While most mutual fund schemes in the balanced advantage or dynamic asset allocation categories are equity-oriented, this scheme will maintain the equity allocation between 35% and 65% to make it eligible for the indexation benefits announced by the government in the Union budget for 2023-24.
The portfolio will have a 10-20% allocation to equities, some in arbitrage (to reach between 35-65%), and the rest in fixed-income securities. This structure ensures indexation benefits for investors who hold on to the scheme for more than three years.
In the Budget 2023, the government scrapped the indexation benefit for debt mutual funds, dealing a blow to the popularity of these schemes. Until then, if one held debt mutual funds for more than three years, the long-term capital gains were taxed at 20% after indexation which significantly reduced the tax outgo. Now, the taxation is in line with the individual’s tax slab.
Distributors believe this scheme scores due to its low cost and tax efficiency, which increase post-expense and post-tax returns for investors. “Investors seeking tax efficiency or a monthly cash flow can use such a product which comes with low volatility,” said Abhay Mathure, a Mumbai-based mutual fund distributor.For example, in a fixed deposit that yields 8%, an investor in the 30% tax bracket will have a post-tax return of 5.53% after three years. Assuming a 5% inflation, the post-tax returns for this scheme (post-indexation) could be 7.4%.The NFO of Parag Parikh Dynamic Asset Allocation Fund is currently open and closes on February 22. The fund will have an expense ratio of 30 basis points plus GST in the direct plan and 60 bps plus GST in the regular plan. “Strong management team with a good track record of managing funds makes this a good bet for conservative investors, eyeing a predominantly debt allocation,” said Nikhil Gupta, founder of Sage Capital.