Financial gurus have time and again shared that the best way to create, conserve and multiply wealth is through diversification. The basic idea here is to have your capital spread across different asset classes to protect your corpus from any untoward development in one particular asset class. At a time when equity markets have rallied significantly, asset allocation becomes even more important. In the near to medium term equity markets are likely to be volatile due to various domestic and global developments and newer strains of the virus has added to the uncertainty.
Winner Keeps on Changing
Markets are dynamic in nature and various asset classes perform differently each year. This is because not all the asset classes will react to a development in the same manner. E.g. When equity markets faced a sharp correction last year, gold rallied significantly. This year gold has underperformed while equities have delivered good returns. As a result, no one can predict which asset class will out or underperform at any given point in time. Therefore, the optimal approach is to invest across asset classes.
However, when a retail investor tries to invest across asset classes he/she faces various challenges in terms of selection of asset classes, timing the investment, sizing and taxation. Investors are inundated with information about various offerings spread across asset classes, that making a sound decision is no easy task. Furthermore, for a lay investor recognizing the various of a market cycle and investing accordingly is almost out of question. As a result, making a multi asset allocation is a not only a tedious task but also a challenging and at time an unnerving exercise.
Even if an investor were to succeed at allocating funds across asset classes, then while rebalancing the portfolio which involves switching between various asset classes, such an investor is bound to attract short or long term capital gains tax. As a result, if rebalancing were to be done multiple times in a year, the tax attracted would sometimes in itself act as a deterrent from the rebalancing exercise.
As a means to address these challenges, various fund houses has launched multi asset funds as a part of their hybrid offerings. Here, the fund house has the flexibility to take exposure to three plus asset classes and the allocation to each of these asset classes is actively managed. The latest new fund offer by ICICI Prudential Mutual Fund has brought an interesting twist to the multi asset landscape.
They have launched the ICICI Prudential Passive Multi-Asset Fund of Funds i.e. a multi asset fund which is passively managed. Apart from being a passive fund, the fund will invest across Domestic Equity ETFs/Index Funds (25%-65%), Domestic Debt ETFs/Index Funds (25%-65%), Gold ETFs (0%-15%) and Overseas ETFs and Index Funds (10%-30%). Through this offering, the fund house aims to offer a simple investment solution which provides an investor access to all the asset classes.
Within equity, the offering will invest across both domestic and international markets. This means along with diversification across asset classes, the portfolio will have the added advantage of geographical diversification as well. For overseas investment the product basket includes ETFs which tracks markets like the US, China, Russia and Japan.
Given its fund of fund structure, the offering will invest in units of other underlying mutual fund schemes from the same mutual fund house or different mutual fund houses. The Scheme is capable to invest in any ETFs/ Index Fund launched by any other mutual fund in India. Managed by professional fund management team, the allocation to each of the asset classes will be actively managed to make the most of the various investment opportunities which may arise in the market from time-to-time.
From the context of tax implications, unlike equity taxation, given the current regulations, the FoF will be taxed as a debt instrument. A long-term investor who holds this scheme could claim indexation benefits which significantly brings down the overall tax implication.
The scheme plays on the advantage of investing into historically low correlated asset classes. Since the scheme follows strategic rebalancing, it eliminates market timing risk. Being a passive fund, there is no fund manager risk or credit risk involved.
The offering is ideal for investors who are looking for a one-stop solution for asset allocation needs on the passive side. Given its diversified all-encompassing asset class approach, an investor can consider this fund as a part of one’s core portfolio. This fund can also be considered for lump sum investment irrespective of the market environment.
(Faisal Ahmad is a Mutual Fund Distributor. Views are personal and may not necessarily reflect the views of Outlook Magazine)