The Hindu Business Line : Post Budget — MFs lose comparative advantage?

AS you read this on Monday morning, you have probably already factored in the Budget and the various provisions related to taxation. You have also probably started working out those little mental sums, the ones that would form the very basis of your financial planning as you consider the investment options that may be exercised during the rest of the year.

Investors in mutual funds would do well to go through the fine print before committing fresh money and organising their outlay. Their plans would be determined by key budgetary pronouncements, some of which are being described by certain quarters as quite unfair to the investor fraternity.

It is amply clear from post-Budget reactions that transaction tax is being seen as a major dampener for the market. As things stand at this juncture, the bond market too has reacted extremely negatively to the proposal.

The tax, investment circles point out, is a proxy for capital gains tax; bonds are primarily purchased for securing income from interest (and not strictly for booking capital gains). A turnover tax on bonds is, therefore, not a very practical proposal, it is pointed out.

On another front, it needs to be seen how corporate investors, the ones that account for an overwhelming portion of the market for mutual funds, change their investment strategies keeping in mind the latest announcements. Treasury managers working for the corporate sector would be faced with even bigger challenges. As always, they would have to optimise returns in a safe, tax-efficient manner and without bending governance norms.

For the ordinary investors, mutual funds would in all probabilities lose some of their comparative advantage. That could mean an even greater turn towards traditional, fixed-income options, which are normally billed as `safe' and `secure' products. One is specifically referring to schemes that are sold through post offices as well as bonds issued by the Government of India. These have been a major hit with investors - not without reason. The tendency to go in for these instruments might only become stronger, it is felt.

It must be mentioned here that some sections of the asset management industry have sought clarifications on various issues. AMFI, one feels, should come out with clear statements, detailing all the issues that should be dealt with by the authorities. A delay on this count could undermine the industry's interests, perhaps with significant long-term implications. Indecisiveness on its part could also harm the interests of investors, the very backbone of the industry.

Reactions to the Budget have differed widely. Some, like Mr Milind Barve, MD of HDFC MF, have taken a conservative stand, preferring to describe the Finance Minister's proposals as "a step in continuity". The move to eliminate long-term capital gains tax and reduce short-term capital gains tax are measures in the right direction, Mr Barve has noted.

However, not every body has been so charitable and generous.

Feedback may be sent to blcal@vsnl.net

More Stories on : Mutual Funds | Mutual Confidence

Article E-Mail :: Comment :: Syndication :: Printer Friendly Page

Stories in this Section
A tax that can be unsettling

Rating of MFs enhances efficiency in the market

Post Budget — MFs lose comparative advantage?

Bajpai to meet Chidambaram today

Hope and caution - the buzzwords

Infy, Satyam slip

'New tax will cut volume'

Ho jayegi balle balle!

`Be very cautious for next couple of months'