Recently, the Dalal streets have been abuzz with the surge of multi-asset allocation of mutual funds. These funds have emerged as a beacon for investors looking to diversify their portfolios across different asset classes. With at least three asset classes in their investment mandate and a minimum allocation of 10% to each, these funds offer a blend of equity, debt, gold, and sometimes even more exotic investments like silver, REITs, InvITs, and overseas equities.
A significant shift in the taxation policy, as amended in the Finance Act, of 2023, has played a pivotal role in spotlighting hybrid funds, particularly multi-asset allocation funds.
The capital gains from mutual fund investments, especially those with less than 35% in domestic equities, are now taxed according to the investor's tax slab, removing the long-favoured long-term capital gains (LTCG) and indexation benefits for debt mutual funds initiated post-April 1, 2023. This change has nudged investors towards hybrid funds, seeking tax efficiency alongside investment diversity.
Multi-asset allocation funds have been pitched as a less volatile option compared to their aggressive hybrid equity counterparts, offering indexation benefits if the equity allocation lies between 35 to 65%. This proposition, coupled with the recent tax changes, makes these funds an attractive choice for those seeking diversified, tax-efficient investment avenues.
Last year we witnessed the launch of nine multi-asset allocation funds by different fund houses. This influx can be seen as a testament to the growing investor interest and the fund houses' efforts to fill portfolio gaps or cater to high demand.
It's essential to recognize that these funds come in various flavours, each with its unique blend of investments. Some might lean heavily towards international markets or include commodities, adding a layer of diversity to your portfolio. This variety means that as an investor, a thorough examination of each fund's composition is necessary.
Introducing new funds that may seem attractive at first glance. However, diving into these waters requires a clear understanding of what each fund entails and the risks associated with them. This is especially crucial for those just starting their investment, where the allure of novelty should be balanced with caution and due diligence.
For individual investors, particularly those exploring investments without the guidance of a financial advisor, the wisdom lies in moderation. Committing to a single multi-asset fund and keeping it to a reasonable proportion of your overall portfolio—ideally between 15 and 20%—can offer a balanced approach to risk and reward. Conversely, those who have the benefit of personalized financial advice might find their paths better illuminated by strategies that are tailored to their specific risk appetites and financial goals.
Multi-asset allocation funds stand out as a versatile investment option, suitable for those embarking on their investment journey and seasoned investors seeking diversification. However, it's essential to approach these funds with caution, understanding their inherent risks and ensuring they align with your investment objectives and risk tolerance. While these funds offer a mix of growth, income, and diversification, they should not be chosen solely for potential tax benefits.
Thorough research, perhaps guided by professional advice, is key to making informed investment decisions in this innovative fund category. Remember, in the world of investing, there's no one-size-fits-all answer, but understanding your options is the first step towards financial success.
The author, Chakrivardhan Kuppala is Co-founder and Executive Director at Prime Wealth Finserv
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