35% of debt fund money may get impacted

The Finance Bill amendment that removed long-term tax benefits for debt funds took a toll on shares of asset management companies (AMCs) on Friday.

Shares of UTI AMC, Aditya Birla Sun Life AMC and HDFC AMC declined over 4% whereas Nippon Life India lost 1.29%.

According to industry players, around 35% of the Rs 13-odd trillion debt fund investments would be impacted by this decision. However, the relief is that the new guidelines will come into effect only from April 1, which means that the existing investments will be grandfathered and will continue to get tax benefits whenever they are withdrawn.

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Nilesh Shah, MD, Kotak Mutual Fund, said, “This was an unexpected announcement. However, the grandfathering of the existing investments will help investors. There would be a slowdown in the deepening and development of the bond market.”

Industry players said the slowdown in funds will happen, especially from corporates, high net worth individuals and family offices.

Radhika Gupta, MD and CEO of Edelweiss AMC, in a series of tweets, called the move an “unfortunate step”, saying that debt funds have channelled a significant amount of 10-year plus money into the bond markets. She added that India requires significant borrowing owing to infra spends, and bond market liquidity has been a concern for a long time. While MFs are institutional investors that aren’t hold-to-maturity, other bond investors are, which implies long-term implications as borrowings will return to banks, she added.

According to Association of Mutual Funds in India (Amfi) data, net assets under management (AUM) for debt schemes stood at close to Rs 12.30 trillion as of February 28, with the overall MF AUM at Rs 39.50 trillion.

D P Singh, deputy MD and CBO of SBI MF said: “In debt MFs, indexation was the most important narrative for efforts to get retail investors into debt. With the proposed amendments, the overall ecosystem will get impacted, especially the NBFC space. However, taxation is not the only part to be considered while looking at debt funds; there are other benefits over traditional investment options. Also, given that the overall penetration of debt funds is currently not very high, the impact therefore may not be as high.”

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He pointed out that close to Rs 4.5 trillion falls into this category, which goes up to Rs 6 trillion after including target maturity funds.

The amendment in the Finance Bill will be applicable to debt, gold, and international funds. According to the government, this was done to treat all income instruments at par and to align taxation levels.

Speaking to a TV channel, AMFI chairperson and Aditya Birla Sun Life AMC MD and CEO A Balasubramanian said that the larger purpose of debt funds was better price discovery in the market. Saying that the development does come as a surprise, he pointed out that the MF industry has played a larger role, investing Rs 4.2 trillion in bonds of maturity over three years, thus making funds available for long-term investing.

“It makes far better sense to remove tax loopholes in products like zero-coupon listed debentures which convert interest income into long-term capital gains after a holding period of 366 days. We hope there will be a level-playing field,” Shah added.

According to industry players, the mutual fund industry will have to innovate and restructure products in order to get retail investors back in debt funds, going forward.

Sandeep Bagla, CEO of Trust MF, however, feels that with inflation expected to reduce over the coming months, fixed income could look attractive again at a real rate of 2.0-2.5%. He expects higher inflows into gilt funds once interest rates start falling, as a decrease of 1% in interest rate could fetch an annualised return of up to 15%.