A note on multi-asset funds

The number of asset management companies (AMC) have increased over the years. This makes it difficult for product differentiation in the equity space, as funds typically invest within the universe of 500 stocks comprising large-caps, mid-caps and small-caps. It is, therefore, not surprising to see AMCs creating different products to woo investors. A differentiating product in recent times has been multi-asset funds. Here, we discuss the characteristics of such funds and if they fit into your core portfolio.

Asset allocation

Asset allocation is the most important step in the investment process. It refers to the portion of savings you invest in asset classes to achieve life goals. Asset allocation can vary for each goal, even if all the goals have the same time horizon. Why? Asset allocation is a function of risk attitude- more important a goal is, less risk you want to take; that means more bonds and less equity allocation. For instance, the asset allocation for your child’s education portfolio may be more conservative compared with that of your retirement portfolio.

A multi-asset class fund could take exposure to three asset classes — equity, bonds and commodities (typically gold and silver). You must be mindful of having commodities in the core portfolio, as prices are volatile driven by global demand and supply and geopolitical issues.

That apart, such a fund decides the optimal allocation to each asset class based on investment mandate. In other words, the fund’s asset allocation cannot be tailored to your goals or risk attitude.

Conclusion

You must make tax-efficient investments. Are multi-asset funds tax efficient? A multi-asset fund that invests more than 65% in equity is considered an equity fund.

The point is that if you sell your fund units after holding them for more than 12 months, you must pay 12.5% long-term capital gains tax above ₹1.25 lakh in any year you realise the gains. But funds holding less than 65% in equity are considered as non-equity-oriented funds.

Capital gains arising from such funds will be added to your total income and taxed at your marginal tax regardless of the holding period. This has major implications on the post-tax returns on your investments, as the equity portion of the fund will also be taxed at your marginal tax rate (typically 30%). You must be mindful of these factors when you choose multi-asset funds.

(The author offers training programmes for individuals to manage their personal investments)