LTCG in Budget 2018: Investing in mutual funds? Look at growth schemes

Budget 2018's 10% long-term capital gains tax has not upset the mutual funds industry

A 10 per cent long-term capital gains (LTCG) tax has not upset the mutual funds industry. Sector officials say that the move will not have any major impact on current inflows in equity and that it will settle down fast. According to them, growth schemes will be more looked for going forward against dividend-paying schemes.  

According to the Finance Bill 2018, "With a view to providing a level playing field between growth-oriented funds and dividend paying funds, in the wake of new capital gains tax regime for unit holders of equity oriented funds, it is proposed to amend the said section to provide that where any income is distributed by a Mutual Fund being, an equity oriented fund, the mutual fund shall be liable to pay additional income tax at the rate of ten per cent on income so distributed."

The equity segment of mutual funds has seen nearly Rs 3 trillion of inflows over the past three years. In 2017 alone, investors had poured in a massive Rs 1.5 trillion in equity schemes, which also include tax saving schemes. It is worth noting that mutual fund players have played an important role in not letting the stock market correct significantly in the past three years. 

"A 10 per cent tax on long-term capital gains is quite nominal and I don't think it will have any impact on inflows. Further, even with this tax rate, equities continue to remain a superior asset class compared with other investment avenues," says G Pradeepkumar, chief executive of Union Mutual Fund.

Other fund houses, too, echoed the sentiment. In their initial reaction, they maintained that it would have a very marginal impact if any.

A top CEO said, "My view is that HNIs may look for more growth schemes and shift from dividend-paying schemes. As far as retail is concerned, I don't think flow from this category will see any impact. Mutual funds have always been advised for the long term, and a tax of 10 per cent on gains exceeding Rs 100,000, in my view, does not take away the attraction for equity investments."

The flow of retail money has been rapidly growing over the past few years. The amount of money coming in on a monthly basis through the systematic investment (SIP) route has seen over a six-fold increase from less than Rs 10 billion to over Rs 62 billion. With this pace, the industry expects the monthly SIP flow to touch Rs 100 billion in the next one year. 

Currently, India's mutual fund industry has overall assets worth Rs 22 trillion. In the past five years, the size of the industry has more than trebled. 

With robust inflows from domestic investors, fund managers had their hands full with cash to deploy. On several occasions, when stock markets showed weakness, mutual funds have been heavily investing in stocks, providing the much-needed push to sustain the markets at higher levels.