Investors must set the return expectations right
Last week, Moneycontrol wrote about multi-asset funds (in the backdrop of healthy collection in a new fund offer) and whether these funds added any value to an investor’s portfolio. Given that asset allocation is important for reducing portfolio volatility, especially in times such as these when some segments have run far ahead of their valuations. Smart investors have been known to spread their funds across asset classes. Multi-asset funds (MAFs), which invest across asset classes, become an obvious choice here. But these funds are not a magical solution to your asset allocation needs. Investors must set the return expectations right.
Multi asset funds differ in style
Since MAFs are expected to invest in a mix of stocks, bonds and gold, the performance of each asset class will affect the overall returns.
ICICI Multi Asset and Axis Triple Advantage invest a minimum of 65 percent in stocks (which can go up to 80 per cent). In bull markets, this strategy is likely to pay off. Motilal Oswal Multi Asset invests 40-80 per cent of its portfolio in bonds; so returns will mostly be determined by the performance of the debt portion.
Past performance not a perfect indicator
Most funds in this category were re-purposed after the introduction of the scheme categorization norms in October 2017. Hence, barring a scheme such as Quantum Multi Asset Fund of Funds, most others have a limited history.
Ravi Kumar TV, founder of Gaining Ground Investment Services, says, “Investors are looking at these schemes as a better place to hide in an uncertain environment, as they get exposure to all asset classes.” In the last three months, these funds, as a category, delivered 11.81 per cent returns, as per Value Research data. This is an outcome of all asset classes such as domestic stocks, gold, bonds and international stocks posting good performances. Despite a severe dip in stocks and gold in March 2020, the one-year performance of the multi asset funds have been fairly good, at 8.45 per cent.
Despite this, Ravi advises investors against relying on the recent short-term performance of schemes. The key to predict how the fund would move is to know its asset allocation; how much it can invest in all the asset classes. An equity-oriented multi-asset fund’s behavior, for instance, would depend largely on how equity markets move.
Comparing funds becomes difficult
Be careful when you review your multi-asset fund’s performance. Your scheme may not be the best in the category at a given time. For example, since your multi asset fund has been investing in gold, doesn’t mean it would outperform gold exchange-traded funds (ETF). A gold ETF invests its entire corpus in gold, whereas your multi asset fund would have invested just a portion of its corpus in gold.
Do not compare the performance of an MAF with the best performing fund. “Investors should avoid doing this because a scheme investing in an asset class depicts different returns and volatility compared to that of a multi asset fund,” says Vishal Dhawan, founder and chief financial planner, Plan Ahead Wealth Advisors. “Investors must understand that a fund that invests across asset classes cannot be the best performer,” he adds.Investors should always look at multi asset funds for diversification and containing downsides. Chirag Mehta, senior fund manager, Quantum AMC says that a return that is a bit higher than what fixed income funds give is good enough expectation from multi asset funds, over the long term. Since these schemes invest across asset classes and are expected to generate a little more than fixed income returns, do not forget to track the scheme’s expenses.