.” This way, your downside is limited and there is an opportunity for growth as well.
Besides, you don’t have to go the extra mile to monitor and can avoid some of the associated costs of switching. Says Singh, “If done individually, switching between asset classes would require investors to monitor the trends of each asset class, rebalance the portfolio and be liable for taxes, charges etc. when moving between asset classes. This is not the case when the fund manager rebalances the portfolio in such funds.”
Low Volatility: In the scheme information document (SID) issued along with their latest multi-asset fund, DSP Multi Asset Allocation Fund, DSP Mutual Fund wrote: “Investing in a multi-asset allocation strategy gives you the opportunity to get equity-like returns but with about half the volatility. Over the last 23 years, domestic stocks (Nifty 50 TRI) gave an annual return of 12.8 per cent with a standard deviation of 22 per cent, whereas a multi-asset approach achieved a 12.2 per cent return with lower standard deviation of 12 per cent.”
Outlook Money ran some numbers to gauge low volatility in multi-asset funds as claimed by various fund houses.
We found that standard deviation, which measures the volatility in a fund, is much lower in multi-asset funds compared to equity funds.
For instance, on the basis of three-year rolling returns, the standard deviation of SBI Large and Mid Cap Fund was 4.32, while that of SBI Multi Asset Allocation fund was 2.40. Similarly, for ICICI Prudential Large and Mid Cap, the standard deviation was 4.56, while for ICICI Prudential Multi Asset Fund, it was 3.45. This clearly shows that multi-asset funds provide better risk-adjusted returns.
Downside Protection: When we dug deeper into the performance, we found that the ones that have stayed true to the promise of dynamic asset allocation delivered better returns and protected themselves against downsides.
For instance, ICICI Prudential Multi Asset Allocation Fund, one of the oldest funds, has delivered 16.77 per cent returns in the last 10 years, the highest in the category over the period. On 10- and 7-year basis, the category average stands at 12.03 per cent and 11.70 per cent, respectively. This is better than the much-hyped BAF category, which delivered 11.93 per cent and 9.18 per cent in last 10 and seven years, respectively.
Should You Invest?
The multi-asset fund category provides a relevant solution to the long-term needs of investors.
Says Anthony Heredia, managing director and CEO, Mahindra Manulife Mutual Fund, “We firmly believe that it not only helps investors diversify their portfolios effectively, but also provides a proven and optimised asset allocation strategy. They do so by harnessing the power of diverse asset classes such as equities, bonds, and alternative investments (gold, silver, commodities etc.) all carefully managed to maintain a balanced risk-return outcome.”
Heredia also believes that this category has universal appeal and should become a core part of every investor’s portfolio.
Regardless, you need to carefully choose a fund because not all schemes follow the same asset allocation strategy. This is because different fund houses use different in-house models.
Says Singh from SBI Mutual Fund: “We have an internal quantitative asset allocation framework, which helps in deciding the strategic allocation to each asset class based on volatility. For example, the allocation is higher if the perceived risk of the asset class is lower. The model then adjusts the allocation towards each asset class based on the return expectations of each one of them considering the prevailing macroeconomic factors.”
As a result, their returns also vary. For instance, over three years, the best return from a multi-asset fund is 27.75 per cent, while the worst performer gave 7.59 per cent (see How They Fared).
So, instead of riding on the new fund offer wave, it’s better to stick with a funds which have a proven track record.
kundan@outlookindia.com