Segregated portfolio cost formula
The rule for splitting a mutual fund unit's original cost of acquisition between the main scheme and a segregated portfolio, in the same proportion as the fall in each portfolio's net asset value.
In plain language
When a scheme's segregated portfolio is created, an investor's existing units suddenly become two different sets of units — one in the main portfolio and one in the segregated portfolio. Both sets need a cost of acquisition for tax purposes, and neither is simply the original cost repeated in full.
The workbook gives a specific rule for splitting the original cost between the two.
How it works
The cost of acquisition of the units in the segregated portfolio is computed as:
Cost of units in segregated portfolio =
Original cost of acquisition in the total portfolio
x (NAV of the segregated portfolio / NAV of the total portfolio, immediately before segregation)
The cost of the units retained in the main portfolio is simply the original cost of acquisition less the amount allocated to the segregated portfolio.
The period of holding for the segregated portfolio units is not reset to the date of segregation. Per the workbook's own rule, it is reckoned from the date the investor originally acquired the units in the main scheme, before segregation ever happened.
A worked example
The workbook's Example 15: Mr X acquired 1,000 units of a mutual fund on 1 April 2021 at Rs 15 per unit — a total cost of Rs 15,000. On 1 June 2022, the fund segregates its portfolio. Mr X is allotted 1,000 units of the segregated portfolio, whose NAV is Rs 2 per unit; the NAV of the total portfolio, just before segregation, was Rs 12 per unit.
Cost of acquisition, segregated portfolio
= Rs 15,000 x (Rs 2 / Rs 12) = Rs 2,500 (Rs 2.50 per unit)
Cost of acquisition, main portfolio
= Rs 15,000 - Rs 2,500 = Rs 12,500
And, per the workbook's parallel Example 14, the period of holding for both sets of units is reckoned from 1 April 2021, the original acquisition date, not from 1 June 2022, the date of segregation.
Why NISM asks about it
Chapter 13 (Tax Provisions for Special Cases), section 13.8, "Taxation in case of Segregated Portfolios of Mutual Funds," states this cost-splitting formula and the carried-over holding period, right after explaining why SEBI permits segregated portfolios for troubled debt and money market instruments. Expect a computation question applying the NAV-ratio formula to a given set of figures.
Common exam traps
- The split is by NAV ratio, not by number of units and not an equal 50-50 split. The segregated portfolio's often-smaller NAV usually means it gets a smaller share of the original cost.
- The holding period is not reset at segregation. A unit held for 11 months in the main scheme before segregation is still treated as held for 11 months in each of the resulting portfolios.
- This formula answers only the cost-of-acquisition question. It does not change how a segregated portfolio works operationally, which this glossary's Segregated portfolio entry covers separately.
Where this is taught
Free preparation for NISM Series X-BRelated terms
- Segregated portfolioA ring-fenced sub-portfolio holding the debt instrument hit by a credit event, split out of a scheme so that the good assets stay liquid and exiting investors cannot leave the damaged paper behind.
- Taxation of winding-up proceedsMoney a unit-holder receives when a mutual fund scheme is wound up is treated like a normal redemption amount - so the ordinary capital gains rules for that scheme apply to it.
- Winding up waterfallThe order in which a wound-up scheme's sale proceeds are used: liabilities due and payable first, then a provision for winding-up expenses, and only the balance to unit-holders.