Multi-asset and dynamic-asset funds to consider

The nomenclature of multi-asset and dynamic-asset allocation could sometimes confuse investors. Here’s the difference:

Multi-asset

These funds invest 10% each in a minimum of three asset classes (equity/debt/gold/exchange-traded commodity derivatives). The benefit is that you get to hold a diversified portfolio which helps in reducing volatility. Gold had a stellar run during the pandemic led economic meltdown while equities saw a precipitous drop in March 2020. So investing in such a fund would have helped you participate in the gold rally, with the benefit of protecting your portfolio (to the extent of exposure to equities) through debt allocation during the March 2020 crash in Indian markets. In the same vein, if the fund manager had increased exposure to equities post the market correction in March 2020, the fund would benefit from the rally that we are seeing currently. All asset classes don’t perform similarly during all times so allocation to different assets help.

Dynamic asset allocation

These funds have the flexibility to invest in equity and debt dynamically depending on where fund managers see an opportunity. If the markets are overvalued, the fund manager could rebalance the portfolio by moving towards debt to shield the portfolio from volatility. The major difference between dynamic asset and multi-asset funds is that the former can move in a wider range between equity and debt exposure while the latter tend to follow a more stable allocation. Dynamic asset allocation funds eliminate the need for investors to worry about increasing or decreasing their equity exposure on their own. Do note that the taxation of such funds could change depending on the exposure to debt/equity.

Dynamic asset, Multi-asset, Multi-cap: What’s the difference?

Here are two funds from the multi-asset and dynamic asset allocation categories:

ICICI Prudential Multi Asset Fund

  • Category: Multi Asset
  • Analyst: Nehal Meshram
  • Analyst Rating: Silver
  • Fund Overview

ICICI Prudential Multi Asset Fund (erstwhile ICICI Prudential Dynamic) witnessed a change in Morningstar Category, from the flexi-cap to multi-asset category, consequent to the implementation of SEBI categorisation norms. The fund, managed by Sankaran Naren, invests at least 10% across the three asset classes: equity, debt, and REITs/gold. On the face of it, the change looks significant, but the broad contours of the fund strategy remain the same.

The portfolio prefers large-cap names, but manager Naren also invests in the small/mid-cap space offering attractive value commensurate with the risk, while at the same time ensuring it does not constitute a major part of the portfolio. He aggressively trades large-cap picks based on relative valuations. With small/mid-caps, he tends to have a longer investment horizon. The fund's deeper-value profile and heavy contrarian bets drag the portfolio away from its peers. It holds more cash when it struggles to find value in the market, but it has always capped it below 35%. It has currently maintained 10% in gold and intends to keep it in the 10%-25% range.

The fund continues to remain a credible investment option, with Sankaran Naren managing the strategy with his distinct skill of uncovering value opportunities with a judiciously applied investment process.

HDFC Balanced Advantage Growth

  • Category: Dynamic Asset Allocation
  • Analyst: Himanshu Srivastava
  • Analyst Rating: Bronze
  • Fund Overview

This fund is a part of the dynamic asset allocation Morningstar Category, whose investment mandate allows the fund to freely invest across equity and fixed-income instruments without any limitation. However, as per the fund house, this fund will largely follow a similar investment pattern as earlier. Hence, the equity allocation will hover in the range of 65%-82% of the portfolio. Other funds from the category may run a fluid investment approach and exhibit different risk-reward profiles. Therefore, this fund is now competing with a different peer set and must establish a superior track record against them over the long term.

This fund continues to be an aggressively managed balanced fund rather than a true dynamic asset-allocation fund, which is an important aspect for investors to look at while investing in it.

The equity portion of the fund is managed by Prashant Jain. Prashant Jain’s investment style has certain unique elements. On the equity side, his valuation-conscious approach leads him to invest in beaten-down segments of the market, which can go through prolonged phases of underperformance, as has been the case since 2019.

While this strategy has delivered pleasing results over the long term, it has not been able to fully adapt to changing market dynamics. Consequently, while the risk in the strategy has risen sharply, there are times when it has been found wanting in terms of generating commensurate returns for investors.

© 2020 Morningstar. All rights reserved. The Morningstar name is a registered trademark of Morningstar, Inc. in India and other jurisdictions. Research on securities, referred to for the purpose of this document as “Investment Research”, is issued by Morningstar Investment Adviser India Private Limited, which is registered with SEBI as an Investment Adviser (Registration number INA000001357), providing investment advice and research, and as a Portfolio Manager (Registration number INP000006156). For the complete disclaimers, click here.

Source: Morningstar India Website