MUTUAL FUNDS: Multi-asset funds give a tax advantage



After the changes in the tax structure of debt funds, individuals are now preferring to invest in multi-asset funds for tax-efficient returns and diversification. These funds have outperformed because of the mandate to invest at least 10% in gold as the yellow metal has beaten most traditional asset classes like equity and debt so far this year.

The changes in tax structure, which came into effect from April 1 has eliminated the indexation benefit for funds with less than 35% allocation to domestic equities. As multi-asset funds invest 65% in equity either directly or through hedge and remaining into a combination of debt and gold, investors are shifting their funds to equity-heavy hybrid funds and get the tax advantage. Moreover, these funds come with allocation in different asset classes like equity, debt and gold which helps in creating a well-diversified portfolio and reducing risks at the same time.

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Nirav Karkera, head of research, Fisdom, says revised taxation has opened up opportunities in the multi-asset category. “Although there is a significant difference in the risk associated with debt funds and multi-asset funds, investors are opting for the latter due to their tax efficiency,” he says.

MUTUAL FUNDS: Multi-asset funds give a tax advantage 10

Similarly, Amar Ranu, senior vice-president and head, Investment Products and Insights, Anand Rathi Shares and Stock Brokers, says, “Post debt tax efficiency going away through debt MF route, investors are looking for ways to improve the efficiency of debt allocation through other products such as multi-asset allocation funds.”

Diversified portfolio

Multi-assets have potential to be better than just plain vanilla equity or hybrid funds. Most funds begin with the minimum threshold of an exposure to each asset class and the allocation will change depending on the valuations. In case a fund manager holds a view that equity markets are looking expensive from a valuation perspective, he can reduce the allocation to equity and invest more in debt or gold based. On the other hand, when markets look cheap, he can reduce allocation to debt and gold and invest more in equity. This strategy helps in getting higher risk-adjusted returns.

For instance, last year while equities delivered low single-digit to negative returns, gold delivered double-digit returns. In contrast, multi-asset funds which invest across different asset classes such as domestic equity, international equity, fixed income and gold have delivered balanced returns with lower risk profiles.

Nitin Rao, head, Products and Proposition, Epsilon Money Mart, says the basic tenet of multi-asset allocation funds lies in ‘not putting all the eggs in one basket’. “As different assets perform well in different economic situations, diversification helps in hedging the overall portfolio,” he says.

Active or passive

The decision to select actively managed or passively managed multi-asset funds lies on the individual’s preferences and investment objectives. Susmit Misra, chief business officer, Equentis Private Wealth, says a mix of both strategies in a fund would be ideal. “The commodity and international equity allocations could be passively managed, and the portfolio’s domestic equity and debt portion could be actively managed. In any case, the entire portfolio should be managed dynamically to capitalise on the opportunities arising from the underlying asset classes,” he says.

Similarly, Ranu of Anand Rathi Shares and Stock Brokers says even if one is investing in multi-asset funds, actively managed funds make more sense as the fund manager brings in the forward-looking approach to decide the allocation between all asset classes. “And the history says that actively managed funds which are a combination of fundamental and technical factors including macro have worked well.”

What to keep in mind

As multi-asset allocation funds can vary in their investment strategies, aligning your investment objectives with the fund’s objectives is crucial. Evaluate if the fund’s allocation strategy is suitable for your risk profile as different assets will take time to go through a complete cycle.

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Santosh Joseph, founder, Refolio Investments, says when asset prices get volatile the model might not be able to efficiently capture. “Investors must look at the assets, weightage to each asset and methods for changing the weightage depending on the market needs,” he says.

The benefit of multi-asset funds lies in their ability to diversify across different asset classes, which can help reduce overall portfolio risk. “Evaluate the fund’s diversification across sectors and types of securities to ensure it aligns with your risk management objectives,” says Karkera and adds that investors must evaluate how the fund mitigates risk, — through diversification, hedging strategies, or active management.


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