Radhika Gupta, Managing Director and Chief Executive Officer at Edelweiss Asset Management on Monday spoke about the recent changes in the mutual fund industry. On debt fund taxation amendments, Gupta said that it should be wait and watch for the next three months.
"I know a lot of people have been saying that fixed deposits are now far more attractive. But I don't think the story is so simple. We are the largest player in the target maturity fund. And I still think there's a lot that the open ended debt mutual fund has to offer that traditional instruments don't have by way of liquidity structure and longer term options," Gupta said while talking exclusively to CNBC-TV18.
The Finance Bill amendment recently said that the capital gains arising from debt mutual funds will be classified only as short-term capital gains. The government said that investment in mutual fund where not more than 35 percent is invested in equity shares of Indian company (which is debt funds) will be deemed as short-term capital gains.
The announcement was done on March 24 and the provision became effective from April 1. In order to take benefits of the low long term capital tax (LTCG) regime, investors were seen purchasing these funds in the last week of March.
Gupta believes that flows will continue in funds having maturity under 3 years.
"I break this into two parts. One is under three years where anyway there was no impact of taxation. So, I think liquid or short term funds will continue to be business as usual. Also, arbitrage funds, which was popular with corporate and HNI investors, will continue to be more popular. In fact, perhaps more popular than it has been in the past," Gupta said.
Over the three years category where the tax benefit has some impact, Gupta stressed that this is in wait and watch mode. However, she added that there are still benefits with mutual funds.
"For instance, you have to pay tax every year in case of FD and with mutual funds, you have to pay the tax only on redemption. Also, I think liquidity is a huge benefit. I also think one category of funds that will get more popular is hybrid funds. Rather than doing equity and debt standalone, you can do it in the context of a hybrid fund like a balanced fund or a balanced advantage fund and enjoy equity tax benefits. Hybrid funds will become a more popular way for the retail customer to do asset allocation," Gupta told CNBC-TV18.
On the total expense ratio (TER) proposals, Gupta said that it is too early to speak about margin reduction because of the changes in TER.
"This entire conversation is yet to conclude, and we're yet to see the outcome. I think over the last 10 years, the mutual fund industry has seen a lot of regulatory changes and while margins may have come on the pressure, I think volume growth has compensated," Gupta told CNBC-TV18.
It is being anticipated that margins may be hit due to TER changes.
As of now, Sebi allows mutual funds to charge investors certain operating expenses for managing mutual fund schemes. These expenses are collectively referred to as TER. Sebi is now reportedly considering bringing in changes and standardising a uniform TER across mutual fund schemes in a bid to prevent agents from misleading investors.
According to Gupta, asset management companies (AMCs) are Rs 40 lakh crore industry. So, she believes that while margins can come under pressure, volume growth will compensate for it.
"And we still are in a country where under penetration levels are so prevalent that the growth room for AMCs is substantial," Gupta told CNBC-TV18.