Mutual Funds

Your Fund Portfolio

Parvatha Vardhini C | Updated on January 28, 2018

mutual fund

I would like to know more about the new SEBI guidelines and from when these will be implemented by mutual funds. I also want to know which schemes will merge and close.


SEBI has brought out rules to streamline various open-ended mutual fund schemes through a circular dated October 6, 2017.

The main objective of the rejig is to ensure uniformity and comparability of funds. SEBI has now created five buckets for schemes — equity, debt, hybrid, solution-oriented (retirement, children’s future, etc) and others (ETFs, index funds, fund of funds ). In each of these buckets, there are sub-categories and clear definitions of the composition of the portfolio of the scheme that is eligible to fall in each of the categories.

A fund house, for example, can no longer call a scheme a “balanced” fund and invest, say, 80 per cent in equity and 20 per cent in debt and cash. Such a scheme will have to be reclassified as an aggressive hybrid fund.

A corporate bond fund should invest 80 per cent of its portfolio in corporate bonds and that too only in instruments with credit rating of AA+ and above. Besides, definitions for large-cap, mid-cap, small-cap stocks have been standardised.

For investors, these changes make it easier to compare performances of similar funds. It will also bring down the number of schemes as all offerings will now to have to compulsorily fall under any of these buckets/categories and only one scheme per category will be allowed (barring index funds, ETFs, fund of funds and sector funds).

The merger of similar schemes implies consolidation of their assets under one roof and a consequent increase in the size of the continuing fund.

This could lead to lower expense which would indirectly boost returns over the long term.

On the taxation front, from April 1, 2016, units allotted from the consolidated fund to an investor of a consolidating fund are not considered a transfer of capital asset.

Hence, you, you will not be liable to capital gains tax if a fund you hold merges with another fund.

But given that existing funds have to be fitted into straitjacket buckets, it is possible that some funds could undergo changes in fundamental attributes.

When such issues arise, usually, fund houses have to offer exit option. . If you choose to exit, you may have to pay taxes on gains.

Since the modalities are still being worked out, it is not possible to exactly point out as to how many or which schemes will be merged right now.

Originally, fund houses had two months (from October 6, 2017) to propose to SEBI ; it had to be implemented three months from the receipt of SEBI’s observations on the proposals. But SEBI , in an updated circular brought out on December 6, 2017, asked fund houses to submit their proposals no later than December 15, 2017.

Based on the proposals, once consultations between SEBI and mutual funds are completed, the new norms are likely to be implemented.

It is generally advised to park funds in liquid funds for a short while till the funds are finally invested in a target fund. Does it mean that the capital growth is taxed as short-term capital gain?


It is true that investors are many times advised to park lumpsums in liquid funds and invest in a target fund through SIPs.

This approach is especially useful for investing in equity funds in times such as now when the market is at a peak and is expected to correct in the near to medium term. Investing in the target fund in a staggered manner helps averaging out of the cost by buying more units when prices are low and fewer units when prices are high.

Since liquid funds are also debt funds, they get the same tax treatment as debt funds. Thus, investments that are redeemed (transferred, in this case) within 36 months attract short-term capital gains tax and the returns are taxed at the slab rates.

Units that are redeemed/transferred after 36 months attract long-term capital gains tax at 20 per cent, with indexation benefits.

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Published on January 28, 2018

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