Now that the field is levelled between mutual funds and banks in terms of taxation, the former has renewed the long-standing demand for issuing instruments like cheques for debt fund investors.

If approved, the MF debt funds will compete to attract funds parked in savings accounts of investors.

‘Logical conclusion’

Nilesh Shah, Managing Director, Kotak Mahindra Asset Management Company and former AMFI chief said the withdrawal of Long Term Capital Gain benefits for debt MFs from April 1 is a push towards a level playing field among financial services and new tax regime.

“We hope that the Government will permit debt mutual funds to serve investors with innovation like Cheque writing facility on Money Market funds. This innovation will not only provide better returns to retail investors but also deepen our bond market,” he said.

Hoping that this journey reaches its logical conclusion, he said for a zero coupon listed debentures continue to convert interest income taxable at 39 per cent for high networth investors against LTCG at 10 per cent earlier.

Finance Bill 2023: How will it impact mutual fund investors?  Finance Bill 2023: How will it impact mutual fund investors?  
‘A large chunk’

In 2003, the Association of Mutual Funds in India moved RBI for cheque writing facility for investors. The biggest stumbling block was the existing regulations, which allows only banks to issue instruments like cheques.

Moreover, mutual funds have to join the clearing system. In order to overcome these hurdles, AMFI had earlier suggested RBI to limit the number of cheques issued by MFs, or impose a cap on the amount of cheques issued.

If allowed, MFs have the potential to grab a large chunk of the low-cost deposits that banks hold with them in the form of savings accounts.

Also read: MF stocks bleed after investors lose tax benefit

Notwithstanding the new tax regime, even a half per cent higher return from these funds as compared to savings deposits would attract investors.

Steady outflow

Even with the long-term capital gain tax and indexation benefits, MF debt funds have seen a steady outflow with the asset under management dropping 13 per cent last month to ₹12.30 lakh crore from ₹14.09 lakh crore in February 2022 due to steady rise in interest rate.

Institutional investors accounted for 70 per cent of investments in debt mutual funds as of last December while individual investors including high-networth individuals, account for 27 per cent share.

New segment

The amendment divides mutual fund categories into three segments, as opposed to two – debt and equity. The new segment consists of funds that invest between 35 per cent in debt and 65 per cent in equities, said Crisil Market Intelligence and Analytics.

On the positive side, in the newly formed segment, mutual funds could introduce more asset-allocation products, thereby expanding the range of products available to investors in the medium to long term, it said.