DSIJ Mindshare

MULTI-ASSET CLASS FUNDS: A CLOSER LOOK

Asset allocation is an integral part of your investment process. Asset allocation is important not only because it allows you to diversify your investments across different asset classes but also helps you determine the kind of returns you can expect from the portfolio. Remember, when you invest in two different asset classes that tend to go in opposite directions in different market conditions, the combination is likely to have a stabilizing effect on your portfolio. For example, the stock market does well during an economic boom, and loses ground during recessionary times. The bond market, however, goes in the opposite direction.

For your asset allocation strategy to be successful, it must be flexible enough to accommodate the changes in your financial circumstances as well as the changes in the economic cycle. It is important because economic environment has a direct impact on the behaviour of the financial markets. While the benefits of asset allocation are well-established, it can be quite tricky to decide the right allocation for different asset classes such as equity, debt and gold. Even more challenging can be a situation wherein you may be required to rebalance the asset allocation when one or more asset classes perform better than others.

If you find it tricky to decide an appropriate asset allocation for yourself, multi-asset class funds can be the solution. As the name suggests, these funds invest in different asset classes such as equity, debt and gold. These funds usually cap the maximum and minimum exposure to each of these asset classes. Since the fund managers are required to maintain these limits, they keep rebalancing the holdings through strategic and tactical asset allocation from time to time. It makes rebalancing a disciplined as well as a tax-efficient exercise. Besides, since the money remains invested in different asset classes, investors do not miss out on sudden gains in an asset class. Of course, one misses out when a particular asset class does well for prolonged periods but then the key to investment success in the long run is to maintain the right balance between risk and reward.

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These multi-asset class funds follow different investment patterns. For example, while Axis Triple Advantage Fund invests equity and debt component in stocks and debt instruments respectively, its allocation to gold is through its own gold ETF. On the other hand, there is Franklin India Multi-Asset Solution Fund, which is a fund of funds. Simply put, this fund invests in a combination of other funds of Franklin Templeton mutual funds as well as another mutual fund. For example, the equity portion is invested in Franklin India Bluechip Fund, debt component is invested in Franklin India Short Term Plan and allocation to gold is through Goldman Sachs Exchange Traded Fund.

Of course, there are certain drawbacks of investing in multi-asset class funds. While someone looking to invest in these asset classes separately has the option of choosing from a number of quality funds for each of the asset class, for an investor in a multi-asset class fund, the choice gets limited. Besides, a fund house managing a multi-asset class fund may not have the same level of expertise for different asset classes. Moreover, an investor loses the flexibility to change the asset allocation when his personal circumstances may require him to do so. That’s why, one must have a close look at the proposed asset allocation in a multi-asset class fund before investing in it.

Another major drawback of multi-asset class funds is tax implications of investing in them. Since as per the present tax rules, only those funds that invest 65 per cent or more in domestic equities are treated as equity funds, these multi-asset class funds are considered as debt funds. Besides, fund of funds are treated as debt funds for tax purposes, irrespective of their asset allocation. Therefore, you need to remain invested for three years to claim long-term capital gains benefits. Any gains on units redeemed before three years is treated as short-term capital gains and is taxed at your applicable tax rate. Of course, if you invest in these funds with a time horizon of three years or more, the tax implications will change dramatically.

As is evident, there are pros and cons of investing in multi-asset class funds. The key, therefore, is to assess one’s ability to decide asset allocation and rebalance it from time to time. If you are not sure about your ability to establish and rebalance your asset allocation, you will be better off opting for a multi-asset class fund. This will ensure that you don’t end up making haphazard changes in the portfolio, which may either make a significant dent in your portfolio returns or expose you to unnecessary risk.

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