Debt Fund Taxation Rule Changes. What Expert Wealth Managers Say?

A look at what wealth managers think about the tax rule changes in debt mutual fund gains.

Debt Fund Taxation Rule

Avid mutual fund watchers would be aware of the recent tax rule amendment that takes away the indexation benefits from long-term debt mutual funds. Fund managers are all too conscious of this change and its implications. They have a small timeframe till the end of this financial year, to make the most of indexation benefits for their customers. 

Also Read: New mutual fund rules introduced with effect from 1 April 2023: Will you be taxed more? Check details.

A Re-look at the Amendment

Any gains made on mutual funds with less than 35% equity investment will be taxed as per the tax slab without the benefits of indexation. This is applicable for all purchases made on or after 1 April 2023. In other words, purchases in this fund category made till 31 March 2023 can avail of the indexation benefits. 

Last Chance Saloon for Inxvestors

Interested investors can invest in these debt mutual funds till 31 March 2023 to enjoy the tax benefits. Such funds, if held for more than three years, will be taxed at a flat 20% after considering the indexation benefits. Thus, investors with a sizeable fund and a long-term investment horizon can see this as the last chance to invest in steady-income funds with tax benefits.

Also Read: Finance bill tweak: Winners and losers among mutual funds

Fund Manager’s Stance

Mutual fund stakeholders, fund managers in particular, are coordinating with big investors to explain this limited-period opportunity. Debt mutual funds are attractive for bigger investors as they fall into a higher tax slab, and it offers them a lower tax bracket. Once long-term capital gains from debt funds get taxed as per the tax slab, this tax advantage will go away.

Fund managers are spreading this awareness among investors. Webinars are being conducted and conference calls are held to cascade this information. MD and CEO of Motilal Oswal Private Wealth, Ashish Shanker said that investors should convert their low-yield schemes into high-yield alternatives before 31 March and enjoy the benefits of long-term compounding. 

Amit Bivalkar of Sapient Wealth Advisors has opined that banking and PSU funds and dynamic bond funds can be good choices for long-term fixed income. This could mean an investor preference for open-ended funds through which tax liability can be deferred as per your financial goals. 

However, with an eye on the global economy, Feroze Azeez of Anand Rathi Wealth observed that dynamic schemes with low-rated bonds should be avoided. The relevance of target maturity funds is likely to remain, as they have good government securities as backing. Besides, their net yield will remain decent given the low expense ratio. 

Ashish Shah of Wealth First Portfolio Managers similarly votes for target maturity funds. With low management costs, these funds can deliver handsome returns if interest rates are trimmed by the RBI in the coming years.

Also Read: First sovereign green bond mutual funds to be launched.  HDFC AMC files for approval. Know more about the fund

The Quant Dynamic Asset Allocation fund has changed its investment strategy to become an equity fund. More fund schemes are expected to react similarly to the recent changes. Like AMCs, investors must also reconsider their portfolios, while keeping their long-term financial goals in mind. 

Source:

  • https://www.moneycontrol.com
  • https://freefincal.com

Avid mutual fund watchers would be aware of the recent tax rule amendment that takes away the indexation benefits from long-term debt mutual funds. Fund managers are all too conscious of this change and its implications. They have a small timeframe till the end of this financial year, to make the most of indexation benefits for their customers. 

Also Read: New mutual fund rules introduced with effect from 1 April 2023: Will you be taxed more? Check details.

A Re-look at the Amendment

Any gains made on mutual funds with less than 35% equity investment will be taxed as per the tax slab without the benefits of indexation. This is applicable for all purchases made on or after 1 April 2023. In other words, purchases in this fund category made till 31 March 2023 can avail of the indexation benefits. 

Last Chance Saloon for Inxvestors

Interested investors can invest in these debt mutual funds till 31 March 2023 to enjoy the tax benefits. Such funds, if held for more than three years, will be taxed at a flat 20% after considering the indexation benefits. Thus, investors with a sizeable fund and a long-term investment horizon can see this as the last chance to invest in steady-income funds with tax benefits.

Also Read: Finance bill tweak: Winners and losers among mutual funds

Fund Manager’s Stance

Mutual fund stakeholders, fund managers in particular, are coordinating with big investors to explain this limited-period opportunity. Debt mutual funds are attractive for bigger investors as they fall into a higher tax slab, and it offers them a lower tax bracket. Once long-term capital gains from debt funds get taxed as per the tax slab, this tax advantage will go away.

Fund managers are spreading this awareness among investors. Webinars are being conducted and conference calls are held to cascade this information. MD and CEO of Motilal Oswal Private Wealth, Ashish Shanker said that investors should convert their low-yield schemes into high-yield alternatives before 31 March and enjoy the benefits of long-term compounding. 

Amit Bivalkar of Sapient Wealth Advisors has opined that banking and PSU funds and dynamic bond funds can be good choices for long-term fixed income. This could mean an investor preference for open-ended funds through which tax liability can be deferred as per your financial goals. 

However, with an eye on the global economy, Feroze Azeez of Anand Rathi Wealth observed that dynamic schemes with low-rated bonds should be avoided. The relevance of target maturity funds is likely to remain, as they have good government securities as backing. Besides, their net yield will remain decent given the low expense ratio. 

Ashish Shah of Wealth First Portfolio Managers similarly votes for target maturity funds. With low management costs, these funds can deliver handsome returns if interest rates are trimmed by the RBI in the coming years.

Also Read: First sovereign green bond mutual funds to be launched.  HDFC AMC files for approval. Know more about the fund

The Quant Dynamic Asset Allocation fund has changed its investment strategy to become an equity fund. More fund schemes are expected to react similarly to the recent changes. Like AMCs, investors must also reconsider their portfolios, while keeping their long-term financial goals in mind. 

Source:

  • https://www.moneycontrol.com
  • https://freefincal.com

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