Mutual funds may have been in the news for all the wrong reasons in the last one year. From FMP delays to sharp falls in the NAV, debt funds have become the new source of risk. At the same time, MF collections continue to be robust. Here is what budget can do!
Time for MF reforms
The government deadline to push MF reforms has come and the budget should be the platform. Mutual funds manage Rs.25 trillion and they are now systemically important. From regulating the portfolio of liquid funds to making AMCs accountable to making these mutual funds subject to more stringent regulation; should be announced in this budget. It is time not to put the trust on trial any longer.
Giving an equity push to MFs
Over the last few years, ELSS schemes have emerged as an important tax saving instrument for the young and first time equity investors. The budget can look to carve out a separate limit of Rs.1 lakh into the Section 80C basket for ELSS alone. This will be a big incentive for ELSS investors and also catalyze the equity cult in India. The 3 year lock in period anyways instills a long term view in the investors. The government can also create an intermediate category with a shorter holding period but a lower level of tax exemption. This can bring in a larger MF equity cult.
Remove the tax anomalies
One of the attractions of equity funds in the long run is the post tax returns. The flat LTCG tax without indexation is bad enough. In addition, the dividends on equity funds are also now being subjected to 10% DDT. Both should be scrapped immediately as mutual funds are the genuine long term planning products. It puts an unnecessary burden on the investor and creates an uncertain tax environment. In addition, budget should also look to revive the Section 54E exemptions for mutual funds which pertained to reinvestment of capital gains. These can give good buy points for mutual funds as an asset class.
Address systemic issues
It is time for the budget to address a lot of systemic issues. With AUM of Rs.25 trillion, it is too big. There are three broad areas. Firstly, mutual funds must be given more investment freedom. Let the fund invest in equity, derivatives, commodities and structures within well defined parameters. Secondly, put greater onus on the board of trustees to escalate issues of importance to the small investor. Lastly, make mutual funds accountable at multiple levels. If banks can bear the cross of wrong decisions then why not fund managers. While investment decisions can be right or wrong, cases like investing FMP money in private NCDs is crazy. The budget must nip this in the bud. ©