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

8 Jan 2024 , 09:39 AM

What are multi asset allocation funds and why?

A multi asset allocation fund that splits the portfolio across multiple asset classes. It is not just about investing across equities, but such a fund allocates a portion of the portfolio to equity, debt, gold, silver, arbitrage positions, gold, silver, and global assets. Equity will continue to dominate the mix and between the equity and derivative positions, the net equity exposure will be above 65%. This ensures that the multi asset allocation fund is treated as an equity fund for tax purposes and gets the benefits of concessional tax rates. If you look at asset classes over the last few years, you will find that different asset classes outperform at different points of time. 

Combining such assets, not only ensures a stable flow of income, but also enables value creation in the long run, with better management of risk. But the real logic of investing in a multi asset allocation fund is that it is all about asset allocation. According to a study conducted in the year 1986; asset allocation is the determinant of 91% of the variability in returns. Hence, that is the most important decision that fund managers have to make. Once that is done, then security selection explains about 4.6% of the variability in returns and market timing explains about 1.8% of the variability in returns. That means; if you get your asset allocation; then 90% of your job is done. That is where multi asset allocation funds add value and that is where the NFO of Bandhan Multi Asset Allocation Fund is positioned.

Did you know the best performing asset classes since 2011?

This is a rhetorical question. If you ask this question to anybody, the standard answer would be that equity is the asset class that gives the best returns over the long term. That is true, but that is not the point here. We are not just talking about returns, but also about risk and we all know that equity has the highest level of risk. But, let us come back to the point of what were the best performing asset classes in the last 13 years? Here is an explanation.

• If you look at the last 13 years, then equity has been the best performing asset class only in 4 out of these 13 years. For 2 years, it was the second best performing asset class and for 5 years, it was the third best performing asset class. In two years i.e., in 2011 and 2016, equity was at the bottom of the heap.

   

• What about gold? Believe it or not; gold was the best performer in 5 out of the last 13 years; that makes it better than equities. In 2 years, gold was the second best performer, but in the remaining 7 years, gold was the bottom of the heap. In short, gold revels in extreme performances.

   

• If you thought fixed income was passe, think again. Fixed income (bonds) was the best performing asset class in 1 year and the second best performing asset class in 2 years. However, it was the third best performer in 7 out of the 13 years and at the bottom of the heap in the remaining 3 years.

   

• What about global equities? Interestingly, global equities were the best performer in 3 out of the 13 years, so it is very close to domestic equities. It was the second best performer in 7 out of the 13 years. That means, in 10 out of the 13 years, international equity was either first or second; which says something about global diversification.

What is the moral of the story. Historically, no asset class has been able to outperform consistently. The logic of spreading across these asset classes is that each year you have a part of your portfolio that is doing very well. That is the logic on which the Bandhan Multi Asset Allocation Fund is based.

Harmful propensity to chase returns

One trend you get to see across investors is the propensity to chase returns. Here is how it works. When an asset class performs well, most retail investors tend to gravitate towards that asset class. However, by then most of the initial story of that asset class is over. That happened across gold, large cap equity, mid-cap equity and small cap equity. In all these cases, the retail investors were the last to get in as they purely chase returns. What is the problem with performance chasing. In the process, they end up selling underpriced assets and buying overpriced assets. 

For instance, if you have created an equal weighted portfolio of these 4 asset classes viz., domestic equity, gold, international equity, and fixed income; the returns since 2011 would have been 8.7% CAGR. However, had you followed a performance chasing portfolio, then the CAGR returns would have been just 7.3%. A multi asset allocation fund like the Bandhan Multi Asset Allocation Fund overcomes this problem return chasing. That is why, it also makes a lot of sense for the retail investors.

How Bandhan Multi Asset Allocation Fund will spread investor money

Here is how the portfolio mix of the Bandhan Multi Asset Allocation Fund will be worked out, both at the main level and the subsidiary level.

1. Out of the total macro allocation for the Bandhan Multi Asset Allocation Fund, 50% will be allocated to domestic equities, 15% to international equities, 15% will be allocated to arbitrage positions, fixed income will have an allocation of 10% while gold and silver will have an allocation of 10%. The mix will be maintained in such a way that net exposure will be held above 65% to give it the equity definition for tax purposes.

    

2. Within the domestic equity allocation, the fund will allocate 30%-50% to large cap stocks, 25%-35% to mid-caps and 25%-30% for small cap stocks. The pillars for stock selection in the portfolio would be based on diversity, discipline, and dependability. To avoid fund manager bias, it will maintain sizable allocations to all market cap stocks.

    

3. Investments in debt will also adopt a dynamic approach. There will be a focus on bond quality and on duration management. The preference will be for high quality and the spread will be across government bonds, state development loans (SDL), corporate bonds, and money market instruments. The bias will be for a high duration portfolio.

    

4. The exposure to gold, silver and international ETFs will be through a passive approach. The global equity mix will be across developed markets and emerging markets. Participation in gold and silver will be purely through ETFs only.

How Bandhan Multi Asset Allocation Fund will add value

Let us check out, how the Bandhan Multi Asset Allocation Fund plans to add value.

• Asset allocation explains 91.5% of portfolio return variability 

   

• The Fund will achieve that through strategic asset allocation, and transparency

   

• The Bandhan Multi Asset Allocation Fund leverages the power of 13 sub-asset classes

   

• Asset Allocation avoids behavioural pitfalls like performance chasing and herd mentality 

   

• Over a time-frame of 3 years to 5 years, the multi asset allocation strategy noted offers returns in sync with the Nifty 50 but with 45% lower volatility

It is this risk adjusted return that is really valuable about the Bandhan Multi Asset Allocation Fund.

Performance of multi asset allocation funds in India

Here is a quick look at the best performing multi asset allocation funds ranked on returns since launch on direct plans. The data is as on January 05, 2024.

Scheme  Name	NAV  Direct	Returns  1 Year (%)	Returns  3 Year (%)	Returns  Since Launch	Daily AUM  (₹ in crore)
Baroda BNP Paribas Multi Asset Fund	12.39	23.91		22.75	1,237.58
Tata Multi Asset Opportunities Fund	20.92	21.07	17.36	21.19	2,258.32
Nippon India Multi Asset Fund	17.74	26.32	16.31	18.60	2,346.55
ICICI Prudential Multi Asset Fund	649.55	25.04	25.16	16.79	31,008.96
Quant Multi Asset Fund	114.71	24.61	30.49	15.09	1,299.71
SBI Multi Asset Allocation Fund	54.00	25.62	14.69	12.23	3,244.09
HDFC Multi Asset Fund	64.79	19.58	14.42	11.70	2,314.46
Axis Multi Asset Allocation Fund	37.86	15.20	10.43	10.41	1,227.01
UTI Multi Asset Allocation Fund	65.24	31.19	15.60	9.61	1,072.20
Motilal Oswal Multi Asset Fund	13.02	15.13	7.35	8.02	101.52

Data Source: AMFI India

Currently, multi-caps manage around Rs46,110 crore in terms of AUM. If you look at the performance, all funds have given positive returns over a 1 year period, over a 3 year period and also since inception. This is largely on account of the outperformance of equity as an asset class compared to other assets. However, multi asset allocation funds are not just about returns but also about risk diversification. If you look at multi asset allocation funds, they have given CAGR returns since inception of 14.64% on an average, which is extremely impressive. However, if you look at these multi asset allocation funds in terms of 1-year returns, then the average returns would be around 22.77%. 

This is impressive, but may not be realistic over a longer period when multiple asset class cycles are visible. The reason is that there is lot more variation in the returns on multi asset class funds. It is not surprising that a lot of the net inflows into mutual funds (especially hybrid funds) is gravitating towards multi asset allocation funds, rather that the other hybrids. However, variations are also quite high. For instance, over a 1 year period, the returns of multi asset allocation funds range from 31.19% to 15.13%. In terms of returns since inception, the returns range from 22.75% to 8.02%.

Glance at the Bandhan Multi Asset Allocation Fund NFO

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

1. The NFO of Bandhan Multi Asset Allocation Fund opens for subscription on January 10, 2024 and the NFO subscription will close on January 24, 2024. Being an open ended fund, the fund house will offer purchase and redemption at NAV linked prices.

    

2. The Bandhan Multi Asset Allocation Fund NFO offers an opportunity to investors to diversify across asset classes through a single fund. It is also in sync with the empirically proven theory that over 90% of returns can be explained by asset allocation. 

    

3. Entry loads do not exist in India. In terms of exit loads, there is no exit load for redeeming 10% of your holdings. However, if you redeem beyond 10% within a period of 30 days, then it attracts an exit load of 0.5% on the redemption value. This also applies if the additional holdings (above 10%) are switched to another fund within 30 days.

    

4. Let us turn to minimum investment. For lumpsum investing and for additional purchases, the minimum is Rs1,000 investment and in multiples thereafter. In the case of SIP, it can be as low as Rs500 per instalment subject to minimum of 6 instalments. The minimum ticket for SWP is Rs200 and for STP Rs500; and in multiples of Rs1 thereafter.

    

5. The fund offers Regular and Direct plans for the investors. In addition, investors can either choose the Growth option or the IDCW (income distribution cum capital withdrawal) option. The fund also offers the dividend reinvestment option to its investors. Dividend declaration is subject to surplus in the fund.

    

6. How will the fund be benchmarked? The benchmark for the fund will be a combination of 65% Nifty 500 TRI (+) 25% Nifty short duration index (+) 5% domestic price of gold (+) 5% domestic price of silver.

    

7. The investment objective of the fund is to generate income and to generate long term capital appreciation by investing across asset classes like equity, debt, derivatives, gold, silver, REITs, and international equity. There is no assurance of returns and it would be a high risk investment as it is subject to the vagaries of multiple asset classes.

    

8. The fund managers for the Bandhan Multi Asset Allocation Funds would be Viraj Kulkarni, Daylynn Pinto and Nemish Sheth for equity portion. Gautam Kaul will manage the debt portion while Ritika Behera and Sreejith Balasubramanian will handle foreign equity and debt investments respectively.

The Bandhan Multi Asset Allocation Fund NFO is an opportunity to benefit from a structured approach to investing in multiple asset classes; locking in returns and minimizing risk at the same time.