Some mutual fund scheme are only portfolio diversifiers

There are many interesting concepts that one can buy without any investment advisor

Sample this: In the past year, on an average, arbitrage funds returned about nine per cent, asset allocation funds returned eight per cent, multi-asset funds gave six per cent returns and quant funds returned about 10 per cent. In the same period, the BSE Sensex returned 12.5 per cent, while the National Stock Exchange's 50-stock Nifty returned 13 per cent.

While most financial planners do not favour these schemes, as not many investors understand how they work, these schemes have given decent returns. Of course, the all-time favourite equity diversified funds returned better ---11.5 per cent.

"Taking one's risk appetite into consideration, these could be used as portfolio diversifiers," says Ramanathan K, chief investment officer at ING Investment Managers. His firm offers funds in asset allocation (ING OptiMix Asset Allocator Multi Manager Fund of Funds0) and multi-asset spaces (ING Optimix Financial Planning Aggressive, ING Optimix Financial Planning Conservative and ING Optimix Financial Planning Prudent). (Click here for tables)

These themes were introduced three to four years ago to lure more individual investors. However, the number of such new introductions in the market has fallen since then. Most financial planners don't recommend these themes.

Vivek Rege of Mumbai-based VR Wealth Advisors admits to judiciously advising such themes, especially multi-asset funds, to clients. "These are meant for investors who are not very active with investments or aren't savvy," says Rege.

Here's why: Instead of having different funds for different assets and managing these manually, depending on the asset price movement, one can invest in a multi-asset scheme. The advantage is the fund manager has a cap on the amount to be invested in an asset and, therefore, would rejig the portfolio of the fund accordingly. Therefore, this does away with the need to rejig the portfolio and also keeps a watch on asset performance.

Also, if one manages three different funds (say equity, debt and gold) and even if one asset price changes drastically, the investor/adviser would have to rejig the holding by selling some of it. In that case, there are chances of tax on short-term gains and exit load, if held for less than a year. This is not so in the case of multi-asset funds.

Hemant Rustagi of Wiseinvest Advisors cautions against of the flip side of the coin. "In case of a multi-asset fund, even if one or more asset performs badly, it would pull down the portfolio performance at large."

Asset allocation funds that work like fund-of-funds (FoF) aren't beneficial, as irrespective of the number of years you stay invested, you would have to pay taxes (10 per cent without indexation, and 20 per cent with it) when you redeem gains. This is because FoFs are taxed as debt funds. Also, you hand over your money to just one fund house and, therefore, concentrate your investments and increase the risk.

In case of quant funds, no human intervention (as the fund works on back-tested data) is both an advantage, as well as a drawback. This is because if it doesn't work, no one can state the reason why.

"Arbitrage funds are good for those who do not want to take equity risks, because this fund takes the advantage of price difference (or arbitrage) between the cash and futures markets. Also, the tax treatment is the same as in the case of equities. But investing in an equity scheme will always give better returns," says Rustagi.

Experts caution against exposure of more than five to eight per cent in such funds, which are meant for those with high risk tolerance.

D Sundarajan of Trendy Investments says those who take investment advisers' help may not need these. This is because the advisers take care of investment needs across time, age and requirement. Those who don't take an adviser's help can invest in these funds systematically.

Certified financial planner Karthik Jhaveri of Transcend Consulting feels these are interesting concepts but may not be very useful. For instance, if a multi-asset fund invests 65 per cent in equities and the rest in gold, it is an equity fund and entails more equity-related risks than gold-related. Therefore, having one such fund in the portfolio would only increase your equity exposure, which may not be healthy.

"There is no compulsion to include these schemes in a portfolio. It is a lot easier to manage separate equity and debt portfolios. These schemes are flavours with a shelf life; these do not have a bright future," says Jhaveri.

Ramanathan says globally, a new theme is becoming popular---one that offers risk-parity based allocation that challenges the traditional concepts of balanced funds and monthly income plans. "Here, the risk level is maintained continuously and for that, equity and debt allocations have to be changed, unlike a balanced fund that has a fixed 65 per cent exposure to equities," he says.

We may see some new offerings in the times to come.