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Happy days for Fund of Funds?

Mutual fund players are hoping that these funds would be classified as equity schemes in the coming budget

Will Fund of Funds (FoF) finally get their due in this budget? That is the question doing the rounds in the mutual fund industry. Like every budget season, mutual fund players have started with lots of optimism. Several fund managers like A Balasubramanian, CEO, Birla Sun Life Mutual Fund and Nandkumar Surti, CIO, JP Morgan Mutual Fund, told Value Research a fortnight ago that they believe these funds will be finally clubbed as equity schemes for the purpose of taxation. Several others, including prominent investment advisors, were also hopeful that the government would at least accord the status of equity funds to international funds that invest a sizeable part of their corpus in equity.

However, with the budget just a few days away, many mutual fund players are nervous. "I was hopeful that these schemes will finally get justice. We have been waiting for years for this to happen. We were hopeful the government is serious about rectifying the anomaly," says a fund manager, who doesn't want to be named. "However, we don't know whether it is included in the final proposal. So we are keeping our fingers crossed," he adds.

Fund of Funds (FoFs) have been a non starter in India. The main reason for their defeat was related to taxation of returns from these schemes. FoFs, which invest in a combination of funds within or outside the fund house, were classified as debt schemes for the purpose of taxation for some strange reasons. This put them at serious disadvantage, especially those invest predominantly in equity schemes, vis-à-vis equity mutual fund schemes . Long term capital gains from equity mutual funds are tax free, whereas long-term capital gains from debt investments used to be taxed (before the last budget) at 10% without indexation or 20% with indexation benefit. This was the main reason why FoF was largely a non-starter in India.

However, the fate of these funds looked almost sealed when the finance minister hiked tax on non-equity funds in the interim budget in July. The finance minister has hiked long-term capital gains on non-equity funds to 20% from 10% and the lock-in period to qualify for long-term capital gains tax to three years from on year in the last budget. Prominent fund houses like Franklin Templeton, Birla Sun Life, Quantum, among others, have FoF in their stable. Mutual fund industry and advisors are hoping that the government will correct the tax anomaly in the budget, so that investors can use these funds to take care of their long-term needs and effectively diversify their portfolios across best performing mutual fund schemes.