Multi asset funds are a popular investment option for those who want to spread their money across various asset classes such as stocks, bonds, and gold. These funds are known for their ability to diversify investments and reduce risks. But when it comes to taxation, things can get a little tricky, especially because each asset class has its own set of tax rules.
What Are Multi Asset Funds?
Multi asset funds invest in at least three different types of assets. These can include:
- Equity (stocks) – Investing in the stock market
- Fixed Income (bonds) – Government bonds and securities
- Commodities (gold) – Precious metals like gold
Some multi asset funds may also invest in international stocks, real estate investment trusts (REITs), or infrastructure investment trusts (InvITs). According to SEBI (Securities and Exchange Board of India) guidelines, multi asset funds must allocate at least 10% of the portfolio to each of the three chosen asset classes.
Why Should You Consider Multi Asset Funds?
1. Diversification
Multi asset funds spread your investment across different types of assets, reducing the risk. If one asset class performs poorly, another may balance the loss with better returns.
2. Portfolio Rebalancing
These funds automatically adjust the balance between the different assets based on market conditions. This reduces the need for investors to constantly manage their portfolio.
3. Convenience
Multi asset funds offer a ready-made diversified portfolio, which is helpful for those who lack the time or expertise to manage investments across multiple asset classes.
4. Stability
The balanced nature of these funds means they are often more stable than investing in just one asset class, as the risk is spread out.
Challenges of Multi Asset Funds
1. Complex Taxation
The taxation of multi asset funds can be confusing because it depends on how much of the fund is invested in equities. This is particularly challenging if the asset mix changes frequently.
2. Higher Management Fees
Because these funds require more active management, the fees may be higher than those of single asset class funds.
How Are Multi Asset Funds Taxed?
The tax treatment of multi asset funds depends on their equity exposure. Let’s break this down:
If Equity Allocation is 65% or More
If a multi asset fund invests 65% or more in equities (stocks), it is taxed like an equity fund.
- Long-Term Capital Gains (LTCG): If you hold the investment for more than a year, any profit up to ₹1.25 lakh in a financial year is tax-free. For profits over ₹1.25 lakh, LTCG tax is levied at 12.5%.
- Short-Term Capital Gains (STCG): If you hold the fund for less than a year, the gains are taxed at 20%.
If Equity Allocation is Less Than 65%
If the equity portion is less than 65%, the fund is taxed as a debt fund.
- Taxation: The gains are taxed according to your income tax slab. This means if your income falls into a higher tax bracket, you’ll pay more taxes on the gains.
Who Should Invest in Multi Asset Funds?
Multi asset funds are ideal for investors looking to diversify their portfolio without the hassle of managing multiple individual investments. These funds provide a balanced investment strategy, where the performance of one asset class may offset the fluctuations in another.
However, it’s essential to keep in mind the taxation rules and the management fees before investing. If you have a low tolerance for risk or prefer a more straightforward investment, you might need to explore other options.
Conclusion
Multi asset funds are a great way to achieve diversification in your portfolio. They offer stability, convenience, and the potential for good returns. However, the tax treatment can be complex, especially when the equity portion changes. Before investing, ensure you understand how taxes work and consider your risk appetite and financial goals.
