Hello Readers!
It is suggested to investors to go through a complete analysis of the past performance of funds and then pick out the best scheme. If we go through the historical performance of various funds, we will find out that no single asset class has done well in all the years.
For some years, it was an equity fund trending on the peak, while for some years it was a debt fund or gold, trending on the peak. Surprising was, that for the last 10 years' historical performance, it was gold that topped the return chart list for the five times.
This all made investors think that why to go asset allocation in a single type fund, and why not look for funds that have their allocation in multi-asset classes? Well, this is the basic login that led to the formation of multi asset-allocation funds by various fund houses.
What Are Multi Asset-Allocation Funds?
Multi Asset-Allocation funds are actually Hybrid Funds, that invest in more than one asset class in a certain proportion. The varied asset classes are debt, equity, gold, and other commodities. While some hybrid funds also take up to 10% exposure in real estate (via REITs).
As per SEBI regulations, it is mandatory for hybrid funds to use an asset allocation strategy based on at least 10% each in debt, equity, and gold assets to be called a multi asset-allocation fund.
By investing in hybrid funds, investors can get benefits in their returns from different asset classes. The fund manager through their strategy aims to reduce portfolio volatility and improve risk-adjusted returns for its investors.
However, investing in Hybrid funds do have some challenges that one must know.
Diverse Set
The asset allocation rule as per SEBI for Hybrid funds is much liberal, due to which there is a large-scale divergent in strategies used for asset allocation in these funds. Some, for instance, allocate anywhere from 10-75% into equities, while others have options to invest across commodities including metals, oil, and agriculture. Some funds also allocate funds in index funds for exposure to international equities.
Most of the funds decide their asset allocation based on the personal discretion of their fund managers, while some fund make take market lucrativeness as an objective for their asset allocation. So basically, a lack of rule for asset allocation in hybrid funds has imparted its effect on returns. As per historical return analysis, there are not many multi-asset funds with a long track record.
Tax Complications
Some experts feel that investing in a hybrid fund can be taken as an efficient way to save on taxes. That’s because you need not redeem equity or debt funds to arrive at your targeted asset-mix at various points in time. However, it does have some complications. Some hybrid funds have their exposure in equities up to 65% or more, just to give their investors the benefit of lower long-term capital gains taxes (10%). While fund that has 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.
At last, if we conclude, multi-asset allocation funds are a good option to participate in different asset classes, by investing in a single fund, however, this fund might upset your strategic asset allocation as these funds have a pre-structured asset allocation plan and it is not designed as per investor’s need. Thus, it is suggested to investors with an investment horizon of five to seven years to go allocating their assets in equity and debt funds as per their needs and requirements.
For any kind of query, you can contact us at Shri Ashutosh Securities Pvt Ltd., we are here to help you in any way possible.
Happy Investing!
(Mutual Fund investments are subject to market risk Illustrations are for example only, there is no guarantee of returns. Past performance is not an indicator/guarantee of future returns).