Meet multi asset allocation funds with equity and (new) debt taxation

Multi asset allocation funds have become the talk of the town among fund houses and distributors. The category has gained interest after there has been interpretation among a section of experts that investors investing in multi asset allocation funds will continue to get indexation benefits, which was given to debt funds before April 1, 2023. 

In this context, team Cafemutual did an analysis on investment portfolio of multi asset allocation fund to understand how many schemes offer equity taxation and (new) debt taxation. 

Our analysis shows that of the total 13 such schemes, five multi asset allocation funds have over 65% exposure to equities and related instruments and hence, they will be considered as equity funds for taxation purposes. 

The other eight schemes have equity exposure between 35% and 65%. Many experts believe that multi assets funds funds having equity exposure ranging from 35% to 65% will still be eligible for indexation benefits if the holding period exceeds 36 months.

Let us look at the table to know more:

In fact, a communication sent to distributors by a fund house reads, “Multi asset allocation fund will have 35-40% allocation to equity. That’s crucial. With at least 35% in equity, it won’t be classified as non-equity fund. And with less than 65% in equity, it won’t be classified as on equity fund too. Ergo: no-man’s land, so LTCG on slab will be taxed 20% after indexation.”

It further said, “Multi asset funds have been around for some time but the fund house has given a twist to the tale: it’s now offering a debt fund with continued tax concessions. It is safe to assume that other fund houses will likely take a lesson or two from this and come up with similar offerings. It is also safe to assume that the finance ministry will be watching the cat-and-mouse game at play. Will it resort to another shock-and-awe amendment to plug the loophole and end the tax arbitrage again?”