Pre-Budget 2024 Expectation Mutual Funds: Industry Seeks Tax Reforms, New Categories Of Funds

Tax reforms and new categories of mutual funds are expected by the mutual fund industry, if not in the Interim Budget 2024, then in the near future. Read on to learn more.
Pre-Budget 2024 Expectation Mutual Funds
Pre-Budget 2024 Expectation Mutual Funds

As India eagerly awaits Budget 2024, the mutual fund industry is expecting more room for growth after its stellar performance in 2023.

With equity market benchmarks of Nifty and Sensex, reaching unprecedented highs and the NSE Midcap 100 and NSE Small-cap 250 advancing 40.9 per cent and 42 per cent, respectively in CY 2023, mutual funds gave stellar returns with top 20 schemes giving over 20 per cent returns.

A recent survey by BankBazaar revealed that 54 per cent of Indians prefer mutual funds as their investment option, over fixed deposits or any other investment option. 

In the run-up to the budget, experts called for equitable tax treatment between Unit linked Insurance Plan (ULIP) and equity mutual funds, and revision of equity-oriented mutual fund definitions.

They also expect increased government capital expenditure and the return of indexation benefits for fixed-income funds.

Despite the mutual fund industry's Assets Under Management (AUM)-to India's GDP ratio standing at 15 per cent, much lower than the global average of 75 per cent, the substantial increase in AUM in recent years offers hope for the industry.

Notably, individual investors, including retail and High Net Worth Individuals (HNIs), hold a significant 59.2 per cent share of this AUM.

As expectations for Budget 2024 are in the air, industry experts deliberate on reforms they expect if not in this interim budget, then in the near future.

MF Industry On Budget & Reforms In the Near Future

Jimmy Patel, MD & CEO, Quantum AMC, said "For deeper penetration of the mutual funds, i.e. for a bigger pie of the households’ financial assets, investor education, and government making mutual fund investments more tax efficient is the way forward. Many of the long-standing expectations of the Indian mutual fund industry haven’t been honoured by the government so far." Patel proposed aligning the taxation of ULIPs and equity mutual funds and revising the definition of equity-oriented mutual fund schemes to include equity Fund of Fund (FoF) schemes.

"We expect the budget to address the difference in tax treatment between equity mutual funds and ULIPs. At present, when it comes to capital gains of ULIPs, if the annual premium is less than Rs 2.5 lakh, the returns are not taxed...The government should revise the definition of equity-oriented mutual fund schemes by including equity Fund of Fund (FoF) schemes. Equity FoF should be on par with equity-oriented mutual funds for taxation," Patel added.

Further, he suggested exempting Intra-scheme switches from capital gains tax and introducing a Debt Linked Saving Scheme (DLSS) category similar to Equity Linked Saving Scheme (ELSS). This, he believed, will attract more retail investors to the bond market, especially with the coming inclusion of Indian bonds in the JPMorgan Global Bond Index and Bloomberg indices. "Although we understand that this is an interim budget -- a vote of account -- before the Lok Sabha elections 2024, many of these suggestions are structural reforms for greater financial inclusion with mutual funds," he added.

Sandeep Bagla, CEO, of TRUST MF, said that his AMC expects a healthy increase in government capital expenditure to drive economic growth in 2024. "We expect that the indexation benefits on open-ended fixed-income funds that manage interest rate, credit and liquidity risk could be brought back," Bagla added.

Paras Matalia, Fund Manager, SAMCO MF said that as this is an interim budget, major tax reforms are unlikely due to Election Commission regulations. He expects the government's focus on initiatives such as housing for all, infrastructure development, green energy, and 'Make in India' initiatives to continue.

Chakravarthy V., Cofounder and Director, Prime Wealth Finserv Pvt Ltd, said, "Given the record highs in SIP contributions, it is hoped that the government will encourage more diversified investment strategies and support actively managed funds, emphasizing efficient risk management. Such governmental backing is crucial for sustaining the growth momentum and ensuring stability in the mutual fund sector."

Kaustubh Belapurkar, Director - Manager Research, Morningstar Investment Research India Private Limited said that while no big bang announcements are expected in the interim budget the thrust toward infrastructure spending and manufacturing PLIs will continue in the full budget announcement later in the year.

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