Evolved investor knows, change is the only constant. Its not too long ago PFAs, CFPs, Mutual Fund companies and me, screamed at top of our voices that Debt Mutual Funds were better fixed income option with taxes and indexation benefits. Even, Banks sold debt mutual funds to customers!
Alas! On 24th March 2023, Finance Bill eliminated all the tax and indexation benefits enjoyed by the Mutual Funds were stripped off brutally.
Investors conditined to say ‘Mutual Funds Sahi Hai’, suddenly feel confused. What changes for investors? Honestly, not much for citizens investing in debt mutual funds upto 20% tax brackets. They can still get an extra return on the debt mutual funds compared to the Fixed Deposits. But for Gold ETF, Fund of Funds and International Funds, its little more than a jolt.
For debt instruments, what changes is the balance of power between the Banks and the Mutual Funds. Over the years Debt Mutual Fund evolved as a lucrative fund raise options for corporates and an investment vehicle for investors. Mutual Funds saw a late but steady growth in debt funds participation, especially last 5 years have been defining with various index funds, target maturity funds etc coming in play.
As per reuters report debt mutual funds held, Rs.12.42 trillion in debt fund as on 31st Dec 2022, while fixed deposits in Bank stood at Rs.178 trillion rupees in deposits.
For Mutual Funds, one of the most regulated sector in India, the path to growth has been rough yet spectacular. On Jan 1, 2013 many predicted a slowdown of the industry with birth of Direct Mutual Funds option. Since then, Mutual Fund industry has more than quadrupled its assets under management. Exactly after 10 years, on 1st April 2023, another reform has been plannedto take away important tax advantage they enjoyed thus far. Lets see, what still remains? And can MF industry come back stronger.
One point still remains, Debt MFs likely to still give 1-2% higher return thanFixed deposit schemes. A banker mentioned, Debt MF still be more efficient with no penalty for pre-mature exits. There could be removal of exit loads from the debt MF products to make it lucrative for investors.
In global funds, investors enjoy dual opportunity to make returns on rupee depreciation against dollars and the real returns of the funds. It still makes a lucrative option over the long term and SIP mode as it is likely generate better returns than debt products
GOLD ETFs have become less lucrative over the years with the launch of Sovereign Gold Bonds which offers 2.5% taxable interest income and no tax on the maturity of the bonds.
Economic Environment, investment vehicles will keep evolving. Like ULIP agents lost the massive commission, Mutual Funds agents lost entry loads, and entry of direct MF brought in option to complete An intelligent investor will learn the tricks of the trade and come out shining finding more opportunities to create wealth
