Mutual fund is a financial instrument which pools the money of different people and invests them in different financial securities like stocks, bonds etc. Investing in mutual funds is a popular way to grow your wealth. They offer diversification, professional management, and access to various asset classes, making them suitable for investors with different risk profiles and investment goals. They provide liquidity, convenience, and the potential for higher returns compared to individual stock picking.
Mutual funds are like a big piggy bank where lots of people put their money together. A professional person called a fund manager takes care of the money and buys things like stocks and bonds. When the money grows, everyone gets a share of the extra money.
In this article we are going to understand the concept of multi asset funds and why it is important to invest in it.
Multi Asset Allocation Funds are balanced funds or asset allocation funds that must invest at least 10% of their assets in any three asset classes either equity, debt, gold & alternatives. These funds often include a mix of equity, debt, and one or more asset classes such as gold, real estate, and so on. The goal of these funds is to create a diversified portfolio that can potentially provide investors with a balanced blend of risk and return.
Taxation
When it comes to the taxability, multi-asset allocation funds can be classified as either equity oriented mutual funds or non-equity oriented mutual funds.
An equity oriented fund is a fund which invests more than 65% allocation of fund money in domestic equities. Multi asset allocation funds do not have a strict allocation among the asset classes. They can have dynamic allocation depending upon the market conditions. Hence, if a multi-asset allocation fund has maintained more than 65% allocation to equities, then it would be an equity oriented fund, else a non-equity oriented fund.
Equity oriented mutual funds - If you hold equity-oriented mutual funds for more than one year before selling them, the gains are classified as long-term capital gains. Currently, long-term capital gains are taxed at a flat rate of 10% without the benefit of indexation. However, there is an exemption on long-term capital gains of up to ₹1 lacs in a financial year whereas if you sell your holding within 1 year, the short term capital gains will be levied at the rate of 15%.
Non-equity oriented mutual funds - If you sell your non-equity oriented mutual fund units after three years of purchase, the gains are considered long-term capital gains. As per the current tax regulations, LTCG is taxed at a flat rate of 20% with the benefit of indexation. Indexation allows adjusting the purchase price for inflation, which reduces the taxable gain. However, if you sell your units within 3 years, short term capital gain is levied as per your taxable income and taxed according to your applicable income tax slab rate.
Advantages
Multi-asset funds, also known as diversified funds or balanced funds, offer several advantages for investors. Here are some key advantages of multi-asset funds:
Diversification - One of the primary advantages of multi-asset funds is diversification. These funds invest in a variety of asset classes, such as stocks, bonds, commodities, and real estate. By spreading investments across multiple asset classes, the fund can reduce the risk associated with investing in a single asset class. Diversification helps to smooth out volatility and potentially improve risk-adjusted returns.
Risk management - Multi-asset funds aim to manage risk by allocating investments across different asset classes based on market conditions and the fund manager's strategy. The fund manager can adjust the portfolio's asset allocation to reduce exposure to volatile assets or take advantage of opportunities in certain sectors or markets. This active management can help mitigate downside risks and provide better risk-adjusted returns.
Tailored investment solutions - Some multi-asset funds offer different risk profiles or investment strategies, allowing investors to choose a fund that aligns with their risk tolerance and financial goals. Whether an investor seeks conservative income, balanced growth, or aggressive capital appreciation, there are multi-asset funds available to suit various investment preferences.
Flexibility - Multi-asset funds can adjust their asset allocation based on market conditions. This flexibility allows the fund manager to adapt the portfolio to changing economic environments, interest rate fluctuations, or shifts in market sentiment. The ability to make timely adjustments can help protect the portfolio during market downturns or take advantage of emerging investment opportunities.
Unrestricted entry and exit - Multi-asset funds are open-ended mutual funds, and an investor can enter freely at any given period of time. Exiting the scheme is also easy and free if the investor redeems at least 10% of their investment within 1 year of entering. If the remainder of the investment is not redeemed in a year, an exit load is charged at the rate of 1%. However, no exit load is levied on it, if it is traded after a year.
However if an investor is looking for higher returns, then it would be prudent to invest in a diversified equity scheme as the allocation towards equities would be higher than any multi asset fund.
Selection of a multi asset scheme would depend on the investment mandate of each individual scheme & one must consult a financial advisor to understand the risk profiling before investing.
Rohit Gyanchandani is Managing Director at Nandi Nivesh Private Limited
