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
Registered readers can post their queries by accessing the Ask Morningstar tab. Our team will answer SELECT queries relating to mutual funds, portfolio planning and personal finance. While we provide broad guidelines, we suggest you consult a financial adviser before making investment decisions.
