Can I invest in Edelweiss Multi Asset Allocation Fund for higher tax benefit?

Published: June 7, 2023 at 6:00 am

A reader wishes to know if he can invest in the newly launched Edelweiss Multi Asset Allocation Fund as its taxation is lower than debt funds—a discussion.

Edelweiss Multi Asset Allocation Fund is an open-ended scheme investing in Equity, Debt, Commodities and units of REITs & InvITs.  The typical asset allocation strategy is:

  • 35-40% Equity Arbitrage.  Equity Cash Future Arbitrage. No open equity exposure. This will ensure that the LTCG tax rate of 20% with indexation will apply to units over three years old. This allocation can range from 10-80%
  • 10-15% Gold & Silver Arbitrage . 100% hedged Gold & Silver using an arbitrage strategy. No open exposure to any other commodity, This allocation can range from 10-30%
  • 45-55% Fixed Income. 1-3 years Mac duration G-Sec, SDL and AAA-rated corporate bonds. This allocation can range from 10-80%

Commodity arbitrage seems to have been introduced as a return booster as they can typically offer better returns (esp. silver arbitrage) than equity arbitrage and money market instruments. But the downside is that it brings with it additional risk factors and volatility.

Will the AMC increase the commodity arbitrage to twice the indicated value (30% max) if returns from equity arbitrage and bonds are low? This will also increase the risks. This makes me uncomfortable.

Red Flag: My biggest problem with the offering is its choice of benchmark: Nifty 500 TRI (40%) + Nifty 5 yr Benchmark G-Sec Index (50%) + Domestic Gold Prices (5%) + Domestic Silver Prices (5%).

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The scheme document says, “Rationale for adoption of benchmark: The benchmark has been structured to enable a fair comparison of the performance of various asset classes in which the scheme plans to invest over a period of time”.

If the scheme is guaranteed to hold no open equity (unhedged), then it must be benchmarked with an arbitrage index and not 40% of Nifty 500 TRI. What are they trying to do here? This alone is enough for me to stay away from this scheme.

Commodity arbitrage is another reason. It is unnecessary, IMO and could be a double-edged sword because of volatility. I could not find any data source to appreciate risk vs reward in commodity arbitrage (likely due to my limitations), and therefore, I view it as an unknown area.

Will I buy this fund or any product to save tax? Never. Will I buy anything with fancy investment ideas? Never.

The AMC says Edelweiss Multi Asset Allocation Fund is  “positioned between Equity Arbitrage Fund and Equity Savings Fund on risk-return matrix.”. The pre-tax rewards do not look terribly exciting, even if we take this at face value (you should not if you wish to commit money).

This is because the fund should be held for at least six years* or more. And for such durations, I would either choose known devils like a simple money market fund or an equity arbitrage fund for intermediate-term (5-10Y) goals or gilt funds or corporate bond funds for long term goals.

* Why six years? In my experience, if an AMC says, “Hold for three years or more” (which they have in this case), the safe tenure is twice the minimum recommended duration to keep bond interest rate risk at bay.

In summary, we are not terribly enthusiastic about Edelweiss Multi Asset Allocation Fund. I think it is trying to do too many things simultaneously to appear fanciful and tax-friendly. If you have a lot of money to play with, you can buy it as an experiment. For all others, it would be best to avoid or at least wait for a year or two. Decisions made only to save tax are almost always wrong.

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