MUMBAI: In the final few days of the March 31 fiscal year, mutual fund companies are wooing retail investors who want to take advantage of long-term tax benefits in debt funds. Investors in mutual fund schemes that hold less than 35% domestic equity in their portfolios lost access to indexation benefits last week. The new guidelines will take effect on April 1, 2023.
High-net-worth individuals (HNIs), who anticipate annual returns of up to 7% after indexation and taxes, are said to be driving the demand for debt funds, according to industry participants. Such profit, in any equivalent item, can be acknowledged provided that pre-assessment forms are 10%. However, market participants stated that no product currently offers a 10% annual return with low risk.
Returns are calculated after adjusting for inflation under indexation, and those who have invested for more than three years receive the benefit. Gold and worldwide value plots also have been influenced by the Money Bill changes, as they are treated as obligation assets for tax collection. Upon redemption of investments made after April 1, investors will be required to pay tax based on their income slab.
Mutual fund distributors stated that asset management companies (AMCs) are heavily promoting these schemes before the end of the fiscal year. Some asset houses like Mirae Resource and Edelweiss have even opened up their worldwide assets for single amount speculations regardless of administrative restrictions.
Since February 2022, AMCs have been restricted by a Sebi mandate covering abroad speculation limit at $7 billion. At the moment, fund houses can only accept new money to take advantage of any headroom in the limit that comes from shares being sold and redemptions, as long as the new money does not exceed the AUM (assets under management) threshold on February 1, 2022.
"These investors (HNIs) are locking in their money at these levels before the financial year ends so that they can enjoy long-term tax benefits," Gajendra Kothari, MD and CEO of Etica Wealth, stated. These funds aren't just for high-net-worth individuals (HNIs) and ultra-high-net-worth individuals (UHNIs), but also for businesses that are confident they won't need any money for the next three years. According to fund distributors, mutual fund houses are also heavily promoting these debt schemes before the fiscal year ends.
Analysts say that the government's move seems to be to cut down on arbitrage. The major participants in the debt segment are corporations and HNIs. According to a report published by brokerage Prabhudas Lilladher, "HNIs invest for tax advantage while corporations invest for treasury management." While HNI streams might see some effect, their portion in store houses' resources and income is negligible, the report added.
According to a report published by JM Financial, "Overall impacted AUM forms hardly 2-5% of the revenue for the AMCs... Fund houses may also benefit from these regulations as debt money may move to hybrid funds (where a higher total expense ratio, or TER, is charged)."
Investors, on the other hand, shouldn't go overboard with these funds just to get tax benefits, according to some industry players. WealthMills Securities' Kranthi Bathini stated, "Investors should study their portfolios and financial goals before over-diversifying."