As Finance Minister Nirmala Sitharaman prepares to present the Union Budget 2024 later this month, the mutual fund industry is eagerly awaiting significant announcements. Expectations within the industry are varied, including hopes for tax incentives and the introduction of debt-linked savings schemes. Fund managers, however, do not anticipate major policy shifts due to the continuity of the current government.

Key expectations from the mutual fund industry:

Tax concessions in debt mutual funds

The Association of Mutual Funds in India (AMFI) has requested that capital gains on redemption of units of debt-oriented mutual funds held for more than three years be taxed at a rate of 10% without indexation, similar to debentures. “India’s aspirations of becoming the third-largest economy by 2027 and a developed country by 2047 require a liquid, deep, and well-functioning debt market. An active bond market could lower the cost of long-term finance and encourage retail investor participation, diversifying their investments. Therefore, an amendment to the Finance Act, 2023, is needed to align the tax rate on mutual fund units with that on bonds, debentures, SDLs, and G-secs,” AMFI stated.

Long-term capital gains (LTCG) exemptions

AMFI proposes that LTCG on listed equity shares or units of equity-oriented fund schemes be exempted from capital gains tax if held for at least three years. Alternatively, they suggest increasing the existing threshold limit to Rs 2 lakh per financial year. “The current threshold limit of Rs 1,00,000 per year is too low. Exempting LTCG tax after a three-year holding period will encourage long-term investments in equities and channel more household savings into the equity markets, benefiting the Indian economy,” AMFI noted.

Tax benefits under section 54 EC for special MF units

AMFI recommends including mutual fund units, with underlying investments in specified infrastructure subsectors, in the list of long-term assets qualifying for tax exemption under Sec. 54EC. These mutual fund units could have a three-year lock-in period to be eligible for this exemption. “Providing tax benefits under Sec. 54 EC for investments in specified mutual fund schemes can offer investors an alternative investment avenue with market-related returns and ease the government’s burden of borrowing for infrastructure funding,” AMFI noted.

More exemptions for mutual funds

AMFI suggests that the income of mutual funds be taxable in the hands of investors. Given the role of the Corporate Debt Market Development Fund (CDMDF) in the Indian debt markets, a similar tax regime to that of mutual funds should be introduced for CDMDF, exempting its income and taxing distributions in the hands of investors.

“To provide ‘unit level taxation’ to CDMDF, section 10(23D) of the Act should be amended to extend the exemption provided for mutual funds to CDMDF by deeming it a mutual fund for limited purposes of the Act,” AMFI added.

Income tax laws allow adjusting the sale price of a capital asset for inflation to tax only real gains. Indexation modifies the cost of a capital asset to account for inflation, reducing net long-term capital gains (LTCG). However, the benefits of indexation for debt mutual funds acquired on or after April 1, 2023, were eliminated in Budget 2023.

The mutual fund industry eagerly anticipates the Union Budget 2024, hoping for announcements that will support its growth and benefit investors. Key areas of focus include tax concessions, LTCG exemptions, and extending tax benefits to special mutual fund units and the Corporate Debt Market Development Fund. These changes could drive long-term investments and enhance the financial ecosystem in India.

As more retail investors chant the ‘mutual fund sahi hai’ mantra, asset management companies are trying to cash in on the enthusiasm through offbeat offerings. From tourism to business opportunities, mutual funds are launching a slew of new fund offerings (NFOs), specifically in the thematic and sectoral funds space.

Highlights:

• June 2024 AMFI adta: NFO equity inflows (active) surged 54.1% month-on-month to Rs 151.4 billion.
• Tata AMC Nifty tourism index fund: Launched the first-ever tourism-focused fund, including travel and tourism-related industries. Open for public subscription from July 08 to July 19, 2024.
• ICICI Prudential oil and gas ETF: Another industry first, open for subscription from July 08 to July 18, 2024.
• Increased niche passive NFOs: Around 67 draft offer documents filed across fund houses in the last three months.

SEBI data indicates continued growth in niche areas such as digital technology, transportation, logistics, and more.
Market experts suggest that this trend will persist as investors look for thematic funds for both long-term and tactical allocation. The diverse audience in India means that niche products can suit a significant number of investors. Additionally, some industry observers believe that the rush of passive thematic NFOs allows mutual funds to bypass SEBI’s rule of only one scheme per category, leveraging the strong performance of various sectors over recent years.

The Indian Mutual Fund industry remains on a positive trajectory, driven by consistent SIP inflows and growing investor confidence in equity markets. The industry’s ability to weather market volatility and offer diverse investment options positions it as a key player in wealth creation for Indian investors.

SIPs, a popular method for regular investment, continued to drive growth, with the number of new SIPs reaching 55.13 lakh and total SIP AUM reaching an all-time high of ₹12.44 lakh crore. Sectoral/Thematic funds led inflows with ₹22,351 crore, boosted by new fund offerings (NFOs). Multicap, Large cap, and Mid cap funds also saw significant inflows, while Small cap funds experienced a decline. June witnessed initial volatility due to election results, with benchmark indices dropping sharply before recovering and closing the month with a gain of around 7%. Debt funds, excluding money market and low-duration funds, saw net outflows attributed to advance tax payments and quarter-end activities.

The Indian Mutual Fund industry witnessed significant growth in June 2024, with key highlights including:

• Surge in equity investments: Equity mutual funds saw a record inflow of ₹40,608 crore, up 17% from May. This marks the 40th consecutive month of positive inflows for equity funds.
• SIPs reach new milestone: Systematic Investment Plans (SIPs) reached a new high of ₹21,262 crore, surpassing the ₹20,000 crore mark for the third month in a row.
• Industry AUM crosses ₹60 lakh crore: Total Assets Under Management (AUM) for the industry reached a record ₹61.16 lakh crore, exceeding the ₹60 lakh crore mark for the first time.
• Debt outflows: Debt Funds experienced net outflows of ₹1,07,357 crore, primarily due to advance tax payments and quarter-end adjustments.