Investors' Hangout: Is it a good time to invest in multi-asset funds?

What are multi-asset funds?

Multi-asset funds invest in multiple assets, and not just equity and debt. These funds also invest in InVITs (infrastructure investment trusts), REITs (real estate investment trusts), gold, and silver. This allows you to spread your money across various asset classes.

How do multi-asset funds compare to single-asset funds in terms of returns and risk in the current market environment?

The key risk of a multi-asset fund remains that it is dominated by the equity component - usually 50 to 65 per cent. So the madness of the equity markets will extend to multi-asset funds as well.

If the equity market falls by 20-30 per cent, which is something common, a multi-asset fund could also fall by 5 per cent within a month's time. So be ready for that.

Investors should diversify beyond one asset class. If all your money is in equity, it will be very turbulent. While people are comfortable in rising markets, a market fall can discourage them from investing. And all-equity funds rise steadily and fall dramatically, which can scare investors. That is why you need to add some stability to your investments.

At the very least, you need fixed income. Every investor needs to add something beyond equity, even if they are in it for the long haul.

Here are two reasons why. First, it provides stability to your investment. Second, when the market has tanked, you should have money to take advantage of it. That's when most people don't have cash available.

Then comes the question of what else to invest in. Gold has become an appealing investment avenue in recent years, making an interesting case for itself.

Another evolving segment is REITs and InVITs. They have unique characteristics that are not directly related to equity or debt, which provides meaningful diversification. This is because REITs and InVITs are hybrid investments that provide both capital appreciation and income (through dividends.)

For a long-term investor, does investing in gold and silver make sense?

Gold is an unproductive asset because it does not generate income. When you buy equity, you are providing money for someone to run or build a business. Similarly, debt involves lending money to someone who puts it in their business, generating interest for you.

Gold, however, just sits in a locker, whether yours or a bank's - it remains unproductive. But the case for gold has a new dimension: central banks are stockpiling it as a hedge which has created a new stream of ownership globally.

Additionally, central banks are printing money to such an extent that the value of fiat currency is decreasing. Which is why gold is emerging as a superior store of value. My views on gold being an unproductive asset class haven't changed. However, this new demand is why gold's price has appreciated.

Suggested read: Three reasons why gold has surged 20 per cent in last one year

Are multi-asset funds a viable option for hedging against inflation and currency fluctuations?

Yes, they could be an interesting option because, within a single vehicle, you get exposure to various assets. They are also very tax-efficient and convenient. For any new or inexperienced investor, a multi-asset fund could be an appealing choice because it won't be as scary as anall-equity fund.

After all, most investors remain attracted to the markets when they are rising but once there is volatility, it becomes challenging to stay invested. In such a case, a multi-asset fund can offer instant diversification and tax efficiency, making it easier to build wealth.

What parameters should investors consider when selecting a multi-asset fund?

I would first look at the allocation principle the fund will follow. If it clearly states that a certain percentage - say 50 per cent - will always be in equity and 15-20 per cent in arbitrage opportunities, and if it has a frozen and pre-stated allocation, I would like that fund.

If a fund can deliver these allocations in a disciplined way and simply rebalance the portfolio as needed, I would be happy. This simple strategy would make me a winner.

The challenge of making a big call on whether to lean towards equity or fixed income by timing the market applies as much to fund managers as it does to individual investors. Therefore, I would go for a fund that has a clearly defined strategy for all times.

Viewer's query

In view of new tax rules, can we allocate our debt portfolio to multi-asset funds? If so, what are your recommended funds? Some have less than 65 per cent equity. Will they be a better choice? - Joseph

Yes, in view of the new tax rules, investing in a multi-asset fund could be convenient and beneficial for investors. Your debt, REITs, InVITs, gold or silver components, which may form a third of your portfolio, would still be treated as equity for tax purposes.

Regarding Joseph's point about some funds having less than 65 per cent equity: it's not entirely true. Many funds have less than 65 per cent equity, but that is because they have an arbitrage allocation which could be 15-20 per cent. This allows the fund to qualify as an equity fund for tax purposes, as tax laws require that the equity plus arbitrage component should aggregate to 65 per cent or more.

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Also read: Aggressive hybrid funds vs multi-asset funds: Which is the better option?

This article was originally published on August 23, 2024.