To begin with, let 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 plans to manage the allocation to them.
That brings us to the claim of financial planning and asset allocation needs. Do not fall for these sales pitches. 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, they say.
“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,” says Harshad Chetanwala, CFP, MyWealthGrowth, a wealth management firm based in Mumbai.
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. So, do not get into multi asset schemes thinking they are meant for conservative and moderate investors.
Gaurav Monga, Director, PxG Consultants, a financial planning firm based in Delhi, says that these schemes do not add value to an already diversified portfolio and they are not a one-stop solution.
“If any investor is following goal-based investing and has an asset allocation, then adding this category of scheme will not 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. That problem is present here as well,” says Gaurav Monga.
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. 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 capitalising 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 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 rather than a common portfolio like multi asset fund,” says Harshad Chetanwala.
Finally, let us look at the claims and see whether they hold up.
Claim: invest across different asset classes.
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.
Claim: one-stop solution to all your financial planning and asset allocation needs.
Reality: the scheme invests in a basket of asset classes. The allocation is standard. It may or may not match your allocation needs. So, check whether it matches your allocation needs.
Claim: better returns with lower volatility.
Reality: 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.