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Expectations of Mutual Fund Investors from the Budget?


Posted on 31-Jan-2017 Comments  0

What are the expectations of MF investors from the Budget ?

We broadly expect the Union Budget 2017-18 to be positive for mutual funds investment. We expect that the government, which is planning to goad people into using the mutual funds route to create long term wealth, may also throw in additional benefits. This may apply to equity and debt mutual funds, as in many cases both these products tend to be competing and complementary products in terms of overall financial planning.


Key expectations from the Union Budget for mutual funds…


  • The big change may be in the ELSS product, which is a tax saving product for equity investors. The current exemption limit of Rs.150,000 for mutual fund investments include a plethora of other investments like insurance premiums, PF contribution, long term FDs, principal on home loans etc. Normally, there is very little limit left after the other products are completed. The budget may either look to increase this limit to Rs.200,000 per annum or they may look to carve out a separate niche limit for ELSS, as it has done in the case of the National Pension Scheme.                                                                                                                                                                                                     

  • There has been a constant demand for expanding the definition of ELSS to include debt funds also. Currently, the ELSS benefit is only available only in the case of equity funds. Debt funds offer a good option to retail investors from a financial planning point of view to add stability and security to one’s portfolio. The budget may make a start by making select G-Sec oriented debt funds also eligible under Section 80C. This will also ensure that retail investors are able to participate in sovereign debt in a bigger way.                                                                                                                                                     

  • This is a slight extension of the previous point. Currently, there is avast gap in the tax treatment of equity funds and debt funds when it comes to capital gains. Equity funds pay a concessional rate of 15%tax on STCG while LTCG is entirely tax free. Also the definition of long term in case of LTCG is 1 year. Debt funds are at a disadvantage. Firstly, the definition of long term in case of debt funds is 3 years and not 1 year. Secondly, debt funds attract STC Gat peak tax rates while LTCG attracts tax at 10% (or 20% with indexation). This anomaly could be removed in the Union Budget.                                                                                                                                                 

  • Fund of funds (FOF) may be one area where the taxation anomaly could be removed in this Union Budget. An FOF is a hybrid fund that is creating by selecting a portfolio of good and solid performing funds. The paradox is that even if you create an FOF of equity funds it will still be classified as a debt fund for the purpose of long term capital gains. This has prevented the growth and development of the FOF market in India. In other developed markets, FOF is a big industry and most financial planners and institutional investors use FOFs aggressively for portfolio selection.                                                                                                                                                                                  

  • Capital gains exempt mutual funds could be another product that could make a come back in this budget. Section 54 EC allows you to save on long term capital gains tax if you invest the proceeds in specified Section 54 EC bonds. In the past, mutual fund units were also eligible investments under Section 54 EC, but they were subsequently removed. This budget may see the re-introduction of Section 54 EC benefit on mutual funds, which will help people to save on capital gains tax and simultaneously also create wealth in the long term.                                                                                                                                                                                                                                                

  • Finally,there could be some distinct advantages that mutual funds could be proffered vis-à-vis direct equity investors. Let us understand a few areas where equity funds could encouraged over direct equities…


    1. Equity funds already enjoy the befit wherein dividends are tax-free without any upper limit. On the contrary, dividends on direct equities are taxable in the hands of the receiver if the total dividend received during the year is more than Rs.10 lakh per year.                                                                                                                

    2. Equity funds could also be given some additional benefits in terms of treatment of capital gains. For example, currently the definition of long term both in the case of equities and equity funds is 1 year. We could see a change to the definition of long term in case of equities to 3 years while the definition may remain at 1 year in case of equity funds.


Broadly,the Union Budget is likely to be positive for mutual funds as an asset class. The momentum is in favour of mutual funds in terms of folios and retail participation. The time may be ripe for the government to intervene and give it a push.



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