For the mutual fund investor, the budget held no surprises, pleasant or unpleasant. Most of the budget proposals were on expected lines and were part of the wishlist that the Personalfn Research Team had drawn up before the budget.
The finance minister's proposal to strike a degree of parity within the mutual fund segment with regards to taxation is one of the high points. For instance, at present, close-ended equity funds are treated differently from to open-ended funds with regards to dividends. Also, it has proposed to give more flexibility to equity funds with regards to overseas investments.
The budget has now proposed that:
- Close-ended equity funds will be at par with open-ended equity funds with respect to taxation. Now dividends on close-ended equity funds (like with open-ended equity funds) will be tax-free, i.e. fund houses will not have to pay a dividend distribution tax on close-ended funds.
- The budget has also proposed to give greater flexibility to domestic equity funds to invest in companies listed abroad. This is a two-pronged proposal.
First, the ceiling on investments in overseas instruments has been raised from $1 billion to $2 billion. Second, equity funds can now invest in overseas companies without the earlier requirement of a 10% share holding in a domestic company.
While the move to double the limit for overseas investments is laudable, it has caught us by surprise, since domestic equity funds are not even investing in global companies to the extent of the existing limit of US$ 1 bn.
The budget has also given qualified domestic equity funds the flexibility to invest in overseas exchange-traded funds (ETFs) cumulatively up to $1 billion. Like the proposal to hike investments in overseas companies, the move to allow investments in global ETFs will encourage diversification, the most important trait of a mutual fund.
Although, we do not understand why the move is restricted to global ETFs and not all global funds, it is nonetheless a move in the right direction.
The finance minister has proposed a hike in Securities Transaction Tax (STT) to 0.025% (25% hike over 0.020%). Since equity funds are classified as securities, this means that equity fund investors will have to pay more on gains.
While a lot of investors may complain about the higher STT, in our view it is still very miniscule and for long term investors (with a 3-5 year time frame) it is by no means a cause for worry.
That is not to say that the budget is without its share of negatives. Here are three major ones:
The budget is silent on real estate investment trusts (REITs). REITs have been the talk of the industry for some time, with both investors and the fund houses awaiting some clarity. Unfortunately, the budget was silent on that front. So investors will have to wait for some time before they can broaden their asset allocation to include real estate funds.
Another investment that got no mention in the budget was the gold exchange traded fund (ETF). Actually, this is surprising, and even unfortunate since gold ETFs were given a launch pad in the last budget and fund houses were expecting some clarity before they could launch their products.
The finance minister has extended the Section 80C tax benefit to fixed deposits. While that is a positive move as far as fixed deposits are concerned, it beats us why he did not extend Section 80C benefits to similar investments like fixed maturity plans (FMPs), with a 100% debt component, launched by mutual funds.
After all FMPs, though not in the same league as fixed deposits, also have an element of assured returns because they lock the yield at the time of investment.
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