Mutual Fund Investments: Multi asset funds and asset allocation needs. SIP is the Best still and always !
Mutual Funds mobilise money from various investors, pool them and deploy them in various stocks of diverse sectors like I.T, Pharma, entertainment, cement, steel, Banks, NBFCs etc., They also promote Debt funds and Hybrid funds-both Equity and Debts. Like individuals are advised to invest in diverse assets to reduce the risk and to enhance the returns, MFs too do the same by investment in diverse sectors by offering Multi asset funds. (MAF).
Multi asset funds or mutual fund schemes that invest in multiple asset classes are in vogue these days. Several mutual fund houses and their sales force are pushing these funds as a one-stop solution for the `financial planning needs’ or ‘asset allocation needs’ of investors. Another sales pitch is that these schemes can offer better returns with lower volatility.
To begin with, let us see what these funds do and what they don’t. One, these schemes, as said earlier, help you to invest in multiple asset classes. They typically invest in equity, debt, and gold. The latest addition to the asset class list is overseas equity. That means you can use these schemes if you are looking to invest across different asset classes. The fund manager would buy and sell these assets based on their outlook of the prospects of these asset classes.
It is extremely important to look at where the scheme proposes to invest and in what proportion. Also, how the schemes plan to manage the allocation to them.
That brings us to the claim of financial planning and asset allocation needs.. Mutual funds cannot offer you customisation. They invest in a general basked of assets and the allocation remain the same for all investors.
Financial planners and mutual fund advisors believe that a set kind of asset allocation can never fit different investors. Investors with different goals, risk appetite, investment horizons and tax liabilities cannot stick to an algo-based or set asset allocation to meet their goals.
“The asset allocation varies from person to person as the life stage, needs and risk profile of each person is different. Multi Asset Funds have a common portfolio for all kind of investors. The fund is dynamically managed from economy and growth potential perspective, but there could be a scenario where some investor may not be in position to take additional risk or is in a position to take more risk than Multi Asset Fund. Hence, it cannot be put forward as common solution to all investors.
Investors should also remember that all multi asset schemes do not follow a similar allocations to different asset classes. Some schemes like Nippon India Multi Asset Fund have 70% allocation to equities, which also includes international equities.
If any investor is following goal-based investing and has an asset allocation, then adding this category of scheme will add any value. For new investors where capital is limited, these schemes can be a starting point that can give them exposure to different asset classes. However, as we have seen in hybrid funds, when one side of the asset allocation is not being managed well, it drags the performance of the entire scheme. So an intensive study of the mode and quantum of investment sector wise will help the investor to get better returns.
Financial planners also raise the issue about goals. An investor with various goals, ranging from short- to long-term ones, cannot rely on a single scheme. They argue that liquidity concerns might be a trouble for investors in these schemes. For example, if an investor has a goal of a vacation in six months, she should invest in a multi asset schemes that that invests above 50% in equity.
“For short term goals, debt is the only asset class which can give consistent returns with certain visibility. If you have aggressive long-term goals, pure equity will suit you better. Also, when you redeem from the scheme, you cannot say I want to redeem only the debt portion of my portfolio. You might be forced to redeem when the scheme might be facing losses on the equity side,” says Gaurav Monga.
Some of these schemes are taxed like debt schemes because they invest less than 65% in Indian equities. This means investors might be paying extra taxes in some of these schemes. Let’s look at the performance of these schemes in the last three years. The multi-Asset Funds category has offered 3.93% returns in three years and 8.28% returns in the last one year.
Many of these schemes are also capitalizing on the higher demand for the rising gold at the moment. While gold looks like a lucrative investment at this point, the asset class has a tendency to remain flat for years. This might impact the overall returns from the schemes when things go back to normal and the gold rally stops. “Retail investors should have a maximum 5-10% allocation to gold. It is always better to invest in different asset classes by allocating investment as per one’s profile.
Reality: yes, they invest across different asset classes. But the allocation is not uniform across all schemes. So, see whether you are okay with the allocation pattern.
If managed well, these schemes can take care of volatility to a large extent as they have the option to switch between different asset classes. However, do not fall for the higher returns. When you reduce the overall risk (for example, add a low-risk asset class to your portfolio), it mostly results in lower returns. Expect modest returns from these funds – a little higher than debt, but less than equity schemes.
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