Multi-asset funds are for passive investors

Be ready to pay higher taxes as these are treated as debt funds, returns may be capped

With gold prices rising and debt holding steady, fund houses have launched multi-asset funds for passive customers who are not so nimble while churning their portfolios. These schemes invest in gold, debt and equities with the logic that debt will provide balance to the portfolio and gold or equity or both in tandem will give higher returns.

In January, Morgan Stanley launched its multi-asset fund even as others such as Axis, Canara Robeco and ING have similar schemes. Recently, Quantum Mutual Fund launched a similar product.

The biggest advantage of such a fund, says Arvind Bansal, vice-president and head, multi manager investment, ING Investment Management, is that one need not rebalance portfolios as the market moves. “These are best suited for passive investors who are not able to manage various asset classes in their portfolios regularly. Rebalanc-ing of portfolios is time consuming and expensive. With such a scheme you need not pay rebalancing costs at an individual level.”

At the time of the launch of Morgan Stanley’s multi-asset scheme, Jayesh Gandhi, lead portfolio manager, mid/multi cap equity at the fund said since the asset classes have low/negative correlation, it reduces downside risks significantly without sacrificing returns. “The fund would try to deliver consistent returns over the long term, with much lower levels of volatility or risk,” he said.

In the last six months, these funds have given returns of between five and nine per cent. The Sensex during this period has gone up 12 per cent, gold funds have returned investors 9.49 per cent and debt funds between three and five per cent.

So say, if you had created a portfolio six months before and invested 50 per cent in equities, 30 per cent in debt and 20 per cent in gold, the portfolio would have earned 4.5 per cent. From this perspective, these funds have been at par or even better than self-created portfolios.

But while the returns have been comparable, wealth managers are not keen on them. “They do not really add any value to the portfolio. This is because most of their investments go into debt, making it a more debt-oriented fund. We rather suggest investors to invest in MIPs and gold separately,” says Swapnil Pawar, chief investment officer, Karvy Private Wealth.

However, the biggest problem is on the taxation front. These schemes are taxed as debt funds, which means, long-term capital gains are taxed at 10 per cent without indexation or 20 per cent after indexation, leading to high taxation. In the short-term, the gains are added to income and taxed as applicable.

On the other hand, there is no tax on equity schemes after one year, whereas gold schemes and debt are taxed like debt schemes. So, the tax incidence is lower.

Many others, such as, Amar Ranu, senior manager (third party products), Motilal Oswal Private Wealth, argue that because of hedges like debt in the portfolio, and many times, lower exposure to gold and equities, returns may also get capped.