Equity or debt-oriented? Let risk profile and time horizon decide for MAAFs

Amid market turbulence, investors seeking stability with reasonable returns may multi-asset allocation funds

Diversified equity funds (large, mid and small) have declined between 11 and 19 per cent over the past six months. Multi-asset allocation funds (MAAFs), a hybrid category of funds, have done a much better job of containing the downside by declining 5.6 per cent over the same period.

 

Amid market turbulence, investors seeking stability with reasonable returns may MAAFs. These schemes invest across equities, bonds and commodities, with a minimum 10 per cent allocation to each asset class. In addition, they may invest in units of Infrastructure Investment Trusts (InVITs) and Real Estate Investment Trusts (ReITs).

 

“Multi-asset funds attempt to give smoother returns with varied asset allocation mixes that have lower correlations with one another, thereby creating a stable return profile with possibly lower drawdowns,” says Rahul Pal, chief investment officer–fixed income, Mahindra Manulife Mutual Fund.

 

Winners keep rotating among various asset classes. This works in favour of  MAAFs. “Market cyclicality means no two asset classes perform in a similar fashion under different market conditions. The recent volatility shows how investing in MAAFs can help tide over market uncertainties,” says Ashish Naik, fund manager, Axis Mutual Fund.

 

Varied asset mix

 

MAAFs follow diverse allocation strategies. “Not all MAAFs are identical. Currently, roughly 80 per cent of them are equity-oriented (65 per cent in equity and the rest spread across other asset classes), and they enjoy equity taxation. The balance 20 per cent are debt-based (with a small component in equity and other asset classes),” says Naik. Some also invest in units of index funds tracking global indices. 

 

Within commodities, some funds invest in gold and silver exchange-traded funds (ETFs), while others opt for listed commodity instruments.

 

Know the risks

 

MAAFs tend to underperform when one asset class experiences a sustained rally. “If there is a secular bull run in one asset class, MAAFs may offer relatively moderate returns as they must always invest in other asset classes,” says Pal.

 

These funds, too, experience some downside during a market downturn. “Investors must not live with the unrealistic expectation that these funds will not have any downside, as the assets they hold might not be perfectly uncorrelated,” says Kumar.

 

How to select a MAAF

 

One MAAF can be very different from another. “When selecting a MAAF, consider its asset allocation strategy to ensure that it aligns with your risk profile and investment goals,” says Abhishek Kumar, Securities and Exchange Board of India (Sebi)-registered investment adviser and founder, SahajMoney.com.

 

Naik adds that investors must, based on their risk appetite, decide whether to go for a MAAF that is high on equity or on debt.

 

Suitable for varied risk profiles

 

Given the variety on offer, investors with varied risk profiles can find a MAAF suited to their risk appetite. “MAAF can be a part of every investor’s portfolio as they aim to strike a good balance of risk,” says Naik.

 

Aggressive investors may prefer schemes with 65 per cent equity exposure, while those with moderate risk appetite can choose a fund with 35–65 per cent equity allocation.

 

First-time investors may also go for them. “New investors exploring different asset classes may begin by allocating to MAAFs. Over time, they can decide the asset allocation that best suits their portfolio and allocate accordingly,” says Jiral Mehta, senior research analyst, FundsIndia.

 

Investing for at least five years is essential. “Those who invest for a shorter time horizon may be disappointed,” says Pal.

 

Finally, investors must not expect returns from a MAAF to match pure equity funds.