Post-Budget 2009-10, infrastructure-based mutual funds are likely to move centre stage. The investment vehicle of choice for middle-class investors?mutual funds are sanguine that Budget announcements will push up markets gradually and especially those from the infrastructure sector. Though the industry itself has not got anything specific that could boost its operations, most of the fund managers have welcomed the policy stance taken by the finance minister.

Along with funds with an infrastructure focus, those piggy backing on the rural growth story are set to be the favourites. For the fixed-income investors, fund managers reckon, high volatility would be a key concern.

The fact that the market has tanked by 5.83% does not mean that the investment opportunity is lost out. In fact, some fund managers reckon that this could well be a time to start investing again. Only thing is that the strategy could change a bit.

According to Ved Prakash Chaturvedi, MD, Tata Mutual Fund, ?In the next few weeks or months we would witness some real policy announcements based on those references. Consequently, we will be tweaking our investment strategy, that market reacted emotionally to the budget out of over expectation and the budget truly reflects reality of current environment.?

Moreover, the budget moves to increase the income would actually prompt some fund houses to come out with more offerings. Here again, the focus would be on the equity side. ?The budget proposes to put money in the hands of the individual with the expectation that it will lead to increased consumption while also focusing on infrastructure investment, both of which are required to get back on track to achieve 9% GDP growth,? says Ashu Suyash MD & country head, Fidelity Mutual Fund.

Sanjay Sachdev, country manager – India and regional for fund management for South-East Asia, Shinsei Bank says, ?For middle income earners, the hike in the exemption limit under income tax will give some relief and for high income groups the abolition of surcharge on income taxes will give significant relief and is a big positive towards encouraging personal consumption and savings.?

The thrust on the infrastructure area and the huge focus on inclusive growth are key indicators for investors. Gopal Agarwal, head equities, Mirae Asset Management says, ?The rural India story just grew stronger. We expect funds with a rural flavour to do well in times to come.?

Fund managers were gearing up for announcements on the disinvestment front and were gearing up allocations in case the minister announced an ambitious plan. ?We were indeed looking forward to this move where the minister would announce a disinvestment plan and we could participate in this opportunity,? said a fund manager.

?Now, we do not expect to have a major change in our allocations and will wait for events to unfold. We were also contemplating a fund based on the disinvestment theme,? he added.

However, the thrust on infrastructure spending will be a boost for dedicated infrastructure funds. Reliance Mutual Fund recently launched its infrastructure fund and garnered around Rs 2,300 crore from the market. There are at least three other funds waiting to launch their dedicated infrastructure funds and they too are expected to receive investor attention.

Overall fund managers reckon that the FMCG sector, the pharmaceuticals sector to make a comeback. Infrastructure funds and capital goods sector will also be favoured. Fund managers reckon that the reaction to the banking sector stocks, which took a pounding on Monday, as ?emotional? rather than logical. ?If India has to grow at 8% and more, then the banking sector will be the first to benefit, hence we reckon that funds could well increase their exposure to banking sector stocks and benefit from lower prices at the moment,? says a fund manager with a leading international fund.

On the fixed income side, fund managers are rather concerned about the volatility in the bond markets. K Ramnathan, head of fixed income and structured products reckons that short term liquid funds would be the best option for investors at the moment. ?However, it is the time frame of the investment that is critical here. Over six months the volatility will be extremely high, hence over a period of a year, things will look much better,? he adds.

Similarly, Sukumar Rajah, CIO – Equity, Franklin Templeton Investments, India, says, ?Given the quantum of borrowings for the rest of the year, we are likely to witness additional pressure on the long end of the curve and a contraction in corporate spreads due to the economic growth and additional flows into the system. The short-end of the curve is expected to be steady helped by the monetary easing?.

The positive factor for the mutual funds industry can come from the fact that the fringe benefit tax, which was seen to as cumbersome and a niggle is being done away with and the exemption limits for income tax have been increased by Rs 10,000 (for individuals). The extra money at the hands of the individuals from tax savings could well end up with mutual funds.

Also, for the New Pension System (NPS) fund managers there is some relief ? though not in line with the expectations. There were strong expectations that investments in NPS would be totally tax exempt. There were several representations made by industry bodies to have the NPS be EEE, or totally tax exempt. However, ?NPS to continue to be subjected to EET method of tax treatment of savings,? the government document said.

The relief comes from the fact that the NPS Trust will now be exempted from income tax and the dividend distribution tax on the dividend received by it. This puts it at par with other mutual funds and gives the fund managers some breathing space for operations. Eventually, these benefits would be passed on to the subscriber and thereby there is an indirect benefit. Also, the NPS trust will also be exempt from securities transactions tax and this would mean that the cost of operations would be lower for the fund managers.

The NPS, launched in April 2009, has not found many takers. Most were waiting for the announcement of complete tax exemption. ?Now the direction is very clear and the fund managers will now start taking decisive action to step up the NPS marketing,? says another fund manager with a leading domestic fund house.