Page 48 - mutual-fund-insight - Mar 2021_Neat

ASK

EXPERT ADVICE

What’s wrong with liquid funds? Segregated portfolios
Why are liquid funds not performing? What are considered as the date and cost
Should I hold my investment in liquid funds of acquisition of segregated portfolios for
or withdraw and invest in FDs? the tax purpose?
– NIKUNJ JALAN – AJIT GUPTA
Liquid funds are not yielding as much Your date of acquisition for a segregated
Liquid funds are returns as they used to until the recent portfolio would be the original date of
not yielding as past because the interest rates have fallen investment in a fund. Let’s say you invest-
much returns as substantially. Therefore, while till recent- ed in a bond fund about five years back
they used to until ly, liquid funds were able to offer mean- and about one year back, there was a credit
the recent past ingfully higher returns than a savings event because of which the fund had to
because the bank account, in the recent past, that mar- segregate a certain portion of the portfolio.
interest rates gin has dropped substantially. Now one year down the line, let’s say the
If you have an investment horizon of
have fallen more than one year, liquid funds are not a fund has been able to recover that amount
which it had to segregate and pay it back
substantially
suitable category of funds anyways. You to you. So, your tenure of holding for even
should look to move your money to a the segregated portfolio would be consid-
short-duration fund. Over a timeframe of ered as this entire five-year duration.
two to three years, short-duration funds As for the cost of acquisition, the origi-
can also yield potentially better returns nal cost of acquisition of the units of this
than an FD. fund would be split between the main
portfolio and the segregated portfolio in
Investing in NFOs the ratio of the NAVs of the main portfolio
Is it advisable for an investor, who’s been and the segregated portfolio on the date of
investing in mutual funds for the last five segregation. Let’s say you have a fund
years, to invest in new fund offers? I’m of- whose prevailing NAV is Rs 95, out of
ten approached by relationship managers which Rs 5 is contributed by certain
For all practical to switch to an NFO. bonds which are distressed and the fund
purposes, one - ROHIT KUMAR company decides to segregate these dis-
should stick with New fund offers make sense only if they tressed bonds into a segregated portfolio.
the old and more offer something unique which existing So, you will end up with two portfolios –
established funds mutual funds are unable to provide. But the main portfolio, whose NAV would be
and avoid such NFOs are very rare. So, for all practi- Rs 90, and a segregated portfolio, whose
investing in NFOs cal purposes, one should stick with the NAV would be Rs 5. Thus, the ratio of
old and more established funds and avoid your main portfolio to the segregated port-
investing in NFOs. folio on the date of segregation is 90:5 and
Also, just bear in mind that when rela- in course of time, when you are to redeem
tionship managers ask you to switch from these units, your original cost of acquisi-
an existing fund to an NFO, more often tion of these units will be bifurcated in
than not, it ends up serving their interests this 90:5 ratio to calculate the cost of
more than yours. So, you should really acquisition of the main portfolio and the
avoid the temptation to switch from an segregated portfolio. Accordingly, the tax
established fund to an NFO. liability will be calculated.

44 Mutual Fund Insight March 2021
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