Weekly Musings – NFO Pick (Mirae Asset Multi Asset Allocation Fund)

24 Dec 2023 , 09:57 AM

MULTI ASSET ALLOCATION FUNDS – WHAT ARE THEY

The Mirae Asset Multi Asset Allocation Fund NFO is an opportunity to invest in multi asset allocation funds as an asset class. The multi asset allocation fund is based on 3 premises. Firstly, asset allocation drives most of the returns for any investor in the long run, so it is best to focus on the right asset allocation. Secondly, asset allocation is a complex task, since it entails getting in and out of assets at the right time. Hence it is best left to expert fund managers with the ability to evaluate multiple asset options and evaluate entry and exit strategies. Thirdly, multi asset allocation funds offer a low-cost alternative to spreading risk across multiple asset classes. Hence, the multi asset allocation fund offers the best choice for investors to look at an asset allocation approach.

WHERE DO MULTI ASSET ALLOCATION FUNDS INVEST?

So, where does a multi-asset allocation fund invest? Such a fund invests in multiple asset classes like gold, debt, equity, and also in alternative asset classes like passive funds, foreign equities, and REITs / INVITs. The beauty of the multi asset allocation model lies in its dynamic allocation, wherein the fund managers assess the market condition and allocate funds in across asset classes. Investing in multi-asset allocation funds helps diversify the portfolio and enhances the risk-adjusted returns over a longer time frame. Multi asset allocation funds work in the long run since the outperforming asset class tends to alternate over time. An allocation across such assets with timing of the cycles, based on an allocation model, is your best bet against volatility. Chunk of the allocation of multi asset allocation funds is spread across equity, debt, and gold.

MAJOR ADVANTAGES OF MULTI ASSET ALLOCATION FUNDS

Here are some of the key benefits that investing in multi asset allocation funds proffer to the investor. 

1. Being open ended funds, they offer free and unrestricted entry and exit options. Normally, while the entry is free, the exit has a steep load which you must factor into calculations. However, investors must not look at asset allocation funds for the short term, since it works best over a period of 5 to 7 years.

    

2. The multi-asset allocation funds are the simplest way to diversify your portfolio across multiple asset classes. While diversification is possible across the same asset class also, macro risks do remain common. In case of a multi asset allocation fund, the gains arise due to low correlation or even negative correlation between various asset classes. 

    

3. A multi asset allocation fund provides automatic rebalancing portfolio. It is also much easier than trying to rebalance your portfolio at your end. Rebalancing and asset reallocation are much needed to cope with the vagaries of the market and the multi asset allocation fund offers an automated and package model to do that.

    

4. Multi asset allocation funds offer you access to multiple asset classes through just one gateway. The investor does not worry about how the allocation is done. They just need to enter and exit the fund and that largely simplifies your access to multiple asset classes. That is of special importance for retail investors who need to spread across.

    

5. Lastly, it offers a ready made portfolio, which is not based on the assessment of one person but by the assessment and insights of a complete fund management team with the necessary checks and balances. It may not be tailor made to your specific needs, but the investment design gives a fair idea of what you are getting into.

These are the factors that make multi asset allocation funds specifically attractive to investors in mutual funds.

MAKING A CASE FOR MIRAE MULTI ASSET ALLOCATION FUND NFO

One of the best ways to make a case for the multi-asset allocation funds is to look at how such a combination fund would have performed based on historical data. 

• If you consider the 15 years since the global financial crisis (GFC), in any year equity saw volatility differential range from +16.3% to -12.8%. Gold saw volatility differential range from +13.7% to -8.3%; while for debt it ranged from +1.9% to -0.8%. However, if you had combined equity, debt, and gold in the ratio of 65:20:15; then differential volatility would have ranged from +10.2% to -8.4%, with lower standard deviation compared to equity and gold. That is where multi-asset portfolio scores; risk-adjusted returns.

   

• What is the probability of the asset class giving returns between 8% and 16% over the last 15 years since the GFC? It was 41.9% for equities, 24.5% for gold, Nil for debt and in the case of the EDG portfolio in the ratios of 65:20:15, the probability was 69.7%. Clearly,  the combination sharply enhances y our probability of above average returns.

   

• What about rolling returns over last 3 years? Gold gave a maximum of 35.3%, minimum of -7.9% and average of 10.8%. Equities gave a maximum of 33.2%, minimum of -5.5% and average of 13.3%. Debt gave a maximum of 10.2%, minimum of 4.8% and average of 8.0%. However, the multi asset EDG combination gave a maximum of 26.1%, minimum of -0.3% and average of 11.8%. Clearly, multi asset scores on all fronts.

   

• Debt and gold act as a hedge for the multi asset allocation model. It has implications across phases. In a bearish phase, the fall in the EDG combination is about half of equity. In a sideways market, the returns on EDG are at par with equities. In a bull market, the EDG combination returns are lower than equities, but thrice of gold and debt.

   

• In bear markets and sideways market, the EDG portfolio shows better pullback than equities. However, an equity portfolio does pull back faster in a bull market, but that is par for the course.

   

• Finally, the combination of diverse return patterns and low to negative correlation ensures that EDG offers a better risk and return median. In last 15 years, equity has been the top performer in 6 years and bottom performer in 3 years. Gold has been the top performer in 7 years and 2 years it was debt. However, gold was also the bottom performer in 5 years. The EDG portfolio was ranked second on returns in 8 years and third in returns for 6 years. That is surely a much better median.

The data clearly points out that an EDG combination of 65:20:15 has given better risk-adjusted returns over the long run.

MIRAE ASSET MULTI ASSET ALLCOCATION FUND PORTFOLIO

Here is what you need to know about the portfolio structuring of the Mirae Asset Multi Asset Allocation Fund.

• The fund will have an exposure of 65% to 80% to equities, 10% to 25% in debt, 10% to 25% in gold/silver and up to 10-15% in REITs and foreign equities. The 65% exposure to equities is to classify it as an equity fund and make it tax efficient for the investor.

   

• The equity exposure will be a mix of direct equity and arbitrage positions with net equity levels of 40% to 75%. The equity approach will be multi-asset and a mix of top down and bottom-up approaches.

   

• While equity allocation will be negatively related to the level of the Price/Book ratio, the allocation debt would be based on the spread of bond yields over earnings yield. There will be a flexibility of +/- 5% either ways.

   

• Allocation to debt would be based on high liquidity, on short and medium duration bonds so as to bet on the directional movement of interest rates. The broad strategy in debt will be a buy and hold strategy.

   

• The exposure to gold, foreign equities, indices and REITs / INVITs will be limited and purely based on the emerging opportunities and an assessment of the risks entailed in the investment.

The Mirae multi-asset allocation fund is suited to investors entering the MF market with a time horizon of 3 years and above. These are typically investors looking at better risk-adjusted returns. This is a window for investors to participate in an agnostic manner across diverse asset classes.

HIGHLIGHTS OF THE MIRAE ASSET MULTI ASSET ALLOCATION FUND NFO

Here are some key takeaways that investors should know about the NFO.

• The Mirae Asset Multi Asset Allocation Fund NFO opened for subscription on January 10, 2024 and closes on January 24, 2024. The fund will be available for continuous purchase and redemption from February 01, 2024. 

   

• Harshad Borawake, Amit Modani, Siddharth Srivastava, and Ritesh Patel will be the fund managers for the Mirae Asset Multi Asset Allocation Fund. They have a combined experience in the fund management industry of over 52 years.

   

• It is an open ended mutual fund scheme which is classified as a hybrid fund with dynamic allocation across asset classes. The Mirae Asset Multi Asset Allocation Fund runs the risk of equities, interest rates, international gold and also the risk that fund managers get their allocation model right.

   

• The performance of Mirae Asset Multi Asset Allocation Fund will be benchmarked S&P BSE 200 TRI index (65%), Nifty Short Duration Debt Index (20%), Domestic Gold Prices (10%) and domestic silver prices (5%).

   

• The objective of Mirae Asset Multi Asset Allocation Fund is to generate long term capital appreciation and income through a mix of investments so as to maximize the risk adjusted returns of the portfolio. 

   

• Lumpsum purchases in the NFO entail a minimum investment of Rs5,000 per application. Additional applications can be done of minimum Rs1,000 while, SIP investments that are subsequent do not have any specific limit.

   

• There will be no entry load under SEBI regulations. However, an exit load of 1% will be imposed on the fund if it is sold within 365 days of the allotment date. Any sale of the fund beyond 365 days does not attract any exit load.

   

• The Mirae Asset Multi Asset Allocation Fund offers Regular Plans and Direct Plans to investors with the TER adjusted accordingly. In addition, the fund also offers investors the growth option, and IDCW options to investors. Investors must evaluate tax implications of the various options before opting for the same.

   

• While there are no lock-in restrictions, it is suggested that ideally the Mirae Asset Multi Asset Allocation Fund be held for a minimum period of 5-7 years, to derive the full benefits of varying asset class cycles and to counter the added risks of multiple asset class exposures.

In case of equity funds, dividends are taxable at the marginal tax rate applicable. Being classified as an equity fund for tax purposes, the capital gains are taxed at concessional rates of 15% for short term capital gains and 10% for long term capital gains (above a threshold of Rs1 lakh of capital gains). Here long term gains are defined as holding of 1 year and more.

UNDERSTANDING MULTI ASSET ALLOCATION FUNDS IN INDIA

Here is how multi-asset allocation funds performed in India. All returns and NAVs pertain to regular plans only.

Scheme  Name	Scheme  NAV	Returns  1 Year (%)	Returns  3 Years (%)	Return  LTD (%)	AUM  (₹ crore)
Axis Multi Asset Allocation Fund	32.67	11.28	9.78	9.28	1,217.69
HDFC Multi Asset Fund	58.18	16.52	13.77	10.07	2,269.20
ICICI Prudential Multi Asset Fund	589.00	23.35	25.72	21.25	29,737.65
Motilal Oswal Multi Asset Fund	12.27	13.77	5.80	6.22	100.68
Nippon India Multi Asset Fund	16.65	22.55	15.56	16.60	2,231.66
Quant Multi Asset Fund	105.80	20.84	29.15	10.92	1,225.74
SBI Multi Asset Allocation Fund	48.40	22.76	14.31	9.15	3,009.26
Tata Multi Asset Opportunities Fund	19.23	17.37	16.34	18.76	2,226.56
UTI Multi Asset Allocation Fund	58.43	27.95	14.86	12.40	1,038.19

Data Source: AMFI (LTD is launch till date)

Prior to this NFO, there were 9 multi-asset allocation funds in India with total AUM of Rs43,057 crore. In terms of returns, these multi-asset funds have done very well in the last one year, but that is more due to the outperformance of equity as an asset class. Most multi asset allocation funds maintain their equity proportion at over 65% so that they can get the best benefits of the tax efficient status of equity mutual fund portfolios. Over the longer time frame, these multi-asset allocation funds have given enhanced risk-adjusted returns.