The new Direct Taxes Code is set to transform the investment landscape in India. Manish Sonthalia, fund manager, Motilal Oswal Financial Services, speaks to Manoj John of The Financial Express about what to look for in the code, how the market conditions are improving, and the new investment avenues such as currency futures.

The Direct Taxes Code is said to be generally good for all sectors. Is there any sectors/stocks that will be affected by the Direct Tax Code in the short term?

Firstly, the ?grandfathering? provisions would need to be addressed in absolute and clear terms because there are many companies across sectors that may get adversely affected by it. Secondly, companies paying MAT would get very badly affected because MAT would be payable on gross value of assets and that too at 2%, which is way above international rates.

What are the benefits for HNIs in the new Direct Taxes Code?

The new Direct Taxes Code puts more money in the hands of individuals by raising the income slabs at which individuals would be taxed. It raises exemption limits available u/s 80C of the old Income Tax Act from Rs 1 lakh to Rs 3 lakh. This higher income would find its way into higher consumption, which would be positive for the manufacturing sector and thereby positive for stock markets. The new Direct Taxes Code discourages long-term investments (including investments in equities) by taxing capital gains at the marginal tax rate, which would be 30% for HNIs. Long-term capital formation in the country may get adversely affected by it

Are you positive about any asset classes in the short to medium term?

I am bullish on equities as underlying fundamentals are improving the world over. It would get reflected in strong earnings for corporates in the short to medium term. I am also bullish on certain commodities. I am bearish on gold and real estate in the short to medium-term

Would you encourage investment in derivatives in these times? What kind of strategies should HNIs follow?

No financial product is bad per se. It is how one uses it, which determines whether it is good or bad for him. Recklessness in its use is a sure recipe for disaster. Derivatives are financial instruments which serve purpose for all three participants in any market?the investor, the speculator and the hedger. I would advise HNIs to use derivatives only to hedge their positions so as to eliminate the systematic risk involved in any investment. If one chooses to use derivatives as a speculative tool, he must fully understand the risks involved.

How is the currency derivatives market shaping up for individual and retail investors? Where is the rupee futures market headed for?

Currency derivatives are at their nascent stage and would be used only by specialised people who understand them. It is not a product for retail investors, just yet. The major participants in the currency derivatives segments are banks and corporates that want to hedge their forex exposures.

Rupee futures is just the first product and that too against the US dollar. Over the next few years, I am sure it would get extended to other currencies and newer instruments similar to those prevalent in international markets, but nuances in currency derivatives would and should happen very slowly and gradually.

How will individual and retail investors benefit from the soon-to-be-launched interest rate derivatives market?

Again, this is a product not for the retail investor but for corporates and banks that want to hedge and optimise their interest and principal liabilities on debt through swaps, strips, futures etc.

The share of household in investment vehicles remains very low in India since people still prefer fixed deposits, gold or realty. What are the steps that need to be taken to attract a bigger share of household savings into markets and investment funds like MFs?

The percentage of equity and equity-related products vis-?-vis savings is on the rise constantly. It is a gradual process and as the per capita income of people increases, more equity would be seen in ones portfolio. People would have to be educated to enhance the process and that is the only way. In the past, people have burnt their fingers investing in equities due to scams, poor regulations (vanishing companies) and poor risk management on stock exchanges. These things have undergone a drastic change and systems and processes have been made robust and akin to world class standards. Corporate governance norms have got strengthened. In fact, they are getting strengthened by the day. I think all these measures would bring back faith in equities dramatically over a period of time

Is the worst over for the global markets? Where do you see the emerging markets headed for in the near term?

The worst for global equity markets has been over for some time now. Global equity markets, particularly emerging markets, are already in bull phase, and are expecting to see higher levels in weeks and months to come.