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Tax implications for mutual fund investors

November 17, 2008 16:33 IST

I wish to clarify the meaning of beta in stocks. Also, I wish to know whether beta value should be less than or greater than 1? Which value of beta is desirable and why?

Vrajesh Shah

Beta is a statistical term. It measures the volatility of a stock (or fund) relative to the market (or the benchmark). The value of beta of a stock or fund is always stated against its benchmark, which is always equal to 1.

If a stock is benchmarked against Sensex and has a beta value, that is, greater than 1 (say 1.5), this indicates that the stock is 50 per cent more volatile than the market as the beta of the Sensex is 1. The stated stock will deliver 15 per cent return if the market has delivered a 10 per cent return in the same period. This implies in a falling market too. If the Sensex delivers 10 per cent negative returns, then the stated stock will fall by 15 per cent in the same period. A beta of less than 1 implies lesser volatility.

The desirable value of beta depends upon the individual risk-bearing capacity. So, while you can expect a high return from a stock that has a beta of 2, you will have to expect it to drop much more when the market falls.

Please explain the concept of expense ratio in equity and debt schemes? Will it affect returns?

Vigneshkumar S

The expense ratio is the total amount of annual expenses incurred by a fund. It includes the management fee and operating expenses like the registrar and transfer agent fee, audit fee, custodian fee and marketing and distribution fee. These expenses are divided by the assets under management. Simply put, the expense ratio is the per-unit cost incurred in managing the fund. The net asset value that you see daily is calculated after deducting these expenses. However, the expense ratio of a fund is disclosed only once every six months.

The expense ratios of equity and debt funds differ. Since the expenses of equity funds are more than those of debt funds, the expense ratio on equity funds is greater.

According to the regulations of the Securities and Exchange Board of India, a mutual fund can charge a maximum expense of 2.5 per cent (equity funds), 2.25 per cent (debt funds), 1.5 per cent (index funds) and 0.75 per cent (fund of funds).

Costs do matter. While choosing a fund, everything else being equal, choose a fund with lower expenses because that will result in a higher return.

I want to invest in debt funds and I have shortlisted Canara Robeco Income Fund (G). But when I had a look at the fund's portfolio, it showed that more than 50 per cent of it was in cash/ call. However, the fund's returns have been consistent since inception. How should I read the performance of this fund?


Canara Robeco Income Fund (G)'s history is mingled with periods of impressive and dismal performances. This fund has performed better than the market since February 2008. But if you look at its five-year history, only on two occasions (2005 and 2006), this fund has performed better than its peers. Otherwise, the record states the opposite. The new fund manager has taken some quick and smart bets so far. The allocation of 50 per cent in cash/ call money had actually helped the fund with handsome monthly returns of 4.44 per cent (category average: 0.76 per cent) and 3.05 percent (category average 0.82 per cent) in August and September respectively.

I want to know more about UTI Mutual fund's UTI Wealth Builder Fund-Series II scheme. This fund will invest a portion of its assets in equities and another portion in gold exchange-traded fund. Is there any other existing scheme from UTI or any other asset management company, which is similar to the scheme mentioned above (part equity, part gold ETF)?


The newly-launched UTI Wealth Builder Fund-Series II has come with an innovative idea. It will provide exposure to a diversified portfolio of equity and equity-based instruments, debt instruments as well as gold ETFs (up to a maximum of 35 per cent) by investing through a single fund. You can avail yourself of the diversification benefit by having some exposure to gold ETFs without owning a demat account. Since the equity exposure is a minimum of 65 per cent, for tax purposes it will be treated like an equity fund. This fund could be ideal for conservative investors. There are no other funds available that have a similar theme.

What are the tax implications for an investor who has invested in a fixed maturity plan, growth option, and after the maturity the proceeds are reinvested in another FMP under the same option?

R Sreedharan

The amount of tax will depend on the holding period of the fund. Short-term (less than a year) profit from the fund is added to your income and will be taxed according to your income slab. In case of redemption made after one year, the long-term capital gains tax will be charged. This will be at 10 per cent without indexation or 20 per cent with indexation, whichever is lower.

I want to invest in DSP Black Rock World Gold fund and the Latin America Fund from ING. What is the long-term capital tax incidence for these funds?

Jasmal Sandhu

These funds invest in foreign funds. Therefore, they will be taxable at 10 per cent without indexation and 20 per cent with indexation, whichever is lower.

For tax purpose, how can a person adjust the profit and loss occurred through trading of shares?

Dr S Venkatesan

You can adjust the short-term capital loss against gains. According to income tax regulations, short-term capital loss can be offset against both short-term capital gains as well as long-term capital gains.

By Value Research

B S Reporter in Mumbai