'Changes in the administered rate of interest, RBI's move to reduce the repo and RBI relief bond rates will sustain the low interest rates,' says A Balasubramanian, Head (income funds), Birla Sunlife Mutual Funds.
On how the Budget affects the Mutual Funds industry
There are some changes in the budget for the mutual fund industry. With the lots of changes in the various administered rate of interest, MF industry growth should be very decent inthe coming months. In terms of changes, dividend distributed by income schemes are subject to deduction of distribution tax at 12.5 % and it is not taxed in the hands of investors. At the same time, dividend declared by the equity schemes are not subject to any deduction on the dividend declared and it is not taxed in the hands of investors also. Short and Long capital gains tax rates remain the same. Changes that are happened in the budget for MF industry are as follows; Distribution tax on dividend declared by the Income schemes have been introduced at 12.50%. This means, dividend received from Income schemes is tax free in the hands of investors. Dividend declared by Equity schemes are not subject to Distribution tax deduction and it is tax free in the hands of investors also. However, there is not change in short and long term capital gain tax treatment for Mutual Fund investments.
On how the stock market is reacting to the Budget
Market has taken the budget positively but it is moving in a narrow range. Fundamentals continue to remain better. With interest rate dropping further, stock markets are becoming even more attractive. But the budget has been taken with cautious note due to lack of any major participation coming from institutional investors. Domestic institutions can not participate beyond a point. FIIs investors would be compelled to invest purely on the basis of attraction on fundamentals of the economy and cheap valuations of the market. Ultimately, it is going be a patience game. Institutional participation is lacking due to lack of funds with domestic investors. FIIs investment would begin to happen purely driven by valuations, low interest rate etc. Domestic liquidity continue to be good. With the interest rate falling to at such low levels, even the investments coming from domestic retail investors could help the market going up. FIIs investment could only act as a booster.
On how he would rate the Budget
Contrary to the general belief on the populist nature of the budget, Government has rolled out a budget with clear focus on infrastructure, domestic industry to boost growth etc. Removal of Relief Bond, reducing the rate on Postal savings, PPF etc are steps in the right direction. Giving helping hand to the State Government are also in the right direction to improve the financial health of the various states.
On the shortcomings in the Budget
Budget has reduced excise, customs duty etc on various products. They have done something for the salaried class people also. Overall fiscal deficit is increased to 5.60% from 5.30%. That means, the Government need to be borrow more in the coming year. Government is also encouraging State Governments to borrow from the market as the interest is low currently. Rs.60,000 crores allocated for road, airport, port development will have to be funded out market borrowing (partially). This means, there could be additional supply for bonds in the coming years and have impact on the interest rate.
On strategies that could help maximise mutual fund returns for investors
While investing in debt funds, one has to look at from medium to long term point of view to generate return higher than any comparable return on any other instruments. One should also look at Monthtly Income Schemes. This schemes could generate return better than any debt funds due its investments in a controlled manner in equity. As far as equity goes, one should invest through Systematic Investment Plan which should capture all ups and down of the market. This would reduce the risk of making an onetime investment/market timing and encourage long term savings to create long term wealth
On what debt funds hold out for a mutual fund investor after the budget
Recent fall in the NAVs of income funds was largely driven by factors such as IRAQ tension and its impact on oil prices, inflation, and apprehension about Government's ability to cut the savings rate etc. In the budget,Government has cut the rate on administered savings rate by 1%. Dividend distributed by income schemes are also made tax free inthe hands of investors ofcourse subject to deduction of distribution tax. If one has to invest for more than 6 months,income funds are the best.
On whether the cut in the PF rate by 1 percent will affect the middle class
There is not much choice for the Goverment to reduce the PF rate. This would have been reduced last year itself. In relation to the international interest rate, our interest rate is relatively higher. When Government securities are not offering more than 6% to 7% for different maturities, it is difficult to generate the return what is being offered on the PF rate.
On whether this will be the year of IT sector stocks on the markets
The year could see other sectors such as Banking, commodities, pharma participating in the overall movements. Probably, the return could vary here and there. IT sectors would be bound by the international developments such as IRAQ events etc.
On the stock markets lack of enthusiasm towards the Budget
More than the just budget announcement, fundamentals of most of the companies are improving. Today we are in a scenario where interest rate is in the range of 6% to 7%, dividend yields from the companies are in the range of 5% to 11%. Thus, patience would pay for equity investments as long as the investments are made in companies that are having long term business potential run by a efficient management.
On what the Budget holds for the IT industry
IT industry continue to enjoy the importance of the one of the prestigious industry for the country. Benefits arising out of section such as 10A AND 10B are being continued. That means, IT companies no need to pay tax.
On whether investing directly in equity is more atractive rather than putting money in mutual funds because the long term capital gain tax has been removed on the equities but not on the mutual fund units.
As per the budget announcement, dividend distributed by the MF schemes are not subject distribution tax. That means, MF could take the route of increasing the frequency of dividend declaration subject to the availability of distributal surplus. This would increase the cash flow in the hands of investors as well as reduce the incidence of short term capital gain tax arising out of booking profit before the end of 1 year.
On whether interest rates can go down further in India
Interest across the globe continued to remain soft due to slow growth in the economy. In India too, interest rate is likely to remain soft due to recent changes in the administered rate of interest, RBI move to reduce the repo rate and reducing the RBI relief bond rates. Interest rate is already low and it has to sustain at these levels and remain range bound till such time we see a revival in the world economy.
On how the implementation of the Kelkar committee proposal on taxing short-term capital gains of mutual funds would have affected mutual funds
It is currently taxed in the hands of investors in any case. If Kelkar committee recommendations have been implemented, there could have been increased paper work and overall computation of NAV and accounting would have become further complicated.
On how the economy will perform considering the impact of the drought
Even on the backdrop of poor monsoon last year, domestic industry has grown reasonably well. Industrial growth has been around 5%. Core sectors driven by capital goods sectors have grown by 5%. Service sectors continue to contribute to the overall growth of GDP. Thus, our economy is increasing becoming more resilent to such events.
On the interest rate 6 months down the line
Overall interest rate would remain stable as long as global economy continue to remain under pressure. Any strength in the US dollar would make the intererest rate to reverse. However, in the immediate future, there are no signs of interest rate going up.
On if the asset allocation to be done while planning investments in MF
MF investments is necessary for any individual. Over and above the professional way of managing the funds, transparency levels also have gone up substantially. Service levels have improved like Banks. More than the timing,one should develop the habit saving gradually through MF investment depending upon one's risk appetite to dividend between debt and equity. One should look at a diversifed portfolio between Debt schemes, MIP and equity schemes. Equity allocation could be in todays market could even be higher at 30% if you are a conservative investor.
On how the salaried class can save on tax in the mutual fund industry
Under Section 88, any investment made in the ELSS scheme upto Rs.10000 is exempt from tax upto 20%. We do have Birla Equity Plan for such investors with 3 year lock in. You can probably invest before 31st March 2003 for availing this benefit for this year. This is the scheme, one can also look at Systematic Invesmtment.
On the possible returns by income funds
Income funds in an ideal scenario, should generate return between 6.50% to 8%.
On whether debt or equity fund is better in view of a possible war
If you are risk taking ability,i would suggest equity investment would be better irrespective of war kind of situations. Valuations of sensex stocks are quiet cheap. Dividend Yield funds could do well such as Birla Dividend Yield Plus. Debt funds should be looked at from medium term perspective.
On whether the party in the bond market is over
Party of double digit return may be over. But, debt funds over a period of time would generate return which would be in line with market rate.