With renewed interest in foreign stocks and changes in taxation introduced in the 2024 budget, multi-asset funds can be an attractive proposition.
The Securities and Exchange Board of India (Sebi) classification rules require multi-asset funds to allot a minimum of 10% in equity, debt, and gold each while leaving it up to the fund manager to decide the maximum exposure.
Some but not all multi-asset funds also invest in international stocks.
Fund-of-funds (FoFs), which have baskets of domestic, overseas, and commodity exchange-traded funds (ETFs), also function a lot like multi-asset funds. An FoF can add an additional layer of expense capped at a maximum of 2x the expense ratio. That makes even an FoF investing in low-cost ETFs attractive.
The idea behind multi-asset FoFs or funds is that a fund manager can deliver alpha by allocating money across assets and rebalancing your portfolio. Instead of buying separate funds and switching between them or buying different funds through one’s distributor/advisor, one can invest in just a few diversified funds, such as multi-asset funds, and cut the need for self-review or rebalancing.
When equities get overvalued, a good multi-asset manager will switch to debt or gold. The argument is similar for international equities. While there are dedicated overseas feeder funds and ETFs, you can take the same exposure via a multi-asset fund that allocates to the US market or other markets.
The advantage of this approach is tax efficiency. Rebalancing within a fund does not attract tax, unlike selling one mutual fund to buy another, which can invite capital gains tax—20% for short-term capital gains (STCG) and 12.5% for long-term capital gains (LTCG).
The July 2024 budget also clarified the taxation of multi-asset funds and FoFs with less than 65% allocation to domestic equities. Previously classified as debt funds and taxed at the slab rate regardless of the holding period, gains from these funds are now taxed at 12.5% after a two-year holding period. This change frees fund managers from the earlier ‘forced allocation’ of 65% gross exposure to Indian equities.
Is this the right approach?
As the Reserve Bank of India refused to increase the overseas limit for mutual funds in February 2022, multi-asset funds are one of the few avenues open for domestic investors to bet on foreign stocks. Dedicated overseas funds are mostly shut, or they open for brief periods when there are redemptions (there’s some limit to utilize) and close.
A multi-asset fund is not generally closed due to the overseas allocation stoppage, but if the scheme sees a lot of inflows, there is dilution—the allocation comes down as a percentage of assets. This is one risk.
These funds are also more tax efficient, as there is no tax on rebalancing within the fund. This makes it possible to truly hold such funds for the long term with lower volatility than pure equity. They are more fill-it, file-it, and shut-it than your average domestic-only equity funds. If Indian equities underperform assets like global equities, debt, and gold, this category will prove to be an excellent bet.
While multi-asset funds provide a workaround to access international markets despite regulatory constraints, they come with inherent limitations regarding overseas allocation percentages and dilution risk, cautioned Abhishek Kumar, a registered investment advisor, founder and chief investment advisor at SahajMoney. “So, it might work for a while, but sooner or later, these funds, too, would hit the ceiling,” he said.
For investors willing to explore alternatives, Kumar suggested the liberalized remittance scheme (LRS), which allows direct investment in global stocks. However, he pointed out that direct stock investment through LRS carries its own risks, especially when done without proper research. “Small retail Indian investors looking to diversify their portfolio across geographies are caught between a rock and a hard place,” he added.
On the contrary, Amit Sahita, director of Fincode Advisory Services Pvt. Ltd, highlighted the operational advantages of multi-asset funds over LRS. He noted that LRS investments above ₹7 lakh in a year attract a 20% tax deducted at source (TDS) and require cumbersome processes, whereas multi-asset funds allow for easy investment and redemption.
He also pointed out that global PMS requires a minimum investment of $75,000 (~ ₹65 lakh), making it a less viable option for most retail investors. “By investing in multi-asset funds, investors can easily invest and redeem at their convenience,” he said.
Major multi-asset funds in India
One of the oldest multi-asset funds in the country is the ICICI Prudential Multi Asset Fund. Launched in 2002, it has given a substantial 21% return since inception. However, much of this history is irrelevant, as it was originally a multi-cap fund before being reclassified under Sebi’s 2017-18 classification rules. Notably, it has no exposure to overseas stocks or ETFs.
The ICICI Prudential Passive Multi-Asset FoF, which has a 30% exposure to overseas ETFs tracking China, Japan, S&P 500 Dividend Index, Latin America, and gold miners, also allocates 35% to Indian equities, 30% to debt, and 2% to gold ETFs.
The DSP Multi Asset Allocation Fund has a 17% overseas allocation. It invests directly in stocks such as Alibaba, Tencent, Microsoft, and Brookfield. Its portfolio includes 40% domestic equity, 28% debt, and 15% gold/silver ETFs.
Finally, the Nippon India Multi Asset Fund has a 12% overseas exposure via the iShares MSCI World ETF, but the majority of its portfolio is in domestic assets—54% in equity, 18% in debt, and 16% in gold and silver.
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