Threshold Limit in Equity Oriented Mutual Fund schemes to be lowered from 65% to 50% AMFI BUDGET PROPOSALS 2018-19

AMFI-  Association of Mutual Funds in India

BUDGET PROPOSALS FOR FY 2018-19

Threshold Limit in Equity Oriented Mutual Fund schemes to be lowered from 65% to 50%

Background

As per the Income Tax Act, 1961, an "equity oriented fund" means a fund—

i                       (i) where the investible funds are invested by way of equity shares in domestic companies to the extent of more than sixty-five per cent of the total proceeds of such fund; and

ii                     (ii) which has been set up under a scheme of a Mutual Fund:

Provided that the percentage of equity shareholding of the fund shall be computed with reference to the annual average of the monthly averages of the opening and closing figures.

Previously, this threshold limit was fifty percent and the same was revised to sixty-five per cent w.e.f. 1-6-2006, by the Finance Act, 2006.

Proposal

It is proposed that the threshold limit of 65% be reverted to 50% which was prevailing before June 2006 and accordingly, the definition of “Equity Oriented Funds” be revised as follows:

An "equity oriented fund" means a fund—

i                       (i) where the investible funds are invested by way of equity shares or equity related instruments of domestic companies to the extent of more than fifty per cent of the total proceeds of such fund; and

ii                     (ii) which has been set up under a scheme of a Mutual Fund:

Provided that the percentage of equity shareholding of the fund shall be computed with reference to the annual average of the monthly averages of the opening and closing figures.

Justification

For the growth of capital markets, it is imperative to channelize long-term savings of retail investors into capital markets. Mutual funds are ideal vehicles for retail investors create wealth over long term. The “Make in India” initiative of the Prime Minister is expected to boost the economy in a big way and bring prosperity to the capital markets. It is therefore expedient to encourage and incentivize the retail investors to participate in equity markets through Mutual Funds and reap the benefit expected from the “Make in India” initiative.

However, mutual fund products have still remained ‘push’ products. Of a population of over 1.34 billion, barely 18 million persons have invested in mutual funds, as there is a perception that mutual funds are rather risky (as all mutual fund advertisements are required carry a mandatory message that Mutual Funds are subject to “Market Risk”.

Reducing the threshold limit of equities from 65% to 50% for being regarded as ‘equity oriented fund’ would ensure that asset allocation products with equitable risks are also promoted leading to penetration of debt markets and promotion of real balanced portfolios and encourage more number of investors with lower risk appetite to invest in mutual funds.

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