Should Modi 2.0's Full Budget Introduce Debt-Linked Saving Scheme?
Jul 03, 2019

Author: PersonalFN Content & Research Team

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The Association of Mutual Funds in India (AMFI) has been awaiting the government's go-ahead on Debt-Linked Savings Schemes (DLSS) for a while now.

DLSS are debt-linked funds envisaged on the lines of Equity-Linked Savings Schemes (ELSS).

So far, the finance ministry hasn't given in to industry's demand.

Will luck favour the mutual fund industry in the first full-year budget of Modi 2.0?

Although it's unlikely, the possibility can't be entirely ruled out.

Let's delve on what's AMFI's rationale for DLSS...

According to the AMFI, DLSS is an appropriate way to channelise the household savings of conservative investors into corporate bond markets. Banks have been the overarching source of credit for the Indian economy. As India needs to increase investments in infrastructure massively, it's imperative for large corporates to mobilise resources directly from the markets, and banks will take up the responsibility of providing credit to smaller entities.

Is this demand justified?

The AMFI's budget wish list has offered justification for its demand for DLSS. However, the real question is, how justified is the justification?

The Government's plans to significantly increase investment in the infrastructure space will require massive funding and the banks are not suited/equipped to fund such investments. If large borrowers are pushed to raise funds from the market, it will increase issuance over time and attract more investors, which will also generate liquidity in the secondary market, points out the AMFI's budget proposal.

If banks aren't equipped to fund large infrastructure projects, why should conservative retail investors take up the risk? Hasn't IL&FS been an eye-opener for the industry? Even National Pension System (NPS) has incurred losses due to IL&FS' default.

Do we need a so-called vibrant secondary bond markets at the cost of retail investors?

Anything debt-linked has become risk-linked in today's environment; DLSS may not be an exception.

At a time when short-term debt funds are struggling to maintain credit quality of their portfolio, long-term debt investments, especially made in the infrastructure space, would require special attention of the asset managers as well as investor.

The AMFI has proposed a lock-in period of five years and expects that the government will allow investments upto Rs 1.5 lakh under a separate subsection Under Chapter VI-A of Income Tax Act 1961. According to the AMFI, doing so will bring debt mutual funds on par with Bank FDs eligible for tax deductions.

If you remember, UPA government had allowed infrastructure companies to garner funds by issuing infrastructure bonds offering tax deductions upto Rs 20, 000 under 80CCF. Most of them will fall due for redemption within the next few years.

It remains to be seen if the on-going liquidity issues affect redemptions of infrastructure companies.

Should you invest in DLSS if government clears their way?

You shouldn't invest in any product just because it offers some tax benefits. After all, the safety of your money is more important for you, especially if you are a conservative investor. You should always be mindful of the track record of the fund house offering DLSS.

Nonetheless, you need not avoid debt funds. After SEBI introduced the risk management norms recently, debt funds now carry slightly lower risk.

In the wake of diminishing credit quality lately, fund managers of responsible fund houses might have already started taking corrective steps. This includes paring exposure to low-rated papers, not relying excessively on independent credit agencies, and realigning their portfolios keeping in mind the scheme's defined objectives, among others.

Don't forget this when investing in any debt oriented fund.

  • Investing in debt funds isn't risk-free.

  • You shouldn't invest in schemes only because they have outperformed their benchmarks in the recent past.

  • You should consider your financial goalsrisk appetite, and time horizon before investing in any debt-oriented scheme.

  • Following your personalised asset allocation is the key.

  • Ideally, you should invest only in schemes that have a maturity profile resembling your time horizon to avoid negative surprises.

  • Last but not the least, invest only in debt schemes offered by mutual fund houses which follow robust investment processes and have adequate risk management systems in place.

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