Driving investors towards mutual fund investments

Three key measures taken in the Budget are likely to generate greater interest in mutual fund investments, especially in the case of retail investors.

By directing more and more investment avenues through the mutual fund route, the Government may be seeking to promote equity or a more market-linked savings.

Higher inflows

A reduction in securities transaction tax (STT) on equity mutual funds, expanding the ambit of investments in the case of provident funds and pension funds, together with an improved RGESS, could mean potentially higher inflows into mutual funds. With the RGESS benefits extended for three years, there is potential for steady inflows into fund houses.

The first measure is expected to reduce cost of transaction, while the others are expected to increase the depth of investments.

Wider ambit of investments

The STT has been made nil (from 0.1 per cent) while purchasing equity mutual funds. In the case of sale of units, the proposed rate is 0.001 per cent (from 0.1 per cent). With entry loads also done away with, the cost of transaction at the time of investment gets reduced substantially for all genres of investors.

According to Hitendra Parekh, Fund Manager (index), Quantum Asset Management, an investor could have a saving of 20-25 basis points on one full round of investment.

The more substantive move is the widening of the mandate in investments for pension funds and PF trusts to include debt mutual funds, exchange traded funds (ETFs) and asset-backed securities. From being allowed to invest only in the Sensex and Nifty index funds and largely Government securities, pension funds and PF trusts would now be able to benefit from newer investment avenues.

The new mandate would enable them to invest in broader market ETFs such as CNX 500 or BSE 500. ETFs also tend to have very low tracking errors and lower costs compared to pure index funds, which is where the AMCs running the new pension scheme are allowed to invest in at present.

Investment in debt mutual funds and asset-backed securities may help these pension funds and PF trusts to generate returns that are marginally higher than or at least equal to inflation rates even on a post-tax basis.

For example in 2012, the best performing debt mutual funds could generate 12-14 per cent returns.

The only irritant for mutual fund investors is the increase in the tax from 12.5 per cent to 25 per cent tax on all dividends distributed by (non-equity) schemes to unit holders.

Published on February 28, 2013

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