Considering the long wish list of the mutual fund industry for the finance minister in Union Budget 2007, the document has come out as a bit of a downer. In fact, there is nothing much for the MF industry to write home about. It has rather come out as a mixed bag.
While the MF industry has been permitted to launch and operate dedicated infrastructure funds to promote flow of funds into the infrastructure sector, hike in dividend distribution tax from 12.5 to 15 per cent will hit the bottomline of MF players.
Also, the 25 per cent tax on dividend distributed by money market and liquid funds is a negative for the category. Nilesh Shah of Kotak Mutual Fund feels that the increase in dividend distribution tax will bring down debt funds at par with bank fixed deposits, while money market/liquid funds will now be less attractive to investors as compared to bank fixed deposits or any other saving instruments.
However, Vivek Kudva of Franklin Templeton Investments (India) supports the FM's decision as he says, "There was a big tax arbitrage in liquid and money market funds, which has been reduced, and that is directionally right because if you create arbitrage and structural imbalances then you create wrong kind of behaviour."
The clause that individuals can now invest in overseas securities through Indian Mutual Funds, will infuse a lot of funds to the system adding to MF bottomline.
On the positive, Rajiv Anand of Standard Chartered Mutual Fund feels that the status-quo on capital gains and STT (Securities Transaction Tax) itself is in a sense good news for the industry.
Budget 2007 - Reactions from Mutual Fund Industry
Nilesh Shah, president of Kotak Mutual Fund says, it's a Budget that continues to reflect continuity. For the growth momentum that India is on for the next 3-5 years, this Budget is one more step in that direction. From short to medium-term perspective, I would say that the Budget is neutral from overall perspective.
Impact on MF Industry - No disappointment for the mutual fund industry except for the arbitrage that was available to investors in money market mutual funds has come down significantly.
To that extent, I think that category of funds becomes less attractive to investors as compared to bank fixed deposits or any other saving instruments.
There is a 180-degree change in what was expected from the budget for debt mutual funds and what the budget has eventually offered. To that extent that category of investments will surely get affected and debt funds would come at par with bank fixed deposits.
Outlook for the markets - We have clearly seen the first round of correction in the market place. The biggest trigger for that was clearly valuations. The second broad reasons were clearly interest rates and inflation. The third factor essentially is the China factor in terms of the regulatory issues which are there are in the capital markets.
Because of the correction the first issue has got addressed as valuations have become far more attractive. The problems with the Chinese market is a big positive for India because thats going to attract more and more foreign institutions to India vis-à-vis a market like China. Over the last four months, India was competing with China in terms of getting higher allocation in their portfolio. This event is really positive for India. So from that perspective where the markets are today, the markets look extremely attractive from 12 months horizon.
Sector Outlook - Cement is clearly the most hit, to some extent IT services got hit and they get hit because they have been brought under MAT. Two is ESOPs come under the FBT net. Three is service tax imposed on rentals, which they pay out and they are reasonably large users of real estate oriented space.
Clearly I think for IT, it has been not a nice budget. In terms of positives, gas pipeline companies, companies, which lay the gas pipelines, companies which manufacture gas pipelines benefit a lot. Secondly companies, which are into food products, food processing, biscuit companies stand to gain. Thirdly companies, which make leather products gain.
Rajiv Anand, Head-Investments at Standard Chartered Mutual Fund says this is a Budget that has some positives some negatives.
Impact on MF Industry - The dividend distribution tax for corporates and the dividend distribution tax increase for money market mutual funds is certainly negative. The increase in taxes in terms of surcharge is negative.
I think the road to fiscal consolidation clearly remains and that should hold us going forward. Clearly the positives are there were some expectations of hike in capital gains and STT that hasn't come through. As far as mutual funds are concerned, the fact that equity mutual funds continue with their zero tax status, capital gains remains zero as far as equity is concerned is in a sense good news.
There were hopes that debt mutual funds would also see similar status as equity, but that was a bit far fledged. As far as interest rates are concerned and it creates an unnecessary arbitrage. So we would have liked it to be neutral but the arbitrage still exists and money market mutual funds are quality products.
Outlook for the markets - For the markets, its the same yesterday's story. Most of the stocks are incremental, it doesn't add much or too little to earnings estimate. What we need to go forward is in terms of whether one needs to rework estimates, which I don't think we will need to and I think global factors also become critical, now that the budget event is off the way, markets will now begin to focus on that.
Vivek Kudva, president, Franklin Templeton Investments (India) says the finance minister has limited options and in the light of that it's a reasonable Budget. Initially some of the Budget proposals haven't gone down.
But if you look at the main tax exemptions that are available in terms of long-term capital gains, etc and securities transaction tax, there have been no changes. On balance, nothing is in it that should alarm the market.
There was a big tax arbitrage in liquid and money market funds, which has been reduced, and that is directionally right because if you create arbitrage and structural imbalances then you create wrong kind of behaviour.
From a long-term growth perspective there is a lot in the Budget but otherwise its broadly neutral. At all levels, for women, individuals and senior citizens this is just again online with inflation, which is seen at about 6 per cent. It is just trying to offset the increase in the threshold by correlating this with the inflation.
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