Offering a Better Mix

Every asset goes through ups and downs. Since 1991, when India started opening up its economy to the world, financial markets have been through many phases. Debt was the best performing asset between 1994 and 2003. Between 2003 and 2008, stocks beat others by a wide margin. The last four years have belonged to gold, which has given 20% return a year since the 2008 global financial crisis (See Timing the Market).

“Investors often make the mistake of chasing the asset class that has given the best near-term returns,” says Jayesh Gandhi, executive director, Morgan Stanley Mutual Fund. That is the reason they often end up investing in an asset at the end of its bull cycle. For instance, in 2002, there was a rush for fixed-income instruments such as bank fixed deposits. In 2007, investors flocked to stocks. Gold, it turns out, is the latest rage.

“Investors fail to realise that all asset classes go through both good and bad cycles,” he says. Investing in different assets, he says, is the only way to earn consistent returns.

VARIETY RULES

Multi-asset funds, which invest in debt, equity and gold in varying proportions, can be a great help to long-term investors. Although these funds are not new to the Indian market, they earlier used to invest in just two assets—equity and debt. For instance, monthly income plans (MIPs) and balanced funds (also called hybrid funds) have for years been offering investors the option of investing in both debt and equity.

MIPs, typically debt-oriented, are conservative and provide regular income. They invest 5-25% corpus in stocks and the rest in debt to ensure portfolio stability. In the last one year, they have given an average return of 8%, with the top performing fund returning 11%.

The other category of hybrid funds, also called balanced funds, is equity-heavy and thus more aggressive than MIPs. These are similar to equity-oriented funds (with more than 65% exposure to stocks). Over the last 10 years, they have returned 18% a year on an average, which is comparable to the returns from the broader market.

As compared to MIPs and hybrid funds, multi-asset funds offer a more diverse exposure. Some, for instance, invest in gold too, besides equity and debt.

However, in more developed markets like the US, these funds offer exposure to real estate, currency and commodities too.

BALANCING ACT

Experts are of the view that most multi-asset funds do not offer enough diversification.

“It’s not a uniform class of products; some are just like debt products with a thin overlay of other assets. In these cases, the products are not particularly more suited for meeting goals than debt funds,” says Swapnil Pawar, CIO, Karvy Private Wealth.

However, Gandhi of Morgan Stanley is of the view that diversification is the biggest strength of multiasset funds. Also, the negative correlation between different assets ensures that not all investments fail at the same time, giving stability to the portfolio. For instance, losses made on an asset like equity (during 2008-12) can be recouped by gains from gold or bank fixed deposits.

Here’s how it works. Equity and debt are known to share an inverse relationship, except when the market cycle is turning, like in 2003-2004 or after the 2008 global crisis. Gold, on its part, has a low or negative correlation with most assets, which means its price is independent of other assets. That is why it has been rising at a fast pace after the 2008 global financial crisis hit returns from most assets, especially equity. This quality allows the metal to add value to any multi-asset portfolio.

“A combination of debt, equity and gold lends credibility to the portfolio and allows it to generate at least modest returns,” says Chirag Mehta, fund manager, Quantum Mutual Fund.

Debt, for instance, gives returns in the form of yield and capital appreciation when overall interest rates in the banking system start falling. Also, it is less volatile and has a low correlation with equities. Gold, on its part, offers stability and shares a negative correlation with equities. It provides safety if either of the other two assets performs badly. Stocks, on the other hand, are risky but have the potential to provide good returns over the long run.

Mehta says a fund with investments in equity, debt and gold is best for investors who want consistent returns for a long period.

RETURN GIFT

Although multi-asset products are less volatile due to their diversified portfolio, Gandhi says low volatility does not mean low returns. In fact, in the last 15 years, these funds have given returns that are as good as that from stocks, he adds (See Asset Play). However, over five- and 10-year periods, the returns have been 9-12%.

WATCH OUT

Experts warn that the exact allocation between assets chosen by the fund may not best suit your objective. In such a case you can work out your own strategy.

But Gandhi says the fund route is better. Since shuffling among assets is done within the fund, investors are not bothered with timing the entry and exit as well as issues related to taxation. Further, fund managers may be better equipped to take decisions in the market. These decisions pertain to being underweight/overweight on certain assets, the duration for which each asset is to he held in the portfolio and the type of stocks to be bought. Although multi-asset funds do not have a long history, over the last one year they have returned 10% on an average (See Diversification Pays), better than the 8% delivered by debt-oriented hybrid funds.

HOLDING COST

The expense ratio of multi-asset funds is 1.5-2%. However, there is little clarity in case of funds that take the fund of funds route, that is, invest in other funds. Pawar of Karvy Private Wealth says such funds have added costs and may not add a lot of value unless they offer something substantially superior to debt funds. For instance, Quantum Multi Asset Fund invests in Quantum Gold Fund, Quantum Long Term Equity Fund, Quantum Liquid Fund and Quantum Index Fund. Although the fund’s expense ratio is among the lowest in the industry (0.25%), this can be a bit misleading as the funds in which it invests also charge a fund-management fee.

Kotak Multi Asset Fund, an actively-managed fund(not a fund of fund), has an expense ratio of 2.07%, while the expense ratio of Morgan Stanley Multi Asset Fund is 1.85%.

“Having said that, multi-asset products are tax-efficient. Typically, they are treated the same way as debt mutual funds,” says Pawar of Karvy.