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It was just about that investors had started warming up to the idea that mutual funds (MFs) are more than just equity funds. Retail and high net worth individuals investors had started investing across the categories of liquid funds, debt funds, gold funds and international funds. The finance minister in a singular move has completely undone the learning of MF investors. The Finance Bill 2014 has three key changes in the tax provisions which impact non-equity MF investments. These changes impact all categories of MFs which are not equity-oriented funds. Equity-oriented funds are defined as MF schemes that invest at least 65% of their assets in listed domestic equity shares. Thus all other categories of MFs i.e. liquid funds, debt funds, fixed maturity plans, gold funds, fund of funds and international funds are affected by these changes. With the changes announced in the Budget, not only does the finance minister undo all the efforts of the MF industry and the changing investment habits of investor’s from fixed returns to market returns but is unfair to MF investors. Let us first understand what these three changes are: 1. Non-equity oriented MFs would now qualify for long-term capital gains (LTCG) tax only after a holding period of three years from the date of investment. Earlier this period was 1 year from the date of investment. 2. LTCG tax for non-equity oriented MFs will now be calculated at 20% plus indexation benefits. Earlier the investor had a choice of calculating LTCG at 10% without indexation or 20% plus indexation, whichever was lower. 3. Lastly, the dividend distribution tax (DDT) will now be calculated at the grossed up value of dividend paid plus the distribution tax. Till now DDT for debt MFs was calculated at 28.325% on the dividend paid (25% + 10% surcharge + 3% cess). This innocuous change in calculation methodology makes the effective rate of the DDT now for every investor at 39.52%+ vis-a-vis 28.325% on a like to like comparison! Though the finance minister says that the objective of these changes is to remove the tax arbitrage between bank deposits and debt MF investments, the impact of these changes goes far beyond this objective and it primarily happens because it does not distinguish between debt funds and other categories of funds as mentioned above. The most important change in the investment behaviour that was happening was two-fold—one, investors were learning to accept market-related returns even from debt funds rather than just focusing on guaranteed returns and secondly, the concept of asset allocation was gaining ground among investor’s rather than just looking at MFs from the perspective of being only equity funds. On both counts, the investor now sadly goes back to the old regime. This, in my limited view, is a regressive step. Secondly, all these changes will be effective immediately from the assessment year FY16. Thus all investments made earlier in any of these non-equity oriented MFs will be subject to the new tax structures implying a significant change in one’s tax liability and financial planning. Ideally a road map for these changes should have been put into place and these changes should have been only limited to debt MFs. As we talk about a stable regime for foreign investors, don’t resident MF investors’ deserve the same? The writer is chief executive officer at Outlook Asia Capital, a consulting and wealth management firm.

Read more at: http://www.livemint.com/Opinion/JhlNKwHPdtBKWisAl5fqDP/Unfair-to-mutual-fund-investors.html?utm_source=copy