Ask Morningstar: How are multi-asset funds taxed?

For taxation, multi-asset funds may be treated as ‘equity-oriented’ or ‘other than equity-oriented’ depending on the asset allocation.
By Mohasin Athanikar |  15-06-22 | 
 

Do not put all eggs in one basket! Yes, we have all heard that before. From an investment perspective, it means that one should not invest entirely into a single asset class/security subjecting your portfolio to the risk of being dependent on the performance of that security class/security solely.

Diversification is an important aspect to look at while building your portfolio, as it cushions the portfolio against any adverse movements since different asset classes, (viz. equities, fixed-income, gold, etc.) and even securities within an asset class respond differently to the same set of economic drivers. One should ideally follow an asset allocation-based approach (mix of equity, debt, gold) for investing towards their goal. Exposure to volatile asset classes such as equities should be in line with your risk appetite.

Multi-asset funds provide instant diversification given that their mandate is to invest a minimum of 10% in at least three asset classes (such as equity, debt, gold, REITs).

The fund manager based on his assessment of expected macro and market conditions goes under/overweight an asset class with a view to maximize returns and minimize volatility thereby improving the risk-adjusted performance of the portfolio.

For taxation, multi-asset funds may be treated as ‘equity-oriented’ or ‘other than equity-oriented’ depending on the asset allocation.

  • Mutual funds investing at least 65% in domestic equities are subject to equity taxation. For ‘equity-oriented’ funds, capital gains in case of holding periods up to 1 year are termed as short-term gains and taxed at 15% excluding cess and surcharge. Capital gains in case of holding periods more than 1 year are termed as long-term gains and taxed at 10% on gains in excess of Rs 1 lakh per annum.
  • For ‘other-than equity-oriented’ funds (debt and foreign funds), capital gains in case of holding periods up to 3 years are termed as short-term gains and taxed at the marginal rate of income. Capital gains in case of holding periods more than 3 year are termed as long-term gains and taxed at 20% with indexation.

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Articles authored by MOHASIN ATHANIKAR

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