Multi-asset funds: Diversified portfolio ensures smoother experience

Exposure to too many of these funds can make it difficult to control asset allocation or have a unified strategy

Multi-asset allocation (MAA) funds have witnessed steady inflows over the past year. From Rs 19,225 crore in June 2022, the assets under management of this category has risen to Rs 27,739 crore (April 2023).

Diversification benefit

The Indian equity market has been volatile over the past year owing to high inflation and rapid rate hikes. “In such times, by investing in a category like MAA, investors get the benefit of diversifying their investments across three or more asset classes within a single fund,” says Ihab Dalwai, fund manager, ICICI Prudential Asset Management Company (AMC).

These funds can offer exposure to equities (including international), debt, gold, real estate investment trusts and infrastructure investment trusts. “Over the long term, such a diversified portfolio tends to provide better risk-adjusted returns,” says Dalwai.

The fund manager can change the asset allocation based on the outlook of various asset classes and hence benefit from opportunities arising in them.

Different asset classes can do well at different points. “Gold and silver have performed well over the past year. International equities and fixed income (due to rising yields) have also turned more attractive,” says Niranjan Avasthi, head-products, marketing and digital, Edelweiss Asset Management.

Varied portfolio strategies

Some MAA funds have an equity-heavy strategy (equity exposure above 65 per cent) and enjoy equity-like taxation. The balance 35 per cent is split between debt and gold. These funds have a high risk-return profile.

Some vary the equity allocation in a wider range (10-40 per cent, or according to the fund's mandate). Some use arbitrage to ensure equity-like tax treatment. In others, the equity component could be between 35 and 65 per cent. These funds have a moderate risk-return profile. If held for more than three years, they are taxed at the rate of 20 per cent with indexation.   

In a third category, which Edelweiss AMC has recently introduced, the fund takes exposure of 35-40 per cent to equity arbitrage, another 10-15 per cent to gold and silver arbitrage, and the balance to high-quality bonds. “With about 50 per cent exposure to arbitrage strategies and 50 per cent to fixed-income, the returns will be closer to that of a debt fund. The fund will have a fixed-income like risk-return profile. Investors who stay invested for three years will be taxed at the rate of 20 per cent with indexation,” says Avasthi.

Muddled asset allocation

Seasoned investors would already have exposure to pure equity, debt and gold funds. “The investor’s portfolio strategy using these individual funds could be different from the strategy followed by the MAA fund, leading to a muddled outcome,” says Arun Kumar, head of research, FundsIndia.

As the investor’s portfolio grows, she may not want to concentrate her entire investment in one or two MAA funds. “They may want to diversify into four or five funds. But once you have exposure to so many MAA funds, it may become difficult to know your portfolio-level exposure to individual asset classes,” says Kumar.

Study the fund closely

If you decide to invest in a fund from this category, understand its asset allocation, portfolio management strategy, and tax treatment properly.

One use case for these funds could be to add them to the debt portion of your portfolio for a debt-plus kind of return, along with superior tax treatment (20 per cent tax rate with indexation benefit for funds having 35-65 per cent equity exposure). “The investor must take a call on how aggressive a fund he wants to select, and choose one with appropriate allocation to equity and gold,” says Kumar.

He adds that the Edelweiss fund can be used as a replacement for a pure debt fund by investors who want superior tax treatment and have a three-year investment horizon.