Funds withdrawn from debt funds will be diverted to bank FDs

MUMBAI: The proposed changes in the Finance Bill are negative for the mutual fund industry and may lead investors to shift to equity schemes. Financial analysts believe that gold funds and international funds will also be affected by the proposed amendment.

Financial analysts believe that bank FDs will become more attractive, as the maturity amount of both debt funds and bank FDs will now come under the same tax net. The proposed changes are likely to come into effect from the new financial year starting April 1.

If this proposal is implemented, there will be a negative impact on all debt funds, especially in the retail category, as people with high net worth may opt for safer investment options like bank FDs.

We can see capital inflows from long-term debt funds to equity funds and also rise in popularity of sovereign gold bonds, bank FDs and non-convertible debentures in the debt category. This is good news for banks, as they can attract customers with the help of higher interest rates and increase the size of their lending and savings accounts.

According to analysts, the liquid mutual fund category will not be affected much as these are mainly short-term schemes and will not see much change in terms of tax. He estimates that the mutual fund industry has around Rs. 8 lakh crore is non-liquid debt AUM (19 percent of total AUM).

Currently, long-term capital gains tax is levied at the rate of 20 per cent with indexation benefit and 10 per cent without indexation on all gains made during three years on debt fund investments. On the other hand, investment returns for the last three years are subject to short-term capital gains tax, which the investor has to pay as per his slab rate.

A senior fund manager at a mutual fund house said, the move is development negative and may increase outflows from debt funds. This is a structural change. However, it would be too early to say anything definitively about this. Capital inflows into debt mutual funds may be affected if these proposals are implemented.