Should you look at niche mutual funds such as multi-asset funds?

Kavya Balaji   /   November 17, 2020
Should you look at niche mutual funds such as multi-asset funds

There is a plethora of mutual funds in the marketplace today. This includes several exotic products that were launched this year. There seems to be some kind of interest shown by mutual investors as this has not been a great year for many investors. Here are the details regarding the mutual funds that have been launched and whether you should have a look at them.

Why are mutual funds launching these products?

The main reason why Asset Management Companies (AMC) are coming out with these funds is because there is no cap fixed by the Securities Exchange Board of India (SEBI) for the New Fund Offerings (NFO) of niche mutual funds. Another reason is because the AMC needs funds. Launching more funds will help them get more assets to manage.

Are these products in demand?

The answer is no. The mutual fund distributors can earn a fair bit of money by pushing these products to the investors. So, their push makes it seem like the niche mutual funds are popular.

Which are the niche funds that have been launched?

The products include environment social governance (ESG) and special situations funds, multi-asset funds and exchange-traded funds (ETFs) based on smart-beta strategy.

What are ESG funds?

These are socially responsible funds, that is, the funds identify companies that do business the right way and invest in them. They look at those companies that are well positioned to exploit all the opportunities. So, stocks of companies that manufacture products such as tobacco or alcohol are ruled out. These are thematic funds.

There are no major advantages for this fund over other equity diversified funds. This is just for those investors who sentimentally might feel that they shouldn’t invest in stocks that are against their value system.

What are multi-asset funds?

Multi-asset funds are hybrid mutual funds that invest a minimum of 10% of their assets in at least three asset classes. Most of the times, these funds invest in equity, debt and one other asset class such as gold or real estate. So, multi asset funds invest across different asset classes. There are AMCs that have started adding asset classes such as international equity to multi-asset funds. The idea is to offer diversification for the investor so that risks are reduced.

The main advantage of this fund is that it invests in different asset classes. Since all asset classes don’t underperform at the same time, the fund may not grossly underperform.

What are smart beta strategy ETFs?

Smart beta ETFs aim to provide enhanced returns with reduced risk using diversification. Here diversification is not in terms of traditional evaluators such as sector weightages. Smart beta ETFs make use of specific characteristics, such as dividend growth, stock momentum, low volatility or high quality to diversify the portfolio. It uses a rules-based system for choosing stocks to be included in the fund portfolio.

The advantage here is that the stock selection is niche and is unconventional. Since the filters are of higher standards, the fund might do better than traditional peers.

Should you invest in niche mutual funds?

The main thing to be considered here is that niche funds such as ESG funds are risky because they have no track record and you will have to wait it out to see if they perform well. If you are comfortable with this, you can consider investments in these funds. This means they need to be strictly used for only the long-term goals.

Whether you should invest in them will depend on your risk appetite, financial goals and diversification requirements. If you are knowledgeable about mutual funds or if your financial advisor recommends them, you could consider investing in these funds for the sake of diversification. However, you should see if it suits your risk appetite and financial goals. Understand that an over diversified portfolio will lower your returns in the long run. So, add the funds to your portfolio after careful consideration or after discussing it with your financial advisor.

For retail investors who don’t have much knowledge on how these funds, it is best to stick to equity funds that have a good track record and have been known to give good returns.

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