Will the surge in mutual fund collections sustain?
Mar 18, 2000

Author: PersonalFN Content & Research Team

Reports carried in leading newspapers suggest that mutual fund collections, which topped Rs 432 bn by January 2000, are likely to touch Rs 500 bn by the end of the fiscal year i.e. 31st March 2000. On a year on year basis, the growth is likely to be over 100%.

The three groups - the Unit Trust of India, the private sector mutual funds and the public sector mutual funds, have turned in varied performances during the first ten months of the current fiscal year. The private sector mutual funds (share of total funds 23.4%) turned in an exemplary performance during the period, recording the highest amount of net inflows. This was followed by the UTI (65.86%) and then the public sector mutual funds (10.74%), which actually faced a net outflow during the period.

Just to recap, the boom in the mutual fund sector, in terms of inflows, commenced early in 1999, post the presentation of the union budget. The finance minister, in a much-appreciated proposal, exempt from dividend tax, all mutual fund schemes that had an exposure of over 51% to the equity markets. Furthermore, income in the hands of the investors in the eligible schemes was also made tax-free. This made investments in mutual fund schemes advantageous from the tax point of view, and funds began to flow in.

However, it must be noted that the exemption is available only till FY02 (dividend tax now stands at 20%). And coupled with the withdrawal of the tax exemptions available under Section 54 EA and 54 EB in the recent budget proposals, the expectation that mutual fund will continue to record large inflows is to be doubted.

Both these proposals are likely to have an adverse impact on inflows. This is mainly due to the fact that the tax exemptions associated with such schemes are considerable and a withdrawal of the same would imply relatively lower after tax returns. This would increase the attractiveness of other investment avenues.

The mutual funds sector has had a tremendous year thus far. However, the initial growth of the sector was aided by the tax exemptions, rather than solely by performance. In light of the gradual withdrawal of these exemptions, it is now upto the mutual funds to sustain growth by turning in better returns. Post tax.