From schemes to taxation: Expert answers to your mutual fund queries

Many mutual funds and investment platforms offer eKYC (electronic know your client) on their websites and apps. If I do eKYC on one of the apps, will that be sufficient to invest across any apps or directly with any mutual fund house? Also, want to understand what is common account number (CAN) on MF Utilities website.

Yes, completing the KYC registration on one website, platform, or app is enough to enable you to invest across all mutual fund houses. The CAN on the MF Utilities (MFU) platform is a single reference number that can be used to view all your mutual fund investments made through the MFU platform. Your CAN will help generate a consolidated account statement for all your investments in a single-view format.

I want to shift my existing investments from commission-based funds to direct schemes. Do mutual funds offer a seamless transition for this? For taxes, will this be redemption be taxed? 

You can shift your existing investments from a regular plan to a direct plan by submitting a duly filled switch form or by submitting an online request. As the two plans have different NAVs, a change request from regular to direct plan is considered as redemption from the regular plan, and a fresh investment in the direct plan. The investor will be subject to applicable taxes in the year of the switch.   

What are the key differences between equity savings, balanced funds and hybrid equity aggressive schemes?

Balanced hybrid funds, as the name suggests, has balanced exposure to both equity and debt. Both equity and debt exposure are each anywhere between 40 per cent and 60 per cent of the total assets. There is no arbitrage allowed in this scheme.

Aggressive Hybrid Schemes have a higher bias towards equity where the exposure is anywhere between 65 per cent and 80 per cent of total assets. Debt exposure in such schemes is between 20 per cent and 35 per cent of the total assets.

Equity savings schemes also have a higher bias towards equity with a minimum equity exposure of 65 per cent of the total assets. They are, however, relatively safer as the equity portion is hedged using derivatives. The size of such hedge or arbitrage is individual to each scheme. The debt exposure in these schemes is at least 10 per cent of the total assets.

For my cashflows requirement, I want to start a systematic withdrawal plan (SWF) by investing in a debt fund. I can either select partial withdrawal or choose the dividend option. For an investor in 30 per cent tax bracket, which among the two is more tax efficient?

It is advisable for you to opt for an SWP instead of a dividend option for regular cash flow requirement. Assuming you have an immediate cash flow requirement, you would be subject to 31.2 per cent tax (for income below Rs 50 lakh) on short term capital gains.The tax is applicable only on the capital gains portion of the total withdrawal amount, that is, units withdrawn multiplied by the increase in net asset value (NAV). On the other hand, the applicable dividend distribution tax as per the current tax laws is 29.12 per cent. 

Consider you had invested Rs 10,000 at a NAV of Rs 10. You would be allocated 100 units. If the NAV moves up to Rs 11 and the withdrawal amount is Rs 100, then the number of units withdrawn is 9.09 units. The capital gain on this withdrawal is Rs 9.09 as the increase in NAV is only Rs 1. Therefore, a 31.2 per cent tax on the capital gain of Rs 9.09 comes to Rs 2.84. In case of a dividend of Rs 100, the dividend distribution tax would amount to Rs 29. However, SWP withdrawal is a trigger, and even in case the NAV declines, your regular cash flow requirement will not get affected as the money will flow out of your initial investment.

The writer is MD & CEO, SBI Mutual Fund. The views expressed are the expert’s own. Send your queries yourmoney@bsmail.in