What can mutual funds expect from the Union Budget 2018 - Motilal Oswal
What can mutual funds expect from the Union Budget 2018 - Motilal Oswal

What can mutual funds expect from the Union Budget 2018

Normally, the impact of Union Budgets on mutual funds is quite limited. Occasionally, there have been significant announcements like in the previous budget the merger of a mutual fund scheme was made exempt from capital gains tax for the fund holders. To that extent, Union Budget 2017 mutual funds impact was quite significant. What has been the impact of union budget on mutual funds and what are the expectations of union budget 2018 for mutual funds? Here are 6 such key expectations that mutual funds have..

Enhance Section 80C limit for ELSS and broaden definition of ELSS
The equity linked savings scheme is a key tax saving technique for taxpayers who rely on Section 80C. However, the overall limit is quite inadequate. The Rs.2 lakhs limit is quite small considering that it has to accommodate life insurance premium, EPF, PPF, long term FDs, tuition fees and home loan principal apart from ELSS. That hardly leaves you much scope for reaping the tax benefits of ELSS. Since ELSS offer tax benefits plus wealth creation through equities there are 2 expectations that mutual funds have. Firstly, there is a demand to enhance the limit of Section 80C to at least Rs.3 lakhs and also carve a separate niche for ELSS. Secondly, since ELSS are pure equity funds there is a demand to permit the inclusion of equity-based hybrid funds also under the definition of ELSS.

Cut rates on small savings to prevent distortion of the yield curve..
The government has gone ahead and cut the administered rates on PPF and RBI Bonds. The problem with small savings is that they offer tax benefits and therefore become very attractive in post-tax terms. This tends to distort the yield curve. In the last couple of years, as interest rates have fallen, there has been an increase in flow of funds towards equity and debt funds.  This budget is expected to cut small savings rates further to align them to the market and allow fairer competition with other investment instruments.

Offer new products to mutual funds to diversify risk
Today mutual funds have largely become binary products. They either offer equity in some form or debt in some form. There are so many other products available in the market. MFs have just been permitted into commodities but the restrictions are still too many. Give them a freer hand to invest in REITs, InvITs and even in structured products. Mutual funds are transparent mechanisms where disclosure standards are quite high. It is high time the government permits mutual funds to diversify their risk by looking at a plethora of investment options including global assets. That is the big hope from this Budget.

Reclassify FOF as equity funds and the anomaly of arbitrage funds..
These two announcements have been in the offing for some time but have not happened still. There has been an anomaly in both the above cases. For example, globally fund of funds (FOFs) are quite popular as financial planning instruments. The problem in India is the taxation. Even if you create a FOF of equity funds, the FOF will still be considered as a debt fund for tax purposes. That means LTCG will be after 3 years. Additionally, STCG will be taxed at peak rate and LTCG at 20% after indexation. There is an expectation that the government may remove this anomaly and reclassify FOFs as equity funds for tax purposes. Another anomaly is arbitrage funds, which are quasi-debt funds but are taxed like equity funds as equity component is more than 65%. This puts arbitrage funds at an unfair advantage vis-à-vis other debt funds. It is expected that both these anomalies may be rectified in this budget

Reduction of GST rates on financial services
GST at 18% is quite high when you judge the impact on fund management expenses and the eventual cost passed on. Many times, the GST amount changes the economics of the fund performance. The proposal is to reduce the GST on all financial services from 18% to 12% and that is expected to make a big difference to the net returns of the mutual fund investor. Over a long period of time, this difference accumulates to quite a big sum.

Putting debt funds at par with equity funds on taxation front
This is one more demand from the mutual fund industry. Currently, debt funds are used by more conservative investors but they end up getting taxed at higher rates. Most retirees and senior citizens also depend on debt funds for their regular income but they end up paying higher capital gains tax and also a higher tax on dividends distributed. Since both are intermediations, the demand is that both equity funds and debt funds can be treated at par for tax purposes. Whether that means shifting the definition for both equity and debt to 1 year or 3 years remains to be seen.

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