A new story for debt mutual funds is playing out?
Undoubtedly yes, but this amendment in the Finance Bill has not impacted existing investment or investments which will be made up to 31st March 2023. Those investments will continue to get benefits of long-term capital gains and indexation. From 1st April 2023, investments made over a three-year horizon will not attract long-term capital gain tax, but they will continue to get other benefits of debt mutual funds, which is diversification, professional management and anytime liquidity.
What about those investors who want to continue the investments in their debt funds, even after 31st March? How will the tax change impact their investment or their corpus?
Majority of Indian investors will have tax rates below 20%. For them, there is absolutely no impact of this proposal or this will be beneficial. Earlier, if they invested for more than three years, they were getting long-term capital gains tax benefits, which is 20% with indexation, 10% and 20% depending upon your time horizon and indexation benefits.
But if your normal tax rate is lower than 20%, then you are better off investing post 1st April 2023. People who are in a higher tax bracket, of course, will have to pay a little higher tax. If you are in the highest tax bracket, like myself at 39%, earlier you could have got a tax advantage at 20% with indexation. Now you will be paying tax at 39%. So yes, there is a marginal hit on account of withdrawal of tax benefits.
Investors need to be very smart in understanding as to how they want to park in their money. But then talking from an AMCs perspective, this was a time where investor awareness regarding debt mutual funds was actually growing and tax benefit, indexation benefit was a major hit and a very big reason behind debt mutual funds picking up. At an AMC level, how do you think now the narrative will change from AMCs?
We will have to focus on financial education. There are more than one and a half crore Indians who have lost more than Rs 2 lakh crore over the last 20 years in Ponzi schemes and collective investment schemes. We have to educate investors not to go to those kinds of Ponzi schemes like Emu and teak wood plantations and real estate and gold and so on and so forth.
Second, we will have to continue to educate investors about risk and return. Mutual funds are mark to market and hence there is volatility in NAV. But over a period of time, they have the ability to deliver real returns. They can also create asset allocator solutions, which while attracting higher tax also ensures that investors are able to do asset allocation in line with the market.
As time evolves, more products will be approved or launched. At the end of the day, as long as we are adding value to the investors in terms of real return, we will continue to get their investments.
Since you mentioned asset allocation, let us talk about the available options in a debt mutual fund category. Looking at the interest rate scenario, how would you advise them to make the most of the products available because in terms of product features and the kind of design the debt mutual funds have laid out, it is superior to a lot of other fixed income instruments?
One, mutual funds are more transparent than any other instrument. Our intermediation costs or charges paid by consumers are far lower. And we have products for all the ranges. If you want to invest just for overnight, there is an overnight fund. If you want to invest for seven days to 30 days or 90 days, you have liquid funds available, which gives you any time liquidity.
If you want to invest up to six months horizon from three to six months, you have money market funds available. If you want to invest from a six months to one year kind of horizon, you have short term bond funds available, floating rate funds available. If you want to invest on a longer term horizon, you have PSU debt fund, corporate bond fund, guilt fund, bond fund, dynamic bond fund kind of products available.
Depending upon your time horizon and depending upon your risk profile, there are multiple choices available in mutual funds. They are transparent, they are cost effective, they provide you diversification benefit, and most importantly, they provide any day liquidity.
We always try to have the right kind of investments for investors and are taking them away from physical investments and making them invest in better investment instruments as far as gold is concerned. Now gold funds have gone out of this scenario, sovereign gold bonds take the lead clearly?
Undoubtedly in sovereign gold bonds, you get coupon income to 2.25% or 2.5%, depending upon your maturity. In physical gold, you have to pay what is known as an entry premium. If you buy gold in small quantities, then you pay far more than the market value. In gold ETF or gold funds, there might be a little bit of entry cost, but much lower compared to physical gold. But in gold funds, as well as physical gold, you have to pay the cost. In sovereign gold bonds, you actually get interest income. So to that extent, sovereign gold bonds are attractive from a long-term investment point of view.
Is it a major dampener for international FOFs (fund of funds)?
Actually there is no impact on the international fund of funds because most of the limits are full. Most of the international FoFs are closed for subscription. They are only open for redemption and existing investments are grandfathered. As and when the limits open up, we will have to see how investors react to it.
