All capital gains from hybrid debt-oriented funds are taxed according to holding period

In the case of long-term gains, the investor will get the benefit of indexation while calculating the amount of gains that are subject to tax


How are hybrid debt-oriented mutual funds taxed?

—Rakesh Ojha

Hybrid mutual funds are those funds that invest in both equity and debt investment instruments. When such a fund is labelled as a debt-oriented fund, it implies that the fund’s portfolio is predominantly made of debt instruments, such as government and corporate bonds, as well as bank deposits.

Portfolios of such funds hold between 75% and 90% of assets in debt investments with the remaining in equities.

In terms of taxation, in India, capital gains from mutual fund investments are treated in only one of two forms. If a fund’s portfolio is holding more than 65% of its assets as investments in the domestic equity market, then long-term capital gains for holding period of more than a year are tax exempt. If the holding period is less than a year, then tax at the rate of 15% would apply.

In all other cases, including debt-oriented hybrid funds, capital gains arising out of investment in such funds are subject to taxation at 20% for long-term gains (where the units are held for more than 3 years) and at the investor’s income tax slab rate for short-term gains. In the case of long-term gains, the investor will get the benefit of indexation while calculating the amount of gains that are subject to tax. The cost of the mutual fund units redeemed will be increased (thus bringing down the capital gains accrued) by applying an indexation factor as published by the government to cover for inflation over the holding period.

Can there be more than one nominee in a mutual fund account?

—Bobby Zakaria

Having nominations in your mutual fund folios ensure that in case of an untoward incident to the investor on the folio, the assets reach the right people in a seamless manner. You can have up to three nominees specified, and you can even specify what percentage of the investments should go to each. For example, you can have three nominees with the first nominee getting 50% (for example, spouse) and the other two nominees getting 25% each (say, kids). If you don’t specify the allocation, the mutual fund will distribute the proceeds in equal measure to all specified nominees.

Are mutual funds with low net asset value (NAV) better than those with high NAV?

—Rani S.

The net asset value (NAV) of a mutual fund scheme is a per unit value of its net assets. Essentially, it is the total value of all its assets (less any liabilities) divided by the number of units outstanding in the scheme. For example, if the total value of all the portfolio holdings (assets) of a fund is Rs400 crore and if there are 10 million units outstanding, the NAV of the fund would be Rs400.

When a fund has a low NAV, an amount invested in the fund would fetch more units than a fund with a higher NAV. For this reason, many investors think that it would be better to invest in a fund that has a lower NAV.

However, this perception is wrong. The only thing that matters is the difference between the price at which units are bought and the price at which they are sold. This difference, usually expressed in percentage terms, is the only thing that an investor should be concerned about.

Two funds with the same portfolio would take the same time to go from an NAV of Rs10 to Rs12 as from an NAV of Rs100 to Rs120. Investors in both these schemes through this time would see the exact same returns. Investing in the fund with an NAV of Rs10 would not have made any difference. So, for all practical purposes, the numerical value of NAV need not be considered at all when choosing schemes.

What is a consolidated account statement (CAS)?

—Shobit Lohia

A consolidated account statement (CAS) is a statement of holdings and transactions that are dispatched to investors periodically by depositories such as National Securities Depository Ltd (NSDL) and Central Depository Services Ltd (CDSL). This statement would aggregate an investor’s holdings across all the mutual funds. There are two types of such statements—monthly and half-yearly. The monthly statement is sent only for those folios where there is at least one transaction in the preceding month.

Mutual fund folios without any transaction will not be reflected in this statement. The half-yearly statement, however, is sent to all investors regardless of whether there is a transaction in the period or not. These statements are aggregated based on the Permanent Account Number (PAN) of an investor and sent to the know-your-customer (KYC) registered address of the investor.

This statement helps you keep an eye on investments and performances as well. Reviewing these statements (both transactional and half-yearly holding statements) would be a useful due diligence exercise that investors must conduct to ensure that their money is safe.

Srikanth Meenakshi is co-founder and COO,

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