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Historically, no single or multi asset class has done well in all the years. Some years it was equities, others it was either debt or gold. So, why not own a fund that invests across asset classes? That way you will be able to protect your capital at all points in time and also earn decent returns. That’s the logic behind the introduction of multi asset-allocation funds by various fund houses. 

Gold has topped the return charts in five out of the last 10 years, while equity and debt did it for three and two years respectively. With gold as an asset class doing phenomenally well in recent years (it’s doubled in the last five years) these funds have gained prominence. Does it make sense to invest in it?

First of all, let’s understand multi asset-allocation funds. These are hybrid funds that invest in varied asset classes – equities (including international), debt, gold and other commodities such as metals and agriculture. Some also have a mandate to take up to 10% exposure in real estate (via REITs). As per Sebi norms, a fund needs to invest at least 10% each in debt, equity and gold assets to be called a multi asset-allocation fund

By diversifying across different multi asset with weak correlation, the fund manager aims to reduce portfolio volatility, while improving risk-adjusted return for its investors. 

However, there are certain challenges.

Diverse set

There are not many multi asset funds with a long-track record. Since the Sebi definition of multi asset category is liberal, asset-allocation strategies of these funds are divergent. Some, for instance, allocate anywhere from 10-75% into equities, while others have options to invest across commodities including metals, oil and agriculture. Others have a mandate to capitalize on arbitrage opportunities between the cash and futures commodity prices while another uses an index fund for exposure in international equities. 

A subjective measure could prove counter-productive especially in good times when a bull run can lead fund managers to let the asset holding drift towards the maximum in the quest for earning more higher and popular growth as well. 

Lacking rule-based allocation

Taking a call on asset mix has played an important role in the performance of these funds. Most funds have left it to the personal discretion of their fund managers to decide on the asset allocation. While some have an objective measure to gauge market lucrativeness and tweak asset allocations, others don’t have it. A subjective measure could prove counter-productive especially in good times when a bull run can lead fund managers to let the asset holding drift towards the maximum in the quest for earning more growth. 

Tax implications

Some experts feel it’s a tax-efficient way of balancing one’s portfolio. That’s because you need not redeem equity or debt funds to arrive at your targeted asset-mix at various points in time. However, there is also uncertainty regarding tax liability. Some funds are keeping exposure of equities above 65% to give their investors the benefit of lower long-term capital gains taxes (10%) while others aren’t. A less-than-65% exposure to equities attracts short-term capital gains tax at the marginal rate if sold within three years and 20% (with indexation benefit) if sold after three years. 

Uncertain asset mix

Furthermore, investors are uncertain about their asset allocation in this fund. Investors seeking a 10% exposure to equities will be stumped by a 50% exposure to equities or vice-versa. Investors are better off investing separately into equity and debt. 

Takeaway

Investing in multi-asset funds might upset your asset allocation strategy. Investors with an investment horizon of five to seven years are better off doing their own asset allocation into equity and debt funds. 

Why should you invest in multi asset funds?

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