Debt mutual funds suffer large outflows

Mutual funds have sold as much as Rs4,500 crore of debt in two days leading to higher bond yields. Are mutual fund investors redeeming their debt mutual fund investments due to the new tax norms?

Last year, we saw bond yields rise as foreign investors started heavily selling Indian debt. This year after the budget announcement, mutual funds have sold as much as Rs4,500 crore of debt in two days. This has been the highest amount sold on two consecutive days since 31 July 2013. On 10 July 2014, the Union Budget 2014-15 announced, higher long-term capital gain (LTCG) tax for non-equity mutual funds. On the day of the budget mutual funds sold Rs1,183.50 crore of debt and on the next day as much as Rs3,351.30 crore of debt securities were sold, according to data released by the Securities and Exchange Board of India. Foreign investors on the other hand were net buyers of around Rs988.24 crore of Indian debt over the same period. The benchmark 10-year government bond yield rose by four basis points to 8.77% on 11 July 2014 from 8.73% on 9 July 2014. Was this due to heavy redemptions from debt mutual funds on account of the LTCG tax amendments?


Finance minister Arun Jaitley, in his maiden budget, announced that tax on debt mutual funds will be increased to 20% (from 10% earlier), as well as the holding period for classification as long term would be extended to 36 months from the earlier 12 months. This was an attempt to bring parity between different instruments.
 

Reports mention that the tax impact could result in huge outflows from debt mutual funds. The Association of Mutual Funds in India has written to the regulator and the finance ministry to ensure that none of the tax proposals are brought in force with retrospective effect which could lead to heavy redemptions. The FM has yesterday announced that he may consider imposing this next year instead of this year itself.

 

Commenting on the impact of this regulation, Mr Balasubramanian, CEO, Birla Sun Life Mutual Fund said, “I would assume that FMPs as an asset class would lose attraction for short term and will come largely on the longer term. So, anyone with money for this category would need to come in for three years.” Further, he mentioned that, “The increase in long-term capital gain tax for debt funds would encourage investors to come in longer term saving.”
 

Much of the mutual fund redemptions could be from corporate investors. Murthy Nagarajan, head- fixed income, Quantum AMC, mention that, “These norms are aimed at the corporate investors who used to invest for one year and avail of tax benefits by investing in a fixed maturity plan. The same corporate investors if they invest in bank deposits will pay at the highest marginal tax rates. The retail investors participation has been nominal in one year FMP’s. The idea is to pluck this tax arbitrage for corporates. Going forward, the FMP money maturity may be invested in liquid funds or in bank fixed deposits.”

 

Clarifications required
 

Another issue with this regulation is its applicability. There has been no clear instruction on when would this tax norm be effective and would investors have to pay long term capital gains tax of 20% if they have redeemed their investment during the period between April 1, when the revised rate is proposed to take effect, and July 10, the date of its announcement. A clarification is said to be issued.
 

Similarly, the budget highlights mentions a line about ‘Uniform tax treatment for pension fund and mutual fund linked retirement plans’, however, the budget speech, and neither the finance bill mentions anything about taxation for mutual fund linked retirement plans.
 

Again the applicability of Section 80 CCD for private sector employees investing in a pension fund has been a much discussed issue. Industry experts have different views of the same. Some are saying the section was reworded to bring clarity and thus would have no implication for private sector employees who have claimed deduction under this section. Others have the view that, private sector employees, employed on or before 1 January 2004 would have wrongly claimed a tax deduction under this section.

Comments
rajivahuja
1 decade ago
Bad & ill conceived decision.
Suiketu Shah
1 decade ago
there shd not be contradictory decision by the same govt.They have taken a stance of discouraging MF(and initiating people for FD's in banks) fine.But the consistency in this policy shd continue.There shd not be a situation that 2 yrs down the line they wish to discourage bank FD's and tax it 50%.This is why it is very imp to have a hard core economic expert(and honest) in the core of things.
Esakky Kumar
1 decade ago
As retail investor like who earns less than 10 laksh at 20% tax will be affected by this amendment. We invested into FMPS and Debt funds to save 10% tax on FD, now will have to pay 30% Tax. Finance minister should not penalise the investments done at previous year.
Esakky Kumar
1 decade ago
It is fair to impose the amendment from the next year as lot individuals invested in FMP as tax planning compared to Fixed Deposits, where they can save 10% tax by indexation, which now they have to pay 30% on the income.
sivaraman anant narayan
1 decade ago
Although the FM talked of not imposing retrospective application of taxes, he has done exactly that, perhaps unwittingly, for individuals who are already invested in FMPs prior to 10/07/14 in periods ranging from 1-3 yrs. they do not even have an exit option! I am sure many of them individuals are retired persons like me.
Anil Agashe
1 decade ago
I think the tax should be applicable only to corporate entities and individuals should be exempted if the government wants retail participation in bond markets. Secondly I think this is done at the behest of banks as money flowed in these funds especially FMPs. Also may be government would want people to put their money in infra bonds that banks are to issue!
rajivahuja
Replied to Anil Agashe comment 1 decade ago
I agree with your observations.
Suiketu Shah
1 decade ago
Wealth management companies always used to pitch FMP against FD sayig it wl earn 1% more than FD.That wl not be the case now.
Array
Free Helpline
Legal Credit
Feedback