This year, SEBI included some changes to mutual funds to make them more attractive and more reliable for retail investors. As an investor, knowing these changes will help review your current portfolio. Further, changes were also made to the tax regime at the Union Budget 2020 that will indirectly affect decisions regarding the type of investments to be made this year.
1. New income tax government In the Union Budget 2020, Finance Minister Nirmala Sitharaman announced a new tax regime that will allow higher interest tax cuts if one let's go of most discounts and exemptions. Under the new simplified tax regime, you do not have to speculate about which instrument to choose for tax-saving. You won't need to worry regarding lock-in periods or negotiate with ROI (return on investment) from your mutual fund products. Without the tax-saving pressure, investors can choose designs that are in their financial interest and invest to create wealth as per their risk desire, goals, and liquidity needs.
2. Dividends The dividend distribution tax (DDT) was transferred to make dividends taxable at the hands of the receiver based on their income tax pieces. TDS (tax deducted at source) will be levied on any income paid by the mutual fund firm to a unitholder if such an amount exceeds Rs 5,000 in a financial year. These dividends from mutual funds would be attached to your income and charged according to your income tax slab for FY21.
3. Unified stamp duty With impact from 1 July 2020, the central government has required 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 trades in securities, were deemed to have been paying the duty as per various State Acts. All mutual fund transactions are thus responsible for stamp duty and the new system has standardized the charges across states and the manner of combination of stamp duty.
4. Allocation in multi-cap funds Beginning 1 January 2021, SEBI has made it mandatory for multi-cap equity mutual funds to have at most limited 75% of their asset allocation in equity and equity-related investments compared to the prevailing 65% requirement. Further, the fund will have to invest a minimum of 25% of their office each in large-cap, mid-cap, and small-cap companies.
5. Risk-o-meter tool SEBI fixed upon the risk-o-meter tool and introduced a new category of "very high" risk. The current risk-o-meter did not expose the risks involved in a mutual fund simply as it assigned the level of risk based on the category of the fund sooner than the actual portfolio. The new risk-o-meter has six categories of risk: i) Lowering Risk ii) Low to Moderate Risk iii) Medium Risk iv)Slightly High-Risk v) High Risk vi)Very High-Risk Debt funds will be assessed based on the interest rate, credit, and liquidity. Equity funds will be assessed on market cap, volatility, and impact cost. The new risk-o-meter comes into power from 1 January 2021 but can be utilized earlier if ready.
6. Renaming share option In mutual funds, investors are given two options: increase and dividend. In the growth option profits made by the scheme are reinvested into the scheme, while in the completion option the profit is distributed to unitholders on a quarterly, half-yearly, or annual support as "dividends." These dividends, like company dividends, are not regulated and only distributed when there is a profit. To avoid confusion, this decision will be renamed as "income distribution cum capital withdrawal" option.
7. Inter-scheme transfers In case of Private Ended Schemes, Inter Scheme Transfers would be provided within three business days of allotment pursuant to New Fund Offer (NFO) alone. Further, the transfer of assets between different open-ended mutual fund projects can only be used when other means of raising liquidity has been consumed.
8. NAV Calculation SEBI said that mutual fund projects shall allot NAV on units based on when the product is realised irrespective of the size or time of the investments, starting 1 January 2021. The provision does not apply to overnight funds as the realisation of numbers on the same day is already needed for investing in such schemes.
9. Flexi-Cap Fund In November, SEBI included a "Flexi-Cap Fund" category in mutual funds, wherein the store will have to spend at least 65% of the total corpus in equities and equity-related machines, across large, mid, and small-cap plants. However, unlike multi-cap funds, there will be no limitations on how much could be allowed to a specific market cap category.