Funds with multiple asset allocations score an edge over funds with a balance sheet advantage
Multi-asset allocation funds (MAFs), a relatively unknown category of hybrid investment funds until early 2023, have overtaken the more popular hybrid investment option balanced advantage funds (BAFs) in terms of net inflows over the past 14 out of 15 months.
Schemes under the MAF mutual fund (MF) category have attracted a net inflow of Rs 42,980 crore since April 2023, compared to just Rs 14,033 crore inflows into BAFs during the same period.
As a result, the assets under management (AUM) of MAFs have more than tripled since April 2023 to Rs 83,720 crore in June 2024. During the same period, the AUM of BAFs grew 41 per cent to Rs 2.7 trillion.
April 2023 marked a new dawn for MAFs as the change in taxation on debt funds forced MFs to design new tax-efficient asset allocation products to preserve debt flows. MAFs emerged as the most popular option for MFs as it offered the required flexibility and most fund houses did not have a product in this category, industry officials said.
The MAF space has seen back-to-back new fund offerings (NFOs) and has been grabbing attention due to the resulting promotion for the category. In the span of 15 months, MFs have launched 13 NFOs in this space, taking the total fund count to 24. During the same period, the number of BAF schemes has increased by 5 to 33, data from the Association of Mutual Funds in India (Amfi) shows.
MAFs are similar to BAFs, except for the flexibility to invest in commodities. While BAFs can only invest in equities and debt, MAFs can also invest in gold and silver.
This difference in allocation is one of the key reasons behind the growing popularity of MAFs, according to MF executives. “Gold and silver have seen significant appreciation in their prices in recent months, making MAFs more attractive relative to BAFs,” said Bhavesh Jain, co-head of factor investing at Edelweiss MF.
Manuj Jain, co-head of product strategy, WhiteOak Capital AMC, pointed out that apart from the string of NFOs, the relatively higher net inflows in MAFs were the result of outflows from BAFs. “A large chunk of the investments in BAFs have been around for a number of years. Hence, the category is likely to see higher outflows compared to MAFs, which have accumulated more than half of the assets in the past year or so,” he said, adding that gross inflows into BAFs have been higher than MAFs over the 12-month period.
According to experts, the choice between the two hybrid options may differ from investor to investor.
“MAFs invest in at least three asset classes with a minimum allocation of 10 per cent in each. They offer a ready-made portfolio for investors looking for a one-stop solution. But if you have an existing portfolio, it may not be a good fit and could result in an unintended overweight/underweight position and you may lose some flexibility in asset allocation,” said Jiral Mehta, senior research analyst at FundsIndia.
Equity taxation for MAFs is similar to BAFs, except for the 10-15 percent gold allocation. In equity tax hybrid products, it is mandatory to invest at least 65 percent of the corpus in equities and derivatives. This leaves fund managers with limited scope to invest in other assets.
However, some fund houses have launched more flexible products in the MAF space under a different tax structure. These funds, which were mandated to invest 35-65 per cent in equities, were eligible for the erstwhile debt tax (20 per cent post indexation if held for more than 3 years). However, as per new norms announced in the Budget, these schemes will be eligible for long-term capital gains tax of 12.5 per cent if held for more than 2 years. The new rules are likely to come into effect for redemptions after April 1, 2026.
First print: Jul 29, 2024 | 7:37 PM IST