How Multi Asset Allocation Funds are Taxed: Multi Asset Allocation Fund or Multi Asset Fund is an investment option that invests in multiple asset classes like equity, fixed income and gold. This not only provides diversification to investors but also reduces the risk. But do you know how multi asset funds are taxed? This question arises because different income tax rules apply to all the different asset classes in which the multi asset fund invests. We will discuss this question later, but first let us understand what is the true meaning and features of Multi Asset Allocation Fund.
What is a Multi Asset Fund?
Multi asset funds invest in at least three or more asset classes. These asset classes include equity, i.e. investment in the stock market, fixed income assets like bonds and government securities, and precious metals like gold which come under the commodity category. Apart from these, some funds also invest in financial derivatives, international stocks, real estate investment trusts (REITs) and infrastructure investment trusts (InvITs). As per SEBI rules, it is mandatory for any multi asset allocation fund to invest at least 10-10% in any of these 3 asset classes.
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Benefits of Multi Asset Funds
Diversification : By investing in these funds, your money gets divided into different asset classes, which reduces the risk.
Rebalancing of Portfolio:In multi asset funds, the portfolio is balanced according to the market fluctuations. This eliminates the need for investors to change their portfolio frequently.
Ready-made Portfolio: This is beneficial for investors who are unable to manage their portfolio themselves and want to invest in different asset classes through a single fund.
Better Stability: Due to diversification and balance in the portfolio of multi asset funds, fluctuations in one asset class can be balanced by the returns of other asset classes.
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Drawbacks of Multi Asset Funds
Complexity in Taxation:It may be a little difficult to estimate the tax applicable on income from multi asset funds in advance, especially if the ratio of asset classes in the portfolio keeps changing.
Management fees:The management fees of these funds may be slightly higher than other funds as they invest in different asset classes and keep rebalancing the portfolio.
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How are Multi Asset Funds taxed?
Taxation on multi asset funds depends on their asset allocation. If 65% or more of the fund is invested in equities, it is taxed like an equity fund.
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If investors hold such funds kept in the category of equity funds for more than a year, then there is no tax on profits up to Rs 1.25 lakh made during a financial year. If the profit is more than this, then Long-Term Capital Gains (LTCG) tax has to be paid at the rate of 12.5%.
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If investors hold such funds kept in the equity fund category for less than a year, then Short-Term Capital Gains (STCG) tax will have to be paid at the rate of 20% on the profits earned on it.
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If the proportion of equity in a multi asset fund is less than 65%, then it is taxed like a debt fund. That is, tax has to be paid according to the slab rate.
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For whom are multi asset funds right
Multi asset funds are ideal for investors who want to invest in different asset classes through a single fund and keep their portfolio balanced. However, it is important to keep in mind the tax liability and fees before deciding to invest. Like other mutual funds, investing in multi asset funds also involves market risk, so any decision should be made keeping in mind one’s risk profile i.e. the ability to bear risk.
