BackProduct Crack: Kotak Equity Savings Fund
By tinkering with its structure, the fund claims to be an alternative for an MIP
Premium
Budget 2014’s announcement regarding increase in the threshold of debt funds to claim long-term capital gains (LTCG) to three years, from a year earlier, has triggered many changes in the mutual funds (MF) industry. After fund houses stopped fixed maturity plans with tenors of less than three years, some are now looking at turning the age-old product—monthly income plans (MIPs)—on its head. Typically, such a scheme invests up to 25% in equity and the rest in fixed income. It does not assure returns, but aims to give regular income. MIPs are debt instruments; you pay LTCG tax (20% with indexation) if you withdraw after three years. Kotak Mahindra Asset Management Co. Ltd aims to make a statement with its Kotak Equity Savings Fund (KES). By tinkering with its structure, the fund claims to be an alternative for an MIP, but one that comes with an equity tax advantage (LTCG threshold is one year; and no LTCG tax).
What works...
KES aims to invest 10-35% in fixed income securities and between 65% and 90% in equities (this will include 40-75% in arbitrage opportunities and 15-25% in pure equity instruments). Since arbitrage opportunities are classified as equity exposure in MF parlance, it will ensure that the combination of exposure taken in the equity and arbitrage segments come up to at least 65%. KES’s biggest advantage is that it gets positioned as an equity fund on the taxation front and can give you better post-tax returns than an MIP-type of product. Also, unlike many MIPs, where equity exposure can go down to zero or almost zero, KES’s pure equity exposure cannot go below 15%. So, the fund manager has constant exposure to equities, and the scheme would also need to maximise it if arbitrage opportunities are few.
What doesn’t
This is a first of its kind, so apart from the scheme not having a track record, there are no other schemes to see whether such a strategy has worked. As opposed to other arbitrage funds, KES will not be as handicapped if arbitrage opportunities in the equity market dry up. Typically, this happens when equity markets turn flat. Rising equity markets may offer many such opportunities, but some equity managers insist that even today there aren’t many arbitrage opportunities. However, since KES’s dependence on the arbitrage segment is lesser, it can afford to cherry pick. But here, returns can get subdued. Its performance across market cycles remains to be seen.
Mint Money take
The rate at which fund houses are launching new schemes, don’t be surprised if you suddenly get a wave of such equity-oriented MIP-type of schemes. Tweaking a traditional product structure just to get around taxation isn’t good for the industry’s long-term prospects. As the budget showed, the taxman will eventually notice if this category swells. This could throw investors’ plans out of gear as well. The idea is good though, especially considering the kind of returns MIPs give. Avoid KES if you are risk-averse. But if your asset allocation is complete and you have money to spare, you can invest a little here as an experiment.
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