Tax impact: Quant MF tweaks its new fund from debt to equity-oriented fund
2 min read 27 Mar 2023, 02:31 PM ISTSome fund houses have reopened their international schemes so that investors benefit from long-term capital gains tax rate before new rules kick-in from 1 April
PremiumQuant Mutual Fund (Quant MF), which had launched a fund in the dynamic asset allocation/balanced advantage category last week, has tweaked its product as debt MFs are set to lose taxation benefits from 1 April.
Earlier, Quant Dynamic Asset Allocation Fund could dynamically move between debt and equity from 0-100%. So, the fund could even go upto 100% in debt if the situation warranted, which was not possible for other balanced advantage funds in the category.
The fund will now maintain at least 65% exposure to equity and equity-related instruments. It will use equity derivatives to hedge its equity exposure. The remaining will be in debt instruments. However, the fund will still retain the provision of going 0-100% in terms of net equity exposure (i.e. unhedged exposure) and now 0-35% to debt.
The 65% minimum threshold to equity (including equity derivatives) would allow the fund to get tax treatment as that of an equity MF, just like other balanced advantage funds in the category. So, long-term capital gains (LTCG) on holding for more than a year, would be taxed at 10%. Gains up to ₹1 lakh will be tax-exempt.
This decision to change the contours of the new fund offering (NFO) has come after the Finance Bill made the amendment that debt MFs will no longer enjoy long-term capital gains tax rate of 20% with indexation benefit, for investments held over three years.
From 1 April 2023, capital gains on new investments made in debt MFs, will be taxed at the investor’s tax slab rate.
So, if the investor falls in the highest tax category, this rate would be 35.8% (including surcharge and cess).
How will the fund be managed
For equity, Quant MF house will follow what it calls as VLRT framework and Q2 to manage its equity portfolio. The Q2, says Sandeep Tandon, founder and chief investment officer of Quant MF, stands for ‘Quantifiable Quality’.
The VLRT framework stands for valuation analytics, liquidity analytics, risk appetite analytics and timing.
For example, when both risk appetite and liquidity are at elevated levels in the markets, the fund would dynamically increase its equity exposure. Similarly, when risk appetite and liquidity are at exhausted levels, the fund increase substantially increase its debt exposure. The risk appetite and liquidity analysis would be key for the fund in assessing whether it is a risk-off or risk-on environment. If it is the former, the fund would reduce equity exposure and increase debt exposure and vice-versa.
Mutual fund distributors say the fund’s track-record over time, will help in assessing its ability to manage volatility and its ability to offer healthy risk-adjusted returns.
“When it comes to the balanced advantage fund/dynamic asset allocation category, different funds are managed in different styles. Some of the funds are counter-cyclical, some are pro-cyclical. Different funds follow different valuation indicators to gauge whether the market is expensive or inexpensive, warranting higher or lower exposure to equity," says Amol Joshi, founder of Plan Rupee Investment Services.
International schemes
Some fund houses have also reopened their international schemes for investor flows as investments made after 31 March will not get to benefit for long-term capital gains tax rate of 20% with indexation benefit.
International funds and gold funds have also lost this benefit as these were treated as debt funds for taxation purpose.
Mirae MF and Edelweiss MF have reopened some of their international schemes so that investors can take advantage of long-term capital gains benefit on new investments before the new tax rules become effective from 1 April.
