Prime Minister Narendra Modi, in his address to the nation on Independence Day, announced that a major GST overhaul will be done around Diwali this year. This festive gift will cover key sectors, including cement, steel, consumer durables, and automobiles.
The government intends to reduce GST slabs from five (0%, 5%, 12%, 18%, 28%) to just two main rates: 5% for essentials and 18% for most others, plus a 40% special rate for sin/demerit goods.
This will not only bring relief for industries and consumers, but it could also turn into an opportunity for mutual fund investors. A fresh report by Tata Mutual Fund highlights that schemes with exposure to these sectors may deliver improved performance in the medium to long term, as lower taxes reduce costs, boost demand and enhance corporate profits.
GST rates will be reduced on many important sectors and products, which will directly affect consumers and industries. But there is another important aspect of this decision — mutual fund investment. Funds that invest in those sectors can see its benefits in the medium to long term.
A recent report by Tata Mutual Fund explains which sectors and mutual fund schemes can get direct benefit from GST reduction.
Which sectors will get GST relief?
The major goods and services on which the government is likely to reduce the tax burden include:
-Cement and construction materials: Earlier 28% GST was levied, now it is expected to be reduced to 18%.
-Steel and manufacturing products: Infrastructure and housing sectors directly benefit from the reduction in tax rates.
-Consumer durables: such as electronics, kitchen appliances, ACs and washing machines.
-Automobiles and auto-ancillaries: Demand likely to increase due to reduction in GST rates.
-Sanitary ware and tiles: Lower tax rate from 18% will reduce the cost of middle-class housing.
What does it mean for investors?
Mutual fund schemes that have exposure to these sectors may see improved returns shortly. Especially thematic and sectoral funds that focus on infrastructure, consumer and manufacturing.
According to a Tata Mutual Fund report, the government’s move in these sectors will boost demand and improve the profit margins of companies. As a result, investors’ fund value may see a positive impact.
10 Tata funds that have good exposure to consumer durables, FMCG, cement, auto and insurance sectors:
- Tata Business Cycle Fund
- Tata Large Cap Fund
- Tata Large & Mid Cap Fund
- Tata Mid Cap Fund
- Tata Small Cap Fund
- Tata Flexi Cap Fund
- Tata ELSS Fund
- Tata Value Fund
- Tata Ethical Fund
- Tata Childrens Fund
(Source: Tata Mutual Fund report)
Both benefits and risks are present
Benefits: Lower taxes will increase demand, companies’ profits will improve and investors can get good returns in the long run.
Risk: Thematic funds are always sector-specific. If a sector performs poorly or there is a policy change, the risk can also be equally big.
Caution for investors
Before investing, remember that past returns are not a guarantee of future returns. Thematic funds are only suitable for investors who have a long-term investment horizon and can withstand sectoral volatility.