Wealth edition 26-May-2025 to june-1-2025

Economic Times

26-05-2025

Some beat the blues, others feel them
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Know your fund
Asset allocation funds came into the limelight when the equity market turned sour towards the end of last year. Amid a prolonged market slump lasting over six months, the primary task for these funds was to cushion the downside. Now, as the market rebounds, these funds have had a chance to prove their mettle. So did your multi-asset fund or dynamic asset allocation fund do its job?The sharp correction in the broader market since October last year tested many investors ' nerves. The BSE 500 index fell nearly 21% by 7 April 2025 from its 27 September 2024 peak. It has since recovered, and now hovers 8% off its previous high. Asset allocation funds as a basket have fared better, but most were not completely immune to value erosion. During this period, multiasset allocation funds saw an average NAV decline of 6.7%, while dynamic asset allocation funds recorded a drop of 8.5%.There were some outliers in this space. Among the multi -asset funds that averted a drawdown were Edelweiss Multi Asset Allocation, WhiteOak Capital Multi Asset Allocation and Franklin India Multi Asset Solution Fund of Funds. A few others like Quantum Multi Asset Fund of Funds , HDFC Multi-Asset Active FoF, ICICI Prudential Asset Allocator Fund, among others, managed to limit the downside. Parag Parikh Dynamic Asset Allocation was the only scheme from the dynamic asset allocation basket to deliver a positive return in this period. However, many like DSP Dynamic Asset Allocation, Franklin India Balanced Advantage and SBI Balanced Advantage cushioned the downside well.A closer look at the asset allocation patterns of these funds reveals why they could hold their ground so well. Not surprisingly, the funds that averted a drawdown had among the lowest exposure to equities. In a category populated by funds taking a distinct equity slant, it was the funds that practiced a prudent asset allocation approach that kept investors in the game.Sizeable gold allocation in a few funds also helped prop up returns further. Rajani Tandale, Senior Vice President, Mutual Fund at 1 Finance, asserts, 'During downturns, these funds typically benefit from bond and gold exposure, which help offset equity losses.'On the flip side, several funds saw sharp drawdowns during this period, including Motilal Oswal Balanced Advantage, Motilal Oswal Multi Asset, HSBC Multi Asset Allocation and Quant Dynamic Asset Allocation. Some of these are aggressive by nature. These do not necessarily cater to the risk profile of investors that asset allocation funds typically attract. The equity tilt in some funds allows them to retain favourable tax treatment, but risk rises. Tandale says, 'Since October 2024, funds with higher allocations to bonds or gold likely cushioned losses more effectively. In contrast, equity heavy portfolios experienced sharper declines but also stronger rebounds.'Bhavana Acharya, Co-founder, Primeinvestor.in, observes that the risk in some funds emanates from higher exposure to the broader market. 'Individual stocks fell much more than the index during the correction. Funds holding these names got hit far more despite having sizeable allocation to fixed income,' Acharya says. For instance, Motilal Oswal Balanced Advantage and Motilal Oswal Multi Asset had 60% and 50% allocation, respectively, to mid- and small caps at the end of September 2024.This increased further to 73% and 59% by December end. Samco Dynamic Asset Allocation, HSBC Multi Asset Allocation and Shriram Multi Asset Allocation also ran high allocation to mid- and small-caps, hurting returns amid the market crash. Many of these affected funds did not hedge their equity allocation or did so modestly.Samco Dynamic Asset Allocation, Motilal Oswal Multi Asset, Quant Dynamic Asset Allocation and Shriram Multi Asset Allocation, among others, had marginal or no hedging of existing equity positions at September-end. Samco MF's offering raised its hedged positions only later. At the other end, Edelweiss Multi Asset Allocation's fully hedged exposure to equities helped it stave off a drawdown.The choice of funds in this space is critical to your investing experience. In turbulent phases, an asset allocation fund truly serves its purpose if it allows you to keep your cool and not throw in the towel. It gives you the comfort of staying invested even during the tough times. By retaining your invested money, it provides you the platform to continue wealth creation irrespective of the market's vagaries.It is a good idea to look under the hood, insist experts. Acharya remarks, 'The asset allocation construct sounds appealing but what funds do within the portfolio is important. Not all asset allocation funds have the ability to contain downside. Some are more aggressive than others. Investors must know how the fund approaches asset allocation to know if it aligns with their expectations.'Given the role these funds play in the portfolio, experts reckon it is better to opt for funds adopting a moderate-toconservative stance. Avoid chasing returns in this category. Funds that emphasise on risk construct, rather than offering an edge in returns, should be your pick.Kaustubh Belapurkar, Director, Fund Research, Morningstar India, asserts, 'We prefer strategies that take graded exposure to underlying asset classes, that moves within a narrow band. Funds moving from 20% to 80% in equities are essentially trying to time the market, which can deliver lumpier returns.' He emphasises that oscillating equity exposure may not always work in the funds' favour. 'If the fund model doesn't pull equity allocation back when market recovers, it can hurt the fund performance, erasing gains on the downside,' Belapurkar adds.Tandale reckons asset allocation is highly personal and cannot be generalised. Instead of relying entirely on a single fund, investors may be better served by creating their own allocation using low-cost index equity funds, debt funds, and gold ETFs. 'This approach offers greater transparency, better control, and often lower expense ratios than packaged multiasset or balanced advantage funds, which may not suit every investor's profile or goals,' she argues.