Reader's Corner: Mutual Funds

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If I decide to make a distant relative a nominee, can my legal heirs challenge the fund house paying the money to the nominee after my death?

According to the Securities and Exchange Board of India’s (Sebi) regulations, transfer of units in favour of a nominee shall be valid discharge by the asset management company (AMC) against the legal heir. However, according to the law, the nominee is only a trustee of the assets, that is, he or she would be a caretaker of the assets after the death of the investor and is legally bound to transfer the assets to the legal heirs. Your legal heirs, therefore, can challenge the money paid to the nominee after your death.

I had invested in a mutual fund three years ago. The fund house was acquired, and the scheme was merged and renamed. When I redeem the investment, how will the gains be taxed?

Whenever you redeem your investments, the holding period of them for tax calculations would be from the original investment date and the gain or loss will be calculated by taking the original investment cost. According to announcements made in the Union Budget 2017, scheme mergers would not place any additional tax burden on the investor.  In addition, at the time of scheme merger, you would have been allocated the units of the new scheme in exchange for the units of the old scheme in a predetermined ratio. The same ratio will be used for cost calculation in case of partial redemption.

How do fund managers maintain liquidity in their funds, especially in small-cap funds, where the holdings can be difficult to sell?

According to the new Sebi guidelines, small-cap companies are 251st stock onwards in terms of full market capitalisation. The fund manager, therefore, gets a vast universe to invest in terms of stock selection. As far as liquidity is concerned, the portfolio is planned and managed keeping in mind the liquidity, both at the stock and fund level. The fund manager takes into consideration the number of days it would require to liquidate a particular position while making the investment decision. Generally, when small-cap funds get bigger, asset management companies restrict lump sum investments in those funds to maintain liquidity and to protect existing investors.

I want to invest in debt funds for the long term. Which category of debt fund should I opt for if my horizon is 8-10 years? Is it advisable to do a systematic investment plan (SIP) even in debt funds, as in equity funds?

From an 8-10 year horizon, you can consider investing in either income funds or gilt fund category, where the average maturity of the portfolio aligns with your investment horizon. Given the current interest-rate scenario and high bond yields, debt funds offer a reasonable investment opportunity. As far as SIP is concerned you can do so in debt funds, and more so SIP should be looked upon as a facility to invest gradually over a period time with a view to create long-term wealth. It does not have anything to do with the asset class.

What’s the difference between corporate bond funds and credit risk funds in the new categorisation? When should an investor look at these funds and what should be the investment horizon?

The prime difference between corporate bond funds and credit risk funds is the quality of paper. Corporate bond funds need to invest at least 80 per cent of their assets in highest credit rating AAA or equivalent instruments, while credit risk funds need to invest at least 65 per cent of their assets in AA or lower-rated instruments. More than the horizon, the investment should suit the investor’s risk profile, as the risk levels are different for these two types of funds.


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