Multi-asset allocation funds: All you need to know

What are multi-asset allocation funds?
You must have seen that advertisement of ICICI Prudential 'suno sabki karo multi' that talks about investing in multi-asset allocation funds.

Now, you must be wondering what multi-asset allocation funds are?

They are hybrid mutual funds which invest in at least three asset classes with a minimum allocation of at least 10 per cent each in all the asset classes. Such funds generally invest in equities, fixed income and commodities.

As on October 31 2022, multi asset allocation funds, on an average, have invested 58.9 per cent in equities, 16.3 per cent in debt, 11.2 per cent in commodities, 0.6 per cent in real estate and 13 per cent in cash.

When it comes to the taxability, multi-asset allocation funds can be classified as either equity oriented or non-equity oriented funds.

How to know if a multi-asset allocation fund is an equity oriented fund?
An equity oriented fund is a fund which invests more than 65 per cent in domestic equities. Multi asset allocation funds do not have a strict allocation among the asset classes. They can have dynamic allocation depending upon the market conditions. Hence, if a multi-asset allocation fund has maintained more than 65 per cent allocation to equities, then it would be an equity oriented fund, else a non-equity oriented fund.

Taxation of multi-asset allocation funds

Equity oriented multi-asset allocation funds: Taxation is same as any other equity fund. Long-term capital gains up to Rs 1 lakh in a financial year are tax-free. Gains above Rs 1 lakh are taxed at the rate of 10 per cent. Short-term capital gains are taxed at the rate of 15 per cent.

Non-equity-oriented multi-asset allocation funds: Short-term capital gains are added to the income and taxed as per the investor's income slab. Long-term capital gains are taxable at 20 per cent after indexation.

For instance, if the multi-asset allocation fund has been held for over three years, irrespective of whether it is equity oriented or not, the gains will qualify as long-term capital gains and be taxed accordingly as described above.

All in all
Multi-asset allocation funds have historically had an average allocation of 40-50 per cent to equities with less than 25 per cent of the funds having allocation exceeding 65 per cent. ICICI Prudential Multi Asset Fund has been one such fund which has maintained an equity allocation of over 65 per cent for all but one year since the introduction of direct plans in 2013. However, in the current year, the fund has maintained an average equity allocation of only 62 per cent in the first six months. Carrying forward the above example, the redemption in the current year may be taxed at 10 per cent without indexation for gains in excess of Rs 1 lakh, or at 20 per cent with indexation depending upon whether the fund gets classified as equity oriented or not.

The benefit of 80C is available for investing in ELSS funds and not in multi-asset allocation funds. Hence, reinvesting in the same fund will not make you eligible for deduction u/s 80C.

Suggested read: Mutual fund redemption and taxation