Mutual Funds hardsell debt funds as tax benefits end on March 31

MUMBAI: Mutual fund companies are wooing retail investors who seek to avail of long-term tax benefits in debt funds in the last few days of the fiscal ending March 31. Last week, the government withdrew indexation benefits for investors in mutual fund schemes that hold less than 35% domestic equity in their portfolio. The new norms will apply from April 1, 2023.
According to industry players, the demand for debt funds is led by high net worth individuals (HNIs), who expect up to 7% annual returns after indexation and tax. Such earnings, in any comparable product, can be realised only if pre-tax returns are 10%. However, no products can give 10% annual return with low risk currently, market players said.

Under indexation, returns are calculated after adjusting for inflation and the benefit accrues to those who have stayed invested for over three years. Gold and international equity schemes too have been impacted by the Finance Bill amendments, as they are treated as debt funds for taxation. On investments made after April 1, investors will have to pay tax according to their income slab upon redemption.
Asset management companies (AMCs) are pushing these schemes in a big way before the fiscal year ends, mutual fund distributors said. Some fund houses like Mirae Asset and Edelweiss have even opened up their international funds for lump-sum investments despite regulatory limitations.
Since February 2022, AMCs have been limited by a Sebi directive capping overseas investment limit at $7 billion. Currently, fund houses can only accept fresh funds to utilise any headroom available in the limit due to redemptions and sale of shares as long as they don’t breach the February 1, 2022 AUM (assets under management) level.

Etica Wealth MD & CEO Gajendra Kothari said, “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.” It’s not only HNIs and ultra HNIs who are investing in these funds, even some corporates who are sure they will not need some money for the next three years are investing in these funds. Mutual fund houses too are pushing these debt schemes in a big way before the fiscal ends, fund distributors said.
According to analysts, the aim behind the government’s move appears to be to reduce arbitrage. “Corporates and HNIs are major participants in debt segment. Corporates invest for treasury management, while HNIs do so for tax advantage,” a report by brokerage Prabhudas Lilladher said. While HNI flows may see some impact, their share in fund houses’ assets and revenue is minimal, the report added.
“Overall impacted AUM forms hardly 2-5% of the revenue for the AMCs… Fund houses might also benefit from these regulations as debt money may move to hybrid funds (where a higher total expense ratio, or TER, is charged),” a report by JM Financial said.
However, some industry players said investors should not go overboard with these funds just to gain tax benefits. “Investors should study their portfolios and financial goals before over-diversifying,” said Kranthi Bathini of WealthMills Securities.

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