Multi asset mutual funds as a category have the most
potential for diversification.
Each mutual fund scheme in this category can invest in
categories of assets that the other may not.
This is also why as an investor you need to be careful of the mutual fund you
select from this category for investment.
This is because each and every scheme is run in a
manner that could be completely different from the other.
You cannot rely on past returns, you also need to know in
which assets the particular mutual fund scheme is investing and whether or not
you are comfortable in them.
What
is a Multi Asset Fund?
A Multi Asset fund means a mutual fund that invests in three
or more asset classes.
Not all the multi asset mutual fund schemes were multi asset
funds to begin with though.
Some were merged with other schemes after SEBI’s
recategorization exercise in 2018 while some were launched after 2018 like
Motilal Oswal Multi Asset Fund and Nippon Multi Asset Fund.
This is also the only category in the mutual fund universe
where the taxation system applicable varies from scheme to scheme and there’s
no one uniform tax system for the entire category.
How do
multi asset funds work?
Multi asset mutual funds invest a minimum of 10% each in
three or more asset classes.
10% is minimum but the fund manager can go as further as he
wants to as long as a minimum of 10% is invested in three or more asset
classes.
Assets usually invested in by Multi asset funds include but
are not limited to :
- Equity
- Debt
- International Equity
- Gold etc.
The basic idea behind a multi asset mutual fund is to try
and get the best out of each asset class with regards to both returns as well
as diversifying risks.
Different asset classes perform well at different times and
a multi asset mutual fund tries to capture each asset class when it is doing
well and reduce allocation in the asset class that is performing poorly or the
forecast for the same is poor.
Are
multi asset funds a good investment?
Here are the advantages and disadvantages of multi asset
mutual funds.
Advantages
Diversification
If you are someone who’s not well versed with how to
diversify your mutual fund portfolio then this could be a good source of
diversification.
The fund would take care of your diversification needs and
you wouldn’t need to do that yourself.
This would also be beneficial for overall asset allocation
and not just in diversifying your mutual fund portfolio.
The most important benefit of this is that it makes for a
better risk reward ratio.
Rebalancing
With asset allocation what is important for you is proper
and even fixed allocation for some.
So let’s say you want 50% in equities, 25% in debt and 25%
in cash and the equity market has rallied which takes your equity portion to
60%.
The equity portion now exceeds your desired initial figure
leading to reduction in debt and cash allocation too.
In order to bring about uniformity in all the three asset
classes, you would sell 10% from your rallied equity portion and distribute it
equally between cash and debt.
With a multi asset allocation fund, you would not need to worry
about this since the fund manager would be doing this anyway.
This of course only works if the asset classes you wish to
invest in are the same asset classes that the multi asset fund is also
investing in.
Tailor
made portfolio
Whenever you make a portfolio, you worry about what asset classes to invest like equity, debt, gold funds, etc.
Then within these asset classes too, you would need to decide the category and eventually which scheme to invest in.
That would not be the case with a multi asset mutual fund
though.
This is because a multi asset mutual fund would already have
the three asset classes and you would not have to worry about which category
and scheme to invest in.
You would not need too worry about not having diversified
enough even though you hold only one mutual fund scheme since it is a multi
asset fund.
Disadvantages
Timing
Timing is very crucial in a multi asset allocation fund.
If the fund does not deploy cash before a market rally then
the fund would miss out on the rally and you on returns.
If the fund does not reduce equity allocation before a severe
market correction then the fund would also go down so would your returns.
Although timing the market accurately is not possible, yet
being as close as possible definitely helps.
Taxation
The biggest issue with a multi asset allocation fund is
taxation.
Taxation differs for each multi allocation fund though and
is not standard throughout.
Any fund that deploys 65% into equity would be treated as an
equity and therefore would be taxed as an equity fund too.
But any fund that does not deploy 65% into equity would be
treated as a debt fund and therefore be taxed as a debt fund too.
If say your fund invests 55% into equity then any gains from
the equity portion too would be treated as debt and therefore be taxed higher
too since debt funds are taxed at a higher rate than equity funds.
It is therefore very important to know what asset classes
your fund is investing in along with what category of taxation it falls into.
Most multi asset allocations are equity oriented and
therefore are taxed as equity mutual funds.
Additional reading: Click Here to read what went wrong with HDFC Balanced Advantage Fund
High
returns
You cannot expect high returns from multi asset mutual funds
and if that is indeed your goal then multi asset mutual funds are not what you
are looking for.
Multi asset mutual funds invest in three or more asset
classes and never go overboard with any one asset class in particular which is
why even if say the equity is rallying, they cannot take advantage like other
equity mutual fund scheme.
The purpose of a multi asset allocation is not high returns
but rather a favourable risk reward ratio which if you have a long time horizon
with a high risk appetite then it would not make sense to invest in a multi
asset allocation.
Summary
Multi asset mutual funds are more diversified than other
hybrid funds.
A multi asset mutual fund can be a part of your portfolio
but should never be part of your core portfolio.
The main idea behind a multi asset mutual fund is to
diversify risks and not high returns.
It is important for you as an investor to be well aware as
to what asset classes your fund is investing in since not all multi asset
mutual funds are run in one particular manner.
Although most multi asset mutual funds are taxed as equity
funds, not all are so you need to check that beforehand too.
For portfolio enquiries, email us with your doubts at info@themutualfundguide.com