Historically, no single asset class has done well in all the years. Some years it was equities, others it was either debt or gold. So, why not own athat invests across asset classes? That way you will be able to protect your capital at all points in time and also earn decent returns. That’s the logic behind the introduction of multi by various houses.
Note: BSE 100 TRI for, Crisil Short-term bond index for Debt and MCX Gold futures for Gold
Gold has topped the return charts in five out of the last 10 years, whileand debt did it for three and two years respectively (see chart). With gold as an asset class doing phenomenally well in recent years (it’s doubled in the last five years) these have gained prominence. Does it make sense to invest in it?
First of all, let’s understand multi. These are that invest in varied asset classes – equities (including international), debt, gold and other commodities such as metals and agriculture. Some also have a mandate to take up to 10% exposure in real estate (via REITs). As per norms, a needs to invest at least 10% each in debt, and gold assets to be called a multi .
By diversifying across different assets with weak correlation, theaims to reduce portfolio volatility, while improving risk-adjusted return for its investors.
However, there are certain challenges.
There are not many multi-assetwith a long-track record. Since the definition of multi-asset category is liberal, strategies of these are divergent. Some, for instance, allocate anywhere from 10-75% into equities, while others have options to invest across commodities including metals, oil and agriculture. Others have a mandate to capitalize on arbitrage opportunities between the cash and futures commodity prices while another uses an index fund for exposure in international equities.
A subjective measure could prove counter-productive especially in good times when a bull run can lead fund managers to let the asset holding drift towards the maximum in the quest for earning more growth.
Lacking rule-based allocation
Taking a call on asset mix has played an important role in the performance of these. Most have left it to the personal discretion of their fund managers to decide on the . While some have an objective measure to gauge market lucrativeness and tweak asset allocations, others don’t have it. A subjective measure could prove counter-productive especially in good times when a bull run can lead fund managers to let the asset holding drift towards the maximum in the quest for earning more growth.
Some experts feel it’s a tax-efficient way of balancing one’s portfolio. That’s because you need not redeemor to arrive at your targeted asset-mix at various points in time. However, there is also uncertainty regarding tax liability. Some are keeping exposure of equities above 65% to give their investors the benefit of lower long-term capital gains taxes (10%) while others aren’t. A less-than-65% exposure to equities attracts short-term capital gains tax at the marginal rate if sold within three years and 20% (with indexation benefit) if sold after three years.
Uncertain asset mix
Furthermore, investors are uncertain about theirin this . Investors seeking a 10% exposure to equities will be stumped by a 50% exposure to equities or vice-versa. Investors are better off investing separately into and debt.
Investing in multi-assetmight upset your strategy. Investors with an investment horizon of five to seven years are better off doing their own into and debt funds.