What’s making multi-asset allocation funds tick?

An analysis of 25 multi-asset allocation funds has revealed that they have outperformed the majority of general equity schemes in one, three and five years span, a study by Ventura Securities has showed.

Multi Asset Allocation Funds are gaining popularity due to their ability to diversify across asset classes, offer tax benefits, and deliver better risk-adjusted returns.

Multi Asset Allocation Funds, which come under the hybrid mutual fund category, invest at least 10 percent of their assets in at least three asset classes, with a minimum allocation of at least 10 percent to each.

Apart from debt, equity and gold, some funds also invest in silver, units of real estate investment trusts (REITs) or an infrastructure investment trusts (InvITs), as well as overseas equities.

As per the report, these funds stand out for their capacity to deliver competitive returns across multiple asset classes, providing a diversified investment approach that many single-asset equity funds lack.

“Some Multi Asset Allocation Funds have outperformed most equity schemes, and all of this underlines the potential benefits of these funds. These funds offer attractive options for investors seeking balanced risk-reward profiles. However, the varied performance emphasizes the importance of selecting funds aligned with individual investor objectives and risk tolerance, reinforcing the notion that “one size does not fit all” in multi-asset allocation,” said Juzer Gabajiwala – Director – Ventura Securities.

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Performance of Multi Asset Allocation Funds

The study showed that the multi-asset fund from Quant AMC has shown a notable performance, outperforming approximately 79 percent of equity schemes based on its three-year returns and 86 percent over a five-year period.

“Its allocation strategy, despite a controlled equity exposure of less than 51 percent, has proven successful in surpassing the returns of numerous equity funds. ICICI Prudential Multi Asset excelled, outperforming 63 percent of equity schemes’ returns over a three-year period and nearly 50 percent over a five-year timeframe,” the study said.

Asset allocation

The allocation strategies that exist across 25 multi-asset allocation funds show a huge variation, heavy on equity and debt along with a mix of gold and silver, arbitrage and other alternative assets. This diversity underscores the fact that “one size does not fit all” as each fund follows a distinct strategy tailored to different market conditions and investor objectives.

Some funds have outperformed large-cap funds by delivering higher returns with lower associated risk. The analysis of the risk-reward ratio across these schemes reveals interesting insights:

1. WhiteOak delivers solid returns with minimal risk, showcasing a risk-reward ratio of 16.6 compared to the large cap’s 2.8. Its diversified asset mix – spanning Gold, Equity, Debt, REITs, and INVITs- effectively spread risk.
2. Quant has a slightly lower risk-reward ratio of 16.4, closely matching WhiteOak. However, it carries higher risk due to its greater equity allocation, though it maintains a diversified portfolio.
3. DSP and Shriram, with low risk-reward ratios of 7.3 and 7.0, respectively, deliver decent returns but entail relatively high risk. This highlights that some funds are more effective at optimizing returns for each unit of risk taken.

 

The conservative funds that has equity exposure of less than 35 percent includes only two fund houses such as Edelweiss and WhiteOak, which have minimal equity exposure.

Moderately Aggressive Funds include most of the fund houses DSP, UTI, HDFC, AXIs and etc.

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Aggressive funds with more that 65 percent equity exposure include five fund houses, Bajaj Finserv, Shriram, Motilal Oswal, HSBC and Baroda Multi Asset Allocation Funds.

Experts say adopting an all-asset class approach makes sense as we are in an era marked with high inflation & interest rates, low liquidity, high volatility and escalating geo-political issues.