Don’t Rush to New Multi-Asset Allocation Funds to avoid Increased Debt Fund Taxation

A few months back, I had written that the removal indexation benefit in debt fund meant that investors would start looking for alternatives. And it was only a matter of time before AMCs found a way around this new development and came up with new offering.

As expected, more and more AMCs are now lining up to launch multi-asset allocation funds structured in a manner that they can get indexation benefit.

One of the AMCs has gone ahead and launched a new offering in the Multi-Asset Allocation category. The new fund, as per the AMC, will be categorized as a multi asset allocation fund, but it will still be a predominantly fixed-income oriented fund with hedged exposure to equities as well as a smaller hedged allocation to gold and silver.

As per SEBI Fund Categorization rules of 2018, the Multi Asset Allocation Funds come under the hybrid mutual fund category. These have to invest at least 10% of their assets in at least 3 asset classes, with a minimum allocation of at least 10% in each asset.

So as per the detailed provided by the AMC, the objective of the fund is to have a fixed-income oriented allocation, under the umbrella of multi-asset fund, and offer indexation benefits for gains on units held for more than 3 years.

This tax benefit, will naturally attract those investors who were looking for alternatives to debt fund after the recent taxation rule change. So on of the reasons for AMCs interest in this fund/category is to attract fresh inflows from such investors.

Let’s talk about the fund structure a bit –

  • The fund plans to have 35-40% in equity arbitrage position to qualify for and take advantage of debt fund indexation type benefits. This is fine and understandable.
  • The 10-15% in gold-silver arbitrage positions is something interesting. While the actual reason for having this exposure may best be known to the fund managers, I think that the gold-silver commodity arbitrage is kept to get occasional boost in returns. Arbitrage in commodities has a very different return-volatility play than say equity arbitrage. So while this is interesting, the downside is that it brings in additional risk as well as volatility, something which is not necessarily required if the fund is being positioned as an alternative to debt funds for better taxation.
  • The 45-55% in fixed income exposure via G-Secs, SDL, and AAA-rated corporate bonds is fine and required anyways given the presented nature of the fund. This may actually go up as well in future depending on market conditions.
  • And another 0-10% in REIT and InvIT units.

While it is too early to write off the new unique offering (which has emerged due to taxation changes), I think structurally also, there is nothing really too unique that may offer unexpectedly high returns. To be fair, it is too early and without any past real track record, it is difficult to see why one should invest heavily (if any) in new Multi Asset Allocation Fund offerings. While it is unique (and kudos to the AMC for that), it is still better to wait and watch before you decide to move your debt fund money completely into the debt-oriented schemes of multi-asset allocation fund categories.

Please don’t get me wrong here.

No doubt these debt-oriented Multi asset allocation will be much less volatile than the Aggressive hybrid funds or Balanced Advantage funds, which many investors are wrongly considering to invest in place of debt funds for better taxation. Why? Read this detailed aritcle I wrote a few months back – Don’t switch to Aggressive Hybrid Funds due to change in debt fund taxation.

But it is still early days and you should not consider multi asset allocation funds as exactly similar to debt mutual funds. It is not even though it may be made to seem like that on the return and taxation front. Given the complex structure, these debt-oriented multi asset allocation funds with hedged positions will definitely have their own set of risks which may not seem too obvious at first. At a very basic level, these new offerrings offer debt-type returns post-taxes but with higher level risk than pure debt funds with good quality papers in the portfolio.

And please don’t get confused. Multi-Asset Fund vs Multicap Fund are two entirely different fund categories. They may sound similar but they are different species of animals!

Most AMC will always try to gather assets with their unique offerings and New Fund Offers. But unless really unique or offering something really useful (and which is not available in market already), it is best to avoid mutual fund NFOs. Best to give new funds some time to prove themselves.

Disclaimer – The views expressed above should not be considered professional investment advice or advertisement or otherwise. The article is for general educational purposes only. The readers are requested to take into consideration all the risk factors including their financial condition, suitability to risk-return profile and the likes and take professional investment advice before taking any financial decisions or actions which may have financial implications now or in future.

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