The columnist answers some of the queries raised by the readers

From when will the entry load on mutual funds be stopped? What are the advantages and disadvantages of this policy?

Lakshmi Sundaram

The SEBI (Securities and Exchange Board of India) rule that mandates an end to entry load charges levied by mutual funds has taken effect from August 1, 2009. From now on, you need to pay a separate fee to the distributor/agent from whom you buy your units, in return for any help (advice) that you may receive towards deciding which scheme to invest in. If you know what you are doing, and don't need any advice from the distributor, then you can skip the agent's fee and buy the units directly from the fund management company.

The obvious advantage is more transparency because now you know how much fee you are paying and what you are paying the fee for. Earlier, if you purchased units from a distributor, the entry load used to be deducted from the units allotted to you, meaning you would get fewer units than what you paid for. Another after-effect of the revised policy could be that we may see fewer mutual fund NFOs (meaning less confusion), because the high cost of marketing an NFO will no longer be borne by the customer. Well-performing existing fund schemes may come back to limelight.

It may be too early to comment on the downside of this regulation, but one expected backlash effect is the hard selling of ULIPs, which offer better commissions to distributors.

After the entry loads have been dispensed with, would there continue to be a difference between dividend re-investment option and growth option in mutual fund schemes?

E.S. Raja Gopal

Yes, there's a tax angle that would still contribute to a difference between dividend re-investment and growth option. For the growth option, the original purchase date is used for tax calculation. Selling units within one year from original purchase date attracts short-term capital gains tax of 15 per cent for equity-oriented funds. Selling after a minimum one year holding period attracts zero capital gains for equity-oriented funds.

Whereas in the case of dividend re-investment option, every time a dividend is re-invested it is treated as fresh investment from tax perspective. That is if you sell within one year of dividend re-investment, you need to pay short-term capital gains tax (15 per cent) on the profits made on dividend re-invested units. Assuming the typical dividend-reinvesting fund scheme pays a dividend every year (which gets reinvested), selling your units at any point would mean you have to pay short-term capital gains tax on any appreciation from the final dividend amount that got re-invested.

Please note: Over the next couple of years, when the new tax code kicks in, all this may change.

Infrastructure mutual fund schemes seem to be the flavour of the season. How good are they compared to other schemes available out there?

S. Ramesh

Try taking a look at the portfolio holdings of a typical Infrastructure focused mutual fund. I assure you that you'll be in for a surprise. Clearly, the term 'infrastructure' has been very loosely interpreted (if it has been interpreted at all). How else would you describe the presence of Banking, NBFC and Real estate stocks in the portfolio?

Anyways, I am quite downbeat on funds that focus on any particular sector, because they defeat the purpose of investing in a mutual fund, which is to achieve diversification and reduce risk. Concentrating the fund scheme's portfolio in one or two sectors increases risk of capital loss in the event of a bubble. While some sectors may be flavour of the season and experience high returns over the short term, they may not last forever. Long-term investors need to stay anchored to diversified mutual funds that have a long and strong track record.

What are SIP mutual funds? Are they better than normal mutual funds?

Nithin Mahajan

SIP (Systematic Investment Plan) is not a type of mutual fund, so there's no question of whether they are better than normal mutual funds! SIP is a method of investing in a mutual fund. There are two ways in which you can invest in a mutual fund: 1) Outright payment, and 2) Automatic periodic investments. Outright payment is when you cut a cheque to the Mutual Fund Company or Distributor, whenever you want to invest. Automatic periodic investments mode (referred to as SIP), allows you to invest a fixed amount at constant intervals e.g. every month. Before starting a SIP you need to decide on which fund scheme you want to invest in. Dividend or growth option? How much you want to invest? How often do you prefer to invest (periodicity)? How long you want the SIP to go on? How do you plan to make the periodic payments i.e. through cheque or ECS (electronic clearing/ direct debit from bank)? Hope this helps.

For SIP schemes, how is the holding period calculated for tax purposes? In other words, is the one-year period (for long-term capital gains tax to be applicable) calculated from the first SIP payment or the last payment or from the mid-point?

Vijay Kumar

The system of first-in, first-out applies here. For tax purposes, the units that you sell first will be considered as the first units bought and holding period is calculated accordingly.

The writer is a finance specialist and consultant. He can be reached at: shyamscolumn@gmail.com or www.shyamscolumn.com