Accounting, Valuation and Taxation of Mutual Funds
Accounting and NAV
Fund accounts are kept on an accrual basis, with income and expenses recognised as they arise. NAV is computed daily: (total assets − total liabilities) ÷ units outstanding. Assets are marked to market.
Valuation rules: listed equity is valued at the closing price on the exchange where it is most traded; thinly traded or unlisted securities are valued at fair value under documented policies; debt securities are valued on a matrix based on residual maturity and credit rating, with amortisation permitted in defined cases. Non-performing assets are classified as sub-standard, doubtful or loss.
Expenses: the Total Expense Ratio is capped by SEBI (higher for equity schemes than for debt and index funds), and no entry load may be charged. Exit loads are credited back to the scheme, protecting continuing investors.
Taxation (verify current rates with the latest Finance Act)
A scheme is equity-oriented if it invests at least 65% in domestic equity. Equity-oriented schemes: short-term (holding up to 12 months) gains are taxed at a special rate and long-term gains at a lower rate with an annual exemption threshold; STT applies on redemption. Schemes that are not equity-oriented are taxed in the investor's hands at slab rates for units acquired on or after 1 April 2023, with indexation withdrawn. Dividends are taxable in the investor's hands at slab rates, with TDS above the threshold.
Traps
- Believing debt funds still get long-term indexation benefits.
- Assuming a "balanced" fund is equity-oriented for tax - the 65% test decides.
- Forgetting that NAV is already net of expenses.
Rule of thumb: tax follows the equity percentage, not the scheme's name.