Weekly Musings – NFO Pick (Mahindra Manulife Multi Asset Allocation Fund)

26 Jul 2024 , 05:39 PM

WHY MULTI ASSET ALLOCATION FUND NOW?

Here is an interesting piece of insight. In the last 18 years, equities were the best performing asset class in 9 years and debt was the best performing asset class in 2 years. Now, hold your breath, gold was the best performing asset class in 7 out of these years. Just goes to show that your investment strategy needs to go much beyond traditional equity and debt. Adding gold to a portfolio may be complex, so a simple way to do it would be the multi-asset allocation funds, where the corpus is spread across equities, debt, futures, options, gold, silver, and REITs.

This not only diversifies the portfolio of the investors but is also instrumental in helping customers earn higher risk adjusted returns. Most of the multi asset allocation funds are also very tax efficient as they generally opt for the pure equity scheme with more than 65% exposure or for debt exposure with only 35% in equities. The fund manager has the discretion to tweak the mix to time the cycles in asset classes. The whole idea of a multi asset allocation fund is that the strategic asset allocation mix assumes that you don’t know what the future holds, and hence your focus is purely on asset allocation.

THE CASE FOR INVESTING IN MULTI ASSET ALLOCATION FUNDS

Multi asset allocation funds bring some unique advantages to the investors like giving them simultaneous exposure to a variety of asset classes. It also reduces the dependence on just one or few asset classes and this has the tendence to handle cycles better. Thirdly, the multi-asset allocation strategy also helps to keep risk in check by diversifying across assets.

• The equity component of the multi asset allocation fund offers the investor the potential to focus on long term capital accretion as well as compounded annual growth rate (CGR) in positive returns.
• Debt offers the potential for accrual and capital appreciation over time as the trader is also playing the trajectory of interest rates, which makes a huge difference to the long term returns on a high duration bonds portfolio.
• Gold is meant to act as a hedge during difficult times against other asset classes. Gold is also a hedge against market uncertainty, since the price of gold normally tends to appreciate in terms of geopolitical stress and economic risks.
• A multi-asset allocation portfolio across these asset classes will ensure a combination of high CAGR returns, stability through debt and the additional hedge factor through gold. The fund manager also has the discretion to decide on shifting outlays across assets.

Essentially, multi-asset allocation funds are all about asset allocation and you need to get that balance of risk and reward.

PROOF OF THE PUDDING; HOW DID SUCH A MULTI-ASSET STRATEGY WORK?

The multi-asset allocation fund may be a rather elaborate mix of investments, but the good news is that it appears to be working on risk and returns, if you consider the anecdotal data. Here are some highlights to focus on.

• We have assumed a multi-asset allocation portfolio with 50% in equity, 40% in debt and 10% in gold. Let us just focus on bonds and equities. In the last 18 years, debt has given CAGR returns of 7.23%, while the Nifty 500 TRI has given 13.50%. However, the multi-asset allocation fund would have earned 12.68% CAGR in the same period. That is a very small loss of returns for substantial reduction in risk.
• Let us look at risk of this combination from multiple perspectives. Over the last 15 years between 2008 and 2023, the multi asset allocation funds show a lot of volatility. Among the asset classes, it is quite surprising that volatility continues to be high. The volatility of returns on is evident across asset classes. Both equity and gold have seen minimum returns in the negative. It is only in the case of the hybrid funds that such an advantage exists.
• The composite portfolio in the said proportion would have outperformed most of the other case studies. The composite index would have given above 6% on 92% of the occasions. It would have given above 8% returns and above 10% returns on 81% and 57 of the occasions. There are at least 37 occasions when the returns will be above 12%, which is an extremely impressive yield to have.
• The Nifty 500 TRI index has done equally well in bullish markets as well as in bearish markets. This makes the asset allocation much more suited to investors over the long run as they would also have some assets in the portfolio which can outperform the index. This makes the multi-asset allocation framework more dynamic and flexible.

It is apparent that a portfolio that replicates the combination of equity, debt, and gold in the ratio of 50:40:10 has a much better chance of beating other asset classes on returns and also on risk, thus enhancing the risk-adjusted returns.

HOW WILL THE FUND MAKE EQUITY AND DEBT ALLOCATIONS?

Obviously, any discretionary model of allocation has to also be based on a certain logic and strategy. Here are how the equity allocations will be made by the Mahindra Manulife Multi Asset Allocation Fund. Its equity allocation will range between 35% and 80%, based on a fine-tuned quantitative model. Equity will be held at a minimum of 35% to get the debt fund classification for taxation purposes and this will be managed through a mix of cash equities and arbitrage positions. Equity selection will be based on a bottom-up approach.

What about the logic for debt investments. Once the equity portion is identified, the balance will be to debt, with some portion to gold and silver, or REITS if available. The focus will be on the 3 Qs i.e., quality of business, quality of management and the quality of financials. Even in debt, sectoral exposure will be kept in mind. The focus will be on duration plays and not such much on quality arbitrage. More importantly, the credit profile of the invested companies will be continuously tracked through active credit monitoring, rating watch, as well as gauging sentiments from social media and equity conferences.

DO MULTI ASSET ALLOCATION FUNDS HAVE A TAX ADVANTAGE?

It is interesting to note but even if the multi asset allocation fund is structured as a debt fund, the indexation benefit and the concessional 20% tax on long term gains ensure that these multi-asset allocation funds can be tax-efficient. In fact, if you compare the multi-asset allocation fund returns in terms of tax impact on the returns, it is marginally lower than equity funds and substantially lower than debt funds and gold. This makes the multi-asset allocation fund more attractive, even in post-tax terms.

PERFORMANCE OF MULTI ASSET ALLOCATION FUNDS (BAF) IN INDIA

Here is a quick look at the leading multi asset allocation funds in India as of February 16, 2024. These are CAGR returns.

Scheme  Name	NAV  Direct	1-Year (%)  Return	3-Year (%)  Return	Launch (%)  Return	Daily AUM  (₹ in Crore)
ABSL Multi Asset Allocation Fund	12.41	25.21	N.A.	22.55	3,080.59
Axis Multi Asset Allocation Fund	38.37	19.05	10.73	10.41	1,187.38
Baroda BNP Paribas Multi Asset Fund	12.82	28.75	N.A.	23.39	1,172.26
HDFC Multi Asset Fund	66.67	24.34	15.53	11.84	2,523.48
ICICI Prudential Multi Asset Fund	677.24	31.60	23.70	17.01	34,572.05
Motilal Oswal Multi Asset Fund	13.26	18.07	8.38	8.26	100.41
Nippon India Multi Asset Fund	18.49	31.70	17.48	19.24	2,689.77
Quant Multi Asset Fund	129.62	47.13	35.74	16.17	1,615.45
SBI Multi Asset Allocation Fund	54.59	30.12	15.49	12.18	3,859.75
Tata Multi Asset Opportunities Fund	21.76	28.01	17.43	21.60	2,476.88
UTI Multi Asset Allocation Fund	68.65	39.90	17.16	9.99	1,262.52

Data Source: AMFI India

To get a picture of how these multi asset allocation funds have performed, we have considered 1-year returns, 3 year returns and returns since launch. For all these, only the direct plans have been considered since that gives a cleaner picture of fund performance without letting the total expense ratio (TER) distort the picture of returns. There are 11 open ended multi asset allocation funds in India managing a total corpus of nearly ₹54,541 Crore. Out of these 11 funds, just 1 funds; ICICI Prudential multi asset allocation fund manages about 63% of the entire corpus of multi-asset allocation funds in India. Here are the highlights of the performance of multi-asset allocation funds across time frames.

• On a 1-year returns basis, the multi asset allocation funds universe in India has generated maximum returns of 47.13% and minimum returns of 18.05%, showing vast variation due to the dynamic nature of these funds. The average returns over a 1 year period are 29.45%, but 1 year may actually be a very short time frame.
• On a 3-year returns basis, the dynamic asset allocation funds (BAF) universe in India has generated maximum returns of 35.74% and minimum returns of 8.38%, again showing vast variation due to the dynamic nature of these funds. The average returns over a 3-year period were 17.96%, but it is surprising that variations are so high in 3 years also.
• If you look at multi asset allocation funds since inception, they have generated maximum returns of 23.39% and minimum returns of 8.26%, which shows that the dynamic nature of the fund is resulting in vast variations. The average return since inception is 15.69%, which is fairly healthy.

One quick takeaway is that, due to vast variations, it is the fund selection that would be very critical in the case of dynamic asset allocation funds.

GLANCE AT THE MAHINDRA MANULIFE MULTI ASSET ALLOCATION FUND NFO

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

1. The NFO of Mahindra Manulife Multi Asset Allocation Fund opens for subscription on February 20, 2024 and will close on March 05, 2024. The scheme will open on March 15, 2024 wherein the fund house will offer purchase and redemption at NAV linked prices.
2. The Mahindra Manulife Multi Asset Allocation Fund NFO offers an opportunity to investors to participate in a diversified portfolio of assets including, equity, debt, futures & options, gold, silver, and REITs. Fund manager has high discretion in allocation
3. Entry loads do not exist in India. Exit loads will not be applicable at the rate of 0.5% if the fund is sold or switched out before 3 months from the date of allotment. Beyond the 30-month holding period, there are no exit loads. However, it is suggested to stay invested for at least 5-7 years to get full benefits of the multi asset allocation fund.
4. In the NFO, investors can put in applications for a minimum of ₹1,000 and in multiple of ₹1 thereafter. Additional purchases on an ongoing basis will also be in multiples of ₹1,000, while only for SIPs, the minimum limit of investment is kept at ₹500.
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. Dividend plans offer payout and reinvestment options.
6. The Mahindra Manulife Multi Asset Allocation Fund will be benchmarked to (45% Nifty TRI + 40% CRISIL Composite Bond Index + 10% domestic price of physical gold + 5% domestic price of silver. It is classified as a High Risk Fund on the Risk-O-Meter.
7. The fund managers for the Mahindra Manulife Multi Asset Allocation Fund will be Renjith Sivaram Radhakrishnan (Equity), Rahul Pal (Debt), and Pranav Patel (overseas investments. The core focus of the fund will be capital appreciation along with generating income over the long run.
8. The Mahindra Manulife Multi Asset Allocation Fund will maintain equity allocation between 35% and 80%, so it will be treated as a debt fund for taxation purposes and taxed accordingly. STCG (upto 3 years) will be taxed at incremental tax rates while LTCG (beyond 3 years) will be taxed at 20% with indexation benefits.

The Mahindra Manulife Multi Asset Allocation Fund NFO is an opportunity for investors to combine capital appreciation and income generation through a strategic asset allocation across asset classes, encompassing equity, debt, derivatives, gold, silver, and REITs.