The Union Budget 2018 has proposed some key changes in the equity funds. However, experts say that these were in line with market expectations and there would be no knee jerk reactions.
We talked to a few fund managers and experts to know their views on Union Budget 2018.
Chandresh Nigam, CEO, Axis Mutual Fund
The key change has been the re-introduction of the long-term capital gains tax on equity shares and equity oriented mutual funds – at a rate of 10%. Dividends on equity funds, which were hitherto tax-free, will be taxed at 10% as a distribution tax. The new LTCG tax has been introduced with grandfathering of gains until 31 Jan 2018, which minimizes any potential short-term disruptions. While the tax is a negative for the markets, the fact that equity instruments still attract the lowest rate of tax, mean that the asset class will continue see good flows. There however may be some knee jerk reaction in the short term.
Navneet Munot, CIO, SBI Mutual Fund
While there has been marginal tweaking of the long-term capital gain tax at 10% (subject to certain terms and conditions) and no tax benefits for companies with annual turnover of more than Rs.250 crore, citizens such as senior citizens and small businesses have benefited from the budget. Measures on the taxation and spending in key programs would keep the consumption story intact while push to infrastructure build up has continued. We also saw better targeting of social security, which is pertinent to achieve an inclusive growth in the economy.
Fiscal deficit at 3.3% was marginally higher than market expectation, but borrowing of Rs. 6.06 lakh crore was better than expected. The other aspects of budget such as increased recourse to PSE borrowing (Rs 1.7 trillion), reduced tax differential between bonds and equity (post LTCG), higher MSP for farmers (implying likelihood of higher inflation) and more income in hands of senior citizens (who invest in fixed income space) can have mixed impact for the bond markets.
Aashish Somaiyaa, CEO, Motilal Oswal Mutual Fund
While we were wary of the capital gains introduction, we are pleasantly surprised with the nuanced and well-considered implementation. Protecting all past gains up until Jan 31, 2018 was the right way to implement the same. In addition, ensuring that there is a level playing field between dividend and growth schemes is ideal and that has been covered too.
We do not see any impact of this from here on; because all said and done people have to make investing decisions basis relative attractiveness. Equities are for wealth creation and a 10% tax on the gains is not deterrent enough.
Dividend Distribution Tax on equity funds will help stop mis-selling of balanced funds that declare a monthly dividend. Mis-selling has meant that the average balanced fund size is now Rs.5, 092 crore vs average equity large-cap fund at Rs.2, 072 crore.
I think the introduction of 10% tax on dividends has ensured there is no arbitrage between dividend and growth schemes and that is how it should be.
The biggest mistakes are made when something, which embodies risk, is presented as low risk under the garb of regular tax-free dividends. While the funds may still continue to declare monthly dividend the attraction of the dividend would decline. Also, paying a monthly dividend in equity funds is a misrepresentation of risks because underlying principle is susceptible to wild swings but the regular income makes people into believing it is a steady product and by implication low risk too. Mis-selling is aggravated when this equity product is offered to FD investors in the higher tax brackets stating there is no TDS and dividend is tax-free; this will no longer be the case.
Swarup Mohanty, CEO, Mirae Asset Mutual Fund
Overall, it is a neutral budget. There were no surprises as many people were expecting the proposal of long-term capital gains on equity. I feel that the 10% tax on equity is not significant. However, this narrows the difference between the short term and long-term capital gains tax. I believe that this may result in churning and many investors may redeem their units once their capital gains reach close to Rs.1 lakh.
The proposal of the 10% dividend distribution tax on equity funds will have short-term impact on arbitrage funds.
Jimmy Patel, CEO, Quantum Mutual Fund
The budget has proposed that large corporates should tap the bond market to meet one-fourth of their financing needs. However, we are yet to see the retail participation in corporate bond market. There are limited issuers and the market is not transparent. Though the move will help increase the supply of papers, it will come with added risk. In my view, market participants should be careful before jumping into these papers.
Ashutosh Bishnoi, CEO, Mahindra Mutual Fund
The changes in the long-term capital gains have been introduced with attention to past investments by way of the grandfathering provision. This allows investors to consider the future from a fresh perspective. At 10%, the LTCG poses a small hurdle in raising assets for the equity schemes, however, it also has the effect of bringing in a sense of ‘long-termness’ in the investments made in such schemes. However, the government should look into the possibility that people may use ULIP of life insurance to avoid this tax.
Radhika Gupta, CEO, Edelweiss Mutual Fund
The budget is in line with our expectations. Sectors such as rural, infrastructure and healthcare get major attention. Lower corporate tax for companies with turnover of up to Rs.250 crore is a good move.
Vetri Subramaniam, Head-Equity, UTI Mutual Fund
From the perspective of the capital markets, the grandfathering of historical gains should assuage concerns about the imposition having a retrospective impact. It is disappointing that STT continues to be applicable given that short and long term gains are now taxable. The post-tax long term returns from equity would remain attractive compared to other asset classes. This imposition of 10% tax does not in our view alter the long term attractiveness of the asset class
The commitment to fiscal consolidation has led to disappointing trends in capex. The estimate of Rs3 lakh crore for FY19 is at first glance a growth of 10% over the revised estimate for FY18. However, the revised estimate for FY18 is nearly 10% lower than the original budget estimate for FY18.
With the budget out of the way, the focus returns to macro stability, the ongoing growth upturn and valuations.
Rajeev Thakkar, Chief Investment Officer, PPFAS Mutual Fund
Before this budget, unfortunately, many a time the taxation of different asset classes were driving investment decisions. Given that both equity and debt will now be subject to tax, investors should take into account their time horizon, risk appetite and profile, diversification needs, goals and arrive at an appropriate asset allocation. One should not focus too much on the tax aspects now.
In short, taxation ceases to be the critical factor in selecting asset classes.
Given that there is a tax even on long term capital gains, it would be best to keep portfolio churn to the minimum whether in debt investments, debt funds, direct equities or in equity mutual funds.
Purely tax driven products like dividend plans of balanced funds and arbitrage funds may fade away.
Given the stressed bank balance sheets and huge funding needs for the infrastructure, the measures of launching debt ETFs, nudging corporates to move to the debt market and further development of the bond market in India are positive steps and could accelerate the shift from bank deposits to debt funds.
Saravana Kumar, CIO, LIC MF
I reiterate positive stance on infrastructure, agriculture and consumption stories. For example, the increase in standard deduction and health insurance cap for senior citizens has increased to Rs.50000/- is a meaningful positive.
Overall, I maintain positive stand on market. I believe that though LTCG may have near term sentimental impact on the market, the growth boost from the Union Budget will help sentiments to improve in the medium term.
Murthy Nagarajan, Head – Fixed Income, Tata Mutual Fund
The Government fiscal deficit target of 3.3% of GDP is higher than market expectation of 3.2%. However, the gross borrowing of Rs. 6.06 lakh crores is similar to the last year revised gross borrowing programme. The market is however concerned of MSP being set at 50 % more than the average cost of cultivation. The ten-year yield moved up from 7.40 % to 7.58 % levels. We feel the movement in yields is overdone as the inflation impact would be limited as most of the agriculture produce covered by MSP are already priced at these levels.
Kalpen Parekh, President, DSP BlackRock Mutual Fund
Let’s stay Long. Is the message coming out from the budget for us as investors. As investors, the most impactful budget provision was the re-introduction of LTCG at 10% on Equities after a long break of 13 years. On first impression, it hurts the sentiment as we are always happy with tax free investment options. However, even today, for investors looking to grow their capital over long periods of time, equities remain the most efficient asset class as it offers higher growth and at still lower tax rates Vs other asset classes like Gold, FDs or Real Estate.
We feel this is overall a realistic budget focusing on growth continuity with realistic expectations & dominant focus on lifting Rural Incomes. This lends stability to the economic environment and supports the revival in corporate earnings witnessed in recent quarters.
If we seek evidence on impact of budget on future returns of stocks, the outcome is very random. IN the last 21 years, since the budget day, the future one year market returns have seen a very wide range of -47% to a high +102%. This is in line with the randomness of short term returns and confirms no correlation between budgets and future market returns. Equity returns over time are driven by Earnings Growth and Valuation Re Rating. In the current environment, earnings growth momentum is picking up for good companies across many sectors while room for PE Re rating is less as we are at elevated valuations. Hence as investors, we should increase the time horizon of our investments and LTCG introduction will indirectly encourage this trend
