Kotak Multi Asset Allocation Fund New Fund Offer: A Moneycontrol review

Kotak Multi Asset Allocation Fund will invest across different asset classes. In effect, the scheme will implement asset allocation; the most basic principle in wealth creation.

Kotak Mutual Fund, India’s fifth largest mutual fund house, launches a new scheme on August 31. Called Kotak Multi Asset Allocation Fund (KMAAF), it will invest across different asset classes. In effect, the scheme will implement asset allocation; the most basic principle in wealth creation.

What does the fund offer?

KMAAF will invest in equities and debt instruments as well as in gold and silver exchange-traded funds (ETF), international mutual fund (MF) schemes or ETFs and units of Real-Estate Investment Trusts (REITS) and Infrastructure Trusts (InvITs). The fund will alter its allocation between these asset classes depending on how the fund manager sees the markets. However, to retain the equity tax advantage, it will invest at least 65 percent of the scheme’s corpus in equities at all times, even though the actual equity investment might be less than that. KMAAF will compensate for the gap by investing in derivatives and arbitrage instruments.

To be sure, when it comes to investing in equity and debt markets, it would invest directly. But for its investments in gold and silver, KMAAF will take the ETF and mutual fund route.

What works for the fund?

Typically, when you do asset allocation as an individual investor, you invest in MF schemes, all individually. This way, you put money in each of these categories, depending on what percentage of your overall corpus you are supposed to keep in equity, debt, gold, silver, and international equities. Multi asset allocation funds like KMAAF aim to take away the botheration from you.

Kotak MF comes with a good track record when it comes to deciding the asset allocation. The fund house has another fund which is quite similar to KMAAF. Called Kotak Multi Asset Allocator Fund of Funds (FoF), this scheme has given a 20 percent return each over the past 1-year and 3-year time periods, as on August 29. Over the past five years, this scheme has returned 16.85 percent returns. Nilesh Shah, CEO, Kotak Mahindra Asset Management Co Ltd tells us that despite a good track, the FOF hasn’t been able to attract investors. The scheme was launched in 2004, but its corpus is just Rs 1,073 crore, as on July 31, as per Value Research. The main reason behind the FOF’s small size has been its taxation status.

FOFs are treated on par with debt MFs. This got worse earlier this year after the Finance Bill got passed in Parliament that removed the indexation benefits in debt funds. Now, both your short-term capital gains and long-term capital gains get taxed at your income-tax rates. “There was a need to have a similar asset allocation fund, but with an equity tax advantage,” says Shah.

What doesn’t?

Still, that is no guarantee that KMAAF will replicate the success of Kotak Multi Asset Allocator Fund of Funds. For starters, Kotak Multi Asset Allocator Fund of Funds is a FOF. KMAAF will invest directly in equities and debt instruments.

KMAAF’s Fund Manager, Devender Singhal, says that the formula to switch between the asset classes is “pretty much the same.” But the lower and upper limits of equity investments in both funds are slightly different. Still, even if the asset allocation gets replicated, KMAAF’s underlying holdings will be the key. To that extent, it suffers from the typical NFO-syndrome, the lack of a track record.

Moneycontrol’s take

Multi asset allocation funds can serve multiple purposes in your portfolio. These are good for investors who wish to de-risk their portfolio. Although KMAAF does asset allocation, it doesn’t, however, mean you could just invest all your money in just this one scheme and move on. You still need to diversify across other schemes- at least 7-12 overall - but if you like taking a lot of equity risk, then you can keep a small portion of your money in funds like KMAAF and rest assured that your asset allocation would be taken care of.

Asset allocation funds are also meant for conservative investors. “For those who invest in fixed deposits (FD), asset allocation funds can give you 100 to 150 basis points more return than traditional investments like FDs. And still get the benefit of taxation,” says Anup Bhaiya, Managing Director and Chief Executive Officer, Money Honey Financial Services Pvt. Ltd.

The category of asset allocation funds has had a good track record so far. As per ACE MF data, these funds have given double-digit returns in four of the past 10 calendar years.

One caveat: Every multi asset allocation is different. How the fund manager invests within equity and debt asset classes also makes a difference. Schemes like HDFC Multi-Asset Fund and Axis Multi Asset Allocation Fund invest predominantly in large-cap stocks. Some others like Aditya Birla SunLife Multi Asset Allocation Fund and UTI Multi Asset Fund invest a bit more in mid-cap stocks than the rest.

Devender Singhal, Executive Vice President – Equity Funds and KMAAF’s Fund Manager, says that “the equity portfolio shall be managed as a flexicap fund. The portfolio construction shall be primarily bottom-up stock picking.” As far as the debt portion is concerned, “it will be managed in dynamic style with medium term duration in mind. The portfolio shall be a mix of sovereign and high quality corporate paper.”

Ravi Kumar T.V, Director, Gaining Ground Investment Services also advises multi asset allocation and thinks that KMAAF is a good pick. He says that investors should stick with large fund houses that have a good track record of reading macroeconomic news and data and deciphering how that impacts asset classes. “Invest with an experienced fund house. This category has the potential to deliver double-digit returns,” he says.