Multi-asset funds share a name, not a portfolio

On Investors' Hangout, I tend to ask the plainest version of a question, because the plain version is the one that gets an answer a viewer can use. This week, the subject was multi-asset funds, a category many of you had written in asking for, and one that has pulled in a lot of investor money this year.

What I did not expect was that these funds cannot really be compared with each other, even though they all sit in one category listing.

The mandate is the product

What is this fund doing with my money? Several things at once, Dhirendra said. It decides how much goes into equity, debt, gold, sometimes silver and REITs. It picks the securities within each. And it keeps realigning the mix.

The framing worth underlining is the mandate. A pharma fund is told, “Invest my money in pharma stocks.” A multi-asset fund gets a far broader brief: “Reduce my risk and optimise my return.” Optimise, not maximise. And that includes not being in gold, or not being heavily in equity, when the time is wrong.

Why not do it myself?

I can buy an equity fund, a debt fund and a gold fund on my own. So I asked him why not. You can, he said. But there is one advantage I cannot copy at home. If I rebalance my own three funds, I have to sell something, and selling means tax. Inside the fund, the manager can sell equity and buy gold, and I owe nothing on those switches. Dhirendra called it tax-sheltered rebalancing. The tax does not disappear. It waits until you sell your units.

Three funds, all claiming balance

An aggressive hybrid is almost an equity fund. It keeps 20 to 35 per cent in debt at all times. Think of it as a steadier equity fund, for people who want equity but are a little scared of it.

A balanced advantage fund is the flexible version. Its equity and debt mix can swing sharply in either direction.

A multi-asset fund must hold at least three asset classes, with at least 10 per cent in each. Beyond that, the manager has a lot of room, and gold and silver give him a broader palette.

Two cautions

The first is about gold. It had a big run last year, right up to March, and that has completely changed how people see this category. It might repeat. It might not.

The second is that these funds are not a homogeneous set. One fund in this category holds 60 per cent in equity. Another holds 20 per cent. Both sit in the same category listing, and over a short period their returns can look nothing alike. So asking who was right and who was wrong does not really work.

So, do you need one?

If you believe you should own all of it, this is the simplest way. Equity, debt, gold, silver and REITs, in one fund. If you already have two flexi-cap funds, a multi-asset fund may serve you better than a third.

But if you are running your equity and debt deliberately, Dhirendra does not think you are missing anything. Once in a while, gold will surge and you may feel some regret. Over the long term, he said, it all converges.

So, here is the homework. Before you buy a multi-asset fund, or if someone is telling you to buy one, open its fact sheet. See how much is in equity, fixed income, gold and silver. Two funds with the same label can be two very different products. The fact sheet tells you which one you are getting.