Prime Fund Recommendation: A multi-asset fund for long-term portfolios

Multi-asset allocation funds as a category are not easy to use. With funds in the category having the freedom to swing drastically between asset classes, the aspects to consider range from how asset allocation calls are taken, how much the allocation changes, whether this translates into returns, and finally what the taxation is going to be. 

Multi-asset funds have been in place as a formal category only since 2018. While this is not long enough to know how these funds truly perform, it is enough to understand how these funds change asset allocation and how they perform during market corrections and up-trends. Given this, multi-asset allocation funds are best considered as a differentiated hybrid fund in our view. These funds are useful to get some equity exposure without the risk of pure equity funds – much like a hybrid aggressive fund or a slightly higher-risk balanced advantage fund. We don’t view them as a method to get asset allocation in a portfolio.

Our recommendation in this category is ICICI Prudential Multi Asset Allocation Fund (IPru Multi Asset), which we added to Prime Funds in our December 2022 review, for the following reasons:

  • The fund has delivered better returns than its category average over the past few years, even being in line with aggressive hybrid funds, along with better risk-adjusted returns and ability to contain downsides.
  • Apart from shifting between the primary asset classes of equity and debt, it adds smaller exposures to different commodities (such as gold, silver, or oil), REITs and InVits, besides adopting derivative strategies in both stocks and commodities. This offers differentiation from plain vanilla aggressive hybrid funds.
  • It remains equity-oriented in its portfolio, which offers predictability in terms of taxation and return potential.

Here’s exploring the points above in detail, as well as suitability and how to use ICICI Pru Multi Asset in your portfolio.

Asset allocation shifts

IPru Multi Asset invests across the three main asset classes of equity, debt and gold besides REITs and InVits, with a minimum of 10% in each. However, it aims to keep gross equity allocation above 65% (i.e., equity exposure including equity derivatives) at all times making it more like an equity-based fund rather than one with a pure dynamic asset allocation nature. Over the past 4 years, the net equity allocation has moved between 55-78%; the equity allocation typically moves up during market corrections and vice versa. The graph below shows the trend of net equity exposure for ICICI Pru Multi Asset.

However, the fund has made timely shifts between equity and debt, along with picking up smaller opportunities through derivatives, gold, and commodity futures. For example, in periods late 2022, when markets were nearing a high the fund held a good 10-12% in stock and index derivatives. It instead significantly upped debt holding to 26-28%, given the higher return potential in debt now compared to equity. 

In its equity holding, the fund is predominantly large-cap. This reduces the risks compared to aggressive hybrid funds that often tend to hold mid-caps and small-caps during rallies, as well as other fellow multi-asset funds such as Quant Multi Asset or SBI Multi Asset. In its stock picks, the fund follows a value-based approach, as is the AMC’s strategy with most of its equity funds. It has a very diffused portfolio comprising a large number of stocks, but the top few can have heavy weights.

Debt allocation has ranged between 15-29% of the portfolio over the years. IPru Multi Asset has tended to stick to short-term maturities, primarily through money market instruments. To this extent, duration risk and related volatility are minimised. However, it is to be noted that the AMC has often taken duration calls in its aggressive hybrid fund. Since duration as a strategy hasn’t been attractive in the past few years this fund possibly stayed away. But when rates do soften, the possibility of the fund taking duration calls in the future cannot be ruled out.

The remaining portfolio is predominantly gold, through both ETFs and futures. IPru Multi Asset juggles smaller exposures across different instruments such as REITs, InVits, and commodity futures such as silver and crude oil.

Above-average performance

There are only a few multi-asset funds and each adopts a wholly different style of allocating between assets. Therefore, more aggressive funds tend to deliver higher than others but then are more volatile with poorer ability to contain downsides.

IPru Multi Asset beats the category average a healthy 70% of the time based on rolling 1-year returns over the past 4-year period. It is more volatile than its conservative peers, and has dropped into losses over 1-year periods more frequently than peers. However, its risk-adjusted return still holds above the category average and over the longer-term average returns are higher than peers. Its average 3-year returns, for example, comes in at close to 14%, above the category’s 11.4%. 

While Quant Multi Asset scores over the IPru fund in terms of returns, the former can be more aggressive in marketcap orientation and portfolio and is far more volatile. Given that the need for such hybrid funds is primarily to counter pure equity risk, we think the comparatively more conservative approach of IPru Multi Asset is better suited. 

Besides, the IPru fund has been more dynamic in its asset allocation shifts, pointing to a better strategy of picking up different market opportunities. The Quant fund has also only recently added to fund size – it was less than Rs 20 crore until March 2021 which reduces the significance of past performance. The Ipru fund, by comparison, has had asset size of well over Rs 10,000 crore.

IPru Multi Asset is also adept at containing downsides when equity markets correct. Based on 1-month returns since January 2019, the fund captures about 55% of the Nifty 50’s downside – that’s better than even the Nifty’s 65:35 hybrid aggressive index.

IPru Multi Asset has, in fact, matched or even beaten funds from the aggressive hybrid category despite being less equity-heavy both over 1-year and 3-year periods. For example, current 1-year returns at around 9-10% are well above the average 2% of the hybrid aggressive category. The table below shows a quick comparison between the fund and the two categories.

Suitability and portfolio role

IPru Multi Asset Allocation fund suits a holding period of at least 3 years and can be used by any investor. However, bear the following points in mind if you intend to invest in the fund:

  • Only for long term portfolios: It is best used in long-term portfolios to up overall return potential from the equity exposure without taking on the risk of pure equity exposure. Higher-risk investors, for example, can use it to increase their portfolio’s equity allocation. More conservative investors can use the fund as a lower-risk route to equity exposure instead of going for a pure equity fund.
  • Cannot be used as a fund to play asset allocation: It needs to be considered as a differentiated hybrid fund. It cannot be viewed as a fund that will help influence your own portfolio’s asset allocation to take advantage of market conditions. For one thing, the fund itself does not make big changes in asset allocation. For another, your portfolio allocation needs to be decided based on your timeframe and risk, and the fund gives you no control over asset allocation choices. Third, for the fund to wield any influence over your portfolio allocation, you will need to invest a large proportion here which simply increases your concentration risk.
  • Not an alternative to debt: It cannot be considered as an alternative to debt funds in your portfolio, in your effort to circumvent debt taxation impact. The fund, as explained above, is predominantly equity. It is far riskier compared to many of its own peers as well as balanced advantage funds.
  • Avoid this if you have hybrid aggressive from the same AMC: If you already hold ICICI Pru Equity & Debt (also part of Prime Funds), avoid investing in ICICI Pru Multi Asset. While the former does have much more in equity and is not dynamic, there is significant overlap in the equity portion of their portfolios. Returns of the two funds have also charted similar paths.

In terms of taxation, ICICI Pru Multi Asset will be taxed as an equity fund since it aims to maintain the 65% equity cut-off required. 

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17 thoughts on “Prime Fund Recommendation: A multi-asset fund for long-term portfolios”

  1. One concept which could have been mentioned , is the equity tax treatment of LTCG of such funds ( where they maintain 65 % in equities and equity derivatives) which if invested individually in gold and debt funds will attract more tax

  2. Anandkumar Mehta

    Hi Bhavana

    I am currently sitting on 25% equity and 75% cash. I am looking to gradually mobilise cash into equity. I have a horizon of 5-7 years at least. Can you advise me any article or point of view that your team may have on how to mobilise large cash position into equity gradually (as in mobilising x% at each market level etc.). Thank you.

    1. Bhavana Acharya

      Pegging deployment of surplus into equity to market levels is extremely tricky – one, you do not know how long or how deep a cycle lasts, so it’s hard to decide what % of rise or fall to invest and how much of your cash to invest. Two, it can also take a very long time to fully invest as the market level needs to be hit; if your horizon is about 7 years, you will additionally not be giving enough time for equity to deliver depending on how long you have taken to invest. It’s far easier to fix a monthly amount to invest from the cash so that there is a steady and phased out investment, then set a market fall cut-off of say 5-7% in a month and invest additionally over and above the monthly amount when these cut-offs are met. You can also deploy additionally if we issue any strategies or recommendations based on opportunities, like our most recent one on small-caps. Ensure that your portfolio is well-diversified before starting investments. – thanks, Bhavana

  3. If I want to have asset allocation with 60% equity and 40% debt then investment in this fund should be completely counted in equity allocation? Or should its investment should be counted as some % equity and some % debt?

    1. Bhavana Acharya

      Ideally, it should be counted as partly equity and partly debt, as debt allocations can be higher. However, if it’s cumbersome to do, you can consider it to be part of low-risk equity in your portfolio. – thanks, Bhavana

  4. Very good analysis and appropriate comparison! I have been watching the fund for long time when it’s name was Icici Pru Dynamic Fund. I am a retiree, I made some lumps investment in it 4 months back. I don’t have any Aggressive Hybrid fund in portfolio. Quant Multi Asset can be more volatile because of higher 25-30 percentage of Gold in it. I appreciate !

  5. Hi Bhavana,
    The only difference from ICICI Pru BAF seems to be the Gold and InvITs portion. In the long term portfolios isn’t holding BAF a better combo along with SGBs? The Multi-asset fund expenses can be quite high given that it invests in Gold ETFs which itself has its own expenses albeit low. And any idea what would be the expenses of InvITs that also will get added up?

    1. Bhavana Acharya

      No, IPru BAF is by far lower in net equity allocation; it averaged less than 40% over the past year for example. Th returns are lower, and so is both risk and volatility. This apart, gold and debt allocation can certainly make a difference to return – gold prices for example have been up in recent times. – thanks, Bhavana

      1. contact.thiyagu

        Is it a good idea to hold this fund if one already have IPru BAF? Is there too much overlap ?
        Context: I’ve started adding considerable position in hybrid funds (BAF). I’m seeing them as part of my equity portfolio (in terms of risk). I wanted to have considerable exposure to funds which tactically change their asset allocation. Trying out having both flavours in my portfolio – fixed-asset-allocation (major part. I’m planning to rebalance yearly) and tactical-asset-allocation (small but considerable part. BAF funds). Does Multi-asset-funds falls under the ambit of tactical asset allocation?

        1. Bhavana Acharya

          Multi-asset allocation funds are not fits for tactical asset allocation in your portfolio itself. But if you’re looking for a fund that will tactically shift, and therefore deliver better returns without equity-like risk, then yes, these funds work. But if you already hold IPru BAF, this one can be avoided…while the overlap between the two funds will be low owing to the equity differential, the asset allocation calls will be very similar for the funds. – thanks, Bhavana

  6. nice article Bhawana.I am afraid I have to disagree with you.One should not compare a particular fund with category average of other category,instead a fair comparison would have been with other Prime funds like Canara Robe co aggressive hybrid or Mire aggresive hybrid
    the data for last five yrs for 1 yr rolling return shows average return of ICICI multiasset 2% higher at S,D at 6% higher and % loss 10%higher than Canara Robeco aggressive hybrid
    for 3 yr rolling return for same period ICICI multiasset average returns are infact 1% lower and S.D is 2% higher.than Canara Robeco aggressive hybrid .Since you yourself advocate to hold it for long term 3 yr rolling return would make more sense than 1 yr rolling return comparison
    moreover ewuity component of ICICI multiasset can drop below 65% ,what happens to taxation then does average equity holding over whole financial yr or on date of sale is considered.Kindly clarify?

    1. Bhavana Acharya

      We have compared individual funds where necessary – like with Quant, for example, which has also delivered well. When comparisons are made, it is always to give perspective on the fund’s performance. In this case, we looked at the aggressive hybrid category as well since the IPru fund tended to have a higher equity allocation. We don’t have to compare it to every good fund in the category or our recommendations – there is more than one good fund! In terms of longer-term returns, we don’t want to place too much emphasis on it for multi-asset funds as they do not have that long a track record. The category was defined in 2018 only, and any return before that comes from whatever the fund had been earlier before being slotted into the multi-asset category. – thanks, Bhavana

  7. Vittal Venugopal

    Hello Bhuvana,

    Excellent article!!! Very nicely explained, looks like a promising fund from the ICICI Stable. It is like fill it and forget it type of fund. Is it recommended to invest in lumpsump or SIP. How is it different from the ICICI Asset Allocator Fund? Between the two which fund has higher risk adjusted returns. Thanks

    1. Bhavana Acharya

      You can invest through both SIP and lumpsum, whichever is more convenient. If you’re making lumpsum investments, try to make these at different market levels. IPru Asset Allocator fund is a fund-of-fund. To begin with, this will make its taxation that of debt. Second, the fund invests in a wide range of equity and debt funds and there is no control you have over what funds goes into the portfolio; there’s a mix of good and poor performers – and the question also is whether those funds are the most suitable for a particular opportunity. Third, strategies such as using derivative and other commodities will not be possible as well. – thanks, Bhavana

  8. Thank you for this very detailed analysis, ma’am! You highlight the concept of “concentration risk” – what is the maximum portfolio share that Prime Investor thinks should be allocated to any particular MF that’s not very aggressive/ part of one’s satellite allocation?

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