Mutual funds redesigning schemes for tax benefits

Mutual funds are changing some of their existing debt schemes into fund of funds (FoFs) to benefit from new tax advantages. These changes follow tax benefits announced in last year's budget. Some well-known asset managers, including Kotak, Axis, Aditya Birla, and Bandhan, are introducing these new schemes. These funds will invest about 65% of their money in fixed income, such as bonds, and the rest in arbitrage. Arbitrage involves buying and selling shares and their futures at the same time to make a profit. This new structure allows gains from these funds to be taxed as long-term capital gains, which is generally lower than taxes on traditional debt schemes. Currently, investors in traditional short-term debt schemes often pay a high tax rate of 30% on profits. The new hybrid funds, combining debt and arbitrage, may offer higher returns with better tax efficiency, according to industry experts. Kotak has renamed its schemes to reflect their new focus on this strategy. For example, the Kotak All Weather Debt FoF is now called Kotak Income Plus Arbitrage FoF. Other funds have also been rebranded in line with this strategy. While Kotak and others will invest in their own debt products, Axis plans to use a mix of different debt schemes from various fund managers. These new FoF schemes may have higher fees than traditional debt products since they involve paying expenses to both the main fund and the other funds invested in. Analysts view this hybrid product as a strong alternative to traditional fixed income options, predicting they could earn capital gains as interest rates drop over the next few years.