Mutual Funds Tax Reckoner for Financial Year 2015-16 – Individuals, HUFs, NRIs & Domestic Companies

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at

With stock markets rising by 35-40% and bond markets giving 15-20% returns in the last one year or so, mutual fund investments are gaining popularity. More and more people are now recognising mutual funds as a highly efficient vehicle to ride with the pace of corporate profitability and Indian economic growth. What makes mutual funds more attractive is their taxation treatment.

While selling equity mutual funds after holding for more than 12 months makes long term capital gains tax-free, selling non-equity mutual funds after 36 months provides indexation benefits, which make them extremely tax efficient vis-a-vis fixed deposits or post office small saving schemes. Short term capital gains on equity mutual funds are also taxed at a lower rate of 15%. Moreover, dividend received is also tax exempt in the hands of mutual fund investors.

Last year in July, the Finance Minister, Mr. Arun Jaitley increased the holding period of debt mutual funds from 12 months to 36 months for these funds to quality as long-term capital asset. Though Budget 2015 has not tinkered with the tax rates applicable to mutual fund investments, some changes have been proposed as far as surcharge is concerned for high net worth individuals and domestic companies.

Mutual Fund Taxation for Individuals/HUFs

Equity Mutual Funds – Units of equity mutual funds held for more than 12 months qualify as long-term capital asset and long term capital gains (LTCG) on equity mutual funds are tax-free or exempt from tax, while short term capital gains on equity mutual funds are taxed at 15%.

Non-Equity Mutual Funds – Units of non-equity mutual funds held for more than 36 months qualify as long-term capital asset and long term capital gains (LTCG) on non-equity mutual funds are taxed at 20% with indexation, while short term capital gains on non-equity mutual funds are taxed as per the slab rate of the individual/HUF investor.

Dividend Income – Dividend income is tax-free or exempt from tax in the hands of individual/HUF investors. Dividend Distribution Tax (DDT), which is applicable to non-equity schemes only, is paid by the mutual fund/asset management company.

Tax Reckoner Financial Year 2015-16

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Some Important Points:

  1. Surcharge at the rate of 12% will be applicable to Individuals/HUFs having total income exceeding Rs. 1 crore.
  1. Surcharge at the rate of 12% will be applicable to the domestic companies where the income exceeds Rs. 10 crore. Where income exceeds Rs. 1 crore but is less than Rs. 10 crore, surcharge of 7% will be applicable.
  1. In order to qualify as long-term capital asset, the units of mutual funds (other than units of equity oriented funds) should be held for a period of more than 36 months. In the case of equity oriented funds, the units would qualify as long-term capital assets if held for more than 12 months.
  1. In cases where the taxable income, reduced by the taxable long term capital gains of a resident individual/HUF is below the basic exemption limit, the long term capital gain will be reduced to the extent of this shortfall and only the balance of the long term capital gain is chargeable to income tax. The benefits of this provision are not available to NRIs.
  1. For the purposes of determining the dividend distribution tax payable, the amount of distributed income shall be increased to such amount as would, after reduction of the dividend distribution tax on such increased amount at the specified tax rates, be equal to the amount of income distributed by the Mutual Fund.
  1. Rebate of up to Rs. 2,000 available for resident individuals whose total income does not exceed Rs. 500,000.
  1. (i) In the case of a resident individual of the age of 60 years or more but less than 80 years, the basic exemption limit is Rs. 300,000.

(ii) In the case of a resident individual of the age of 80 years or more, the basic exemption limit is Rs. 500,000.

(iii) Education cess is applicable at the rate of 2% on income-tax and secondary and higher education cess at the rate of 1% on income-tax.

Note: The rates above are based on the proposals in the Finance Bill, 2015. They will become a law once passed by both the Houses of Parliament and when they receive the assent of the President.

Tax Reckoner Financial Year 2014-15

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Mutual funds, especially equity mutual funds, are the most tax efficient investment options for investors here in India. But, due to market volatility, most resident individual investors remain skeptical about it. I think they need to understand that it is their wrong timings of entry and exit which make them suffer losses in these funds. If they invest when the markets are down due to overly negative sentiments and sell when the markets are up due to euphoric sentiments, then I think they should be able to earn reasonably higher returns.

If you have any general query regarding mutual fund investments or their taxation treatment, please share it share.

PPFAS Mutual Fund Review

I am usually reluctant about writing a review on a mutual fund NFO as the standard conclusion for most of these is that you should wait a couple of years or so before investing in them.

Usually there is nothing that a new fund offers that is so irresistible that you overlook the fact that it has got no track record and invest immediately.

This is true for the PPFAS mutual fund also, and that’s primarily the reason I’ve held back on reviewing it. However, there have been at least two comments in the Suggest a Topic page to review this fund, and therefore I’m going ahead and doing a small post on it.

This fund is being launched by the Parag Parikh Financial Advisory Services Ltd., which is the parent company and offers Portfolio Management Services to its clients among other things. They manage Rs. 300 crores right now, and I’m fairly a certain a lot of readers are familiar with Mr. Parag Parikh himself as well.

This is an actively managed equity fund which will invest more than 65% of its assets in equity, and the rest in debt products.

The SID says that they are going to invest in securities that are trading at a discount to their intrinsic value, and that this scheme is only suitable for long term investors whose horizon for investing in stocks is at least 5 years.

I’ve seen at least a few reviews that in my opinion have gotten carried away with the description of this approach. You must appreciate that at the end of the day, every actively managed fund, and even small time investor like me is doing the same thing. No one goes in and buys something because they think it is overvalued,  everyone who is an investor (not a trader) is buying a share because they think that the company is worth more than what the share is trading for.

That in itself doesn’t make a great value investor.

Ultimately, valuation is opinion, and not a fact. Your view of intrinsic value may be significantly different from my view of intrinsic value, and then what matters is who is right.

Five years ago, I may have thought a certain company is a great company, and is severely undervalued, but today that share is just half of what it was 5 years ago, so what counts is how good am I in truly discovering undervalued stocks.

The same is true for a mutual fund as well, and what we need to see is how good is PPFAS in executing their strategy of finding undervalued stocks and investing in them.

I don’t think this can be done without a track record, and that’s the reason I started out by saying that the standard conclusion of waiting out before investing applies for this fund also.

I’d be remiss if I didn’t state that there are a lot of cool things about this fund like having a section on their website that actually discourages a certain type of investor from investing with them.

They are also quite frank with investors. Like this excerpt:

It is well known that to be successful in investing one must invest when others are fearful and divest when others are greedy. However, considering that PPFAS Long Term Value Fund is an open ended scheme, its ability to invest during bear markets will depend on your behaviour as investors. If investors desert us when prices are low, it will naturally constrain our ability to make invest when valuations are alluring.

I don’t think I have ever seen that before.

Or the fact that even the results for their PMS products are shared on their website (which has done well); this is not the norm as far as I know.

They have tutorials on behavioral finance on their website as well, which is quite rare.

All of these show good intentions, but unfortunately that alone is not enough, there is no way to tell whether these good intentions will translate into good performance or not, and that’s why I have to disappoint you with my standard conclusion of wait and watch for this fund also.

This post is from the Suggest a Topic page.

Motilal Oswal MOSt Focused 25 Fund Review

Motilal Oswal has come out with their first actively managed mutual fund and it’s called the MOSt Focused 25 Fund. It’s named this way because the fund will invest in up to 25 stocks at any given time.

What will Motilal Oswal MOSt Focused 25 Fund invest in?

This is an open ended equity fund, and they will invest 65 to 100 percent of their money in the top 200 biggest listed stocks. They have also said that they may invest up to 25% of their funds in stocks beyond the top 200 as long as the market capitalization of the company is more than Rs. 1,400 crores. They can also invest a portion of their assets in debt instruments.

I was curious to see how many companies fit this criteria and I looked at the S&P BSE 500 index to find that information. The 200th company in there is Supreme Industries with a market capitalization of about Rs. 4,000 crores, and then WELCORP is number 368 with a market capitalization of Rs. 1404 crores.

Now the S&P CNX 500 represents about 96% of the free float market capitalization of stocks listed on NSE, and this fund is able to invest in about 37o of them, so in that sense there is not really a whole lot of restriction in where it can invest. You can expect the bulk of the funds to be in large or mid cap stocks, but other than that the condition of the top 200 and then beyond that companies with more than Rs. 1,400 crores in market capitalization doesn’t narrow down the field in any significant manner as far as I can tell.

How do 25 shares compare with other big funds?

The next interesting thing to look at is the 25 number. If this active fund holds 25 stocks – how does that meaningfully differ from any other active fund which doesn’t impose such a restriction on itself.

Let’s take the example of HDFC Top 200 because it is successful, somewhat similar in structure to the extent that it can only choose companies from BSE 200, and is very big in size so that can give an indication on how many stocks huge funds need to own.

They have an Excel download with the portfolio of Top 200 as on March 31st 2013, and there you can see that this fund owns 69 stocks, so that’s way more than 25!

Also, you can see that the top 25 stocks form about 70% of their portfolio, and the last 44 constitute only about 28% of their portfolio (they have 2% cash) so that’s an interesting contrast that shows what they mean when they say focused.

I feel this is a good thing because all the stocks in their portfolio should be in a position to meaningfully impact their portfolio if they set an upper limit of 25. That in itself is no magic bullet though, and can backfire as well, but as far as strategies go, it appeals to me.

Who is the fund manager of Motilal Oswal MOSt Focused 25 Fund? 

There are two fund managers – Mr. Taher Badhsah who is responsible for the equity part, and Mr. Mr. Abhiroop Mukherjee who is responsible for the debt part.

I’m going to excerpt the information about Mr. Taher Badhsah from the offer document. 

Mr. Taher Badhsah is the Fund Manager of this Scheme and is responsible for managing investments in equity and equity related instruments of the Scheme. Taher is a B.E. in Electronics from the University of  Mumbai with a Masters in Management Studies (Finance) from the SP Jain Institute of Management, Mumbai. He has over 18 years of rich experience in fund management and investment research. He started his career as an automobiles analyst with Motilal Oswal and has been well-regarded in the industry for his work in this sector. Besides, Taher has also worked in different capacities with organizations like Kotak Mahindra and Prudential ICICI Asset Management Ltd.. He has spent the first 10 years of his career doing sell-side equity research and the past 8 years in active fund management. Taher has worked as a Senior Fund Manager for ICICI Prudential PMS for 3 years post which his last assignment has been with Kotak Mahindra Investment Advisors as a Fund Manager managing a part of their long-only offshore equity assets between 2007 and 2010. At Motilal Oswal AMC, in his capacity as Sr. Fund Manager and Co-Head Equities, he has led the active equity investment team since 2010. Mr. Taher Badshah is not a fund manager for any other schemes of Motilal Oswal Mutual Fund except Motilal Oswal MOSt Focused 25 Fund.

I’m unable to make any meaningful inference out of this, so I’ll leave it without further comment.

Expenses and Dates

The offer document says that the fees will be under the maximum permissible so I think it’s fair to assume that this is not going to be a low cost fund.

The NFO opened on 22 April 2013, and will close on May 06 2013.


Motilal is not the first to come up with the idea of 25 stocks but I do like the idea. However, there is no way to tell how an actively managed fund will perform without looking at the performance itself.

If you are in the market for an actively managed fund, I’d say it is better to invest in one that has already shown promise and keep this one in your watch-list to see how the fund does in a two or three year’s time.

Change of DDT from 12.5% to 25% for Debt Funds

One of the more unpopular things from the recent budget was increasing the Dividend Distribution Tax (DDT) from 12.5% to 25% on all debt mutual funds from 1st June 2013. (Clause 29, Budget Memorandum)
Mr. K Srinivasan had the following question:

Hi Manshu,

Query Subject: Recent Budget-2013 change of DDT from 13% to 25% for Debt Funds

In the recent Budget-2013 PC has increased the DDT tax on Debt Funds from approx 13% to approx 25% . This has made Returns from investments in these Debt Funds, (esp for retirees with Monthly or Quarterly Dividend Payout options for having regular income) in these Debt Funds (vis-a-vis Bank FDs) unattractive. This may be affecting even Debt Conservative i.e. MIP funds?

My questions are:
1) Which classes of Debt Funds are affected?
2) What remedial action is suggested?

Some people have suggested switching toGrowth Option and then use SWP to get regular incomes. Is that a good option? If so, when to switch to Growth and what aspects to take care while doing so in terms of Short-Term Capital gains, Exit load windows etc.??

Would welcome a comprehensive reply on this topic. If already covered please proved a pointer link.

K. Srinivasan

Prior to this change, only liquid funds had a DDT of 25% while all other debt funds had a DDT of just 12.5%. DDT is charged when the mutual fund declares a dividend and is paid by the mutual fund and not the investor. Now all types of debt mutual funds will have to pay 25%.

This will of course still reduce the income of the mutual fund unit holder as the mutual fund will have to declare a lower dividend and the unit holders will now get lower income.

To understand how this will affect returns, let’s take a look at how SBI Dynamic Bond Fund (D) paid out dividends in the last year.

Here is the dividend history.


Rs. / Unit









SBI had to pay a 12.5% DDT every time it declared the dividend and had there been zero tax on dividends, SBI would have declared a Rs. 0.24 dividend instead of a 0.21 dividend and a 0.22 dividend instead of a 0.19 dividend.

This can be seen in the table below, and you can also see what effect a 25% dividend will have on this return.

Money Available for DividendDDT at 12.5%Dividend to unit holdersDDT at 25%New Dividend to unit holders
Total Old Dividend0.82Total New Dividend0.70

There is apparently a surcharge also so you can see this is a meaningful impact, and it would be good if there were a way to avoid this extra hit.

In order to explore that you need to take a view on how short term, long term and dividend distribution taxes are charged on debt funds. Here is a table that shows that.

Asset ClassClassification as Short term or Long termLong Term Capital GainsShort Term Capital GainsDividend Distribution Tax
Debt Mutual FundLess than a year is short term and more than a year is long term10% without indexation or 20% with indexation whichever is lower plus surcharge and cessGains taxed on investor’s slab.25%

Based on the table above the following things come to mind:

Don’t Incur Short Term Capital Gains

Short term capital gains on the highest bracket can be upwards of 30% so there is no point in selling your dividend oriented units because of this rule change, and incurring those taxes. Let the units be at least a year old before you sell them so you incur long term capital gains, and not short term capital gains.

Tax Arbitrage between FDs and Debt Fund Not Completely Eliminated

The idea of bringing out this higher DDT rate is to close down the arbitrage between fixed deposits and debt funds due to the difference tax rates. And while this step largely does so in terms of dividend plans, it doesn’t do so for the growth option of the same mutual fund and the growth option is still more tax efficient than a fixed deposit.

Growth Option of Debt Mutual Funds is the Best Option

Given all these things, I feel that if you owned a debt mutual fund with a dividend option right now, your best bet is to change that to the growth option, and then either redeem units periodically or choose a Systematic Withdrawal Plan (SWP).

Other than that, I don’t see how you can avoid this tax incidence, and with this higher tax rate, I don’t see a reason to stick to the dividend option, and definitely no reason to buy new units of dividend oriented funds.

Short Term Capital Gains and Exit Loans

If you are stuck in this situation, you have to be mindful of the fact that you own the funds for at least a year so you don’t incur any short term capital gains by selling them now, and then most of these funds also charge a 1% exit load if you redeem within a year and you will be hit by that as well. So these two things should be given a lot of importance before making any decision.


Unfortunately, there is not much you can do in this situation, and the only other thing that I can think of is to increase exposure to tax free bonds because other than that all instruments do have a fairly high tax incidence. The main drawback of those is that you get the interest only once a year and if you were depending on them for regular income then that will not work. The rate of interest is lower than debt funds too but then post tax, it may match up or be a bit higher, and there is no uncertainty of returns with those as well.


Pankaj Jariwala wrote in with the following information, which I thought was useful to know,


Many mutual funds do not charge exit load if you simply change the option from dividend to Growth. One may confirm this with the mutual fund he/she is holding

But your date of investment (for capital gain purpose) will be from the date you change your plan from dividend to Growth

so do keep the above things in mind too



This post was from the Suggest a Topic page.


List of all RGESS Mutual Funds

In the last month or so several fund houses have launched their RGESS mutual funds, and while existing funds are also eligible for this rebate, that hasn’t stopped funds from launching schemes specifically for this purpose.

I think that’s mainly because it helps for marketing purposes, and a secondary reason could be that you didn’t have funds that were actively managed and were eligible under RGESS, but now funds have launched such schemes as well.

The table below lists every fund that I know of which has been launched specifically to take advantage of the RGESS scheme, and it has a few words describing what the fund is all about as well.


S.No.Fund NameInvestment ObjectiveNFO Date
1SBI RGESS FundActively managed fund that only invests in shares of CNX 10009 Feb 2013 – 09 Mar 2013
2IDBI RGESS FundActively managed fund that invests in shares of CNX 100 and shares of public sector enterprises which are categorized as Maharatna, Navratna or Miniratna.09 Feb 2013 – 09 Mar 2013
3UTI RGESS FundThe principal investment objective of the scheme is to invest in stocks of
companies comprising S&P CNX Nifty and endeavor to achieve return
equivalent to Nifty by “passive” investment. The scheme will be managed
by replicating the index in the same weightage as in S&P CNX Nifty – Index
with the intention of minimising the performance difference between the
scheme and the S&P CNX Nifty – Index in capital terms
09 Feb 2013 – 08 Mar 2013
4HDFC RGESS FundA Close-ended Equity Scheme investing in Eligible Securities as per Rajiv
Gandhi Equity Savings Scheme, 2012 as amended from time to time.
18 Feb 2013 – 15 Mar 2013
5Birla Sun Life RGESS FundThe investment objective of the Scheme(s) is to generate capital appreciation,
from a portfolio that is substantially constituted of equity securities specified
as eligible securities for Rajiv Gandhi Equity Savings Scheme, 2012
25 Feb 2013 – 20 Mar 2013
6DSP BR RGESS FundThe primary investment objective of the Scheme is to seek to generate capital appreciation, from a portfolio that is substantially constituted of equity securities which are specified as eligible securitiesfor Rajiv Gandhi Equity Savings Scheme (RGESS). The Scheme may also invest a certain portion of its corpus in cash & cash equivalent and money market instruments from time to time.14 Feb 2013 – 28 Feb 2013
7LIC Nomura RGESS FundThe primary investment objective of the Schemes is to seek to generate capital appreciation, from a portfolio that is substantially constituted of equity securities which are specified as eligible securities for Rajiv Gandhi Equity Savings Scheme (RGESS).09 Feb 2013 – 25 Feb 2013

List of Best Balanced Mutual Funds – Updated

Balanced funds are hybrid mutual funds that invest in equity and debt instruments, and usually balanced equity funds invest no more than 35% of their money in debt instruments.

I created a list of the best balanced funds in India in March 2011, and I thought of updating that list as it is close to 2 years since it was created last.

I’m not a big fan of these type of lists because no matter how much you say that past performance is not an indicator of future performance, at the end of the day, if you’re making these type of lists then that shows that you do give a lot of weight to how the fund has behaved in a certain manner.

But I do feel that among all the factors I have seen to evaluate mutual funds, past performance is something that everyone relies and does help you to a certain extent.

For example, in my last list almost 2 years ago there were 10 funds, and based on the best 5 year performance, 8 of those funds feature in the list today as well.

Was there any way to know which 2 would drop out? No, absolutely not. So there is some utility but only so much.

With that said, here is the list of the best balanced funds ordered according to their five year performance.

Fund1 Year Return3 Year Return5 Year Return
HDFC Children Gift Investment12.07%15.34%11.87%
Reliance Regular Savings Balanced17.46%9.75%10.88%
HDFC Balanced9.76%11.72%10.85%
HDFC Prudence10.21%10.99%10.64%
Canara Robeco Balance14.11%10.31%8.83%
Birla Sun Life 9512.88%9.91%8.44%
ICICI Prudential Equity Volatility Advantage20.67%12.91%8.22%
Tata Balanced16.14%10.30%7.96%
UTI CCP Advantage9.56%6.25%7.85%
DSPBR Balanced8.20%7.30%7.18%

The two funds that were present in the earlier list but have dropped down now:

FT India Balanced12.41%8.67%5.90%
Principal Conservative Growth17.74%5.73%3.99%


An update on Franklin Templeton Dynamic PE ratio Fund of Funds

I wrote about Franklin Templeton Dynamic PE Ratio Fund a little under two years ago, and I thought of looking at its recent performance when Business Line put in a buy recommendation for the fund in a recent article. 

Essentially what this fund of funds does is allocate money in a debt or equity fund based on what the current P/E ratio of the market. This way it can allocate more money to equities when the market is down, and allocate more money to debt when the market is high and risks going down. Currently it has 60% in equity and 40% in debt.

The two fund it invests its money are Franklin India Bluechip Fund and Templeton India Income Fund.

Now let’s take a look at how these three funds have performed in the past few years.

FT India Dynamic PE Ratio Fund of Funds

I think the chart above is a very useful way of looking at these three funds and see what’s going on in their performance.

Franklin Templeton Dynamic PE Fund returns similar to the returns of Franklin India Bluechip Fund

What strikes me most about this is that FT India Dynamic PE Fund has returns that matched the Franklin India Bluechip Fund in the longer run, and wasn’t able to out do it even when the equity markets haven’t been good for the past few years.

Protection against volatility

The second thing that strikes me about this is that if you wanted to invest in equities but were wary of the volatility and sudden crashes of the market then this would have proved to be a good option as it protected you from the violent downswings that the past few years have brought in the equity market.

Templeton India Income Fund dragging down returns

Moneycontrol ranks this income fund as one of the lower returning ones based on past returns and that has been consistent over the past few years, so you can see that this fund has been dragging down the returns of the Dynamic PE Fund as well.

Returns comparable to balanced funds

When I wrote about this fund almost two years ago I made the following observation about it with respect to balanced funds:

The fund still beat its benchmark but if you look at my best balanced funds post you will notice that there are quite a few funds that have bettered this performance over the 3 year and 5 year range.

So, when thinking about investing in a PE fund – whether this or another – just take a look at how other balanced funds are performing as well because they are similar in structure.

A good balanced fund like HDFC Prudence has returned 11.2% annualized in the past 5 years which is higher than this and while it is not fair to pick just one good balanced fund and compare its return with this fund the point I’m trying to make is that balanced funds that don’t rely on P/E strategies but invest about 35% or so in debt regardless of P/E levels have been doing at least as well as this fund.

P/E Strategy No Magic Bullet 

Theoretically, the P/E strategy sounds good – you invest more when the market is down and more when the market is up, but in practice it’s no magic bullet. The fund has done well, and there is no harm in investing in such a fund, but where you would go wrong is to expect some kind of sensational returns. In the past it has performed like a balanced fund, and these are decent returns when thinking about how the equity market has done in the same time frame, but that’s about it – it hasn’t given you an edge over them, and won’t do so in the future either.

Source of returns:

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Mutual Funds that have performed well over the last 10 years

FundsIndia has come up with an interesting research report titled: The FundsIndia 5 Best Schemes in the History of Indian Mutual Funds.

In this report they have listed down 5 equity funds that have done well over very long periods of time, and have given a little history about them, how they made their money, and fund managing style.

The first question I had upon reading this title was how do you select the paramaters for such a report? Do you stop at returns or do you go deeper and look at other things as well?

Here are the five things that they chose to see:

1. Longevity: Funds that are at least 10 years old
2. Performance: Ability to deliver higher than benchmark returns consistently
3. Resilience: Ability to withstand market downturns better than its benchmarks
4. Stability: Consistency of fund management principles and personnel
5. Investment-worthy: Their recent performances have not caused any concern keeping them investment worthy even today.

I think these are all good parameters but in my opinion if you are evaluating hundreds of mutual funds you should describe these mathematically and then evaluate funds on them. For example, stability can be shown by the number of fund managers that a particular fund had since its inception. I don’t think they went to that level of detail although they have used numbers to evaluate the funds.

The next question I had was if you select 10 years as the cut off point – how many funds do you really have left, and in then within that how many would have a performance worthy of  a second look?

To answer this I went to the following categories on Value Research and arranged the funds in descending order of their 10 year returns.

There were two things that struck me from looking at these funds in this manner:

Sheer number and range: I was amazed to see the sheer number  and range of equity funds that have done quite well over a 10 year period. The five funds that FundsIndia selected belong to 4 different categories according to Value Research and they are usually not the highest performing funds in that category for the 10 year period.

Difference between the 5 year and 10 year return number: The large number of funds that have returned over 20% returns for 10 years is simply mind boggling, but the same funds have pitiful returns over the last 5 years. This reinforces what most readers already know – the last five years have been bad for equity investors and no matter how good your mutual fund is – if the market doesn’t do well, how can the fund do well?

Given this background, while I think the report is useful and everyone should invest the ten minutes it will take to read the report, look at the fund names, and their story – I’m not convinced that you can call these five funds the best without a shadow of doubt, and indeed can you ever select five funds that you could call that?

Read the report here: The FundsIndia 5 Best Schemes in the History of Indian Mutual Funds.

Disclaimer: FundsIndia is an advertiser on OneMint.

IDBI Rajiv Gandhi Equity Savings Scheme Series 1 Review

Last week I wrote about the SBI RGESS, and now IDBI has also filed a prospectus for their own RGESS Fund, and it differs from the SBI RGESS fund in some fundamental ways.

First of all this is a close ended scheme where SBI RGESS was an open ended scheme. The lock in period of this fund is 3 years but it will list in NSE and BSE so people can trade the units on the exchange. I’m not sure what the situation with other mutual funds is right now and how liquid they are to trade in the stock exchange, and if you are investing in this scheme then it’s better to assume that your money will be locked in for 3 years.

The fund has a lock in period of 3 years because the RGESS requires it – how SBI doesn’t have such a lock in is not clear to me, but IDBI has clearly specified this lock-in period, and maybe SBI will file in a revised draft which will have such a lock in as well. (Read: Details on RGESS)

Anyone who wants to invest in this fund is free to do so, and it is not limited to first time investors by IDBI. However, the presence of a lock in period means that people who don’t want to take advantage of RGESS will be turned away from this fund. It really doesn’t offer anything for you to lock-in your money for 3 years if you don’t want the tax deduction.

What will IDBI RGESS Fund invest in?

The SBI RGESS fund was aimed at investing in only stocks that are part of the CNX 100. The IDBI RGESS Fund will also invest in these stocks, but in addition to that they can also invest in shares of public sector enterprises which are categorized as Maharatna, Navratna or Miniratna by the Central Government as these shares are also RGESS eligible securities.

Interestingly enough, IDBI has other funds that invest in RGESS eligible securities and as I said in my earlier post, I haven’t read anything that tells me that existing funds are not eligible for the RGESS fund; if you know differently then please leave a comment.

Other funds from IDBI that invest in RGESS eligible shares:

  • IDBI India Top 100 Equity Fund: Invests only in Equities and equity related instruments comprising the CNX 100 Index.
  • IDBI Nifty Index Fund: Invests only in and all the stocks comprising the S&P CNX Nifty Index.
  • IDBI Nifty Junior Index: Invests only in and all stocks comprising the CNX Nifty Junior Index.

 Actively Managed Fund

This is an actively managed fund which means the fund manager will pick and choose stocks in an attempt to beat the underlying index and generate extra returns.

Usually actively managed funds come with a higher expense ratio when compared with passive funds, and the expenses ratio of this fund is shown below according to the offer document:

(i) On the first Rs.100 Crores of the daily net assets 2.50%; (ii) On the next Rs.300 Crores of the daily net assets 2.25%; (iii) On the next Rs.300 Crores of the daily net assets 2.00%; (iv) On the balance of the assets 1.75%:

This indicates that this fund will not be low cost, and the expenses will be a bit high like other active funds. There will be both a dividend and a growth option, and investors can choose one of those.

They have just filed the draft document so dates for when this fund will open for subscription aren’t out yet, and I will update this post with the dates when they are declared.


SBI RGESS Fund Review

The RGESS (Rajiv Gandhi Equity Savings Scheme) was announced last year, and I had a post on it in October which explained what it was.

To qualify for this scheme you should be a first time equity investor with less than Rs. 1o lakh income, and you should invest in certain specified stocks which include companies in the CNX 100.

Now, the CNX 100 is made up of stocks of the Nifty and the Junior Nifty and that means you can invest in index funds that track either the Nifty or the Junior Nifty, and you will be eligible for the tax benefit under RGESS. You can of course invest directly in one of those stocks, and that makes you eligible as well.

What I didn’t know is that there are no active mutual funds that limit their investing universe by the CNX 100. This is the difference between SBI’s RGESS funds and other active funds that exist today.

SBI RGESS will only invest in the stocks of the CNX 100, and will be an actively managed fund. Since this mutual fund is specifically targeted at RGESS, there can be no doubt that you will qualify for the RGESS tax deduction by investing in this fund and this is an important point in my mind.

That’s because no other index fund or mutual fund has so far advertised that they are also eligible under RGESS, and even in the case of SBI – they have the SBI Magnum Index Fund which is a Nifty index fund, and therefore should be eligible for RGESS, so then why is SBI coming up with a new product but not advertising the existing one for RGESS as well? It makes me wonder if there is a condition that makes it mandatory that only schemes launched specifically for RGESS will be eligible? I haven’t come across any such condition, but if you know of any then please leave a comment.

Moving on to the features of SBI RGESS Fund, here are some key things to keep in mind.

SBI RGESS Fund is an actively managed fund

Active funds are those where the fund manager has the discretion to pick and choose stocks and try to beat the index and give returns over and above their underlying index. SBI RGESS Fund is such a fund, and the fund manager will try to beat the index but will be restricted to the stocks in the CNX 100.

Such funds are typically characterized by relatively high costs, and that’s true for SBI RGESS fund also.

Expenses of SBI RGESS Fund

Mutual funds incur expenses which they then charge back to their investors, and in this is expressed as a percentage, the lower the percentage the better it is.

The expenses in the case of SBI RGESS Fund are as follows:

  • On the first Rs.100 crores of the daily average net assets 2.70%
  • On the next Rs.300 crores of the daily average net assets 2.45%
  • On the next Rs.300 crores of the daily average net assets 2.20%
  • On the balance of the assets 1.95%

As you can see these expenses are higher than index funds, and that’s a negative for a fund that is meant for new investors. In fact I would consider this is as a fairly big negative and wonder why someone shouldn’t invest in a low cost index fund instead of this fund?

Available for existing investors also

Although the fund is targeted for first time investors there is nothing that prevents other investors from investing in this mutual fund if they so desire. There is no lock in period which is interesting because according to the RGESS scheme there should be a blanket one year lock in of the stock or mutual fund you buy to be eligible but that is not enforced at the fund level.

The offer document has just been filed with SEBI and no dates have been declared but when they do I will update the post.