With rallies in gold and international equities, more and more fund houses are launching multi-asset funds. These funds can invest in equity, debt and gold, a wider selection, than just equity and debt that other hybrid funds invest in. In this piece, we look at whether you should invest in such schemes.
The category of multi-asset funds was created by the Securities and Exchange Board of India (Sebi) in October 2017, however, it did not witness a great deal of interest until early 2020. The principal driver behind this interest has been the roughly 40% rally in gold prices this year. According to Sebi rules, multi-asset funds must invest at least 10% of their assets in equity, debt and gold each.
Tata Asset Management Company (AMC) launched its multi-asset fund in March, with the USP of commodities arbitrage up to 30% of its assets. Commodities arbitrage includes strategies such as buying in the spot market and selling the commodity in the futures market. The AMC also highlighted that it will be able to execute arbitrage in commodities other than gold such as oil or agricultural commodities through this fund.
The Tata’s launch was followed by Motilal Oswal AMC in July. In the Motilal scheme, the fund manager can take a 10-50% equity exposure, 40-80% debt exposure and 10-20% gold exposure. The USP here is two-fold. First, within the equity allocation, the fund can also invest in international equities. Second, gold and international equity exposure is to be taken through exchange-traded funds (ETFs).
The structure of the fund thus encapsulates many of the established trends of 2020—gold, international equities and passive investing.
Nippon India Asset Management Company is slated to launch its multi-asset fund later this month, according to a person who spoke to Mint on condition of anonymity. This will be Nippon AMC’s first open-ended fund (in any category) in 10 years, the source added.
Apart from the new kids on the block, a number of AMCs placed some of their legacy funds in this category when Sebi created it in October 2017. Some of these funds were originally launched in a multi-asset structure while some were not.
For instance, Axis Triple Advantage Fund launched in 2010 had the ability to invest in equity, debt and gold. It has given a return of 7.82% since its inception. On the other hand, ICICI Prudential Multi-Asset was launched as a multi-cap fund originally but was restructured as a multi-asset fund in 2018. Its pre-2018 returns thus are not relevant to this category.
The lack of uniformity has caused historic returns to vary significantly. Returns over the past three years ranged from -4.13% on Franklin Multi-Asset Solution to 7.64% on Quant Multi-Asset Fund. However, they have perked up this year. As many as 16 out of the 18 funds in this category have given positive returns with the best performer delivering a 16.44% return over the past year.
“A single multi-asset fund gives you exposure to several asset classes such as equity, debt, gold and International equities. This saves you the inconvenience of investing in multiple funds investing in these assets,” said Santosh Joseph, co-founder and CEO, Germinate Wealth Solutions LLP. “It’s also more tax-efficient when the fund manager internally rebalances between different assets than you doing so through redemptions,” he added.
When an investor switches between funds to adjust his asset allocation, he or she may have to pay capital gains tax on any accrued gains in them because a switch is treated as a redemption. Joseph also highlighted the lower risk in such funds compared with pure equity but added that they are more for first-time investors than experienced investors who want tactical bets in asset classes.
Nithin Sasikumar, co-founder, Investography, concurred. “Multi-asset funds are good for first-time investors given their lower risk than pure equity funds. But buying them just for gold exposure doesn’t make sense. Sophisticated investors should do their own asset allocation into equity, debt and gold through sovereign gold bonds,” he said.
It is also important for investors to note that multi-asset funds, which have less than 65% allocation to equity can be taxed like debt funds. This means that gains are taxed at slab rates if the fund is redeemed within three years, and at 20% with indexation thereafter.