By
Mr. Srikanth Meenakshi, FundsIndia.com
The Budget 2014-15 proposes to change the
definition of “long-term” from one year to 3 years for non-equity mutual funds
(MF). This takes away an important method that retail investors were using to
get started with their MF investing.
Getting
a person to start investing in MFs is quite difficult. As soon as a potential
investor realizes that we are trying to get her / his into an investment
product, the first question to come up is about returns. ‘Kitna deti hai’ is
not restricted to buying vehicles alone. Investors are always seeking certainty
of return for their investments.
Debt
MFs played an important role..
MFs
as a class of investment products do not offer any such certainty. They also
cannot guarantee principal protection, so there is no clear answer to the
question ‘will I at least get my money back?” The one thing that they do offer
is volatility, which means that all returns that an investor sees are notional
until the units are actually redeemed.
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| Srikanth Meenakshi, FundsIndia.com |
However,
despite all this, we know that investing in MFs for the long term is good for
an investor. Equity & balanced categories of funds have comfortably beaten
inflation & given handsome returns to investors for holding periods of 5
years and above. So, we are always finding new ways to gets investors to make a
start with MFs and encourage them to invest for the long haul. But to do so is
a big challenge.
Till
now, debt MFs played an important role for this purpose. These funds offer low
volatility and a relatively lower risk to principal when compared with their
equity counterparts.
However,
the returns that they generated, except in a falling interest rate scenario
that comes only once every few years, were on par with fixed deposits from
banks. In this context, the indexation benefit offered for a holding period of
over a year provided a real benefit for investors and thus, was a sound
argument for advisers.
MFs,
hamstrung as they are with the lack of principal protection, lack of guaranteed
returns & volatility, could compete
on a level field with bank fixed deposits to mobilize money into the debt
market. This benefit enabled advisers & distributors to provide an easy
‘on-ramp’ to MFs for investors.
The
proposed budgetary change, however, takes this away, and the entire MF
ecosystem - investors, distributors and asset management companies (AMCs)—are
the poorer for that. The finance minister has suggested an abuse of this tax
provision by companies as the main reason for this change.
It
would have been easy to make this taxation change apply only to companies, but
that option has somehow eluded the authors of the change. The minister also
said that the number of retail investors who have benefited from this tax
provision is “very small”. A simple analysis of the industry’s assets under
management and its folios shows that lakhs of investors, if not millions, have
invested more than Rs.30,000 crore in debt funds.
By
no means are these small numbers, either in terms of number of investors or by
amount. All these investments were made under the assumption of a tax treatment
that now stands up-ended. The result of this change, implemented with immediate
effect, affects the credibility of MF advisers and makes planning difficult.
How
will the investors believe us if we say that gains from equity funds are tax
exempt after a year of holding? Will they trust MF investing from a tax
planning perspective?
Also,
while the aim of the budgetary change was to address an ‘anomaly’ with debt
funds, it may also affect gold funds and international funds, which have
nothing to do with the debt market. Is it too much to ask that large changes
such as this be well-defined and well thought-out? In recent years, fund houses
have also made a conscious effort to educate investors about debt funds and
increase this segment of assets under management. Regulations (such as no
separate institutional plan) have ensured that the retail investor is treated
fairly in this asset space.
But
all efforts taken by AMCs and advisers in this ‘awareness initiative’ may go in
vain with a lethal weapon of tax disincentive. This change, as has been laid
out presently, is not fair to retail investors for it affects them
unnecessarily and all too broadly. It is also not good for the MF industry,
which was finally starting to see some good days.
About
the author
Mr.
Srikanth Meenakshi, co-founder and chief operations officer, FundsIndia.com.
From Mint
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