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Budget Special: Wish-List Of Mutual Funds - Outside View by PersonalFN
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Budget Special: Wish-List Of Mutual Funds
Jan 27, 2018

Having a wish-list isn't a problem, but expecting all of them to fulfilled, can sure be a cause of disappointment.

The mutual fund industry has high hopes from the Budget 2018-19, which is considered to be the most for this government so far.

Industry body, the Association of Mutual Funds in India (AMFI) has presented a long list of its desires to the Finance Ministry and looks to the government's decisive nod for some of its long-standing demands. Favourable policy measures can translate into a long-lasting high growth phase for the industry.

The mutual fund industry is having a dream run for a last few years. Its Assets Under Management (AUM) base has increased from Rs 17.06 lakh crore in December 2016 to Rs 22.60 lakh crore in December 2017-a growth of 32%.

What the industry is hopeful of?

Relief in taxation is one of the prime focus areas.

Hopes that equity-oriented Fund-Of-Funds (FoFs) to be treated as equity schemes

Currently, FoFs are classified as the debt schemes under the tax laws.

Further, the industry seeks to classify equity schemes as those investing at least 50% of their assets in equity and equity-related instruments. At present, the tax laws require any scheme to invest at least 65% of its assets in equity or equity related instruments to be able to qualify as an equity-oriented scheme.

Permission to launch Debt Linked Savings Scheme (DLSS)

The industry is optimistic about launching debt products offering tax-incentives-on the lines of Equity Linked Savings Schemes (ELSS)Equity Linked Savings Schemes (ELSS). The industry believes this product category will help conservative investors avail of tax benefits and earn better returns as compared to other fixed income products that currently qualify under Section 80C deductions.

The industry also expects the government to forgo the Security Transaction Tax (STT) on the equity transactions made by the mutual fund schemes and Exchange Traded Funds (ETFs).

Exclusive exemptions for pension products offered by mutual funds

The mutual fund industry is lobbying the government to offer exclusive tax deductions to pension plans. In the current scenario, insurance companies dominate the pension plan sector in India. According to a report presented by Ernst & Young, premiums collected under pension plans account for nearly 1/4th of the insurance companies' total collections.

What these companies often do is blend a vanilla savings scheme with an insurance component and sell this as a product. They promote it as being designed to suit the specific requirements of investors.

A retirement plan being one of them.

Now, a typical retirement plan requires an investor to invest throughout his or her working life-span. The accumulated funds in the account are utilised to buy an annuity from the insurance company. The nature of annuity may differ-immediate, deferred, limited period, etc.

The main bone of contention is, while these retirement plans enjoy tax benefits, pension plans don't.

In fact, the mutual fund industry seems to be convinced that unless pension plans become tax-free, offering retirement plans as a stand-alone product doesn't make much sense. This is precisely why only a few fund houses currently offer retirement plans.

Mutual funds be notified as the long-term specified asset

Mutual fund industry believes, individuals liquidate financial assets to invest in immovable property, but it's rarely the other way round. Therefore, to encourage individuals invest in financial assets to receive benefits of capital gain exemptions, the industry expects the government to include mutual funds in the list of specified long term assets that help investors save capital gains tax.

Other important demands are:

For the removal of all restrictions on the Rajiv Gandhi Equity Savings Scheme (RGESS), equal tax treatment to all Foreign Portfolio Investors (FPIs), and for the removal of taxation on intra-fund house transfer from one scheme to another are some other prominent demands of the industry.

Requests have been also been made to lower the holding period from three years to one year in debt schemes to avail the benefits of indexation.

However, industry experts are not unanimous. Some of them opine that the demands of the mutual fund industry are farfetched. The CEO of a big mutual fund house, on the condition of anonymity, told the media, "We guess the government is going to focus on reviving consumption. There may be some tax concessions, etc. to revive growth. It may also focus on rural and agriculture to revive growth. In this scenario, we don't think the government will have mutual fund industry in its radar."

This appears to be a prudent view in the present scenario.

It's important to see how the Finance Ministry evaluates these demands.

This article first appeared on PersonalFN here.

PersonalFN is a Mumbai based personal finance firm offering Financial Planning and Mutual Fund Research services.


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