There are some fund houses that offer life insurance benefit in the investment of various mutual fund schemes through systematic investment plans (SIP). This is the new concept adopted by fund houses to lure investors towards their mutual funds, initiated by DSPML AMC in 2005 with the name of Super SIP.

Some other players like Birla Sun Life Mutual Fund, Kotak AMC and Reliance Mutual Fund have come out with the same concept with new flavours. Birla Sun Life's MF scheme is known as Century SIP in which insurance expenses will be borne by the AMC. Generally these AMCs charge higher exit load in such schemes in case of redemption before maturity.

The ratings of some 5-star funds have now fallen to 3-star and the returns are also much less than their peers. I have invested through SIPs in two such funds— Reliance Vision and Magnum Global. I have to renew my investments in these funds in June. What should be my strategy? Should I renew my SIP in the same funds, just because they were performing better earlier or should I switch to other 5-star rated funds? Also tell me when I should decide to exit the fund. -Dr Purayil, Chennai

Mutual funds are rated on the basis of the composite measure of both returns and risks. There are two main reasons responsible for the slipping of star rating. One may be that the fund's performance is really declining and other may be the fund has shown average performance but other funds have fared better.

Reliance Vision is a large cap oriented fund. In the past nine months, it has slipped in its performance from being an above-average fund to just an average fund. Its rating is the reflection of its performance. It was sited continuously in 5-star rated category since October 2002.

Its ranking has shifted downward from 5-star to 4-star in September 2007 and further slipped to 3-star in March 2008. Though it has not fared well in recent times, its past performance must be taken into account. As on June 6, 2008, it has delivered 44.52 per cent & 32.58 per cent annualised returns in the last 5 and 10 years respectively.

Magnum Global Fund has delivered 55.86 per cent annualised returns (category return is 40.92 per cent) in the last 5 years. Its ranking has decreased from 5-star to 4-star in March 2008.

It is always advisable to not change your investment decisions on the basis of short-term performance. While churning your portfolio, you must ask yourself whether your investments are yielding returns that you want. Before changing of funds in your portfolio, other points that must be kept in mind are load and short-term capital gains tax. Since you are renewing your portfolio, take a look at other 5- star funds like HDFC Top 200 and HSBC Equity.

I want to know the tax implication (long and short-term) on arbitrage funds, equity derivative funds and also the international equity funds. - Dipankar Dutta

Arbitrage funds are treated just like equity funds while computing tax liability. Hence there will be no tax liability on holding of more than one year.

Equity derivative funds work on a similar theme as arbitrage funds and seek to generate income through arbitrage opportunities (taking advantage by mis-pricing between different markets like cash market and derivative market).

Asset allocation of equity derivative funds varies according to their investment objective. Some funds take more exposure on equity and equity derivative whereas others concentrate on debt markets. Hence, their tax-implications also vary.

The tax implication on ICICI Equity & Derivative Fund is the same as equity oriented funds while the tax treatment on JM Financial Equity & Derivative Fund and Benchmark Derivative Fund are as same as debt funds.

International Equity funds basically park a major portion of their corpus in overseas market instruments. If the overseas investment amount is greater than 65 per cent, then in that case, the tax implication will be the same as that of a debt fund.