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Passive Multi-Asset Funds – What is it, Working & Benefits

  • Rudri Rawell
  • Feb 07 2022
  • 7 minutes
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Passive Multi asset funds are asset allocation funds that invest across a variety of passive funds. These fund types are relatively new to the Indian mutual fund investment space. These hybrid funds invest at least 10% of the corpus in a minimum of 3 asset classes, like equity, debt, and other asset classes like gold, real estate, etc. Here, we will discuss passive multi-asset funds and how investors can benefit from it.

What is a multi-asset allocation fund?

A mutual fund that collects corpus from investors to further invest in a combination of asset classes is known as a multi-asset allocation fund. The asset distribution and composition may vary as per the fund’s investment strategy.

Mutual fund research suggests that the average returns of a fund can be directly correlated to its asset allocation strategy. Multi-asset allocation schemes aim to provide a steady income flow and capital appreciation to investors through a well-balanced portfolio of investments.

By investing in a multi-asset allocation fund, an investor can:

  1. gain exposure to various instruments, including debt and equity
  2. benefit from portfolio diversification with asset categories like gold and gold-oriented investments

With many fund houses rushing to offer this fund category to investors, some have even started offering funds with asset classes, such as international equity, to distinguish themselves from competition.

How does a passive multi-asset fund work?

Investors who are looking for alternatives to actively managed mutual funds that explore different investment avenues within the same portfolio can consider investing in passive multi-asset funds. Here is how it works:

A passive multi-asset fund aims to offer diversification by including multiple asset classes within a single portfolio. This way, it eliminates the need for:

  1. asset allocation, 
  2. portfolio rebalancing and 
  3. fund manager bias in stock selection 

Passive mutlti asset funds primarily invest in other passive funds like ETFs that track a particular index, they also take away the risk of human errors that may otherwise affect fund performance. 

An example can help you understand this better

ICICI Prudential has come up with a Passive Multi Asset fund with asset allocation in the following manner

  1. 25 to 65% of its pooled funds in domestic ETFs and index funds. 
  2. 25 to 65% may be invested in debt ETFs and index funds
  3. 0 to 15% will be allocated to gold ETFs 
  4. 10 to 30% will be invested in international passive funds. 

What are the benefits of investing in a passive multi-asset fund?

Some of the benefits that can be availed from investing in a passive multi-asset allocation fund are:

Portfolio diversification

Investing in a passive multi-asset allocation fund can fetch the right balance between risk and reward due to exposure to different asset classes within a single fund investment. Since investment across asset classes results in varying risk-rewards, it enables the investor to contain the overall risk and fetch steady returns across different market cycles.

Well-distributed portfolio

A well-distributed portfolio with investments from different asset classes has a better chance of generating higher returns than a portfolio concentrated on one or two asset categories. A passively managed multi-asset allocation mutual fund offers the chance to automatically rebalance the portfolio, thereby helping investors to fetch maximum benefits, especially during turbulent market conditions. 

Easy entry and exit

Multi-asset fund investments do not charge investors for investing in the scheme, and most do not charge exit loads if certain redemption conditions are met. Depending on its investment strategy, a multi-asset allocation fund can fetch good returns even if it has not been through a complete market cycle. With a passive approach in fund management, investors need not have asset allocation experience or understanding to earn complete benefits from these funds.

Tax efficiency 

When a passive multi-asset fund does asset allocation across different categories, it makes the earnings more tax-efficient. This is because income from different asset classes attracts different tax liabilities and investors can balance out the overall tax liability through wider exposure.

Who should invest in passive multi-asset allocation funds?

The below points can help investors gauge whether this fund category is suited to them:

  • Multi-asset allocation mutual funds are best suited for investors with a low-risk appetite and steady returns expectations on their investments. With this investment, investors can eliminate the risk of concentration in one asset class.
  • Those looking for a regular income source can consider this fund option as the income comes from overall asset performance and remains relatively unaffected, even if some of the asset classes may be underperforming.

How does investing in this fund benefit investors?

Many investors may either avoid or miss out on asset allocation across segments. Instead, most tend to stay invested in performing assets during rising market scenarios. By exploring Indian as well as global equities, other assets such as fixed income and gold,  passive multi-asset funds aims to fetch earnings consistently while reducing the downside of individual asset performance.

Although it may sound complex to many new investors due to the ambitious approach it adopts. However, considering that these funds are managed by experienced fund managers who manage at least 60 other mutual fund schemes across different asset classes, it carries a good track record of asset allocation decisions and corresponding results.

Factors to consider while investing in this fund

Although the fund adopts a passive management approach, at a macro level, the fund will have multiple fund managers making decisions about the right asset mix to be used. This means the establishment of the portfolio’s structure will not be entirely passive. Hence, investors must be prepared for a minimal level of bias towards asset selection.

Also multi asset fund of funds get taxed as debt mutual funds, so that should also be a factor that you should pay attention to. 

Conclusion

Different asset classes perform differently across various market and overall economic phases. Very rarely would an equity and a debt mutual fund perform equally well within the same time span. Commodity funds such as gold may perform well during market downturns when other assets are on a low. Thus, it makes sense to explore passive multi-asset funds to make the most of varied asset classes within the same fund with relatively lower fund manager intervention.

FAQs

Passive or active investing, which is the right choice?

Lower cost, reduced risk, higher transparency, are some of the aspects that place passive investments over active, especially in case of mutual funds. Passive investing can also be an ideal strategy for a new investor who has a limited understanding of the markets.

How to invest in passive multi-asset funds?

You can invest in a passive multi-asset fund through the Finity app. To invest, you need to download and install the app on your smartphone. The app allows access to a wide range of mutual funds, depending on personal risk/return and investment time horizon preferences.

Do passive mutual fund investments require monitoring by investors?

Passive mutual funds such as index funds and ETFs mostly follow a passive approach, which means these follow the underlying index composition for maintaining an investment portfolio. Therefore, these do not require as frequent monitoring by investors as actively managed funds.

What are index funds?

An index fund invests in the same stocks and in the same proportion as the underlying index it follows. These are passively managed since the fund manager does not actively select securities for investment and therefore charge lower expense ratios.

How are index funds different from ETFs?

ETFs or exchange-traded funds can be bought/sold using a Demat account at any time during trading hours. These invest in a basket of securities, as per the underlying index composition. Index funds are also passively managed but work like mutual funds, hence, there is no need to have a Demat account to invest in these.

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