Multi-Asset Funds: An All-Weather Investment Strategy?

According to industry reports and studies, more than 90 per cent of long-term returns are determined by the mix of assets. Hence, it is more important for an investment to be diversified so that it is protected from high volatility than it is to maximise profits .

Multi-asset funds are typically mutual funds that invest in various asset classes, including debt, equity and real estate or gold. The allocation of investment in each class, however, depends on the investor. Investors should opt for these funds for two main reasons: They are less volatile and they offer better portfolio diversification. A normal retail investor generally parks his hard-earned money into three categories of investments: equity, debt and cash and cash equivalents. Often we assign a specific portion of our funds to each category of investment, depending on four factors: age, time horizon, risk appetite and goals or objectives.

Looking at the equity portion of your investment portfolio, one can invest in direct equity i.e. stocks or shares of publicly listed entities or via mutual funds. Direct equity investment is good but it comes with a lot of risk and the downside can’t bepredicted in falling markets. Hence, mutual funds are a safer bet in this scenario. According to Association of Mutual Funds in India (AMFI) data, the asset base of the domestic mutual fund industry witnessed an annual growth of 14 per cent to reach Rs 37.75 lakh crore in the three months ended June on sustained inflows in equity schemes by way of systematic investment plans (SIPs) and lump sum investments.

The industry’s average AUM rose to Rs 37.75 lakh crore in the quarter ended June 2022 from Rs 33.2 lakh crore at the end of June 2021. They are roughly divided into two types: debt and equity funds. Equity mutual funds invest 65-80 per cent of their funds in stocks of companies whereas the debt mutual funds invest their funds in various debt securities like bonds, money markets instruments, treasury bills, etc. Equity funds are classified according to market capitalisation, sectoral, thematic, hybrid, tax-saving, and growth and value equity funds.

They have an expense ratio ranging from 1.98 per cent to 2.79 per cent and have underperformed the markets severely this year. Looking at the global scenario, the Sensex has underperformed by 8.55 per cent till date whereas Nifty 50 has dropped over 8.62 per cent. As the markets suffer due to the ongoing Russia-Ukraine crisis and the scenario of rising interest rates and inflation, it is given that the equity mutual funds will also take a fall. Here is a list of the performance of all types of equity mutual funds for the year till date: 

Let’s look at the YTD performance of debt mutual funds:

Looking at the above performance tables, only credit risk funds have performed above their mark because they invest inlow-rated debt securities which yield higher rate of returns and hence are more risky. Hybrid mutual funds are a combination of both equity and debt mutual funds. Their exposure in equities differs from theme to theme.

Multi-Asset Allocation Funds
These funds invest 10 per cent each in a minimum of three asset classes that may include equity, debt, gold or exchange-traded commodity derivatives. The benefit is that you get to hold a diversified portfolio which helps in reducing volatility. While stocks saw a sharp decline in March 2020 due to the pandemicdriven economic disaster, gold had a phenomenal run. Due to the benefit of shielding your portfolio to the degree of your exposure to stocks through debt allocation during the March 2020 meltdown in Indian markets, investing in such a fund would have allowed you to take part in the gold rally. 

In a similar vein, the fund would profit from the present rise if the fund manager had increased exposure to stocks following the market downturn in March 2020. Because various asset classes perform differently at different periods, diversifying your portfolio is beneficial. Multi-asset funds are more cost-efficient and tax-efficient compared to investments in individual assets. For equities, debt and gold, investors pay short-term capital gains tax and long-term capital gains tax. Multi-asset funds are taxed like equities as they maintain 65 per cent equity exposure. If one holds them for over a year and gains over Rs 1 lakh, these are taxed at 10 per cent. Short-term gains are taxed at 15 per cent.

Dynamic Asset Allocation or Balanced Advantage Funds
Depending on where the fund managers perceive an opportunity, these funds offer the option to invest in equity and debt in a dynamic manner. The fund management may rebalance the portfolio by shifting towards debt if the markets are overpriced in order to reduce volatility. The main distinction between multi-asset funds and dynamic asset funds is that the latter tend to have a more stable allocation while the former might move in a broader range between equity and debt exposure. Investors no longer have to worry about independently raising or lowering their stock exposure thanks to dynamic asset allocation funds. Note, however, that the taxes of these funds may vary based on their exposure to debt or equity.

Aggressive Hybrid Equity Funds
Equities-oriented Hybrid Funds, often known as aggressive hybrid funds, are hybrid mutual fund schemes having a higher allocation to equity or assets with an equity theme. Equity and debt are the two main asset groups that hybrid schemes invest in. According to the Securities Exchange Board of India (SEBI), hybrid aggressive funds are required to invest 65-80 per cent of their assets in equities or securities that are connected to equities. Hybrid aggressive funds are required to allocate 20-35 per cent of their assets to debt and money market securities. We have compared these three types of funds between the period ofOctober 18, 2021 to July 5, 2022 along with their expense ratios and their point-to-point returns.

According to Association of Mutual Funds in India (AMFI) data, the asset base of the domestic mutual fund industry witnessed an annual growth of 14 per cent to reach `37.75 lakh crore in the three months ended June 2022, on sustained inflows in equity schemes by way of systematic investment plans (SIPs) and lump sum investments.

Looking at the above tables, it is clear that even though multi-asset and balanced advantage funds exhibit returns and expense ratios in a similar range, the returns and expense ratio for aggressive hybrid funds is much higher in the period mentioned. Hence, while looking at a fund’s portfolio diversification, it is important to study the fund manager’s investment style, how much exposure the fund has in Large-Cap, Mid-Cap and Small-Cap companies and the investment horizon. It also helps to keep an eye on the rebalancing techniques and the frequencies with which the churning has happened. With regards to investing in the debt securities, it is prudent to look at the credit rating of the securities invested in, their time of maturity, their default risk in general, and current interest rates. In the case of multi-asset funds, it is important to study the exposure in other asset classes like gold, bonds, derivatives, etc

Studies and statistics from the industry claim that the mix of assets accounts for more than 90 per cent of long-term returns. Therefore, protecting an investment against excessive volatility through diversification is more crucial than maximising returns. With the aid of multi-asset mutual funds, investors may also be able to profit from a bull market. In addition, these can resist challenging market circumstances like a bear market. However, seasoned investors or those who work with advisors might stay away from this fund category.