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Debt taxation impact: Edelweiss, Mirae, Franklin MFs open overseas funds for lump sum subscription

Investors should look at their asset allocation, and if there’s a need to buy more international funds, only then should they invest. Taxation shouldn’t be the only reason to invest, experts say

March 26, 2023 / 07:33 PM IST
Capital gains from debt funds and certain other categories of non-equity MFs are set to be taxed at a higher rate.

Capital gains from debt funds and certain other categories of non-equity MFs are set to be taxed at a higher rate.

With a few days left to go before the new debt taxation rules kick in, Indian asset management companies (AMCs) have started to resume investments in their international funds.

Edelweiss Asset Management, Mirae Asset Investment Managers and Franklin Templeton Asset Management have announced they will be open for subscriptions in overseas funds and securities up to the amount permissible, without breaching the overseas investment limit.

The move by AMCs has come after the recent changes to the Finance Bill spelt doom for certain mutual fund (MF) categories.

Tax googly

In a big blow to MF investors, the government has decided that capital gains from debt funds and certain other categories of non-equity MFs are set to be taxed at a higher rate.

According to the amendments to the Finance Bill on March 24, gains from MFs with less than 35 percent of their assets in equities will now be considered short-term capital gains (STCG) and taxed at a higher rate across tenures.

Earlier, gains from investments in debt MFs for more than three years were subject to the long-term capital gains (LTCG) tax rate of 20 percent, after indexation.

Also read | How Finance Bill amendment will affect debt mutual fund investors post April 1

The revised taxation rate will come into effect from April 1, 2023, and won’t impact existing investments.

The changes to the taxation rules mean that gold funds, international funds, funds of funds – any product which invests less than 35 percent in Indian equities is going to lose out.

Schemes in focus

Per the announcement, Edelweiss Mutual Fund is opening up seven of its international funds for lump sum subscription and switch-in transactions from March 27. The schemes are the ASEAN Equity Off-shore, Greater China Equity Off-shore, US Technology Equity Fund of Fund (FoF), Emerging Markets Opportunities Equity Offshore, Europe Dynamic Equity Offshore, US Value Equity Off-shore, and the MSCI India Domestic & World Healthcare 45 Index.

The fund house had implemented restrictions on lump sum investments in these schemes in February.

Notably, fresh as well as existing instalments of systematic investment / transfer plans / dividend transfer plans were not affected and have continued as is.

Also read | Indexation benefits on debt funds will go away now

“We had some limits, so we thought of letting investors to take benefit of taxation by investing before March 31,” said Niranjan Awasthi, Head - Product, Marketing and Digital Business, Edelweiss AMC.

Mirae Asset Mutual Fund is allowing lump sum and switch-in transactions with no upper limit in its NYSE FANG+ ETF FoF, S&P 500 Top 50 ETF FoF, and Hang Seng TECH ETF FoF.

This move will be implemented with effect from March 27. Further, existing Systematic Investment Plans (SIP) / Systematic Transfer Plans (STP) will be allowed with effect from March 29. However, fresh SIP / STP registrations will not be allowed.

In addition to this, direct applications received for the creation unit size mentioned in the scheme information document will be allowed with effect from March 27 in three Mirae Asset Mutual Fund’s exchange-traded funds (ETF). These are the NYSE FANG+ ETF, S&P 500 Top 50 ETF, and Hang Seng Tech ETF.

In the case of Franklin Templeton Mutual Fund, the AMC has announced that lump sum subscriptions or switch-in will be accepted with effect from March 27 in Franklin India Asian Equity Fund, Franklin India Feeder - Franklin U.S. Opportunities Fund and Franklin India Feeder - Templeton European Opportunities Fund

“It is clarified that fresh registration under Transfer of Income Distribution Cum Capital Withdrawal Plan (TIDCW)/ Daily and Weekly frequency under Systematic Transfer Plans (STP) for investing into any of the Designated Schemes still remain suspended,” the fund house said in a notice dated March 26.

The fund houses may suspend the subscriptions prior to March 31 if investments come close to the permissible limit available as of February 1, 2022.

What should investors do?

“There are two ways of looking at it. Markets have been falling, hence there are redemptions, and limits have opened up. At the same time, fund houses want to capitalise on the old taxation regime till March 31. If the taxation change had not happened, fund houses, most probably, wouldn’t have rushed to open the schemes, despite the headroom available,” said Kirtan Shah, Founder, Credence Wealth Advisors LLP.

Shah said investors should not rush into making investments just based on taxation changes.

Also read | Not just debt funds, gold and international funds to also lose from the Finance Bill tweak

“They should look at their asset allocation requirement, and if there is a need to buy more international funds, only then should they invest. Taxation shouldn’t be the only reason to invest,” he said.

Regulatory overhang

After nearly a year, most Indian equity funds investing in overseas markets started accepting funds from domestic investors in January 2023.

In January 2022, the Securities and Exchange Board of India (SEBI) had asked MFs investing in overseas securities to stop further such investments to avoid breaching industrywide limits imposed by the Reserve Bank of India.

There’s an overall industrywide limit of $7 billion for mutual funds to invest in overseas securities and funds, and a separate limit of $1 billion for investing in overseas ETFs.

Abhinav Kaul