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Mutual fund industry's hopelist for Jaitley

February 26, 2016 17:03 IST
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MFs continue to find it difficult to attract and retain long-term money from investors

In the last two years, the mutual fund industry has been helped in general by an improved economic situation in India, with a direct outcome - the improvement in equity market sentiments.

However, the fortunes of the mutual fund industry in India have swung with the equity markets. During bad times, investors pull out money, and when the markets peak, they come back in droves. Somehow, mutual funds continue to find it difficult to attract and retain long-term money from investors.

As the Budget nears, the mutual fund industry hopes that the finance minister would make some announcements that would help them garner more long-term investment.

Here are some of the key Budget expectations of the mutual fund industry.

Making mutual fund retirement schemes at par with NPS

In last year’s Budget, the Finance Minister had allowed an additional Rs 50,000 deduction - over and above Rs 150,000 limit under Section 80C - on investment in the National Pension System (NPS).

Given mutual fund pension schemes also promote long-term savings, they also ought to be given similar tax benefits as NPS, that is, allow an additional deduction of Rs 50,000. This would help mutual funds garner more long-term investments.

Increasing the Section 80C limit

At present, investment in tax-saving instruments such as Equity-linked Savings Schemes (ELSS) or tax-saving mutual funds up to Rs 150,000 is eligible for deduction from taxable income. This limit could be increased to Rs 300,000. This would attract more investment in tax-saving funds.

Given ELSS is one of the best Section 80C investment avenues, the fact that they form only 3 per cent (around Rs 40,000 crore) of the total mutual fund assets can be puzzling. One reason for this is that the Rs 150,000 limit under Section 80C is so low that it gets exhausted easily through home loan principle repayment, employee provident fund, and life insurance, leaving little room for instruments such as ELSS. A hike in the Section 80C limit would help in addressing the issue partially if not completely.

Tax benefit for infrastructure debt funds

Infrastructure debt funds promoted by mutual funds should be given some tax benefits, either by affording them the status of Section 80C instruments or by allowing lower capital gains tax.

Infrastructure debt funds would get investments from institutional investors, and would invest the same in infrastructure projects. Given how crucial infrastructure is for the growth of the country, any encouragement to infrastructure funding and spending is going to help the sector.

Giving equity status to foreign FoFs

Investment in equity Fund of Funds (FoF) is treated as debt investment and taxed accordingly. So, while an equity fund enjoys a lower short-term capital gains tax and no long-term capital gains tax, investors investing in a foreign equity FoF have to pay both a higher short-term and a long-term capital gains tax.

Since, investors would like to diversify their equity portfolio by investing in equities of other countries, they should not be deprived of the tax benefits of equity funds. The government could correct this anomaly in the upcoming Budget.

Making mutual funds a part of Jan Dhan Scheme

Jan Dhan Scheme is an ambitious financial inclusion plan. However, financial inclusion doesn’t end with the opening of bank accounts; the ultimate aim of financial inclusion is to shift people from physical savings instruments to financial savings.

By adding mutual funds to the Jan Dhan Scheme, the government can not only channelise a lot of money in mutual funds, but also it can help inculcate disciplined investment behavior among small investors.

Exposing very small investors to certain mutual fund schemes - equity or duration funds - can be detrimental. Therefore, to begin with, schemes like fixed maturity plans and short-duration bond funds can be included in the scheme.

Allow mutual funds to buy and sell stocks directly

mutual funds buy and sell stocks through brokers. If they are allowed to buy and sell stocks directly, it could not only improve efficiency but also help them save a large sum that they pay as brokerage every year.

Higher infrastructure spending

The government can help the industry indirectly by giving higher allocation to infrastructure sector. Higher infrastructure spending has a multiplier effect - it generates demand, employment and attracts foreign investment.

All these would help boost GDP growth, drive consumption, improve profitability of companies and as a result stoke positive sentiments both in the equity and bond markets.

Illustration: Uttam Ghosh/Rediff.com

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