If you can re-balance your portfolio once a year, separate equity and debt funds are better
Priya Nair | Mumbai | November 12, 2014 Last Updated at 21:59 IST | Business Standard
It’s raining returns on mutual fund investors with both equity and debt funds seeing good growth. In a bid to take advantage of this, fund houses are launching funds that invest across asset classes: equity, debt and gold. But should investors go for such funds or is it better to invest separately in equity and debt funds? Franklin Templeton India’s Multi-Asset Solution Fund’s new offer closes on November 21. The fund will invest in existing schemes of Franklin Templeton and ETFs.
“We believe investors need to stay invested across asset classes at all points in time, irrespective of whether one asset class is doing well or not. To this extent, there is no sanctity behind timing a multi-asset fund now. Those investors who can do an occasional re-balancing, say annually, might as well hold separate equity and income funds, says Vidya Bala, head of mutual fund research, FundsIndia.com.
A pure equity or a pure fixed income fund may give better returns if seen from one point to another. But in a portfolio, investors need dynamic allocation and they should be able to move between asset classes smoothly. A multi-asset fund will allow this automatically, says Harshendu Bindal, president, Franklin Templeton Investments (India).
For retail investors, re-balancing portfolios, that is, shifting from equity to debt funds will involve transaction costs and can also be time consuming. But investing in a multi-asset fund can give diversification across asset classes and automatic asset re-balancing with exposure to a single fund. “But the disadvantage is that they are mostly fund of funds and, hence, receive only debt status for tax purposes and not too tax efficient,” says Bala. This means that if you stay invested for three years, you will be taxed 20 per cent with indexation. Unlike this, in a pure equity fund, there is no tax after one year. The expense ratio, too, could be higher due to the fund of fund structure, since expenses will be over and above the expenses charged by the underlying schemes.
Another disadvantage is that being a fund of fund, only funds from the same fund house will be available. Hence, the best fund in each category or asset class may be lost, Bala adds.
Explaining the rationale behind investing in gold in the current market Bindal says gold is a traditional hedge against inflation, which is useful given India’s high inflation rates.
R Sivakumar, head-fixed income, Axis Mutual Fund says that multi-asset funds are meant for long-term investors, who are not investing in a particular asset because of the cyclical returns from that asset. “In any asset allocation pattern, you will always have a certain amount in all assets. The advantage of doing this through a fund is that fund will always sell the asset that is over-performing and buy the asset that is under-performing,” he says.
According to data provided by Value Research, Axis Triple Advantage Fund, which invests in equity, debt and gold is the largest fund in this category with assets under management of over Rs 500 crore. It has given returns of 14.64 per cent over one-year period. The fund invests in direct equities and fixed income and in gold exchange-traded funds.
Some other multi-asset funds are Canara Robeco InDiGo, which has given returns of 1.06 per cent over one-year, Birla Sun Life Financial Planning (Aggressive Plan) – 39.46 per cent and Union KBC Asset Allocation Fund Moderate Plan – 15.62 per cent.
Ideally, such funds should have a minimum investment horizon of at least three years. Investors can have a multi-asset fund for the base asset allocation and use separate equity and diversified funds for incremental investment, Sivakumar adds.
Source : http://goo.gl/mcN848