TELLING THE WOOD FROM THE TREES
Budget 2019 has offered a minor boost to such schemes, but there are drawbacks too
Budget 2019 didn’t have much for mutual funds. However, a change in one category—fund of funds (FoF) schemes—could end up benefitting investors. FoFs are mutual fund schemes that invest in other mutual funds, including equity and debt. The government has made changes to the taxation of FoF schemes that invest in equity exchangetraded funds (ETFs).
Schemes that invest a minimum of 90 per cent of their assets in equity ETFs will be treated as equity mutual funds when calculating short-term capital gains tax. Therefore, gains booked after one year will be taxed at 15 per cent, rather than at the investor’s slab rate. This follows a similar change in Budget 2018, which allowed this category of FoFs to be treated as equity mutual funds when calculating longterm capital gains tax.
However, this move will benefit only a small category of funds. “The special status to these FoFs incentivise investing in ETFs that have been used by the government as a vehicle to further
target its disinvestment (CPSE ETF and Bharat 22 ETF),” says Chirag Mehta, senior fund manager at Alternative Investments. The popularity of such investments has historically been tepid. “Investing in ETFs requires investors to have a demat account, which has affected their popularity since the proportion of retail investors who have such accounts is low,” he adds.
One benefit of investing in FoF schemes is that fund managers decide which funds to invest in. “The biggest advantage of such funds is that they give you access to multiple managers through a single fund,” says Kaustubh Belapurkar, director of manager research, Morningstar Investment Advisers.
Secondly, some FoFs provide access to overseas funds, which invest in global themes that may not be accessible in India. FoFs are also pass-through vehicles— therefore, when a fund manager opts for rebalancing and exit schemes, capital gains taxes do not have to be paid. (Individual investors do have to pay taxes when availing such options.)
A major drawback has to do with taxation. Even if the scheme invests the majority of its portfolio in equity schemes, it is still taxed like a debt fund. Secondly, investors do not have control over the choice of funds being invested in. Thirdly, FoFs are also generally more expensive than normal equity schemes as they also have to bear the expenses of the underlying scheme.
FoFs make sense for retail investors who don’t have access to the knowhow needed to take decisions regarding asset allocation. “For laymen investors, FoFs—which invest in both equity and debt and rebalance portfolios based on market conditions—would make sense. More sophisticated investors could also consider FoFs, because they provide access to themes which are not available in India, and therefore allow diversification,” says Anil Rego, founder and CEO of Right Horizons. Belapurkar says that those looking for one-stop solutions should consider such funds; however, they should also consider their risk appetites and investment objectives beforehand. However, if you want full control over your investments, you should invest directly in mutual fund schemes.