Seven Best Mutual Funds To Invest For The Next One Year

Last year has been quite eventful for the Indian MF industry. DSIJ tracks the big changes and explains how they are going to impact you and the mutual fund industry. We are also recommending 7 best mutual funds that you can buy for the next one year. 

A lot has changed in the last one year since we came out with our cover story on equity funds. It is not only the increase in assets by 17.5% in the last twelve months, but a structural change, a tectonic shift has happened in the domestic mutual fund industry. There were five major changes that have happened in the last one year. 

Rationalisation and categorisation of schemes 

The most important was the initiative by the market regulator, SEBI, to simplify the comparison, selection and investment in mutual fund schemes. In a circular issued last year in the month of October, SEBI has given guidelines to the fund houses to rationalise and categorise their funds according to the circular. 

SEBI has specified a total of 36 categories of mutual fund schemes. As per the new rules, the AMCs will not be allowed to offer two schemes under different names with identical investment mandates. Prior to the SEBI circular, there were 398 equity schemes, 427 debt schemes, 159 hybrid schemes and 23 commodity schemes. This circular impacted 90 per cent of the industry’s assets and 610 schemes. Around 1400 mutual fund schemes such as index funds, ETFs, fund of funds and closedended funds did not have any impact of the circular. 

There were reports by some of the brokerage firms that this process will lead to huge change in the number of funds offered due scheme mergers or reduction in number of funds because there might be funds with similar objectives and investment styles. 

Nevertheless, the process of rationalisation and categorisation has been completed now, without any major reduction in the number of schemes. No more than 5% of funds have been reduced by the circular. 

Introduction of Long-Term Capital Gains (LTCG) tax on equity mutual funds 

The next major change in the mutual fund industry was announced in Union Budget FY18. It was the reintroduction of the Long Term Capital Gains (LTCG) tax on equity mutual funds. Any gain on equity mutual fund held for more than 12 months will be treated as LTCG and taxed at 10 per cent. 

However, LTCG from equities is exempt up to Rs1 lakh in a financial year. Initially, there was a knee-jerk reaction to this move by the government and there was a huge fall in the inflow of funds into equity mutual funds. There was more than 50% fall in the inflows into equity funds between January and March 2018. However, the flows have stabilised now at lower level. 

Only the lump sum investments have been impacted as investments through SIPs continue to grow. It has increased from Rs6644 crore in January 2018 to Rs7554 crore in the month of July 2018. 

Introduction of Dividend Distribution Tax (DDT) 

Another shocker that came for mutual fund investor during the Union budget of FY19 was the introduction of Dividend Distribution Tax (DDT). This is not to be paid by the investors, but the fund houses will deduct DDT of 10 per cent plus taxes and the balance will distributed to investors. 

This made the dividend option of mutual fund investments sub-optimal in terms of returns. Therefore, there has been a case where balanced advantage funds that offered steady income for many with their monthly dividend, has seen a sharp fall in the inflows as returns slowed down after the imposition of DDT. 

Benchmarking MF return with Total Return Index (TRI) 

From February 1 of the current year, all mutual fund houses were mandated by SEBI to use TRI to benchmark the performance of their schemes. TRI captures both the price movement and dividend pay-outs of an index constituents. This gives a better sense of performance of a fund against its benchmark. 

Disclosures on Total Expense Ratio (TER) 

After observing frequent changes in TER by mutual fund houses, SBI directed these houses to prominently disclose daily total expenses charged to customers for all schemes under a separate head on their websites as well as on the website of industry body AMFI. This will help usher in more transparency in mutual fund investment and investors can evaluate different funds in a better way. 

There are various reports suggesting that the Indian mutual fund industry is going to hit the Rs50 lakh crore mark in the next five years. The changes introduced by the regulator in the last one year will shape the industry’s growth in a big way. 

Our recommendations for the next one year 

Last one year was eventful for us too as we introduced a dedicated MF section with an innovative cover and unique ranking system of equity mutual funds. In this issue, we are recommending seven mutual fund schemes based on our ranking. 

These are funds with top rankings in different categories of funds. You can invest in one or more of these funds depending upon your risk appetite and how these fit into your overall portfolio.