This year, SEBI introduced some changes to mutual funds to make it more attractive and safer for retail investors. As an investor, knowing these changes will help reconsider your current portfolio.
Further, changes were also made to the tax regime at the Union Budget 2020 that will indirectly impact decisions regarding the type of investments to be made this year.
1. New income tax regime
In the Union Budget 2020, Finance Minister Nirmala Sitharaman announced a new tax regime that will allow higher income tax cuts if one let's go of most deductions and exemptions.
Under the new simplified tax regime, you do not have to think about which instrument to choose for tax-saving. You won't need to worry about lock-in periods or compromise with ROI (return on investment) from your mutual fund products.
Without the tax-saving pressure, investors can choose schemes that are in their financial interest and invest to create wealth as per their risk appetite, goals and liquidity needs.
The dividend distribution tax (DDT) was removed to make dividends taxable at the hands of the receiver based on their income tax slabs. TDS (tax deducted at source) will be levied on any income paid by the mutual fund company to a unitholder if such an amount exceeds Rs 5,000 in a financial year.
These dividends from mutual funds would be added to your income and taxed according to your income tax slab for FY21.
3. Unified stamp duty
With effect from 1 July 2020, the central government has imposed stamp duty of 0.005% on all transactions carried out by mutual funds, systematic investment plans, and daily stock traders, irrespective of state.
Mutual funds, being delivery-based transactions in securities, were supposed to have been paying the duty as per various State Acts.
All mutual fund transactions are thus liable for stamp duty and the new system has standardized the charges across states and the manner of collection of stamp duty.
4. Allocation in multicap funds
Starting 1 January 2021, SEBI has made it mandatory for multi-cap equity mutual funds to have at least 75% of its asset allocation in equity and equity-related investments compared to the current 65% requirement.
Further, the fund will have to invest a minimum of 25% of their portfolio each in large-cap, mid-cap and small-cap companies.
5. Risk-o-meter tool
SEBI improved upon the risk-o-meter tool and introduced a new category of "very high" risk. The existing risk-o-meter did not expose the risks involved in a mutual fund completely as it assigned the level of risk based on the category of the fund rather than the actual portfolio.
The new risk-o-meter has six categories of risk: i) Low Risk ii) Low to Moderate Risk iii) Moderate Risk iv)Moderately High-Risk v) High Risk vi)Very High Risk
Debt funds will be evaluated based on: interest rate, credit and liquidity.
Equity funds will be evaluated on: market cap, volatility and impact cost.
The new risk-o-meter comes into force from 1 January 2021, but can be adopted earlier if ready.
6. Renaming dividend option
In mutual funds, investors are given two options: growth and dividend.
In the growth option profits made by the scheme are reinvested into the scheme, while in the growth option the profit is distributed to unitholders on a quarterly, half-yearly or annual basis as "dividends."
These dividends, like company dividends, are not regular and only distributed when there is a profit.
To avoid confusion, this option will be renamed as "income distribution cum capital withdrawal" option.
7. Inter-scheme transfers
In case of Close Ended Schemes, Inter Scheme Transfers would be allowed within three business days of allotment pursuant to New Fund Offer (NFO) only. Further, the transfer of assets between different open-ended mutual fund schemes can only be used when other means of raising liquidity has been exhausted.
8. NAV Calculation
SEBI said that mutual fund schemes shall allot NAV on units on the basis of when the amount is realised irrespective of the size or time of the investments, starting 1 January 2021.
The provision does not apply to liquid and overnight funds as the realisation of funds on the same day is already required for purchases in such schemes.
9. Flexi-Cap Fund
In November, SEBI introduced a "Flexi-Cap Fund" category in mutual funds, wherein the fund will have to invest at least 65% of the total corpus in equities and equity-related instruments, across large, mid and small-cap stocks.
However, unlike multi-cap funds, there will be no restrictions on how much could be allowed to a certain market cap category.