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The mutual fund industry is hoping for the government to introduce key reforms in the upcoming budget scheduled on February 1, including the reinstatement of indexation benefits on debt mutual funds, and rolling back tax hikes on long-term capital gains (LTCG) and short-term capital gains (STCG).
One of the key asks of the asset management companies is reinstating the indexation benefits for LTCG on debt mutual funds.
“Indexation adjusts gains for inflation, ensuring investors are taxed only on real gains which negatively impacts retail investors, who typically rely on debt funds for stable returns,” stated the Association of Mutual Funds in India (AMFI), as part of its submissions to the government ahead of the Budget.
Another ask is regarding Fund of Funds (FoFs) that invest at least 90 percent in equity-oriented funds under the equity-oriented category. The current definitions, according to AMFI, exclude many equity-invested FoFs, leading to higher taxation compared to direct equity or equity-oriented funds. The above change will bring tax parity, say experts.
Another suggestion is about rolling back the tax hikes on short-term (20 percent) and long-term (12.5 percent) capital gains to their previous levels of 15 percent and 10 percent, respectively. According to AMFI, the higher rates discourage retail participation in mutual funds, reducing their role in channelising household savings into productive markets.
The industry also expects the budget to have some announcements around mutual funds to be allowed to launch pension-oriented schemes with tax benefits similar to NPS under Section 80CCD.
These schemes can offer market-linked alternatives to traditional pension plans and will benefit individuals in the unorganised sector, say industry players.
Also, fund managers expect a flat surcharge rate of 10 percent on TDS for dividends and capital gains on mutual fund units for NRIs. Further, the industry is hoping the government raises the threshold for withholding tax on income distribution by mutual funds from Rs 5,000 to Rs 50,000 per annum. This will reduce compliance hassles for both investors and fund houses.
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Outlook on the AMC sector
Nirav Karkers, head of research at Fisdom said that currently there is no pressure in terms of withdrawal of money from domestic mutual funds. “However, market sentiment has turned slightly benign, which can have some impact on AMC stock prices in the short-term but such fluctuations are transient in nature,” said Karkera.
He further added that in the long run, one should consider that assets under management (AUM) can continue to grow at a compounded annual growth rate (CAGR) of 12 to 13 percent, in line with nominal GDP growth, assuming the savings rate remains consistent with historical trends in India. Therefore, over an extended period, AMC stocks have the potential to deliver steady returns.
Sunny Agarwal, head of fundamental equity research at SBI Securities, said that the valuations in the AMC space are attractive and the current timing offering significant growth opportunities. “Macro tailwinds are also working in favour of the sector, and distinct business-level positives are also emerging,” he said.
Stocks of listed AMCs like Aditya Birla Sun Life AMC, Nippon Life India, HDFC AMC, UTI AMC, ICICI Prudential, and others would be in the focus on February 1.
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