What The Mutual Fund Industry Expects From Modi 2.0’s July Budget
Jun 15, 2019

Author: PersonalFN Content & Research Team

(Image source: freepik.com)

After recording a landslide victory in the Lok Sabha Elections 2019, Mr Narendra Modi has secured his position as the Prime Minister for one more term. In fact, there were no other strong contenders for his position.

But that isn't the case for the finance minister's job.

There were many contenders for the role of finance minister.

The appointment of Nirmala Sitharaman has raised many eyebrows. However, her academic qualifications and her vast experience in different departments ranging from the Ministry of Commerce to Ministry of Defence might have cleared her way to the Ministry of Finance.

It's crucial to see how Mrs. Sitharaman handles one of the toughest roles with her just 5 years of experience as a Member of Parliament. Mutual fund industry has high expectations from Mrs. Sitharaman.

The government had decided to avoid a pro-rich stance in the Interim Budget 2019 perhaps because it was presented only a few weeks ahead of Lok Sabha Elections 2019.

This left the mutual fund industry high and dry.

Although not entirely pro-rich, many of the mutual fund industry's demands would have primarily benefited the middle class and the rich class.

Now that the election mayhem is out of the way, can we expect the government to change its stance, or at least soften it and give in to some mutual fund industry's long-standing demands?

  • Introduction of DLSS: On the lines of Equity Linked Savings Schemes (ELSS), which help investors claim tax deduction upto a sum of Rs 1.50 lakh under Section 80C of Income Tax Act, 1961, the industry seeks the nod of the finance ministry to roll out Debt Linked Savings Schemes (DLSS) for conservative or risk-averse investors.

    The industry has been arguing that DLSS will help deepen the bond market. It proposes to keep a lock-in period of five years for DLSS, which will be at par with most other fixed-income assets allowed under Section 80C.

  • Mutual Funds as a Specified Asset: As you may know, investors can avail an exemption from capital gains tax if they invest in 'Long-term Specified Assets' that have a lock-in period of three years under section 54EE.

    So far, the government hasn't permitted mutual funds to tap this market. The industry expects to get the green signal this time and claims that such a move will help channelise domestic savings into capital markets.

  • Fund of Funds (FoFs) should be classified as an equity scheme: A mutual fund scheme can be classified as an equity-oriented scheme only if it invests at least 65% of its assets in equity shares. Although equity-oriented Fund of Funds (Equity FOFs) invest in other equity mutual funds, currently they aren't classified as equity-oriented schemes, but, on the contrary, a non-equity scheme for taxation purpose.

    If the government approves this demand, mutual fund houses may aggressively roll out and push equity FOF products, as these will be at par with other equity funds for taxation purpose.

    [Read: Why Consider Quantum Equity Fund Of Funds To Build Your Portfolio]

  • Mutual funds should be at par with ULIPs for intra-fund house switches: The mutual fund industry also seeks a level-playing field with the life insurance industry. At present, intra-fund switches are tax-free for Unit Linked Insurance Plans (ULIPs). In other words, if investors want to transfer their holdings to a 'Fund 'B' offered by an insurance company from 'Fund 'A' of the same company, it does not attract any capital gains tax.

    Similarly, the Indian mutual fund industry, too, wants to offer its investors a tax-free switching facility for intra-fund house transfers. The finance ministry, however, might be careful about this suggestion, because it could lead to unnecessary churning of the portfolio at the investor level.

  • At par treatment for debt-oriented funds: Besides, the mutual fund industry is also batting for at par tax treatment for debt-oriented mutual funds as for listed debentures. To qualify as a long term capital asset, one has to hold a debt fund for 36 months; whereas one can claim the benefit of indexation after holding a listed debenture just for 12 months.

  • At par tax treatment with NPS: In December 2018, the government made an important announcement of exempting the proceeds of NPS entirely at the time of withdrawal. Mutual fund industry expects the Modi 2.0 government to extend this exemption to retirement benefit/pension schemes launched by mutual funds.

Apart from the above, the mutual fund industry expects Modi 2.0 to introduce more reforms and continue to invest in infrastructure development.

The government's investments in the infrastructure and the higher support to the agricultural sector will not only boost the demand in certain sectors but can also lead to higher job creation and wage growth.

As you would know, market valuations appear extremely stretched at this juncture as corporate earnings aren't growing at an anticipated pace.

Right now, mutual fund advisers and investors should avoid getting swayed by the Modi-led-NDA government's landslide victory in 2019 Lok Sabha elections. The year 2019 is not going to be easy; it could test the patience of several investors. An economic slowdown could weigh on the corporate earnings and consequentially on the performance of mutual fund schemes.

Therefore, it would be sensible to stagger investments instead of going gung-ho. SIP-ping into mutual funds would help you mitigate the volatility (with the rupee-cost averaging feature of SIPs) while you endeavour to compound your wealth and accomplish the envisioned financial goals.

While, the new finance minister crafts the full year Budget 2019, you too make a conscious effort to crafts yours, so that it can facilitate you to save and invest more and benefit from Modi 2.0.

This article first appeared on Certified Financial Guardian.  


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