“On average, 90 per cent of the variability of returns and 100 per cent of the absolute level of return is explained by asset allocation,” Roger G. Ibbotson, Professor Emeritus in Practice of Finance at Yale School of Management and chairman and CIO of Zebra Capital Management has famously said.
When it comes to investments, it means that your investments need to be spread across various asset classes such as equity, debt, gold and so on.
The argument for asset allocation is that when you invest in multiple asset classes that are not correlated (do not move together), in case one asset is not performing well, the other asset may perform well and thus provide a hedge. “Given that different asset classes behave differently under varying economic and market conditions, a multi-asset approach aids in reducing overall portfolio volatility, as a decline in one asset class can potentially be offset by gains in another,” said Chintan Haria, Principal, Investment Strategy, ICICI Prudential AMC.
Here Is Where A Multi-asset Allocation Fund Comes In
“Multi asset allocation funds come under the parent category of hybrid funds and carry the regulatory prescription of investing in a minimum of at least three asset classes, with a minimum allocation of 10 per cent in each. But the investment mandate of the fund may choose to invest in more asset variants, based on how they see the opportunities,” said Sriram BKR, Senior Investment Strategist, Geojit Financial Services. In case of multi asset allocation funds, in most cases the asset classes under consideration are equity, debt and commodities.
The Role Of The Fund Manager
Most of us may not have the time or the expertise to make prudent decisions when it comes to asset allocation. When you invest in active mutual funds like multi asset allocation funds, you pay a small fee because the fund is managed by an expert fund manager. “The fund manager here plays a crucial role when it comes to deciding on the proportion of the asset mix. Furthermore, the asset allocation is dynamic in nature based on prevailing economic outlook, market conditions and relative asset class attractiveness,” said Haria.
“In fact, most multi asset funds would have a dedicated fund manager, to manage each asset class, like equity, debt, gold, etc. They take active investment calls in their portion of the scheme’s portfolio,” said Shriram.
How They Are Taxed
When it comes to taxes, if the equity allocation of these funds is more than 65 per cent, it will be taxed as an equity fund, while if it is less than 65 per cent, it will be treated as a debt fund.
There is also a tax advantage these funds have over directly managing your asset allocation. “Since asset performance would vary over time, multi asset allocation funds would do periodic rebalancing to maintain the original intended exposure. Since the taxation is at the scheme level, such intermittent rebalancing will not attract tax to the investors, which otherwise they have to bear if they do the same directly in those asset classes,” said Shriram.
Multi-asset allocation funds thus offer a convenient and potentially tax-efficient way to diversify your portfolio. By letting professional fund managers handle the asset allocation and rebalancing, you can gain exposure to various asset classes and potentially reduce overall risk. Remember, diversification is key to successful investing, and multi-asset allocation funds can be a valuable tool in achieving your financial goals.
