Weekly Musings – NFO Pick (Edelweiss Multi-Asset Allocation Fund)

12 Jun 2023 , 09:46 AM

In our previous two issues of NFO musings, we had discussed about the NFO of HDFC Defence Fund and the NFO of Quant BFSI Fund. This time around we discuss the nuances of the Edelweiss Multi-Asset Allocation Fund, its key features and how it would fit into the investment theme of investors. As the name suggests, the fund would be invested across asset classes like equity, futures, bonds, gold, silver, and other assets like REITs. A multi-asset allocation fund solves the problem of allocation for the investors buy doing the same at the fund level. Of course, being an open ended fund, it would be available for NAV linked purchase and redemption once the allotment under the NFO is completed. 

Key features of the Edelweiss Multi-Asset Allocation Fund

Like any multi-asset allocation fund, the Edelweiss Multi-Asset Allocation Fund  will also be invested across different asset classes. However, the tonality of the fund is not about taking naked long positions in any of the asset class, but instead take a hedge position. This hedged position is a much better controller of risk. Here are some of the key features. 

• The Edelweiss Multi-Asset Allocation Fund will be predominantly a fixed income portfolio with additional exposure to equities, gold, and silver. The allocations would be done in a rule-based manner so that the extent of discretion can be reduced. Also, this will give the relative safety of fixed income with alpha from equities and precious metals to add more heft to the performance of the fund.

   

• The exposure of the Edelweiss Multi-Asset Allocation Fund to equity, gold, and silver will be purely through the arbitrage route. That means; its equity positions in the market would be hedged with commensurate opposite exposure in the futures and only the cash-futures spread would be locked in. Even in gold and silver, the Edelweiss Multi-Asset Allocation Fund will arbitrage between the spot market and futures market.

   

• In terms of risk and return matrix, the Edelweiss Multi-Asset Allocation Fund is positioned above an equity arbitrage fund but below a hybrid equity savings fund. The returns would be lower than direct exposure to equities but the risk would also be much lower in this case.

   

• The portfolio of the Edelweiss Multi-Asset Allocation Fund would, therefore, be a combination of fixed income products, arbitrage between equity / futures and arbitrage between gold / silver spot-futures. Other than debt, the exposures to higher risk assets like equity, gold, and silver would be fully hedged.

   

• This makes the Edelweiss Multi-Asset Allocation Fund interesting from a tax perspective. Currently, returns on pure debt funds are taxed at the peak rate of tax. However, if the debt fund also an exposure to equities of over 35%, then the fund would be taxed at 20% of long term capital gains with the benefit of indexation. That is likely to make the Edelweiss Multi-Asset Allocation Fund more tax efficient than any pure debt fund.

While volatility would still be an issue in the fund performance, the hedge nature of exposure to equity and precious metals largely reduces that risk.

What can investors expect from Edelweiss Multi-Asset Allocation Fund? 

Let us first look at the theme of the fund and then we will look at the likely asset class mix of the fund. The idea of the Edelweiss Multi-Asset Allocation Fund is to provide investors an actively managed portfolio of multiple asset classes. In the 20 years, different asset classes like equities, bonds and gold have been outperformers at different points of time. This diversity is captured by the fund. Also, the exposure to equity, gold and silver will be through hedged arbitrage strategies. Hence the focus is more on replicating a fixed income asset through price differentials rather than taking a directional view. The main theme of the portfolio design would be to reduce volatility to the extent possible. 

While the fund lays down some broad rules for allocation, it does give discretion for allocation within the asset classes. Here are some broad allocation themes adopted.

• The exposure to equity and equity related instruments can range between 10% and 80%. This includes cash equities, futures, and options.

   

• The exposure to debt and debt related instruments would also possibly range between 10% and 80%. The fund will predominantly be a debt type fund.

   

• The exposure to commodities through commodity ETFs and commodity derivatives would be restricted to between 10% and 30% of the fund corpus.

   

• Finally, the fund has also left out a small window of up to 10% to be exposed to REITs and INVITs, as and they appear attractive as an asset class.

To begin with, the Edelweiss Multi-Asset Allocation Fund plans to have an exposure of 35% to 40% to equity arbitrage. There will be no naked equity exposure. The exposure to gold and silver arbitrage would be between 10% and 15%; again, purely exposure in the form of arbitrage only. Lastly, the fixed income instruments would be in the range of 45% to 55% across G-Secs, SDLs and AAA rated debt only. They will target a Macaulay Duration of 1 to 3 years on an average.

Indicative returns and risk of Edelweiss Multi-Asset Allocation Fund

This is a managed portfolio and hence returns and risk projection would be more complex. However, one can take indicative returns of the last 3 years as a benchmark to get an understanding.

• If you look at 3 year returns of the CRISIL Short Term Bond index, the median returns have been 7.81% with minimum returns of 4.13% and maximum returns of 10.21%. In terms of risk, the short term bond index had 3 year standard deviation of 1.73%.

   

• If you look at 3 year returns equity arbitrage, the median returns have been 7.19% with minimum returns of 5.17% and maximum returns of 8.25%. In terms of risk, the arbitrage funds have had 3 year standard deviation of 0.99%.

   

• If you look at 3 year returns of silver arbitrage, the median returns have been 7.00% with minimum returns of 6.40% and maximum returns of 7.60%. In terms of risk, silver arbitrage had 3 year standard deviation of 4.08%.

   

• How would all this add up for the multi-asset allocation fund. All 3 asset classes of short term debt, equity arbitrage and silver arbitrage have given median returns of 7% to 8% annualized. Hence allocation returns should also be in that range. However, when these relatively un-correlated assets are combined the standard deviation of the multi-asset strategy comes down to as low as 0.9% over a 3 year period.

So, the multi-asset strategy would focus more on managing risk than on return enhancement, which will anyways boost the risk-adjusted returns.

Quick word on taxation of Edelweiss Multi-Asset Allocation Fund

What makes the multi-asset allocation strategy meaningful is that it gives dual benefit. Due to the equity exposure, the long term capital gains (beyond 3 years) would only be taxed at 20% (22.88% including surcharge and cess). In addition, the indexation benefit is also available in this case. As a result, if you look at a 10% surcharge level, the effective tax rate for a multi-allocation fund is about 7% compared to 11.4% for arbitrage funds and 34.32% for pure debt funds.

This product has generally had appeal for HNIs, although retail have also shown interest in this product. The tax benefits of multi-asset allocation strategy are not only limited to retail and HNI investors, but even corporates investing in multi-asset allocation funds tend to gain in terms of effective tax rate applicable.

Glance at the Edelweiss Multi-Asset Allocation Fund NFO 

Here are some details of the Edelweiss Multi-Asset Allocation Fund you must know to decide on investing in the fund.

1. The fund opened for subscription on June 5, 2023 and the NFO subscription will close on June 19, 2023. 

    

2. The Edelweiss Multi-Asset Allocation Fund offers an opportunity to investors to diversify across asset classes through a more passive approach.

    

3. Entry loads do not exist in India, but if the fund is redeemed within 30 days from the date of allotment, it will attract an exit load of 0.10%. There will be no exit load if held for beyond 30 days.

    

4. The minimum investment in the Edelweiss Multi-Asset Allocation Fund would be Rs5,000 in the NFO and in multiples of Rs1 thereafter. 

    

5. How will the fund be benchmarked? It will be a mixed benchmark comprising of 40% weight to Nifty 500 TRI, 50% weight to Nifty 5-year benchmark G-Sec index, 5% weight to gold prices and 5% weight to silver prices.

The Edelweiss Multi-Asset Allocation Fund is an opportunity to benefit from the risk interplay of multiple asset classes like equity, debt, gold, silver, and REITs.