MAF's Steal A March Over BAF's

Multi-asset allocation funds emerged as the most popular option for MFs as they provided the needed flexibility.

Multi-asset allocation funds (MAFs), a relatively unknown hybrid mutual fund category until early 2023, have eclipsed the more popular hybrid investment option, balanced advantage funds (BAFs), in terms of net inflows in 14 out of the past 15 months.

MAFs have raked in a net of Rs 42,980 crore since April 2023 compared to just Rs 14,033 crore in inflows into BAFs during the same period.

As a result, the assets under management (AUM) of MAFs have grown more than threefold since April 2023 to Rs 83,720 crore in June 2024.

In the same period, the AUM of BAFs grew by 41 per cent to Rs 2.7 trillion.

April 2023 marked a new beginning for MAFs as the change in debt fund taxation forced MFs to design new tax-efficient asset allocation products to retain the debt flows.

MAFs emerged as the most popular option for MFs as they provided the needed flexibility, and most fund houses did not have a product in this category, say industry executives.

The MAF space has seen back-to-back new fund offerings (NFOs) and has gained the limelight due to the resultant promotion of the category.

In 15 months, MFs have launched 13 NFOs in this space, bringing the total fund tally to 24.

In the same period, the number of BAF schemes has risen by five to 33, according to data from the Association of Mutual Funds in India (Amfi).

MAFs are similar to BAFs except for the flexibility to invest in commodities. While BAFs can invest only in equities and debt securities, MAFs can also invest in gold and silver.

This difference in allocation, according to MF executives, has been one of the key reasons behind the growing popularity of MAFs.

Gold and silver have seen significant appreciation in their prices in recent months, making MAFs more attractive compared to BAFs, said Bhavesh Jain, co-head of factor investing at Edelweiss MF.

Manuj Jain, co-head of product strategy at WhiteOak Capital Asset Management Company, highlighted that besides the NFO binge, the comparatively higher net collections in MAFs were a result of outflows from BAFs.

A major part of the investments in BAFs has been around for several years.

Hence, the category is bound to see higher outflows compared to MAFs, which have garnered more than half the assets in the past year or so, he said, adding that the gross inflows into BAFs have been higher than into MAFs during the 12 months.

Experts say that the choice between the two hybrid options can 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 who are looking for a one-stop solution.

But if you have an existing portfolio, it might not fit well and could result in an unintended overweight/underweight position, which might reduce some asset allocation flexibility, said Jiral Mehta, senior research analyst at FundsIndia.

Equity taxation for MAFs is similar to BAFs, except for the 10-15 per cent gold allocation.

In equity taxation hybrid products, it is mandatory to invest at least 65 per cent of the corpus in equities and their 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 have the mandate to invest 35 to 65 per cent in equities, qualified for the erstwhile debt taxation (20 per cent after indexation if held for over three years).

However, according to new norms announced in the Union Budget, these schemes will qualify for long-term capital gains taxation of 12.5 per cent if held for over two years.

The new rules are likely to come into effect for redemptions after April 1, 2026.

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Feature Presentation: Aslam Hunani/Rediff.com