NFO review: Edelweiss MF’s new multi-asset fund is debt-focussed with indexation taxation benefit

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With the changes in the Finance Act, mutual fund schemes have come under three types of taxation. On income from schemes that invest 35-65 percent in equities, you now pay Short-Term Capital Gains tax (if held for less than three years) in line with your income tax rates; long-term capital gains (held for more than three years) attract 20 percent tax with indexation.

Further, the government has removed the capital gains tax and indexation benefits for debt funds that invest less than 35 percent in equity. Such funds are now taxed at the marginal tax rate irrespective of the holding period. However, there is no change in taxation for funds that invest at least 65 percent in equities. These funds are taxed at 15 percent without indexation (if held for less than one year), and 10 percent without indexation, if held for more than a year.

What does the fund offer

The fixed-income oriented Edelweiss Multi Asset Allocation Fund (EMAAF) offers the indexation benefit when it comes to taxation if held for more than three years.

The portfolio construction strategy would be 35-40 percent equity arbitrage, 10-15 percent gold and silver arbitrage, and 45-55 percent would be the fixed-income component.

Arbitrage is the simultaneous purchase and sale of a stock/commodity to take advantage of the price differential in spot and futures markets. This helps in increasing exposure to a certain asset class while avoiding a rise in the risk profile.

Thanks to its equity exposure of 35 percent, the scheme offers a lower LTCG tax of 20 percent post indexation, compared to traditional fixed-income products and pure debt funds.

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Coming to its debt component, the portfolio’s Macaulay Duration would be 1-3 years, with exposure to government securities, state development loans (SDL), and corporate bonds of AAA to AA+ ratings. Macaulay Duration captures the time taken by an investor to recover the money invested in a bond.

“We have made this scheme fixed-income oriented, which means the returns of this product would be closer to the interest rate in the economy,” said Niranjan Avasthi, Head-Product, Marketing and Digital, at Edelweiss Mutual Fund.

Given that the fund invests across asset classes, its benchmark is a mix of various indices. It’s a combination of the Nifty 500 Total Return Index (40 percent), the Nifty 5-year Benchmark G-Sec Index (50 percent), domestic gold prices (5 percent), and domestic silver prices (5 percent).

The fund managers to the scheme are Bhavesh Jain and Bharat Lahoti (equity), Dhawal Dalal (debt), Amit Vora (overseas investing), and Ashish Sood (commodities).

What works?

There are broadly two types of multi-asset funds. One, where the equity allocation is above 65 percent to enjoy equity taxation. Recent funds have been more dynamic in nature, where 40-50 percent is in equity, and the rest in asset classes like overseas stocks and silver, which are dynamically managed.

By investing in equities via arbitrage only, the scheme has managed to reduce the overall risk profile of the scheme.

Further, by keeping the equity component at 35 percent, the scheme would be able to enjoy indexation taxation benefit if held for at least three years, while keeping the fixed-income exposure at 45-55 percent.

Also, per the fund house, the direct expense ratio of the scheme would be around 40 basis points (bps), and the regular expense ratio around 70 bps.

In comparison, expense ratios for existing multi-asset funds are in the range of 1.72-2.31 percent.

According to experts, this scheme would be ideal for someone looking for a fixed-income alternative in a tax-efficient way, earning somewhere around 6-7 percent post- tax.

What doesn’t work?

Two key elements of this scheme are arbitrage and fixed income.

Over the last one year, arbitrage has delivered 6-7 percent returns. Fixed income yields are also currently at around 7 percent.

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“However, arbitrage has delivered 4-5 percent returns when there is no volatility in the markets. Besides, we are at the peak of the interest rate cycle. So we might see some moderation in returns from both going ahead,” said Amol Joshi, Founder, PlanRupee Investment Services.

What should investors do?

As per Kirtan Shah, Founder of Credence Wealth Advisors LLP, this is a debt fund structured as a multi-asset fund to derive the indexation taxation advantage.

“The fund house has made sure that 35 percent of equity exposure is through arbitrage. So, there is no equity risk there. Second, 10-15 percent allocation to gold and silver is also hedged. Thus, there is no risk on commodity investing as well. Lastly, there is AAA to AA+ sovereign fixed-income exposure. So, it is largely a high-quality fixed income product with some taxation benefit,” said Shah, who recommends this fund from at least a three-year perspective.

Joshi said that investors may consider the scheme as part of their satellite portfolio.

The new fund offer (NFO) for Edelweiss Multi Asset Allocation Fund will remain open from June 5 to June 19.