Fund of funds hits roadblock as tax issues come to the fore

Mumbai, March 22 | Updated: Mar 23 2005, 05:51am hrs
It may be some time before OptiMix, Indias first exclusive fund house for fund of funds (FoFs), will see the light of day. A joint venture between ING Vysya Bank and Bajaj Capital, this asset management company was hoping to debut later this calendar year. A delay may occur as the taxation issue ails this scheme category.

The promoters of OptiMix, along with Franklin Templeton and Kotak Mutual Fund, which currently run such schemes, have made a representation to the finance ministry not only through the industry body, Association of Mutual Funds in India (Amfi), but also by themselves to request them to relook the taxation structure for FoFs.

Rajiv Bajaj, managing director, Bajaj Capital, said: FoFs is a very novel concept in India, but it is yet to take off in a big way. Due to taxation problems people are shying away from FoFs right now, but we have made representations to the finance ministry and have been assured that this factor has been overlooked in the Budget proposals and will be taken care of.

FoFs are now subject to various tax structures that are not applicable to MF units at large. Unlike equity schemes where there is no tax on dividend distribution, FoFs are still required to pay the dividend distribution tax.

Tax exemption is also posing a problem for FoFs. While equity funds are exempt from capital gains for holding it for more than a year, FoFs do not qualify under the same clause. This is because, they do not purchase equities as an asset class, but equity funds as securities. FoFs on the other hand qualify for both long-term and short-term capital gains tax.

Sources close to the development say that currently there is no clarity on even the securities transaction tax (STT) issue as FoFs, under the earlier regime were required to cough up STT twice.

The first is when the FoF was purchasing a unit of a MF scheme and the second when the scheme was investing in the equity markets.

These are various palpable issues that are now acting as roadblocks in the path of proposed fund house, that promises to be Indias first multi manager fund.

While the ING group will have 75% stake in the AMC, Bajaj Capital will hold 25% stake through its subsidiary Bajaj Consultancy. The trustees of the fund house however remain optimistic and feel that this clause has merely been overlooked by the ministry of finance and will be rectified shortly.