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MISSION BUDGET 2019: MFs seek parity with Ulips, tax sops

Hope that mutual fund intra-scheme switches would also be exempt from payment of capital gains tax in the upcoming Budget

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About a year has passed since the last Budget, but India's mutual fund industry has remained about the same asset size of Rs 22 lakh crore. While some investors have remained buoyant with their systematic investment plan (SIP) investments, the last one year has been a roller-coaster ride for the MF industry, given the volatile markets ahead of Lok Sabha polls, the overhang of Long Term Capital Gain (LTCG) tax on equity funds and the IL&FS default cloud on debt funds. 

While the upcoming February 1 Budget will be an interim one, and as such expectations are low, the fund industry is hoping some necessary course corrections will be ushered in by finance minister Arun Jaitley.

Usually, the central governments do not tinker much with interim Budgets, but the present government in its characteristic maverick style may some surprises. "Last year, we got the LTCG tax. So we don't want anything negative this time. If they come back to power after polls, we can expect some big changes," said the chief executive of a large fund-house. 

Yes the LTCG tax, in a way, has marred the purple patch of funds. Monthly net inflow in equity funds, the most profitable product for fund-houses, have shown year-on-year drop for the sixth straight month. Apart from technology-focused equity MFs, all the other categories have negative one-year average returns. If it was not for the support from still-growing SIP contributions, outflows would have been the norm. On the other side of the fence, unit-linked insurance plans (Ulips) have been kept out of the LTCG tax ambit. This, many believe, blunts the appeal of equity MFs. "We hope for tax parity for mutual funds. There is no LTCG tax on Ulips. Mutual funds are long-term investment vehicles for retail investors. So, they could be kept out of LTCG tax as well," says Rajiv Shastri, executive director & CEO, Essel Mutual Fund.

Along with LTCG tax parity, there is hope that MF intra-scheme switches (switching of investment within the schemes of the fund house and intra-fund house) would also be exempt from payment of capital gains tax. This would give MF investors full freedom to choose (or switch) their investments without any strings attached, as is the case with Ulips, said a top MF executive.

Fund industry veterans are also looking at some long-awaited changes to be done. "I think the one thing I always wanted from the Budget to do is to revise the definition of “Equity Oriented Funds” (EOF) by including Fund of Funds (FOF) schemes which invest predominantly i.e., 65% or more, in units of Equity Oriented Mutual Fund Schemes," said Jimmy Patel, MD & CEO, Quantum Mutual Fund. At present, fund of funds investing mainly in equity-oriented MFs are still taxed like a debt fund.

The MF industry also wishes to get tax exemption on the lines of NPS for investment in retirement benefit/pension schemes that may be allowed to be launched by mutual funds. 

To attract more household savings flow into the corporate bond market, the MF industry is hoping that the government announces steps to introduce 'Debt Linked Savings Scheme' (DLSS) on the lines of existing Equity Linked Savings Scheme, (ELSS). This will help to channelise long-term savings of retail investors to deepen the Indian bond market, said Patel.

THE WISHLIST

  • Fund industry is hoping some necessary course corrections will be ushered in by finance minister Arun Jaitley
     
  • MF industry also wishes to get tax exemption on the lines of NPS for investment in retirement benefit/pension schemes

Rs 22 L cr – the asset size of mutual fund industry

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