Multi-Asset Funds

A recent report by ICICI Prudential MF about its multi-asset fund has again put up the debate on these funds. Can this hybrid category of fund actually give big returns over a longer time perspective?

What ICICI Pru AMC says

According to the fund, if an investor had put in an investment of Rs10 lakhs into the ICICI Pru Multi Asset Fund in 2002, then that would have grown to nearly Rs5.49 crore in 2023. That is a massive multiplication of wealth by 55 times over a period of 21 years, translating into CAGR returns of 21% over this period. One can argue that it would have been a matter of timing the market. However, even a SIP on the ICICI Pru Multi-Cap Fund would have given CAGR of 17.2%.

What is this category about?

As the name suggests, the multi-asset fund invests across different assets like equity, debt, liquid assets, gold, silver, REITs, derivative products etc. It makes the fund a natural diversifier across the various asset classes, although it is the equity and debt that still predominate the asset mix of such funds. In recent months, we have also seen a surge in the folio numbers as well as the AUM of these multi asset funds. It is the coming of age of these hybrid funds and that is also evident in the recent flows into the mutual funds. But what is the argument in favor of such multi-asset funds and what makes it different from others.

The multi-asset fund edge

The advantages of multi-asset funds stem from a number of factors. In India, it has been observed that different asset classes like equities, bonds, gold, and REITs have done very well at different points of time. That is the edge that the fund brings to the table. Secondly, this fund can either be rule based or it can be discretion based. Most of the existing multi-cap funds are rule based and it remains to be seen how discretionary multi-cap funds perform. Above, all they make very intelligent use of derivatives to create arbitrage positions, to hedge risk in the portfolio and above all to ensure that the fund mix remains that of an equity fund for tax purposes.

What are the risks to flag?

Investors must be careful how they look at these multi-cap funds. It is a good way to spread the risk of the portfolio but it has to be only certain percentage of the allocation. Also, multiple asset classes are not all as liquid as equities. For example, some bonds can be very illiquid while derivative markets can be very volatile. Gold and realty, in India, have gone through rather long cycles. Very often, historic returns will tell little about the future prospects of an asset class. Hence, the basic rule investors in multi-asset funds must apply is to keep it within a certain allocation threshold. It must also fit in properly into the matrix of risk-returns and financial plan.