In its budget proposals, AMFI has requested the Union Finance Minister, Arun Jaitley, to reduce the threshold limit of maintaining equity exposure in a scheme to 50% to qualify for equity funds. At present the limit is 65%.
Reducing the threshold limit will encourage people with lower risk appetite to invest in mutual funds, AMFI said.
“Reducing the threshold limit of equities from 65% to 50% for being regarded as ‘equity oriented fund’ would ensure that asset allocation products with equitable risks are also promoted, leading to penetration of debt markets and promotion of real balanced portfolios, and encourage more investors with lower risk appetite to invest in mutual funds,” AMFI elaborated.
If implemented, this would encourage fund houses to maintain equal asset allocation between equity and debt in balanced funds. Currently, balanced funds have to invest at least 65% of its corpus in equity instruments, including arbitrage, to qualify for equity-oriented funds. Equity funds are exempted from long term capital gain tax after one year.
SEBI has been pushing fund houses to maintain equal allocation between equity and debt. In fact, the new breed of balanced funds cannot invest more than 50% in equity instruments. These funds have to invest in arbitrage opportunities to qualify for tax benefits.
AMFI further said that lowering the threshold limit would change the perception that mutual funds are risky.
Currently, the mutual fund industry manages Rs.1.67 lakh crore under balanced funds.
Before June 2006, a scheme had to invest 50% of its corpus in equity instruments to qualify for equity funds.
