The new year along with it brings new rules for mutual funds
too.
As an investor it is your duty to be updated with any new
rules since these can and do affect your portfolio directly or indirectly.
Being updated with new rules if any from time to time helps
you better understand if you need to take any action with your portfolio and if
you do then what should these actions be.
No matter what the new rules, as an investor you will always
be given ample time to asses and react accordingly by the regulator.
Mutual
Fund NAV
From February 1, 2021 you will receive NAV of the day your
money reaches the fund house.
Earlier you would get NAV of the mutual fund on the same day
if you had invested before the cut off time and your amount was not more than
Rs 2 lakh.
From 2021 onwards, you will receive NAV of a mutual fund the
day your money reached the fund house irrespective of the amount.
Even if you invest in the early market hours like say around
10 am, you will not receive the NAV of the mutual fund of the same day if the
money does not reach the mutual fund house before the cut off house.
This new rule in many ways if not all is more of a test of
the efficiency of your bank.
This new rule is applicable for equity and debt mutual funds
only.
Dividend Mutual Funds
Dividend from mutual fund schemes were and still to a large
extent even today seen as a form of reward for investing in a mutual fund or
because your mutual fund scheme performed well and is passing back to you part
of the profits earned.
In reality though, dividend from mutual fund schemes were
always since beginning a process by which you would get your own capital as
well as part of the profits your mutual fund scheme had earned.
Additional reading: Click Here to read our complete report on ELSS funds and how they work
New
name for Dividend Mutual Funds
The regulator SEBI, has declared that from 1st
April 2021 onwards dividend plans of mutual funds would be renamed as follows:
- Dividend pay-out plan would be renamed as ‘Pay-out of Income Distribution cum capital withdrawal option’
- Dividend reinvestment plan would be renamed as ‘Reinvestment of Income Distribution cum capital withdrawal option’.
- Dividend transfer plan would be renamed as ‘Transfer of Income Distribution cum capital withdrawal option’.
This name change has been necessitated because so far
investors were under the belief that dividends received by them were a part of
their profits when in fact, they were also a part of their capital too.
Basically, investors were paying tax on taking back their
own capital in the form of dividend.
How
you were paying tax on receiving back your own capital?
Suppose a mutual fund scheme declares a dividend of Rs 5
when its NAV is 105.
Now the NAV of the same fund is therefore 100.
The NAV of the fund appreciates up to 102 and that is when
you invest to.
The NAV further appreciates up to 105 when the fund declares
a dividend of Rs 5 again.
Now you the investor, will receive not just Rs 3 of the
profits but also Rs 2 which is your own capital.
So far though retail investors were believing that they were
receiving profits as dividend when in fact they were also receiving their own
capital back in the form of dividends.
You therefore ended up paying tax not just on your profits
(Rs 3) but also on your own capital (Rs 2) which was a loss-loss situation for
you.
The situation would have gotten worse in case you were in
the highest tax slab of 30%.
Under the new rules effective from 1st April
2021, mutual fund companies would have to divide declared dividend into Income
Distribution (Profits) and Capital Distribution (Invested amount) which would
be showcased in your Consolidated Account Statement.
Additional reading: Click Here to read our complete report on ESG mutual funds
Multicap
mutual funds
The
Securities and Exchange Board of India (SEBI) has on 11/09/2020 issued a
circular bringing about changes to fundamental characteristics of Multi Cap
mutual funds.
Present rules regarding Multicap mutual funds
Presently
multi cap mutual funds need to invest a minimum of 65% of total assets into
equity.
This 65% is
needed for any equity fund and not just multi cap mutual funds to qualify as
equity funds which has a favourable tax proposition.
This 65% is
only minimum which can even go up to 100% in case the fund manager so desires.
Whatever
the allocation between 65% to 100%, there is no restriction with relation to
large cap, mid cap or small cap stocks.
Revised changes to Multicap mutual funds
Minimum
investment of 75% into equity (as opposed to earlier rule of 65%) which would
be divided in the following manner:
- Minimum 25% of investment into equity and equity related instruments of large cap companies (as opposed to n0 such restriction earlier).
- Minimum 25% of investment into equity and equity related instruments of mid cap companies (as opposed to no such restriction earlier).
- Minimum 25% of investment into equity and equity related instruments of small cap companies (as opposed to no such restriction earlier).
These
proposals will come into effect within the first week of February 2021.
For portfolio enquiries, email us with your doubts at info@themutualfundguide.com
