Should you invest in multi asset mutual funds? | Economic Times

The basket of multi asset allocation funds is expanding rapidly. After a hiatus of six years, fund houses are rushing to launch new offerings in this space. Since last year, six new multi asset funds have been launched. Some are trying to be different by offering avenues beyond the traditional mix of equity, debt and gold. Are these newer breeds worthy additions or just old wine in a new bottle?Multi asset funds have just one task— allow investors access to multiple asset classes under one roof without worrying about doing asset allocation and rebalancing on their own. All diversification needs are touted to be captured in a single investment. The asset mix is decided by the fund based on internal models in response to market conditions. The investor also doesn’t have to bother about selecting the right instrument within asset classes. Further, investors do not incur capital gains tax on periodic rebalancing within the fund—a cost otherwise they would have had to bear when shifting from one avenue to another on their own.Most of the newer funds offer more diversification by including foreign equities and commodities to the mix. Tata Multi Asset Opportunities was the first to kick-off the spree adding commodity derivatives to the troika of equity, debt and gold. Nippon India Multi Asset Fund was the first to offer domestic equities, fixed income and gold together with foreign equities and commodity derivatives. Motilal Oswal AMC’s offering is the country’s first purely passive multi-asset offering providing allocations across equity, international equity, fixed income and commodities. The underlying funds within its Fund of Funds umbrella are all passive funds. HDFC Asset Allocator FoF is the latest offering that seeks to invest across equity, debt and gold for now. So are these worth exploring?Asset allocation works in investors’ favourA combination of equity, debt and gold would have yielded returns higher than individual asset class returns and with lower volatility. 82341503Data for last 22 fiscal years. Apr 1998 to Dec 2020. ^ pertains to mix of equity-debt-gold. Data used for asset classes: Equity -NIFTY50, Debt-NIFTY 10 year benchmark G Sec, Gold-spot rate Rs/10 gram. Monthly portfolio rebalancing assumed. Source: HDFC MFIf you crave exposure to multiple asset classes but cannot take the headache of picking funds and then monitoring and rebalancing, this may be the right fit for you. Hemant Rustagi, CEO, Wiseinvest Advisors, says, “As a concept, it works well for those not comfortable handling funds selection, identifying right asset allocation and rebalancing regularly on their own.”Note that a multi-asset fund may not provide material diversification if it doesn’t account for a bulk of your portfolio. If the fund itself has only a token allocation in your portfolio, whatever diversification it offers will ultimately get diluted. So if a multi-asset fund holds 15% in foreign equities and 10% in gold, and this fund accounts for say, 10% of your portfolio, your actual global allocation is merely 1.5% while gold accounts for a paltry 1%! “To really allow a multi-asset fund to make a difference, make it a core allocation in your portfolio. Else, don’t bother,” insists Rustagi.Not all funds in this basket offer real diversification. By rule, multi-asset funds are required to invest a minimum of 10% of their corpus in each asset class. But many strive to maintain minimum allocation to equities at 65%. This allows the funds to be taxed as equity funds. The rest is spread across fixed income and gold, with the latter usually finding modest allocation. “In their urge to capture equity returns adequately and maintain equity tax status, some funds do try to hold higher equities,” says Vidya Bala, Co-founder and Head – Research, Primeinvestor.in. This means the fund will be constrained in its ability to dynamically shift between asset classes to contain falls or capture upside.Only a handful of funds retain flexibility to shift allocations more dynamically. However, for funds that are more flexible in allocation, taking lower exposure to equities attracts taxation as a debt fund. Even with sizeable equity allocation, gains from multi asset funds will get taxed as long term only if held for three years. This potentially robs investors of better tax efficiency of equities. Besides, funds packaged as FoFs are taxed as debt funds irrespective of how much equity they hold. However, even with debt-like taxation, a multi-asset fund can work out as a tax-efficient option considering investor pays no tax on rebalancing, argues Rustagi. Only, investors must stick around for at least three years to claim the indexation benefit and lower tax on capital gains.Further, many of these funds do not have a sufficiently long track record. Most are either new funds or have been repackaged as multi-asset funds after the regulator introduced it as a separate category, says Bala. The largest offering in this category, ICICI Prudential Multi Asset is a redesigned version of ICICI Prudential Dynamic with the addition of gold exposure. HDFC Multi Asset’s earlier avatar was HDFC Multiple Yield. Limited history doesn’t allow for a deeper analysis of their efficacy.Experts say most investors are better off doing asset allocation on their own through separate investments. The ‘one size fits all’ approach may not suit everyone’s tastes.