Passive multi asset funds: Invest in equity, debt, gold, and other passive funds through a single scheme

Do you find it cumbersome to manage passive investments in multiple asset classes such as equity, gold, fixed income, etc.? A passive multi asset fund can provide you with different asset classes in a single scheme with regular rebalancing.

Passive Multi Asset Funds

Asset allocation requires you to invest in various asset classes such as domestic equities, gold, debt, international equities, real estate, etc. Each of these asset classes has a specific role in your overall investment portfolio. Also, most of these asset classes have zero to low correlation. So, when one asset class is not doing well and impacting portfolio performance negatively, the outperformance of the other asset classes manage the overall portfolio returns. 

However, managing multiple investment products in various asset classes for portfolio diversification can be cumbersome for an individual investor. Moreover, portfolio rebalancing has tax implications. In this article, we will focus on how to invest in various asset classes with a passive multi asset fund with tax efficiency.

What is a multi-asset allocation fund?

A multi-asset allocation fund is an open-ended mutual fund scheme that invests in at least three asset classes with a minimum allocation of at least 10% to each of these asset classes. For example, let’s assume that a multi-asset allocation fund has assets under management (AUM) of Rs 100 crore. If the fund chooses equity, debt, and gold as the three asset classes for investment, a minimum of Rs 10 crore (10% of the AUM) will have to be invested in each of the three asset classes.

Also Read: Multi-Asset Allocation: Choosing Between Advantage Funds And Multi-Asset Allocation Funds

What is a passive multi asset fund?

A passive multi asset fund is similar to the above-discussed multi-asset allocation fund in terms of asset allocation. A multi-asset allocation fund invests the scheme money directly in equity shares of companies, fixed income securities, etc. However, a passive multi asset fund invests the scheme money in passive funds instead of investing directly in asset classes. For example:

  • Investment in domestic equity index funds and exchange-traded funds (ETFs) instead of investing directly in equity shares of domestic companies
  • Investment in debt index funds and ETFs instead of investing directly in fixed income securities such as government securities, corporate bonds, etc.
  • Investing in gold ETFs or gold Fund of Funds (FoFs) instead of investing directly in physical gold
  • Investment in international equity index funds and exchange-traded funds (ETFs) instead of investing directly in equity shares of international companies

Why should you invest in an asset allocation fund?

Different asset classes move in different directions at the same time as there is low or no correlation. Hence, when investors invest in an asset allocation fund, they benefit from the asset classes that are doing well.

Performance of various asset classes in the last 14 years

Performance Asset Class 14 years

(Source: https://www.icicipruamc.com/docs/default-source/default-document-library/icici-prudential-passive-multi-asset-fund-of-funds-(investor-version).pdf)

The above table shows how in the last 14 years:

  • Domestic equity has been the best-performing asset class for five years
  • Debt has been the best-performing asset class for two years
  • Gold has been the best-performing asset class for five years
  • Global equities have been the best-performing asset class for two years

So, best performance rotation keeps happening among asset classes. Also, we don’t know which asset class will be the best performer next year and in the years to come. So, it is recommended that an individual’s investment strategy should be to invest in a multi-asset mutual fund scheme.

Why should you invest in passive multi asset funds?

Investing in a passive fund (index funds and ETFs) has certain benefits, such as:

a) Lower expenses: The expense ratio of passive schemes is much lower than active schemes. The expense ratio directly impacts the individual investor’s returns. Hence, the lower the expense ratio, the better.

b) Diversification: Investing in a broader market capitalisation index fund, such as a Nifty 50 Index Fund, Midcap 150 Index Fund, or Smallcap 250 Index Fund, gives you exposure to companies from diverse sectors. For example, a Smallcap 250 Index Fund gives you exposure to 250 companies from various sectors. So, index funds provide much-needed diversification, which is essential for every investor.

c) Good returns: As per a 2021 SPIVA report, most active funds in the large-cap category are not able to beat the benchmark index. The underperformance against the benchmark is also visible in the mid-and small-cap category; however, it is lower than in the large-cap category. On the other hand, index funds try to mirror the performance of the benchmark index. So, if active funds are not able to generate alpha, investing in index funds to generate index returns at a low cost is a better option.

Also Read: What Is Asset Allocation, And How Does It Help You Reach Your Goals

Benefits of passive funds

Benefits of Passive Funds

(Source: https://www.moneycontrol.com/news/special-site/7-key-pillars-of-a-passive-investment-strategy-7233141.html)

When you invest in a passive multi asset fund, you get the combined benefits of asset allocation (diversification among multiple asset classes) through index funds (diversification within the asset class at a low cost).

Benefits of investing in a passive multi asset fund

Benefits of Multi Asset Funds

(Source: https://www.icicipruamc.com/docs/default-source/default-document-library/icici-prudential-passive-multi-asset-fund-of-funds-(investor-version).pdf)

Note: The above image talks about the benefits of ICICI Prudential Passive Multi Asset Fund of Funds. However, the above benefits apply to most passive multi asset funds.

How to invest in a passive multi asset fund?

Passive multi asset funds are a relatively new concept. There aren’t too many passive multi asset funds to choose from. One option is ICICI Prudential Passive Multi Asset Fund of Funds. This new fund offer (NFO) was launched on 27 December 2021. You can invest in this scheme either directly through the AMC or via intermediaries. The scheme gives you exposure to four asset classes.

ICICI Prudential Passive Multi Asset Fund of Funds - Asset allocation

Passive Multi Asset Fund

(Source: https://www.icicipruamc.com/docs/default-source/default-document-library/icici-prudential-passive-multi-asset-fund-of-funds-(investor-version).pdf)

As seen in the above image, when you invest in the scheme, you get exposure to four asset classes through various passive funds.

Tax efficiency with passive multi-asset allocation funds

In a passive multi-asset allocation fund, the fund manager will periodically rebalance the asset classes. When this rebalancing is done at the scheme level, there are no tax implications for the scheme investors. It is one of the biggest benefits of investing in a multi-asset allocation fund.

Taxation of a passive multi-asset allocation fund

The taxation of a fund will depend on whether the equity component is always maintained at 65% or above. If yes, it will be treated as an equity fund from a taxation point of view. Else, it will be treated as a non-equity fund.

The taxation will be as follows:

a) Equity fund: If the passive multi asset fund units are sold within 12 months of purchase, the short-term capital gains (STCG) will be taxed at a flat rate of 15%. If the passive multi asset fund units are sold after 12 months, the long-term capital gains (LTCG) will be taxed at 10%. Every financial year, the first one lakh rupees of LTCG will be exempt. Incremental LTCG will be taxed at 10% without indexation benefit.

b) Non-equity fund: If the passive multi asset fund units are sold within 36 months of purchase, the short-term capital gains (STCG) will be added to the individual’s overall income and taxed as per the income tax slab. If the passive multi asset fund units are sold after 36 months, LTCG tax will be charged at 20% with indexation benefit.

Also Read: Why Asset Allocation Should Be The Core Of Every Investment Portfolio?

Passive multi asset funds are a good investment option

Passive multi asset funds provide you investment exposure to at least three different asset classes, which is good from an asset allocation point of view. The exposure to various asset classes is taken via passive investing (index funds and ETFs), which provides diversification within an asset class at a low cost. Finally, when the fund manager does the regular rebalancing among different asset classes, there are no tax implications for the investor. Keeping all these benefits in mind, we can see that passive multi asset funds are a good investment option.

Asset allocation requires you to invest in various asset classes such as domestic equities, gold, debt, international equities, real estate, etc. Each of these asset classes has a specific role in your overall investment portfolio. Also, most of these asset classes have zero to low correlation. So, when one asset class is not doing well and impacting portfolio performance negatively, the outperformance of the other asset classes manage the overall portfolio returns. 

However, managing multiple investment products in various asset classes for portfolio diversification can be cumbersome for an individual investor. Moreover, portfolio rebalancing has tax implications. In this article, we will focus on how to invest in various asset classes with a passive multi asset fund with tax efficiency.

What is a multi-asset allocation fund?

A multi-asset allocation fund is an open-ended mutual fund scheme that invests in at least three asset classes with a minimum allocation of at least 10% to each of these asset classes. For example, let’s assume that a multi-asset allocation fund has assets under management (AUM) of Rs 100 crore. If the fund chooses equity, debt, and gold as the three asset classes for investment, a minimum of Rs 10 crore (10% of the AUM) will have to be invested in each of the three asset classes.

Also Read: Multi-Asset Allocation: Choosing Between Advantage Funds And Multi-Asset Allocation Funds

What is a passive multi asset fund?

A passive multi asset fund is similar to the above-discussed multi-asset allocation fund in terms of asset allocation. A multi-asset allocation fund invests the scheme money directly in equity shares of companies, fixed income securities, etc. However, a passive multi asset fund invests the scheme money in passive funds instead of investing directly in asset classes. For example:

  • Investment in domestic equity index funds and exchange-traded funds (ETFs) instead of investing directly in equity shares of domestic companies
  • Investment in debt index funds and ETFs instead of investing directly in fixed income securities such as government securities, corporate bonds, etc.
  • Investing in gold ETFs or gold Fund of Funds (FoFs) instead of investing directly in physical gold
  • Investment in international equity index funds and exchange-traded funds (ETFs) instead of investing directly in equity shares of international companies

Why should you invest in an asset allocation fund?

Different asset classes move in different directions at the same time as there is low or no correlation. Hence, when investors invest in an asset allocation fund, they benefit from the asset classes that are doing well.

Performance of various asset classes in the last 14 years

Performance Asset Class 14 years

(Source: https://www.icicipruamc.com/docs/default-source/default-document-library/icici-prudential-passive-multi-asset-fund-of-funds-(investor-version).pdf)

The above table shows how in the last 14 years:

  • Domestic equity has been the best-performing asset class for five years
  • Debt has been the best-performing asset class for two years
  • Gold has been the best-performing asset class for five years
  • Global equities have been the best-performing asset class for two years

So, best performance rotation keeps happening among asset classes. Also, we don’t know which asset class will be the best performer next year and in the years to come. So, it is recommended that an individual’s investment strategy should be to invest in a multi-asset mutual fund scheme.

Why should you invest in passive multi asset funds?

Investing in a passive fund (index funds and ETFs) has certain benefits, such as:

a) Lower expenses: The expense ratio of passive schemes is much lower than active schemes. The expense ratio directly impacts the individual investor’s returns. Hence, the lower the expense ratio, the better.

b) Diversification: Investing in a broader market capitalisation index fund, such as a Nifty 50 Index Fund, Midcap 150 Index Fund, or Smallcap 250 Index Fund, gives you exposure to companies from diverse sectors. For example, a Smallcap 250 Index Fund gives you exposure to 250 companies from various sectors. So, index funds provide much-needed diversification, which is essential for every investor.

c) Good returns: As per a 2021 SPIVA report, most active funds in the large-cap category are not able to beat the benchmark index. The underperformance against the benchmark is also visible in the mid-and small-cap category; however, it is lower than in the large-cap category. On the other hand, index funds try to mirror the performance of the benchmark index. So, if active funds are not able to generate alpha, investing in index funds to generate index returns at a low cost is a better option.

Also Read: What Is Asset Allocation, And How Does It Help You Reach Your Goals

Benefits of passive funds

Benefits of Passive Funds

(Source: https://www.moneycontrol.com/news/special-site/7-key-pillars-of-a-passive-investment-strategy-7233141.html)

When you invest in a passive multi asset fund, you get the combined benefits of asset allocation (diversification among multiple asset classes) through index funds (diversification within the asset class at a low cost).

Benefits of investing in a passive multi asset fund

Benefits of Multi Asset Funds

(Source: https://www.icicipruamc.com/docs/default-source/default-document-library/icici-prudential-passive-multi-asset-fund-of-funds-(investor-version).pdf)

Note: The above image talks about the benefits of ICICI Prudential Passive Multi Asset Fund of Funds. However, the above benefits apply to most passive multi asset funds.

How to invest in a passive multi asset fund?

Passive multi asset funds are a relatively new concept. There aren’t too many passive multi asset funds to choose from. One option is ICICI Prudential Passive Multi Asset Fund of Funds. This new fund offer (NFO) was launched on 27 December 2021. You can invest in this scheme either directly through the AMC or via intermediaries. The scheme gives you exposure to four asset classes.

ICICI Prudential Passive Multi Asset Fund of Funds - Asset allocation

Passive Multi Asset Fund

(Source: https://www.icicipruamc.com/docs/default-source/default-document-library/icici-prudential-passive-multi-asset-fund-of-funds-(investor-version).pdf)

As seen in the above image, when you invest in the scheme, you get exposure to four asset classes through various passive funds.

Tax efficiency with passive multi-asset allocation funds

In a passive multi-asset allocation fund, the fund manager will periodically rebalance the asset classes. When this rebalancing is done at the scheme level, there are no tax implications for the scheme investors. It is one of the biggest benefits of investing in a multi-asset allocation fund.

Taxation of a passive multi-asset allocation fund

The taxation of a fund will depend on whether the equity component is always maintained at 65% or above. If yes, it will be treated as an equity fund from a taxation point of view. Else, it will be treated as a non-equity fund.

The taxation will be as follows:

a) Equity fund: If the passive multi asset fund units are sold within 12 months of purchase, the short-term capital gains (STCG) will be taxed at a flat rate of 15%. If the passive multi asset fund units are sold after 12 months, the long-term capital gains (LTCG) will be taxed at 10%. Every financial year, the first one lakh rupees of LTCG will be exempt. Incremental LTCG will be taxed at 10% without indexation benefit.

b) Non-equity fund: If the passive multi asset fund units are sold within 36 months of purchase, the short-term capital gains (STCG) will be added to the individual’s overall income and taxed as per the income tax slab. If the passive multi asset fund units are sold after 36 months, LTCG tax will be charged at 20% with indexation benefit.

Also Read: Why Asset Allocation Should Be The Core Of Every Investment Portfolio?

Passive multi asset funds are a good investment option

Passive multi asset funds provide you investment exposure to at least three different asset classes, which is good from an asset allocation point of view. The exposure to various asset classes is taken via passive investing (index funds and ETFs), which provides diversification within an asset class at a low cost. Finally, when the fund manager does the regular rebalancing among different asset classes, there are no tax implications for the investor. Keeping all these benefits in mind, we can see that passive multi asset funds are a good investment option.

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