Multi Asset Allocation Funds – Why it is the new Kid on the Block

29 Oct 2024 , 09:17 AM

WHAT MULTI ASSET ALLOCATION FUNDS ARE ABOUT?

Market highs are never great times for financial advisors. Most investors want to know if the this is the time to buy more or just sit quiet or to sell and move out to other than equities. The decision can be quite complex. Suppose you suggest long term debt funds based on your expectation that interest rates would be cut by the RBI. If that does not happen, then most investors are likely to be unhappy with the outcome. Similarly, if you asked them to hold on and the markets correct by 20% to 25%, then investors are not going to be pleased with the depletion in value. We all know that timing the market can be a futile exercise in the long run, but not timing can make a lot of advisors sound too generic. The answer lies in multi-asset allocation funds. So, what are these multi asset allocation funds all about?

A multi asset allocation fund typically allocates its corpus across multiple asset classes like equity, debt, derivatives, gold, and REITs/INVITs. This is a diversified portfolio where asset classes tend to move out of sync with one another. The low correlation makes the overall portfolio more diversified and less risky. The Multi Asset allocation funds do not take up naked positions in futures and options. Instead, they create arbitrage positions (long on cash market and short on futures market). This helps in two ways. The arbitrage mirrors a liquid fund and so it becomes stable quasi debt. At the same time, the long on cash market position makes it an equity fund and as a result, the classification of most of the MAAFs is that of an equity fund for tax purposes. We will look at this point later.

WHY MULTI ASSET ALLOCATION FUNDS ARE THE NEW KID ON THE BLOCK?

It is not without reason that these multi asset allocation funds have become the new kid on the block. Here are some key factors that have worked in favour of these multi asset allocation funds (MAAF).

• These MAAFs are naturally diversified funds across multiple asset classes. That includes equity, debt, quasi debt, arbitrage, futures & options, REITs, INVITs, gold silver etc. The presence of multiple asset classes makes the MAAF a sold proposition for anyone looking at a comprehensive portfolio of diverse asset classes.
• There is a lot of diversification built into the MAAF story. There are multiple asset classes and today, the market for most of these asset classes is quite robust. This ensures that the pricing of such assets is robust and the risk of illiquidity is also quite low.
• Apart from being diversifiers of risk, the MAAF is also a very robust example of automatic asset allocation. One of the most common problems that investors face is that they are stuck in assets at high prices and do not have the liquidity when prices comedown. The MAAF uses rule based allocation, so there is automatic profit booking when the allocation goes out of sync with the core allocation pattern.
• MAAFs are also very tax efficient. As we shall see later, the multi-asset allocation funds tend to be generally biased in favour of equities. Here equity means the cash equity and one leg of the arbitrage position. This normally takes the equity allocation of MAAF to over 65% resulting in the fund being classified as an equity fund for tax purposes, entitling them to concessional tax rates. Even if they are treated as non-equity, they still have an edge over pure debt funds since the 35% equity exposure will ensure that they only pay 12.5% tax on long term gains.

In the modern macroeconomic situation where the undertone of markets change on a regular basis, the MAAF can be a very powerful answer. Let us now turn to how the flows into MAAF have been in the last two years and how the MAAF AUM has progressed.

CLOSER LOOK AT MAAF FLOWS AND MAAF AUM

The International Monetary Fund (IMF) presents its semi-annual World Economic Outlook in April and October each year. In addition, these projections also get updated in July and in

Month-Wise	MAAF Flow	MAAF AUM	Month-Wise	MAAF Flow	MAAF AUM
Oct-22	86.70	21,698.83	Oct-23	2,410.04	43,829.58
Nov-22	85.80	22,361.82	Nov-23	2,589.46	48,634.57
Dec-22	1,711.42	23,904.36	Dec-23	2,420.44	52,869.12
Jan-23	2,181.69	25,933.99	Jan-24	7,079.52	50,324.84
Feb-23	510.51	25,947.52	Feb-24	4,043.20	64,695.33
Mar-23	473.22	26,590.89	Mar-24	2,681.46	67,280.12
Apr-23	444.73	27,739.87	Apr-24	3,312.56	74,020.68
May-23	738.47	29,000.01	May-24	3,160.61	77,436.36
Jun-23	1,323.30	31,148.94	Jun-24	3,453.12	83,719.98
Jul-23	1,381.50	33,779.61	Jul-24	3,125.51	89,592.72
Aug-23	1,617.33	35,288.31	Aug-24	2,826.89	92,675.58
Sep-23	6,324.19	42,018.03	Sep-24	4,070.37	98,515.76

Data Source: AMFI (all figures are ₹ in Crore)

The table above captures the monthly net flows into multi asset allocation funds over the last 2 years, when the growth in this category has actually happened. Here are some key takeaways in terms of MAAF flows in the last two years.

• If you look at month-wise flows into multi-asset allocation funds (MAAF) over the last 2 years between October 2022 and September 2024; then the MAAF has set net positive inflows in each of these 24 months. That can be attributed to a combination of several MAAF NFOs hitting the market and also the rising interest among investors.
• Let us look at the AUM of the multi asset allocation funds first. Between October 2022 and September 2024, the AUM of all MAAFs collectively have moved up from ₹21,699 Crore to ₹98,516 That is an AUM accretion of 354% over the last two years, although it must be said that this 354% AUM accretion came on a small base.
• How have the monthly flows panned out in the last two eyes into multi asset allocation funds. If you look at the last two years of data, the total net inflows are to the tune of ₹58,052 Crore. Out of this figure, ₹41,173 Crore came in the recent 12 months and the balance ₹16,879 Crore came in the 12 months before that. Clearly, momentum is high.
• So, what is our quick take on the contribution of net inflows to AUM accretion? Out of the total AUM accretion of ₹76,817 Crore over the last 2 years, ₹58,052 Crore or 76% of the AUM accretion has come from put net inflows and only the balance 24% has come through accretion in value of equities and gold. That is a good indicator.

The moral of the story is that not only have these multi-asset allocation funds seen accretion in AUM in the last 2 years, but more than three-fourth of that that has come from net inflows into these multi-asset allocation funds. But, how have these funds performed?

PROOF OF THE PUDDING – HOW DID MAAFS PERFORM?

The table below captures the performance of the multi asset allocation funds in India over different time frames. We look at 1-year returns, 3 year returns, and returns since launch to get a comprehensive picture. For simplicity, we have ranked the funds on 1-year returns, although in reality, a longer time frame would be ideal. The multi-asset allocation funds in India have a total AUM of ₹93,760 Crore spread across 16 multi-asset allocation funds, but just one MAAF (ICICI Prudential Multi Asset Fund) accounts for 54% of the overall AUM of MAAFs. Hence, returns are bound to be a little skewed in favour of that one fund.

Scheme Name	NAV (₹) Regular	1-Year (%) Returns	3-Year (%) Returns	Launch (%) Returns	Daily AUM (₹ in Crore)
Quant Multi Asset Fund	133.70	44.50	20.82	11.61	2,968.91
UTI Multi Asset Allocation Fund	71.69	37.03	17.37	13.15	4,329.10
Nippon India Multi Asset Allocation Fund	20.08	33.56	14.49	18.22	4,436.77
Baroda BNP Paribas Multi Asset Fund	14.27	31.44	NA	21.16	1,183.57
ICICI Prudential Multi Asset Fund	704.69	29.25	18.51	21.34	50,211.26
Kotak Multi Asset Allocation Fund	12.75	28.47	NA	24.91	7,367.68
DSP Multi Asset Allocation Fund	12.76	28.22	NA	25.30	2,251.76
ABSL Multi Asset Allocation Fund	13.88	27.09	NA	20.83	3,644.86
Tata Multi Asset Opportunities Fund	22.26	25.40	12.91	18.79	3,367.77
Axis Multi Asset Allocation Fund	38.25	25.16	7.09	9.92	1,276.48
SBI Multi Asset Allocation Fund	55.57	24.88	14.24	9.52	6,463.99
HDFC Multi Asset Fund	67.38	24.49	12.34	10.44	3,724.78
WhiteOak Multi Asset Allocation Fund	12.83	23.90	NA	18.92	918.95
Shriram Multi Asset Allocation Fund	12.22	23.69	NA	19.35	167.67
Motilal Oswal Multi Asset Fund	13.32	10.60	7.12	7.03	103.12
Edelweiss Multi Asset Allocation Fund	11.05	8.15	NA	7.70	1,343.66

Data Source: AMFI

The table above captures the 16 multi-asset allocation funds available in India ranked on returns across different time frames. Here are some quick takeaways from the table above.

• Over a 1 year period, the multi asset allocation funds have generated maximum returns of 44.50% and minimum returns of 8.15%. That is a huge divergence in returns. The average returns over a 1-year periods was 26.61% over the last 1 year.
• Over a 3 year period, the multi asset allocation funds have generated maximum returns of 20.82% and minimum returns of 7.09%. That is again huge divergence in returns. The average returns over a 3-year period was 13.88%.
• Finally, if you look at returns since inception, the average returns have been around 16.14%, which is healthy returns. If you add the tax efficiency also, then it does give investors a compelling reason to look at multi asset allocation funds as an asset class.

For the returns to be really meaningful over a longer period, you need more such multi-asset allocation funds and more consistent history. Let us finally turn to the all-important tax aspect of multi-asset allocation funds, that actually makes the big difference.

HOW MULTI ASSET ALLOCATION FUNDS FARE NET OF TAXES?

Flows into multi-asset allocation funds have been robust and also the AUM has grown considerably. That is not surprising considering the returns that these funds have generated over the years. However, it is not just the gross returns but the post tax returns that matter. Here some important points that you must know about multi-asset allocation funds in India and how they have been attractive, even in post-tax terms. The multi-asset allocation funds are dynamic allocation funds. Hence, the fund manager can adjust the asset mix accordingly. For instance, if they believe that gold can outperform, they can raise the exposure to gold. The same applies to equities and REITs. If you expect rates to come down, then the fund manager can take positions in debt with longer duration. Let us look at 3 scenarios and look at how the fund manager can adjust the portfolio in each of the cases and also manage the post-tax returns.

• The first scenario is when the fund manager feels that equities are likely to be the star asset class. In this case, the higher allocation of well above 65% can be made to equities, while the balance can be allocated across arbitrage, bonds, gold, and REITs. The total equity exposure will be the equity exposure including the cash market leg of arbitrage. This ensures the fund makes the best of the equity trend. It is also tax efficient as the tax in this case will be 20% on short term capital gains and 12.5% on long term capital gains subject to a base exemption of ₹1.25 Lakhs per annum. Here LTCG is beyond 1 year.
• The second scenario is when the fund manager feels that short term debt is likely to be the star asset class. In this case, the allocation to pure equities will be reduced, but that will be made up with a much larger arbitrage position, where the cash leg would give the status of an equity fund to the MAAF. The balance will be to long term debt, gold, and REITs. This enables the fund to make the best of higher short term bond yields by using arbitrage as a proxy. As an equity fund, the tax on short term gains will be 20% and it will be 12.5% on long term capital gains subject to a base exemption of ₹1.25 Lakhs per annum. Here LTCG is beyond 1 year.
• What if you believe that long duration debt would be more attractive due to falling rates and bond yields? In this case, the focus would be to go aggressive on long duration bonds to make the best of falling bond yields. The allocation can be minimal, but the fund can boost the short term allocation through arbitrage positions. This will ensure that the equity component remains above 35%. In this case, the short term capital gains on the MAAF (held for less than 2 years) will be at the peak rate applicable. However, the long term capital gains (held for more than 2 years) will be now taxed at a concessional rate of just 12.5% as per the full budget on July 23, 2024.
• Finally, what if you believe that gold or REIT could be the most attractive asset class. Unlike equity and debt, you cannot take gold more than 15-20%. Hence, the allocation to gold can be moved closer to that mark and the arbitrage positions should be used to replicate debt. This will ensure that the equity allocation is more than 35%. In this case, the short term capital gains on the MAAF (held for less than 2 years) will be at the peak rate applicable. However, long term capital gains (held for more than 2 years) will be now taxed at a concessional rate of just 12.5% as per the full budget on July 23, 2024.

What is the real story of multi asset allocation funds in India? As of the end of H1FY25, the multi asset allocation funds (MAAF) had equity allocations between 0% to 70%. You can bucket them into 3 brackets as under.

• Multi-asset allocation funds (MAAF) with equity and arbitrage of 65% and above and would be classified as equity funds for tax purposes.
• Multi-asset allocation funds (MAAF) with equity and arbitrage of between 35% and 64% and such funds would be classified as debt funds for tax purposes. Here again the benefit of LTCG is available if held for more than 2 years.
• Lastly, there were multi asset allocation funds with 0% in pure equities but having exposure of 35% to 40% in equity via arbitrage single-leg positions. Here again the benefit of LTCG is available if held for more than 2 years.

To be fair, multi-asset allocation funds did not exist in India prior to 2018 and it was one of the outcomes of the reclassification of funds. It has surely emerged as a powerful asset allocator in uncertain times for investors.