Ahead of Union budget, the $800 billion mutual funds industry has urged the government to introduce a more favourable dispensation of taxation for debt mutual funds in India.
This is a must if investors have to make right asset allocation and a proper retirement security is to be created for the 1.4 billion people, Navneet Munot, Chairman, Association of Mutual Funds in India (AMFI), told businessline here in an interview.
“Budget should restore a favourable dispensation of tax treatment for debt fund schemes in India,” Munot said.
Development of bond markets in India is as critical as development of equity markets in the country, he said, adding that debt mutual funds will make a comeback if the tax benefits withdrawn few years back is restored.
The removal of indexation benefits in debt funds effective April 1, 2023, have impacted investor interest in debt MF schemes. This is because capital gains from the sale of debt mutual funds are now taxed at the investor’s applicable income tax slab rate.
Debt mutual funds are seen to be a crucial component of an investor’s portfolio, offering both risk mitigation through asset diversification and a steady stream of income. They have historically served as effective diversifiers, especially during periods of equity market volatility, as seen during the financial crises of 2008 and recent COVID 19 period.
Primarily, debt funds are suited for achieving short- and medium-term financial goals, such as building an emergency fund or creating a corpus for immediate expenses, like a home or car loan down payment. However, they can also play a significant role in a long-term investment strategy, providing stability and reducing overall portfolio risk.
Munot expressed hope that the upcoming budget would showcase continuity of reforms and give a push to growth momentum of the country.
“In upcoming budget, we expect policymakers will continue to take right steps to enhance growth momentum of the country. Policy makers must take a multi-pronged strategy to support growth, investment, consumption and exports,” he said.
On recent 12 per cent correction in equity markets since the September 2024 highs of benchmarks and resultant impact on SIP interest from retail investors, Munot said “Our expectation is that most of the investors who have chosen SIP route are investing for long horizon and will not be swayed too much by volatility”.
MF industry has been consistently communicating that markets may remain volatile in short run and it is important to have long term orientation and discipline to create wealth, Munot added.
Munot highlighted that India is currently witnessing a cyclical slowdown in economic growth and corporate profit growth has been muted relative to investor expectations in the last two quarters. “But structural long term growth story of India remains intact,“ he said.
Munot also said that recent SEBI consultation paper on Sachetisation is a welcome one and would help drive mutual participation among Indian households.
“We don’t have an AUM target from Sachetisation. Objective is to take MF product to every nook and corner of the country so that every household can participate in the Bharath growth story in line with their risk appetite,” Munot added.
Venkat Chalasani, Chief Executive, AMFI, said that AMFI’s pitch for Budget is multi-fold. He highlighted that growth of debt mutual funds in 2019-24 has been extremely muted even as growth in the equity market has been substantial.
“Our main request is to bring back the indexation benefit which was withdrawn for debt funds with retrospective effect. We have also requested that capital gains tax on debt funds be brought on par with listed securities,” he said.
“Also similar to tax free bonds of NHAI etc, if we invest in infrastructure with a lock-in period of say 3-5 years then similar benefit as given for such bonds be given to us.”
AMFI has also suggested that budget must introduce Debt Linked Savings Scheme (DLSS) on the lines of Equity Linked Savings Schemes (ELSS), Chalasani added.
In another suggestion, AMFI has made a case for extending all tax benefits currently available for National Pension System (NPS) to all the pension schemes floated by the mutual funds .
AMFI is eyeing an Assets Under Management (AUM)— currently at about 68 lakh crore — of ₹100 lakh crore by 2030. The mutual funds industry is also eyeing at least 10 crore unique investors by 2030 as against 5.2 crore now, Chalasani added.
