The mutual fund industry has seen tremendous growth in terms of asset under management (AUM) over the past five years as it more than doubled to Rs 20 lakh crore over this period. The good performance of the equity markets has helped the industry grow but part of it could also be attributed to the poor performance of the other asset classes such as real estate and gold. However, the overall flows have slowed down in the wake of the crisis in debt funds and equity markets not doing so well in the recent past.
But the inflows through SIP (systematic investment plan) have continued to grow steadily to Rs 8,095 crore per month till February 2019 and remained above Rs 8,000 crore, which shows that retail investors still prefer mutual funds to invest in equities. However, industry experts believe that as the investor's overall exposure to mutual funds is still very low compared to other financial assets and a lot more needs to be done to increase the participation.
Mr. N S Venkatesh, Chief Executive, AMFI, says "Political stability is expected to drive pro-reform economic agenda, thereby help improve fundamentals of our economy, translating into robust equity and debt markets. We now look forward to the new government creating a conducive investment environment for the financial asset class and help bring the investor community, especially in smaller towns to come under the ambit of the mutual fund asset class. This would truly be a 'Sahi Hain' moment for the country."
Here are some of the other expectations of the industry from the new government to make investing in mutual funds more attractive.
- Remove the long term capital gains tax on equity: In the budget 2018, the government introduced the long term capital gains tax of 10 per cent on equities over and above Rs 1 lakh in a financial year. This needs to be taken back in order to make it more attractive for investors to invest in mutual funds, believes experts." Do away the long term capital gains tax on the units of equity schemes of mutual funds to help promote mutual funds since they are a low cost, efficiently managed wealth creation vehicles," says Waqar Naqvi, CEO, Taurus Asset Management Company.
- Fund of fund schemes to be given equity status: Currently, even the equity fund-of-fund schemes are treated as debt funds for taxation purpose. As they invest the majority of the investments in equities schemes, they should be treated on par with equity funds in terms of taxation. "Revise the definition of equity oriented funds (EOF) by including fund of funds (FOF) schemes, which invest predominantly that is 65 per cent or more, in units of equity oriented mutual fund schemes," says Jimmy Patel, MD and CEO, Quantum Mutual Fund.
- Tax benefit to pension funds by mutual funds: Mutual funds were allowed to launch retirement or pension funds a few years back but these products don't have any tax advantage like other pension products available in the market. "To increase the popularity of pension funds, tax incentives should be given at par with other pension products such as NPS, which gets an additional tax break of Rs 50,000 over and above 80C tax deduction," says Patel of Quantum Mutual Fund.
- Need to address the crisis in debt funds: The confidence of investors in debt funds (often sold as alternatives to FDs) have been shaken after the NBFC crisis, where debt papers of some of the big conglomerates like IL&FS were downgraded by rating agencies after they failed to make timely payment. This led to fall in the NAV of the debt funds and investors taking hit on their portfolio. The government needs to work with the regulator to bring in stricter norms to protect the interest of the investors, experts believe. "The spate of incidents in the debt space has shaken the faith of retail investors in debt mutual funds. It has also brought to light the advantages that institutional investors have over retail investors in the debt space. The government may have to work with the regulator to ensure fair and transparent investment outcomes to all classes of investors - retail or corporate - in debt funds," says Vidya Bala, Head - Mutual Funds Research at FundsIndia.