Motilal Oswal AMC is launching a new fund (NFO) opening on 15th July and Closing on 27th July. Of course, it is an open ended fund. So you can invest in it later as well. Let us do a short and quick review of this multi asset fund from Motilal Oswal and see if it is suitable for investment.
Basically a multi asset fund by definition is one that invests in more than 2 assets with each asset having minimum 10% allocation. A multi asset fund bases its existence on logic that different assets perform differently at any particular time. So this helps someone investing in such a fund to reduce volatility. When equity is not doing good, then may be gold or debt would perform better and so it may compensate under performance of equity. You can see how different assets performed in last decade in below image.
Image below shows how multi asset fund would perform year on year. The dark blue worm is much stable than other worms. So your returns are likely to be stable and less volatile.
You may like to read my article explaining Asset Allocation here.
How it will work?
Fund plans to invest in 3 assets Equity, Gold and Debt. Within equity as well, it plans to invest in domestic as well as international equity. So you can think its a actually combination of sort of four sub assets to say – Debt, Domestic Equity, Gold and International Equity.
Debt portion will provide stability to return and capital. Domestic equity will add that little extra to returns and international equity will help in diversification. Gold is mainly hedge against inflation or geo political risk. As per my understanding, this is more of debt oriented multi asset fund. Typical debt allocation would be around 65% and rest 10 % each – Domestic Equity, International Equity and Gold. Domestic Equity allocation would increase as market becomes cheap and can go upto 27.5 % in rare cases. When domestic equity allocation increases, debt proportion would go down. Other two assets are intended to be kept at 10% each.
How your money will be invested?
Debt portion would be invested with around 90% in AAA papers which means top rated and relatively low return instruments. So focus is more on safety and less on returns.
Domestic equity would be invested in large cap oriented. You can see style / performance of Motial Oswal Focused 25 to gauge how this part would perform. In fact same fund manager will be managing equity part of this fund as well. So Focused 25 will be a good guidance to understand how equity will perform. It is one of good large cap fund. So you can expect similar performance from Domestic Equity portion of this fund as well.
International Equity exposure will be in S&P 500 index passively through Motilal Oswal S&P 500 Index Fund. This is one of top and most popular index in world so again here strategy is to take less risk and steady returns. Index has world’s largest 500 companies. So though any equity brings in some risk, this is well diversified index.
Gold investment will also be via passively using Gold ETF.
You can sense focus of fund is to reduce risk as much as possible but give little more return than what a pure debt fund. So surely targeted only at Conservative investors.
How allocation will be re balanced?
Key aspect of any multi asset fund is how asset allocation is managed or re balanced. When fund starts, it will have some base allocation but as time passes, different assets will have different returns. If equity goes up suddenly 30% in a year, overall balance will not be what fund started with. So regular re balancing is what funds need to keep doing. This is where such funds have advantage over a DIY (Do It Yourself) investor who could achieve same by investing in 4 funds (Domestic Equity, International Equity, Debt and Gold Funds). Doing re-balancing is prone to taxation for us as investors. It is also little administrative task unless you have a financial planner doing for you.
Getting back to fund. I see fund will stick to 10% allocation in each of Gold and International Equity. Debt and Domestic equity proportion is based on Motial Oswal own proprietary Logic based on factors like P/E and P/B. It tries to gauge if Stock Market is cheap or expensive. If market is expensive, they will allocate more to debt and vice versa. They used same strategy in their other fund – Motilal Oswal Dynamic Fund. That should give you some idea how this worked so far. I would say it worked okay – neither very good nor very bad.
Since fund is investing in multiple assets, risk is moderate. Also being a debt oriented multi asset fund, volatility is expected to be less than other multi asset funds but of course little more than that of pure debt fund. Also note that fund is going to take 10% international equity exposure. So it helps in diversification but so also comes with country and currency risk associated with such investment.
Image below can help you understand overall picture. Look at volatility of Nifty, Bond, S&P 500, Gold and multi asset fund (during back testing). You will see fund will be more volatile than pure debt fund but much less volatile than other three assets. So theme here is take that little extra risk than debt funds and get investors little more returns than pure debt funds.
The punchline of fund starts with “In low scoring match…”. So you can guess, returns will not be high. And I like about honesty and clarity given to the investor by fund house right upfront.
Indicative returns could be in range of 9%. As any other fund, Motilal Oswal also back tested their strategy of how such asset allocation would have worked in past. You can see last column in below image, strategy would have given in range of 10.25% returns in most cases. If you take out fund management expenses etc, you can expect around 9% returns. You need to ask yourself if that is what you are okay with before making an investment.
This will be taxed like debt funds. So plan to invest for more than 3 years. Long Term Capital Gains would be taxed at 20% after indexation. Post tax returns can be 2-3 % more than say bank FDs especially for people in higher tax bracket. If you however sell it before 3 years, Short Term Capital Gains would be taxed based on your tax slab.
Should you invest in Motilal Oswal Multi Asset Fund?
This is my personal view of Motilal Oswal Multi Asset Fund and you should do your own research or consult a financial advisor before taking any decision.
If you have seen my previous reviews of NFOs, I am not great fan of new funds. I feel we should give any fund time to prove its worth before investing. I prefer existing alternatives available which have demonstrated consistency over long period. However in this case, there is no worthy alternative available with these type of assets in this type of allocation. So my view is Yes for a very small section of investors and Avoid for a large section of them.
So which is this small section of people who could give it a try. You need to be conservative investor but not okay with FD returns. Then you need to ask yourself if you are comfortable with this asset allocation for long term and still okay for relatively lower returns. Your investment objective needs to be more than 5 years since overall equity can be from 20 % to 35 % based on market conditions. You want to take just little extra risk compared to pure debt fund for extra returns. You may say there are many funds like say ICICI Regular Savings Fund which are debt oriented with some equity. Main difference here is exposure to Gold and International Equity. So if you want to have that as well, this could be one stop arrangement for you. But I feel this will be a very small group of investors who are debt oriented but still want to have exposure to other three assets as well. But if you are among those, you can consider this fund as there is no other choice currently available.
For majority of investors, I think this type of asset allocation won’t suit. Equity allocation makes this fund not suitable for short term goals as that is risky. We are better off with pure debt option if goals are less than 5 years.
One personal opinion on Multi Asset Funds is that if you keep doing re balancing too frequently, you are not giving opportunity to any asset class to grow. Let us take example of gold which gave say 40% return in last one year. When it started growing, if you keep reducing allocation of gold every two weeks for re balancing then you do not take advantage of that bull run. By re balancing, fund is sticking to originally agreed allocation but losing out on returns when asset starts moving up. If you still intend to use Multi Asset fund for overall asset allocation, have look at existing options – Hybrid – Multi Asset Funds.
For long term goals, it would be better to invest in multi asset fund that is more equity oriented to get better returns. ICICI Multi Asset Fund and Axis Triple Advantage Fund are alternatives to consider though they do not have International Equity Exposure. One benefit with these two funds is that they will be treated like Equity fund for taxation purpose and you may save little more there.
SBI Multi Asset Fund is another option for people who are inclined to invest around 1/3 in each asset – debt, equity and Gold. Again no International Equity exposure.
Best option would be hire a financial advisor and manage your asset allocation as per your customized needs by investing separately in Equity, Debt, Gold and International funds. That will give you much better control in exact proportion as per your needs. It will also help you change asset allocation as your situation changes be it age, goals, financial situation etc.