Should you invest in multi-asset mutual fund schemes or diversify on your own? Lets explore what these funds have to offer and if you should buy into the new sales pitch
Multi-asset strategies are the shiny new toys in the investment arena. Asset management companies are making a fervent pitch to investors to put their money in multi-asset allocation funds. Most recently, Edelweiss Mutual Fund and WhiteOak Capital Mutual Fund have introduced their offerings in this space. Three more AMCs—Bank of India Mutual Fund, Kotak Mutual Fund and Shriram Mutual Fund—are lining up variants under this category. This sudden push for multi-asset strategies is not coincidental. From 1 April 2023, debt funds, gold funds and international funds have lost their earlier taxation benefits. Mutual funds are offering multi-asset funds as a more tax-friendly alternative to take exposure to the same asset classes. Let’s explore what these funds have to offer and if you should buy into the new sales pitch.What is the big deal?
Multi-asset funds have been formally identified as a separate fund category only since 2018. These are a form of hybrid fund, but distinguished from traditional debt-equity hybrid funds and dynamic asset allocation or balanced advantage funds. Multi-asset allocation funds invest in at least three asset classes, with a minimum allocation of at least 10% to each. The typical asset mix of a multi-asset fund comprises domestic equities, debt and gold. There are variants that also invest in international equities, silver and REITs. The basic premise of a multi-asset fund is to allow investors access to multiple asset classes under one roof without worrying about asset allocation and rebalancing on their own. For many, choosing the optimal asset mix can be intimidating. Selecting the right instruments within each asset type can also be a hassle. Multi-asset funds take this burden on the investor’s behalf. All their diversification needs are met through a single investment. Prateek Pant, CBO, WhiteOak Capital Mutual Fund, observes, “Each asset class performs differently during various market cycles. A judicious mix of these asset classes helps in reducing portfolio volatility and generating reasonable returns over longer time periods.”
Recent changes in rules have made debt, gold and international equity funds tax-inefficient Instead of investing separately in all these asset classes, a more tax-friendly option is to do so through a multi-asset fund.
The asset mix is decided by the fund based on internal models in response to market conditions. Further, investors do not incur capital gains tax on periodic rebalancing within the fund, a cost they would otherwise have to bear while shifting from one avenue to another on their own. Now, investors are being encouraged to harness multi-asset funds for higher tax efficiency. After recent tax changes, gains from investments in mutual funds having less than 35% exposure to domestic equities are taxed at the slab rate of the investor. Starting 1 April 2023, these funds no longer enjoy the benefit of long-term capital gains (LTCG) and indexation for fresh investments. Earlier, the gains realised after three years from these investments were taxed at 20% after indexation. This provision helped lower tax liability, but the revised norms have made debt funds, gold funds and international equity funds taxinefficient for those in the higher tax slabs. However, when the same asset classes are packaged together with domestic equities in one single fund, the tax impact can be lower. Multi-asset funds are making their superiority pitch in this regard. Already, several of these funds are structured to invest at least 65% in equities, which fetches superior tax treatment. Any gains in excess of Rs.1 lakh a year from these funds get taxed at a rate of 10%.
Instead of paying 30% tax separately on your debt, gold or international fund gains, and 10% on the equity portion, a combined fund will get taxed at a lower rate of 10%. In the new system, investments with an equity exposure of more than 35% but less than 65% will continue to get indexation benefit and lower tax rate for holdings of more than three years. Newer multi-asset strategies are tapping this space so that gains are taxed at 20% after indexation. Edelweiss Mutual Fund and WhiteOak Capital Mutual Fund have positioned their offerings within this band. Prior to the tax change, there were 11 multi-asset funds in the market. With the two recent additions and further offerings lined up, this segment is expected to get bigger. Feroze Azeez, Deputy CEO, Anand Rathi Wealth, observes that hybrid funds will now be the flavour of the season post the tax change for debt funds. “Inflows will continue, especially on the retail side, by mixing products that have both equity and debt, and not just standalone debt, gold or any other asset class,” says Azeez.
Choice of disparate funds
The schemes within this category differ in three broad areas—asset allocation, riskreturn profile and taxation. It is pertinent to acknowledge that most funds in this category do not have a sufficiently long track record. They are either new (launched in the past five years), or older funds shifted to this category from an entirely different mandate, after Sebi introduced new fund categories in 2018. For instance, HDFC Multiple Yield reinvented itself as HDFC Multi Asset, and ICICI Prudential Dynamic became ICICI Prudential Multi Asset. This shift involved substantial redesign like addition of gold to the asset mix or change in asset allocation limits. Earlier, multi-asset funds were plain vanilla offerings combining the troika of equity, debt and gold.
Different asset classes perform well in different times
Achieving the right asset mix can cushion your portfolio in weak market conditions
Most of the newer funds offer added diversification by including foreign equities and commodities to the mix. Tata Multi Asset Opportunities was the first to add commodity derivatives. Nippon India Multi Asset Fund was the first to offer foreign equities and commodity derivatives as well. Motilal Oswal Asset Allocation Passive FoF is the country’s first purely passive multi-asset offering providing allocations across equity, international equity, fixed income and commodities. This fund seeks to remove the bias in both fund manager and security selection as all investments in the portfolio are in passive funds. Meanwhile, the latest offerings from Edelweiss AMC and WhiteOak Capital AMC have a greater tilt towards fixed income, with the equity exposure hedged via arbitrage. As discussed earlier, taxation and riskprofile of the fund depends on the equity allocation.
Not all multi-asset funds have a minimum 65% equity as their mandate. There are also around eight multi-asset funds packaged as fund of funds (FoFs), which invest in different funds within each asset class. The tax treatment of FoFs, irrespective of how much equity they hold, is as non-equity funds (LTCG at 20% after three years, with indexation). Given the disparity in choice of asset classes and asset allocation limits, investors must be discerning in their choice of multi-asset funds. “If you are not aware of the composition of the portfolio, whether it has high equity or gold or the nature of debt, you could end up with a fund that does not fit your portfolio. A fund’s strategy in each asset class can also decide whether the fund is suitable for you,” points out Vidya Bala, Co-founder, Primeinvestor.in.
Uncorrelated assets behave differently
A mix of uncorrelated assets in portfolio ensures better risk-adjusted outcomes.
How have funds performed?
Clearly, multi-asset funds are positioned to help contain the downside during weak market conditions and limit volatility in returns over time. In this regard, these funds have similar attributes to the dynamic asset allocation or balanced advantage category of funds. So let’s consider how multi-asset funds compare with this category in actual performance. For this purpose, we checked the rolling returns over one-year periods for the past three years. On an average, multi-asset funds have delivered comfortably higher returns (19.7%) than the dynamic asset allocation funds (11.7%) over this time frame. This superior performance extends over threeyear time horizons as well.
Multi-asset funds come in different flavours
They differ in terms of asset allocation, risk-return profile and tax treatment.
The presence of gold seems to have helped the multi-asset funds deliver superior returns. However, the dynamic asset allocation funds have done a slightly better job of containing volatility and reducing drawdowns over one-year periods. Data suggests that muti-asset funds are not always adept at containing losses in the short term. Several funds have experienced losses over a one-year period (see visual). Bala argues, “Several multi-asset funds cannot contain the downside as much as dynamic asset allocation funds, which extensively use derivatives for hedging.” Multi-asset funds should be viewed as long-term investments. Over three-year time frames, no multi-asset fund has incurred a loss.
Why these funds delivered in flat market conditions
A diversified presence in gold, fixed income and even foreign equities contributed to their superior return profiles.
Should you take the multiasset path?
The temptation of in-built asset allocation in multi-asset funds may be a draw for some investors. Hemant Rustagi, CEO, Wiseinvest, says, “As a concept, it works well for those who are not comfortable handling fund selection, identifying right asset allocation and rebalancing regularly on their own.” Many experts seem to favour a multi-asset approach in the current environment for their ability to deliver better risk-adjusted outcomes. Siddharth Vora, Head of Investment Strategy and Fund Manager – PMS, Prabhudas Lilladher, asserts, “We continue to emphasise that 2023 is going to be the year of multi-asset investing. The best approach for the year is to have a well-balanced portfolio of equities, debt, precious metals and global equities.” Sankaran Naren, Executive Director and CIO, ICICI Prudential Mutual Fund, is a big believer in multi-asset strategies.
“We are in an era marked by high inflation, elevated volatility and geopolitical concerns. In such a scenario, we believe that it is imperative to adopt a multi-asset approach to investing for better outcomes,” he says. Even though the asset allocation approach is practical, experts say most investors are better off doing it on their own through separate investments. Asset allocation is a very personal matter, dictated by one’s circumstances, risk appetite and time horizon. With multi-asset funds, you have no control over the make-up of your portfolio. The ‘one size fits all’ approach may not suit everyone’s tastes. Bala insists a multi-asset fund is not a substitute for holding three funds from different asset classes. “If you are investing for the long term, it is best to blend funds from different asset classes.
This way, the best in each category is available to you and you will be able to pick different strategies in both equity and debt (or gold),” she says. If you cannot identify and monitor actively managed funds separately within each asset class, simply opt for index funds in each bucket. You will be spared the trouble of choosing the best vehicle, yet retain control over the asset mix. Besides, the ‘one-stop shop’ promise of a multi-asset fund works only if it becomes the core fund in your portfolio. If the fund itself has only a token allocation in your portfolio, whatever diversification it offers will ultimately get diluted.
They have performed better than dynamic asset allocation funds
So if your multi-asset fund holds 15% in foreign equities and 10% in gold, it may seem like you have achieved diversification, but if this fund accounts for only a fifth of your entire portfolio, your actual global allocation is merely 3%, while gold accounts for a paltry 2%. There is no merit in pursuing such cosmetic diversification. Further, such modest allocation will not let the fund’s in-built rebalancing influence the overall portfolio allocation. Arun Kumar, Head, Research, FundsIndia, says, “I don’t find a use for multi-asset funds in a big portfolio. Even if you put the entire money in 2-3 multi-asset funds, it defeats the purpose as asset allocation in each fund will move differently.”
Multi-asset funds may not always protect you from losses
Several funds have experienced losses in the short term.
Think beyond tax savings
Are the recent tax changes pushing you towards multi-asset funds? Let’s step back a little before you act on this. Experts maintain that asset allocation decisions should not be driven by tax considerations alone. Don’t invest in multi-asset strategies just to dilute the tax hit. These are not to be used as fixed income or debt substitutes either. There is a varying degree of equity exposure in these funds, which puts them in a different risk profile, even if only moderately. A conservative investor may end up with a higher equity tilt than his risk profile warrants. Kumar avers, “Arbitrage funds and equity savings funds are more suited as debt substitutes.
These will fetch debt-like returns with favourable equity taxation.” Besides, the investors shying away from additional tax outgo on their debt, gold or international funds may be getting carried away. Even if you are in the 30% tax bracket, your tax liability on the gains is not actually 30%. Remember that this 30% tax rate is only levied on every additional rupee you earn after your income crosses a certain threshold—not on your entire income. For instance, the effective tax rate for a person with a taxable income of Rs.15 lakh under the new tax regime is only 9.3%. Your tax outflow will only go higher if the capital gains from such debt funds or international funds push your taxable income from the lower tax slab to a higher tax slab. Further, in most multi-asset funds, any allocation to debt, gold and foreign equity is very modest. The bulk of the portfolio remains in equities. “Investing in equity-heavy multi-asset funds just to escape the tax liability from investing separately in these asset classes won’t yield substantial tax savings,” asserts Bala. Lastly, prevailing tax rules can change overnight, so it is never a good idea to base investing decisions on tax savings.
Is the precious metals rally over?
It may be the right time to buy gold for long-term allocation.
GOLD AND SILVER have both witnessed a sharp correction in recent weeks. From a high of Rs.63,585 per 10 gm in May, gold hit a three-month low of Rs.60,115 per 10 gm on 23 June. This came after the US Federal Reserve Chairman Jerome Powell’s congressional testimony, emphasising further rate hikes in the coming months despite a recent pause in the June policy meeting. It has led to a repricing of market expectations of rate cuts coming later rather than sooner. This caused a spike in the US treasury yields and gave the US dollar strength, putting the precious metal under pressure. The US dollar and treasury yields were further supported by the risk aversion created due to debt-ceiling negotiations in the US. Silver also cooled off from Rs.77,045 per kg to a low of Rs.68,094 per kg on hawkish outlook from major central banks.
However, experts maintain this does not signal the end of the rally in precious metals. The economic headroom for the Fed to keep raising rates further is limited. The possibility of recession in the US remains elevated, refl ected in the still inverted US 10 year-2 year yield curve. The markets expect a rate cut some time later this year. Chirag Mehta, CIO, Quantum AMC, asserts that a rate cut will be preceded by deteriorating economic conditions or fi nancial instability, making the investment case for holding portfolio diversifi ers like gold strong. He suggests investors can use the current consolidation in prices to accumulate gold and build their long-term allocation.
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This story originally appeared on: India Times - Author:Faqs of Insurances
