Over the weekend, top officials of fund houses embarked on the sales campaign, arranging conference calls with affluent investors and distributors, while relationship managers urged clients to take advantage of the window. From April 1, capital gains arising from investments in debt mutual fund schemes will be added to taxable income and taxed in line with the income tax slab rate. The government made this unexpected change as part of amendments in the Finance Bill last week.
This means the indexation benefit in debt mutual funds that lowered the tax outgo for investments held for more than three years has been removed. This tax advantage made debt MFs popular with investors in the highest tax bracket.
Fund houses are recommending investors move money to schemes that invest in a mix of AAA and AA-rated bonds, corporate bond funds, and credit risk funds with tenures of at least three to nine years.
“We are close to the peak of the interest rate cycle. There is a chance of earning capital appreciation as and when interest rates fall over the next three to five years. Investors looking to allocate to debt as part of asset allocation can use this period to get this extra indexation benefit,” said Vineet Nanda, founder of SIFT Capital.
Target maturity funds, the popular open-ended debt scheme category that returns money at the end of the tenure, are being sold most aggressively. This product has been a hit with investors in the last few months due to its low cost and visibility of returns. With the new rules, investors could opt for them if it helps meet a goal in the year of maturity.
“Investors could opt for target maturity funds if they are looking to set aside money for a specific goal. Else open-ended debt funds work well as there is an option to stay invested for as long as they want,” said Deepak Chhabria, CEO and founder of Axiom Financial Solutions. SIFT’s Nanda recommends ICICI All Seasons Bond Fund, HDFC Credit Risk Fund and SBI Medium Term Fund.
Some wealth managers caution investors against randomly shifting money from one asset class to another, or from one product to another just because of tax reasons.
“Stick to your asset allocation and do not randomly shift money from one asset class to another,” said Rupesh Bhansali, head of distribution atGEPL Capital.
Investors should not shift money from equities to a debt scheme just for taxation as the former has the potential to beat inflation and generate higher returns over the long term, he said.
Similarly, investors whose income does not fall in the highest tax bracket and do not use indexation have no need to shift money to debt funds.
“Breaking or redeeming your fixed deposit before its maturity date has a cost involved. Evaluate these factors before considering a shift to debt mutual funds,” said Chhabria.
