Skip to main content

Multi-manager fund can put asset allocation on auto pilot

 

MOST investors love to construct a portfolio of different products on their own. They take inputs from various sources, which maybe advice from a financial advisor, a friend or a website. However, in all such cases, the discretion to invest in a particular asset class or scheme remains with the customer and the portfolio performance is his own responsibility. Experience shows that in most cases, more true in case of retail investors, an investor would take a decision to invest in a particular asset class/scheme when the story is over.

Just imagine how many retail investors would have allocated additional money to equities in October 2008 when the market was at its multi-year low?


How many retail investors and HNIs foresaw double digit returns from income/gilt funds between October 2008 to December 2008?


Research shows more than 80 per cent of returns on any asset class is achieved through right asset allocation. However, this is very difficult and even the smartest of individuals is not able to do it successfully.

So, what is the solution? The trick is in disciplined asset allocation across asset classes. A typical investor would have allocation to equities, gold, fixed income, real estate in various forms such as mutual funds, physical gold, house, office, shares and debentures.

Disciplined asset allocation means review of allocation to these asset classes at market values, and not at purchase prices, at regular intervals.


Whether rebalancing is to be done every quarter or not would be a function of market conditions and client requirements.

When asset allocation is done through independent instruments such as mutual fund schemes, the rebalancing could involve tax incidence and exit loads.


However, a part of this problem can be resolved through multi-manager asset allocation products, which have exposure to equities, gold and fixed income. In such cases, the expert would do rebalancing between equities, fixed income and gold with no tax impact and minimum cost to the customer.

Most customers and rating agencies rate mutual fund schemes on the basis of past track record.


Historical numbers are a good way to start with, but not the only data to rely on. Let us take case of equity markets in 2008 and 2009.


Most of large-cap funds outperformed mid-cap funds in 2008 as they fell lesser. So, if an investor would have assumed that 2009 will be a repeat of 2008, his equity portfolio would have underperformed by 20 ­ 50 per cent as mid-caps did far better than large-caps during this period.

Within a category too, there is a range. Across large-caps, the range for 2009 could be 20 to 35 per cent, as many fund managers never believed in the global economic recovery in the first and second quarters of 2009, and they remained overweight on cash and defensive sectors such as FMCG and telecom. Also, many fund managers could have changed jobs during this period.

In normal market conditions, the range of difference between good and bad managers is small, but in market-turning situations, it is substantial and can have significant impact on returns from a portfolio. So, if a customer would not have rebalanced his managers in asset classes after reviewing their portfolios and market conditions, the return impact, especially in case of equities, could have been between 20 -30 per cent at the least.

A customer could largely solved this problem by outsourcing to a multi manager expert the tasks of choosing a manager and reviewing and rebalancing the portfolio. The expert would choose the manager after looking at past data, current market conditions and future market outlook. When the expert does the rebalancing of schemes, it would not involve any tax impact and, thus, minimise the transaction cost, which the investor would have to do on his own otherwise.

This is where a multimanager fund comes in.


The product allows a fund manager to choose managers for an investor across asset classes, depending on the investment objective of the fund.


In simple terms, in a multi-manager fund, the investor hands over his decision to choose the managers to an expert, in return for a better performance of the portfolio vis-avis his own, over the medium to long term.

A multi-manager fund can be of two types, fund of funds and manage the managers. In the first case, the expert will invest in a range of existing funds available in the market while in the second, the expert will appoint other managers/advisors to run different parts of the portfolio according to a specific mandate.

In India, funds of funds are popular and are offered by various asset management companies.

An additional benefit of choosing a multi-manager portfolio is the reduction in paper work. One does not have to track statements from various fund houses for schemes invested in, check if the redemption money has been credited on time, or calculate tax outgo on periodic intervals.

 

Popular posts from this blog

Tata Mutual Fund

Being a part of the Tata group, the fund has the backing of a very trusted brand name with strong retail connect. While the current CEO has done an excellent job in leveraging the Tata brand name to AMC's advantage, it is ironic that this was just not capitalised on at the start. Incorporated in 1995, Tata Mutual Fund remained an 'also-ran' fund house for around eight years. Till March 2003, it had a little over Rs 1,000 crore in assets and 19 AMCs were ahead of it. But soon after that the equation changed. It was the fastest growing fund house in 2004 and 2005. During these two years, it aggressively launched six equity funds, two debt funds and one MIP. The fund house as of now stands at No. 8 in terms of asset size. This fund house has a lot to offer by way of choice. And, it also has a number of well performing schemes. Tata Pure Equity, Tata Equity PE and Tata Infrastructure are all good funds. It also has quite a few good debt funds. The funds of Tata AMC are known to...

UTI Mutual Fund

Even though only a few of UTI’s funds are great performers, this public sector fund house has many advantages that its rivals do not. It has a huge base of retail equity investors and a vast distribution network. As a business, it looks stronger than ever, especially in the aftermath of credit crunch. UTI is, by a large margin, the most profitable fund company in the country. This is not surprising, since managing equity funds is more profitable than debt. Its conservative approach and stable parentage is likely to make it look more attractive to investors in times to come. UTI’s big problem is the dragging performance that many of its equity funds suffer from. In recent times, the management has made a concerted effort to improve performance. However, these moves have coincided with a disastrous phase in the stock markets and that has made it impossible to judge whether the overhaul will eventually be a success. UTI’s top performers are a few index funds, some hybrid funds and its inf...

Salary planning Article

1. The salary (basic + DA) should be low. The rest should come by way of such allowances on which the employer pays FBT and you don't pay any tax thereon. 2. Interest paid on housing loan is deductible u/s 24 up to Rs 1.5 lakh (Rs 150,000) on self-occupied property and without any limit on a commercial or rented house. 3. The repayment of housing loan from specified sources is also deductible irrespective of whether the house is self-occupied or given on rent within the overall ceiling of Rs 1 lakh of Sec. 80C. 4. Where the accommodation provided to the employee is taken on lease by the employer, the perk value is the actual amount of lease rental or 20 per cent of the salary, whichever is lower. Understandably, if the house belongs to a family member who is at a low or nil tax zone the family benefits. Yes, the maximum benefit accrues when the rent is over 20 per cent of the salary. 5. A chauffeur driven motor car provided by the employer has no perk value. True, the company would...

8 Investing Strategy

The stock market ‘meltdown’ witnessed since the start of 2005 (notwithstanding the recent marginal recovery) has once again brought to the forefront an inherent weakness existent in our markets. This is the fact that FIIs, indisputably and almost entirely, dominate the Indian stock market sentiments and consequently the market movements. In this article, we make an attempt to list down a few points that would aid an investor in mitigating the risks and curtailing the losses during times of volatility as large investors (read FIIs) enter and exit stocks. Read on Manage greed/fear: This is an important point, which every investor must keep in mind owing to its great influencing ability in equity investment decisions. This point simply means that in a bull run - control the greed factor, which could entice you, the investor, to compromise with your investment principles. By this we mean that while an investor could get lured into investing in penny and small-cap stocks owing to their eye-...

Debt Funds - Check The Expiry Date

This time we give you an insight into something that most debt fund investors would be unaware of, the Average Portfolio Maturity. As we all know, debt funds invest in bonds and securities. These instruments mature over a certain period of time, which is called maturity. The maturity is the length of time till the principal amount is returned to the security-holder or bond-holder. A debt fund invests in a number of such instruments and each of these instruments would be having different maturity times. Hence, the fund calculates a weighted average maturity, which would give a fair idea of the fund's maturity period. For example, if a fund owns three bonds of 2-year (Rs 30,000), 3-year (Rs 10,000) and 5-year (Rs 20,000) maturities, its weighted average maturity would be 3.17 years. What is the big deal about average maturity then, you may ask. Well, knowing a fund's average maturity is important because it tells you how sensitive a fund is to the change in interest rates. It is ...
Related Posts Plugin for WordPress, Blogger...
Invest in Tax Saving Mutual Funds Download Any Applications
Transact Mutual Funds Online Invest Online
Buy Gold Mutual Funds Invest Now