Multi-Asset Allocation Funds – Do They Really Work?

A mutual fund investor is like a child in a candy shop. Everything looks delicious and everything must be bought. It doesn’t matter if you like the flavour or taste of the candy, you MUST have it.

Similarly, investors are spoilt for choice. They are confused whether they should invest in –

  • Equities
  • Debt
  • Gold
  • Commodities
  • Currencies
  • Overseas stocks
  • Real estate etc.

The options are endless.

This leads to ‘overchoice’. In an overchoice situation, investors end up making poor investment decisions because they behave like this child in a candy shop.

Multi-Asset Allocation Funds

Does this seem familiar …

  • You invest in the stock market and it falls immediately!
  • You invest in gilt funds and the bond prices crash!
  • You invest in gold and gold hit 52-week lows!

We think this is our bad luck but it is problem of plenty.

What if there was a way to taste all the candies without getting a stomach ache?

Well there is.

Introducing Multi asset Allocation Fund.

The Securities and Exchange Board of India (SEBI) reclassified mutual fund categories in 2018. At that time, it introduced a new category of mutual funds – Multi asset Allocation Fund.

It is one of the 6 types of hybrid funds.

Multi-Asset Allocation Funds

Multi asset allocation funds also invest in multiple asset classes. But they are different from balanced funds.

Balanced funds invest only in equity and debt. Whereas a multi asset allocation fund invests in any of the below assets:

  • Equity
  • Debt
  • Gold
  • Commodities
  • Overseas stocks etc.

Hence, they offer superior diversification than balanced funds.

These funds are fairly new for Indian investors. For years, they invested in balanced funds for diversification. And for years this worked.

But in 2018-19, both equity and debt markets were down. The debt market was suffering from a credit crisis. This crisis crossed over to equities. Investors were left without a ‘safe’ asset.

They panicked and realised their balanced funds weren’t balanced enough! This led to the birth of ‘Multi asset allocation funds’.

What are Multi Asset Allocation Funds?

As per SEBI, ‘multi asset allocation funds must invest in at least three asset classes with a minimum of 10% each in equity, debt and gold’.

The idea is to generate stable and superior returns using negative correlation of asset classes.

Negative correlation is when one asset class falls while the other rises. Equity, Debt and Gold have negative correlation.

  • Equities outperform debt and gold in a growing economy.
  • When stock markets are falling, investors shift to debt and gold for stable returns.

The below table shows the relationship between gold and equities.

Multi-Asset Allocation Funds

A clear negative correlation can be seen in 2008. In 2008, the stock markets fell by 51.84%. But Gold was up by 22.17%!

The same is happening in 2021 as well. As stock market rises, gold has begun its downward journey.

Who Should Invest in Multi asset allocation funds?

This fund is perfect for investors who are looking for a one-stop solution. So, instead of investing in three schemes, investors can get the same benefit by investing in just 1 scheme.

This is perfect for investors who do not have the time or knowledge to rebalance their portfolios as per market conditions.

But are these funds worth the hype?

Should You Invest in Multi asset allocation funds?

This fund might look great on paper. But before investing in them, you need to know the following:

1. No Long Term Track Record: Multi asset allocation funds were launched in 2018-19. Before that, majority of these funds were monthly income plans or hybrid funds.

For example:

It is only after SEBI’s recategorization that these funds became ‘multi asset allocation’ funds. Hence, these funds do not have a real long-term track record of managing multiple assets.

2. Unclear Taxation: These funds do not have fixed taxation.

If a multi asset allocation fund invests at least 65% in equities, then it will qualify for equity taxation. Otherwise, it will follow debt taxation.

So, you will have to increase your holding period from 1 year to 3 years!

For example:

So, HDFC multi asset fund will have debt taxation. But ICICI Pru multi asset fund will have equity taxation.

The fund manager keeps on changing the allocation of multi asset funds. Hence, investors need to be extra careful while investing and redeeming from them.

3. No ‘Real Diversification’: Equity based multi asset funds are in high demand due to their 1-year taxation. To attract such investors, fund managers invest majorly in equities.

Gold and debt allocations are kept at the bare minimum 10%. This defeats the very purpose of diversification. Hence, not all multi asset funds invest in multiple assets.

4. High Cash Component: All mutual fund schemes have a cash component to take care of urgent redemptions. Usually this is between 5%-10% of the corpus.

But in the case of multi asset funds, fund managers hold as high as 60%-70% in cash. Holding cash reduces the overall portfolio returns.

This is not good for investors. They invest in mutual funds to earn higher returns. But if the fund manager prefers to hold on to cash, then investors are better off investing in bank deposits.

The above factors show that these funds might not be as great as they seem on paper. But let’s look at their returns in the last 3 years to reach a conclusion.

Multi-Asset Allocation Funds

As seen above, multi asset allocation funds have underperformed other fund categories in the last 3 years.

So, there’s a high chance that your multi asset fund generated mediocre returns even though gold generated 28.32% returns in 2020.

Final Thoughts:

Multi asset allocation funds might work for investors who do not have the time or knowledge to create a diversified portfolio.

But for investors who do, it is much better to invest in individual asset classes. You will be able to generate substantially higher returns.

Suppose you want to invest Rs 1 Lakhs. You have two options –

  • Invest in multi asset allocation fund (SBI Multi Asset Allocation Fund)
  • Invest in individual asset-oriented funds.

In option 1, the future value of your investment will be Rs 1.26 lakhs. So, your gain is 12.59%.

Fund SBI Multi asset Allocation Fund
Investment Amount                                                   1,00,000
NAV on 1st Jan 2019 26.02
Units Acquired 3842.55
NAV as on 1st Jan 2021 32.99
Current Value of Investment                                                   1,26,767
Net Gains                                                       26,767
Profit (%) 12.59%

In option 2, if you had invested in the same proportion as SBI multi asset allocation, you would have made Rs 1.29 Lakhs.

 Fund SBI Bluechip Fund SBI Gold Fund SBI Short Term Debt Fund
Investment Amount  45,400  12,000   42,600
NAV on 1st Jan 2019 37.31 9.96 20.87
Units Acquired 1216.72 1204.29 2041.33
NAV as on 1st Jan 2021 48.57 15.56 25.11
Current Value of Investment  59,095 18,742 51,254
Net Gains  13,695  6,742  8,654
Profit (%) 14.09% 24.97% 9.69%

Whether you should invest in multi asset allocation fund depends on YOU.

If you do not have the time for periodic portfolio rebalancing, then you should invest in multi asset allocation funds.

Find the list of the 5 best multi asset allocation funds for 2021.

But if you constantly monitor and rebalance your portfolio, then you should invest in individual asset-oriented funds.

Find the list of the best equity funds, debt funds and gold funds in 2021 here.

If you are not sure how to rebalance your mutual fund portfolio, then you should use RankMF’s SmartSwitch. SmartSwitch helps you switch from poor quality funds to superior funds in minutes!

And the cherry on the cake is that SmartSwitch is absolutely FREE! So, open a FREE RankMF account today and start exploring the best mutual fund schemes in India for FREE.

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