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New norms for debt mutual funds: AMCs open subscriptions to international schemes

Many asset management companies (AMCs) have started subscribing to international schemes to maximize cash flows ahead of the new tax rules on debt mutual funds that come into effect from April 1.

Fund houses that have made changes to their international schemes include Franklin Templeton Mutual Fund, Mire Asset Mutual Fund and Edelweiss Mutual Fund.

Edelweiss Mutual opened all seven international funds this Monday. It has started accepting switching or one-time transactions under these schemes.

“There were some restrictions on us, so we decided to let investors avail the tax benefit by investing till March 31,” Niranjan Awasthi, head of product, marketing and digital at Edelweiss AMC, told PTI.

Mirae Asset is now offering a one-time subscription for three international ETFs and three Funds of Funds (FoFs) based on these ETFs. This subscription will open until March 27.

The existing Systematic Investment Plan (SIP) and Systematic Transmission Plan (STP) will resume on March 29. However, the new SIP and STP will not allow it.

According to Siddharth Srivastava, head of product and ETFs at Mir Asset Investment Managers (India) Pvt Ltd, “Since we have limited headroom for fresh inflows, these funds are likely to close again for subscription in the future to comply with current regulatory controls and applicable guidelines for foreign funds.”

In the case of ETFs, investors can enter into swaps of any quantity or multiple basket sizes directly with the AMC. For FOF, he added that investors could use several methods, such as lump sum or rollover, to get a position in the underlying ETF.

The authority over capital markets, Sebi, granted permission for mutual funds to reinvest in foreign equities in 2022 up to a total of Rs 7 billion (USD). The regulator instructed fund houses to halt taking new subscriptions based on investments in foreign stocks in January of last year.

Franklin Templeton Mutual Fund has begun accepting new or one-time investments in three foreign programs. This move allows investors to put money into programs that may have more potential for growth than traditional investment options.

According to experts, investors who sign these foreign schemes by March 31 are reportedly entitled to indexation rewards. They also encourage investors to subscribe to debt, international, and gold funds in order to take advantage of indexation.

It should note that until 2023, existing debt funds, international funds, gold funds, and new investments will not be impacted by the proposed revisions. Friday, March 31, according to the statement.

The AMC’s decision comes after the finance ministry on Thursday amended the Finance Act, 2023, classifying income from debt mutual funds as short-term capital gains. The new norms will come into effect on April 1 2023.

According to the new rule, investments in debt investment funds purchased in 2023 on or after April 1 will tax as short-term capital gains at applicable tax rates.

This means that debt funds, international funds and gold exchange-traded funds (ETFs), regardless of their holding period, will tax at the applicable individual tax rate.

Debt mutual funds held for over three years will no longer get indexation benefits. Besides, the existing LTCG (Long Term Capital Gains) benefits will apply to investments made in 2023 on or before March 31.

Indexing mutual funds take into account inflation during the unit’s holding period. Doing this increases the asset’s purchase price, and tax is reduces.

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