Mutual funds recorded Rs 7,600 crore net inflows into active equity schemes in July while redemptions surged to a 30-month high of Rs 30,400 crore due to profit booking, reveals data from the Association of Mutual Funds in India (Amfi).
Multi-asset allocation funds, has emerged as the flavour of the season owing to back-to-back launches, and recorded over Rs 1,300 crore net inflows in July 2023.
What are Multi Asset Allocation Funds?
Hybrid Funds, or Multi-Asset Allocation Funds, are a type of mutual fund that invests in a variety of asset classes including stocks, bonds, and sometimes even commodities or real estate. These funds are balanced and typically invest at least 10% of their portfolio in three or more asset classes. The purpose of Hybrid Funds is to offer investors diversification across multiple asset classes within a single investment product.
Gaurav Rastogi, founder & CEO, kuvera.in explains the advantages of such funds:
1/ Diversification: This is the core advantage of multi asset funds. By spreading investments across various asset classes, these funds aim to reduce the impact of a poor-performing asset on the overall portfolio.
2/ Automatic Asset Allocation: Multi asset funds rebalance based on market conditions. This dynamic adjustment can help in managing risks and potentially improve returns. For a newbie investor, it might be easier to understand the concept of a multi asset fund than to figure out the intricacies of each asset class.
3/ Tax Efficiency: Before the amendment in taxation rules in 2018, switching between asset classes within the multi asset fund was not a taxable event. However, post the amendment, only those multi asset funds which invest at least 65% of their total assets in equities are treated as equity funds for tax purposes. This still allows a certain degree of flexibility to the fund manager while ensuring tax efficiency for investors.
Why have such funds become popular?
With the Indian equity market reaching new all-time highs, investors are now seeking to diversify their portfolios beyond equities, considering assets like debt and gold.
“Multi-Asset Funds offer a solution by automatically rebalancing allocations, ensuring timely adjustments to maintain a balanced investment approach. This proactive approach helps investors navigate changing market dynamics while optimizing their asset mix,” said Pankaj Shrestha – Head Investment Services, Prabhudas Lilladher Wealth Pvt Ltd.
Moreover, currently, the liquidity situation in the markets is tight, which makes it difficult for investors to buy and sell stocks easily.
“Multi asset allocation funds are more liquid than pure equity funds, which makes them a good option for investors who need to be able to access their money quickly without too much of a risk due to market volatility.
Another possible reason could be because the multi asset allocation funds have been giving good returns recently over 3 and 5 years respectively. For investment horizon of at least 3 years, these funds may give higher returns,” said Adhil Shetty, CEO of BankBazaar.
What kind of returns do multi-asset funds generate?
Multi-asset funds have become prominent in the last few years, but they have existed in some form or the other in the last 10-12 years. According to Dhirendra Kumar of Value Research, multi-asset funds have given a return of little over 10 per cent in the last 10 years.
” This is little more than what fixed income would have earned you or maybe presumably more than what fixed income will earn you. But compare that with an aggressive hybrid fund which will be allocating a quarter of its money to fixed income, but compare that with an aggressive hybrid fund which will be allocating a quarter of its money to fixed income, three-fourth to equity and will keep a static or maybe about this much allocation, that has given about 35 per cent more – 13.62 per cent. And when we look at the Sensex return – total return index from Sensex, that is 14 and a quarter. So, this is the pecking order – 14.26, hybrid funds giving 13.62, multi-asset allocation funds have given 10.18 per cent,” said Kumar.
How to pick the right one?
Before investing, consider the fund’s asset allocation strategy, risks, historical performance, expenses, and alignment with your financial goals.
” First, look for multi asset funds that have low expense ratio and invest predominantly in Index funds. Second, look for multi asset funds where the fund allocation process is mostly formulaic with little fund manager discretion. You are better off paying for asset based diversification and rule based tax free rebalancing and not for the ability of a fund manager to time asset class returns,” said Kuvera’s Rastogi.
“Additionally, it is recommended to carefully review the fund as some funds might have a more aggressive equity allocation, while others might lean towards fixed income. Choose a fund that matches your desired asset mix,” said Shetty.
Shreshta believes one should scrutinize whether it maintains its multi-asset character or merely resembles an aggressive hybrid equity fund, with minimal allocation to other assets like debt and gold.
Who should invest in Multi-aseet funds?
Since multi-asset allocation funds must invest at least three different asset classes, they suit investors looking for more diversification. However, each asset class may have a risk-return profile that the investors should study before investing.
Each multi-asset allocation fund has a unique asset allocation strategy and tax treatment.Since there is no requirement for multi asset allocation funds to retain more than 65% of their assets in debt or equity, the taxation of these funds varies by the scheme. Regarding taxation at redemption, the treatment of multi asset strategies is determined by the proportion of equity and debt holdings in the scheme during a financial year.
“For example, a fund with more than 65% allocation towards equity will be categorized as an equity fund and taxed accordingly. If you gain Rs 2 lakh on a multi-asset allocation fund categorized as an equity fund, Rs 1 lakh will be exempted from tax. The remaining Rs 1 lakh will be taxed at 10%, i.e., Rs 10,000.
If the equity allocation is less than 65%, the fund is categorized as a non-equity multi-allocation fund. In this case, there is no LTCG or indexation benefit provision, and the entire gain is taxed at a slab rate. So, for an investor in the 30% slab, Rs 2 lakh gain on a non-equity multi-asset allocation fund categorized will attract Rs 60,000 in tax,” said Ajinkya Kulkarni, Co-Founder and CEO, Wint Wealth.
As per the new tax rule effective from April 1, 2023, all non-equity funds with less than 35% investment in equities will no longer enjoy the benefit of Long-Term Capital Gains (LTCG) tax of 20% with indexation. With no indexation for long-term holdings, debt funds will now be taxed at par with FDs and other fixed income products.
Are multi-asset funds less volatile than a hybrid fund with static allocation?
These funds tend to be less volatile than the aggressive hybrid fund simply because they have less equity. “Equity adds to the volatility, but one should understand that volatility is not risk. Asset prices go up and down, that is the academic definition that if something goes up and down more often, that is considered risk. But the real risk is when you lose the capital and the permanent nature of that capital loss. And that is something which I would disagree with in a moderate way,” said Value Research’s Kumar.
Which are the best ones in the market
Experts Business Standard spoke to have picked the following funds as the best multi-allocation funds to pick from:
Quant Multi Asset Funds
SBI Multi Asset Allocation fund
ICICI Prudential Multi Asset Fund
HDFC Multi Asset Fund
Axis Multi Asset Allocation fund
What percentage of portfolio should one allocate to multi asset allocation funds?
The appropriate allocation can vary from individual to individual. The multi-asset allocation Mutual Funds are deemed suitable for investors who have a low-risk appetite but want to enjoy steady returns on their investments. Longer time horizons may allow you to tolerate more short-term volatility, potentially justifying a higher allocation to equity-oriented multi-asset funds.
“Your age and financial circ*mstances can influence your allocation. Younger investors with longer time horizons might consider a higher allocation to growth-oriented assets, while those nearing retirement might lean towards more stable assets.,” said Shetty.
Shresta said allocating around 10-30% of a portfolio to multi-asset allocation funds can provide diversification benefits and help manage risk, depending on an individual’s financial goals and risk tolerance
Are they better than ETFs and Index funds?
Multi-asset allocation funds offer diversification across different asset classes and active management, which can be attractive to investors who prefer professional oversight. On the other hand, ETFs and index funds provide a more cost-efficient and transparent way to track specific indices, making them ideal for those who prefer a more passive investment approach.The choice depends on individual investment objectives and preferences.
