Investors might face high taxation, volatility in multi-asset play

Positioned as a one-stop solution for investors, funds may not live up to the tag as higher taxation can affect returns

Multi-asset funds, which are being positioned as one-stop solution to mutual fund (MF) investors amid the current market conditions, might not live up to the tag as higher taxation and near-term equity market volatility could take a toll on returns. 

Over the past three years, multi-asset funds have delivered returns of 4.3 per cent, under-performing the equity large-cap funds that gave returns of 4.6 per cent.

Debt categories such as ultra-short duration, short duration and low duration have, in fact, given higher returns than this category in the three-year period.

“Investors need to be wary of the funds they buy into, as there is no one size fits all. Different multi-asset funds have their own nuances, while investors would have their own set of goals and objectives,” said Kaustubh Belapurkar, director-MF research, Morningstar India.“Such funds may not be considered as key part of a portfolio. An investor may choose such funds if he wishes to keep part of his portfolio on an auto-pilot mode that has re-balancing built into it,” Belapurkar added.

Advisors say multi-asset funds have not yet been able to build a strong performance track-record in Indian markets.

“Credit risks can also crop up in such funds. Some portfolios in this category hold exposure to lower-rated debt papers,” said Rushabh Desai, a Mumbai-based MF distributor.

 

 

The recent rise in inter-scheme transfers in the MF industry had led to concerns that debt funds were off-loading lower-rated credit papers to hybrid schemes of the same fund house.

“Multi-asset funds can also be vulnerable to heightened volatility in the shorter-term as such schemes tend to have higher allocation to equity. Low-volatile products, such as shorter-duration debt schemes can easily meet an individual’s near-term investment objectives,” Desai added.

Experts say investors should distribute their surplus across funds for their asset allocation needs, as this helps to use different products for a range of goals. “Also for better risk-mitigation, it is advisable to keep asset allocation separate and not merge all within one fund,” Desai said. Recently, Nippon India MF floated its multi-asset fund, which is open to subscription till August 21. Motilal Oswal MF also had floated its multi-asset fund, which was opened for subscription last month.

Industry sources say more fund houses are planning to launch such products to tap the increasing appetite for gold and international equities in recent months.

The MF industry currently has eight such schemes with combined assets under management (AUM) of Rs 11,346 crore as of July-end.

A bunch of these schemes attract higher tax rates as allocation to domestic equities is below 65 per cent, and, therefore, these get treated as non-equity for taxation.

For those in the highest tax bracket, taxes on gains can be more than 30 per cent if investments are withdrawn before three years, while for the equity schemes, the capital gains tax is 10 per cent if redemption comes after one year of holding.