Last Updated on May 16, 2024 at 6:44 pm
A reader says, “I am confused about the tax status of multi-asset funds. Some say they are taxed as per slab, some say like a debt fund, and some say an equity fund! Who is right? Can you please clarify?
The short answer is that each fund in this category is taxed differently. As the reader mentioned, there are three different ways in which mutual funds are taxed. This is determined by the annual average of the Indian equity or Indian ETFs (that, in turn, invest in Indian equity) holdings in a fund’s portfolio.
The annual average is understood to be either the average of the daily holdings or the annual average of monthly factsheet data with ‘annual’ meaning over the last 12 months from the date of redemption. More about this here: Should I pay tax as per slab if my fund’s equity holdings drop to 35% for one month?
If the annual average of equity holding is:
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- 65% or more, the fund is classified as an equity fund. So, Short-term capital gains (STCG, 365 days or less) are taxed at 15% plus cess. Long term capital gains (LTCG, older than 365 days) beyond Rs. 1 lakh are taxed at 10% plus cess.
- More than 35% but less than 65%, the fund is a non-equity fund (type 1). STCG (up to 3 years) is taxed as per slab. LTCG (beyond 3 years) is taxed at 20% plus cess with indexation benefit.
- 35% or less, the fund is a non-equity fund (type 2). All capital gains, regardless of age, are taxed as per slab.
Now, coming to multi-asset funds. Their only restriction is to hold 10% of three asset classes (equity, bonds, commodities). So, they can be taxed in any of three ways.
For example, these are the equity holdings for March 2024 taken from the freefincal debt and hybrid fund screener.
| Fund | Domestic Equities |
| Baroda BNP Paribas Multi Asset Fund(G)-Direct Plan | 70.0093 |
| Axis Multi Asset Allocation Fund(G)-Direct Plan | 69.9033 |
| Kotak Multi Asset Allocation Fund(G)-Direct Plan | 66.8014 |
| UTI Multi Asset Allocation Fund(G)-Direct Plan | 66.2066 |
| ICICI Pru Multi-Asset Fund(G)-Direct Plan | 66.1805 |
| Mirae Asset Multi Asset Allocation Fund(G)-Direct Plan | 66.0424 |
| Quant Multi Asset Fund(G)-Direct Plan | 65.8426 |
| Tata Multi Asset Opp Fund(G)-Direct Plan | 65.6542 |
| HDFC Multi-Asset Fund(G)-Direct Plan | 65.5119 |
| Bandhan Multi Asset Allocation Fund(G)-Direct Plan | 64.8998 |
| Aditya Birla SL Multi Asset Allocation Fund(G)-Direct Plan | 64.3030 |
| Sundaram Multi Asset Allocation Fund(G)-Direct Plan | 64.0407 |
| Shriram Multi Asset Allocation Fund(G)-Direct Plan | 63.8884 |
| HSBC Multi Asset Allocation Fund(G)-Direct Plan | 61.5766 |
| Nippon India Multi Asset Fund(G)-Direct Plan | 50.3507 |
| Motilal Oswal Multi Asset Fund(G)-Direct Plan | 41.7835 |
| Quantum Multi Asset Allocation Fund(G)-Direct Plan | 40.0870 |
| DSP Multi Asset Allocation Fund(G)-Direct Plan | 39.5126 |
| Edelweiss Multi Asset Allocation Fund(G)-Direct Plan | 38.9063 |
| SBI Multi Asset Allocation Fund(G)-Direct Plan | 36.6564 |
| Bank of India Multi Asset Allocation Fund(G)-Direct Plan | 35.4197 |
| WOC Multi Asset Allocation Fund(G)-Direct Plan | 34.5547 |
| Mahindra Manulife Multi Asset Allocation Fund(G)-Direct Plan | 24.0428 |
As we can see, some funds hold 65% or higher domestic equity. Some funds hold 35% or lower equity and some between the two limits. Investors will know the tax applicable to their holdings only if they compute the last 12 months’ average from the month of redemption.
Some AMCs, especially those that changed an equity fund to multi-asset to comply with SEBI MF categorization rules, ensure that the equity component never falls below 65%. The most prominent example is ICICI Dynamic Fund, which later became ICICI Multi Asset Fund.
What should investors do? We recommend investors use equity-oriented multi-asset funds. These are a good alternative to aggressive-hybrid funds with a small exposure to commodities (gold is usually the prominent holding). Please note that these funds would be just as volatile as equity funds.
Related Resources:
- How to choose a multi-asset mutual fund
- Aggressive Hybrid Funds vs Multi-Asset Funds: Which are better?
- Multi-asset mutual funds: performance analysis
- Will ICICI Multi-Asset Fund become more volatile with Commodity Derivatives?
- ICICI Prudential Multi-Asset Fund Review: Suitable for new investors?
- Will ICICI Multi-Asset Fund become more volatile with Commodity Derivatives?
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