Mutual Funds: Multi-Asset Allocation Funds Gain in Favour

Multi-asset allocation funds (MAAFs) are in the spotlight as asset management companies (AMCs) or fund houses in India shift their focus to these schemes.

The recent amendments to the taxation of debt mutual funds in the Finance Act 2023 have resulted in drawing interest among prominent banking and financial institutions who have been filing for these schemes under the category with the regulatory authority.

Basically, MAAFs belong to the hybrid mutual fund category. Such funds invest about 10% of their assets in at least three asset classes: debt, equity and gold, with a minimum allocation of about 10% to each.

A few funds are also known to invest in silver, units of real estate investment trusts (REITs) and infrastructure investment trusts (InvITs), as well as overseas mutual funds, exchange-traded funds (ETFs), and foreign securities, etc.

As per the amendments to the Finance Act 2023, gains from investments in debt mutual funds having not more than 35% invested in domestic equities will be taxed at the income tax slab rate.

Debt mutual funds were stripped of the benefits of long-term capital gains (LTCGs) and indexation for fresh investments effective from April 1, 2023.

The changes in taxation have worked in favour of specific hybrid funds that invest in a mix of debt and equity, state analysts.

At the moment, 11 MAAFs are available in the market. Besides, another new fund offer (NFO) is on the anvil.

However, as an investor it is essential to enact due diligence while investing in MAAFs from a tax benefit point of view, especially considering investing in such funds are known to have a high-degree of risk.

High volatility could be experienced in the short-term while investing in MAAFs considering they are known to allocate to risky asset classes such as equity and commodities, especially schemes with at least 65% to stocks.