2018 has been and will be one of the important years in the mutual fund industry. This year has seen major changes like structural changes, more transparency through disclosures, rationalization and categorization for better investor understanding and long-term taxation on equities. Every change in the industry outdoes one another. Through these changes SEBI ultimately wants the investor to be benefitted. With the year coming to an end it’s mandatory to rewind and revise the things that happened in the year. Below is the list of major changes in the mutual fund industry.
Rationalization and Categorization of Mutual Funds Schemes
One of the major changes to the industry is rationalization and categorization of mutual funds. SEBI took this step so that the investors can compare and understand the features of mutual funds without getting confused. SEBI wanted investors to make informed decisions so having a clear distinction between schemes asset allocation and investment strategy is important. The main goal of SEBI with this move was to enable investors to clearly identify the schemes and make a distinction between them.
Read more about the categorization here.
Benchmarking with Total Return Index
Investors tend to compare the performance of one mutual fund with the other and with its own past performance. Investor and fund houses are in need of a proper benchmark to assess the performance. Price Return Index (PRI) was being used by most fund houses as a benchmark. However, PRI takes only capital gains into the picture and ignores the dividend and interest gains. The fund houses use PRI and add up the dividend and interest gains and show a higher performance of the scheme. To increase transparency of the performance of the schemes, SEBI on 4th January 2018 released a circular to benchmark with Total Return Index (TRI). TRI takes all the capital gains, dividend and interest payments of the constituents. Now investors will know the actual performance of the scheme and can make more informed decisions.
Long-Term Capital Gain Tax on Equity Mutual Funds
In the budget session for 2018-19, the finance ministry announced that the LTCG tax will be reintroduced on equities. Now equities mutual funds will be subject to a tax of 10% starting from April 1st, 2018 if the investor holds it for more than a year. In the short-term (less than one year) the tax is 15%. This news certainly shook the industry. But to soothe the effect this has on equities the government introduced grandfathering of gains. This means that to calculate LTCG tax the cost price would be the actual purchase price or the price as on 1st Feb 2018, whichever is higher.
To know more about LTCG tax read here.
Dividend Distribution Tax on Equity Mutual Funds
Equity mutual funds will also be subject to dividends distribution tax of 10% on the dividends paid w.e.f 1st April 2018. Investors need not pay this tax but the funds do. So investors will receive lesser dividends than what is actually intended to as the tax gets cut before the investor receives it. This tax is only on equity mutual funds and not on equities. This is because there is no tax on dividends up to Rs 10 lakh received in a financial year. DDT has been introduced so that investors and fund houses do not misuse the dividends way to avoid LTCG tax.
Disclosures and drop in TER
Total Expense Ratio (TER) is a recurring expense charged on mutual funds. It is usually expressed as a percentage of AUM. This expense ratio has been slashed in September for all mutual funds. In case of open-ended equity schemes, TER was slashed from 1.75%-2.5% to 1.05%-2.25%. In the case of debt funds, the TER was cut to 0.8%-2% from 1.50%-2.25%. For index funds and exchange-traded funds, the TER was reduced to a maximum of 1% from 1.5%. For a closed-ended fund, the TER for equity-oriented schemes will be a maximum of 1.25% and for other than equity oriented schemes will be a maximum of 1%. This drop in the TER will make mutual funds investment cheap for the investors.
Also, to help track the changes in TER and to increase transparency, SEBI has mandated all the fund houses to disclose TER on a daily basis on their websites.
Read about changes in TER here.
Discontinuation of E-KYC and E-NACH
After the Supreme Court judgment about the prohibition of the use of Aadhar data by private entities, the Unique Identification Authority of India (UIDAI) invalidated e-KYC norms. Until September 2018, investors were able to get their KYC done online by verifying based on their Aadhar number and one-time password. But after the judgment, online platforms cannot use e-KYC anymore.
National Automated Clearing House (NACH) is a common platform created so that all the banks are included and also there is pan India presence for auto-debit. E-NACH was enabled by the government for one-time verification of digital signature. But with SC’s order on the ban of the use of Aadhar information, -NACH platform has been disabled. With no e-KYC and e-NACH investors and fund, houses have to rely on paper-based verification. Some companies have video-based authentication for KYC process.
The only thing constant is change and all one can do is adapt to it. There might’ve been some confusion with the changes for example changes in names of funds and their structure and grandfathering of gains after the introduction of LTCG tax on equities. But all these changes are for a better investing future. It may take time, but the investors are the ultimate receivers of the benefit. These changes shouldn’t be affecting your investment decision in mutual funds. These changes will help investors make informed decisions. Even with all these changes, mutual funds remains to be the top investment avenue for people. Invest in mutual funds through Upwardly.