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North Block will have to seriously think of increasing the limit under Section 80 C and in addition to this also allow more categories of mutual funds to take advantage of this benefit. Here, the reference is to categories like large cap funds, multi cap funds and even balanced funds.
This article was published on moneycontrol.com on July 9, 2014. In the month of February 2014, UTI Mutual Fund achieved a milestone in the mutual fund industry when it celebrated the golden jubilee of pioneering wealth creation. The celebrations were marked by an open bell ceremony at the NSE and a grand function at NCPA, which was attended by none other than the former Finance Minister Mr.P.Chidambaram. The irony of this whole affair was that as we celebrated the 50th year of existence of the oldest mutual fund house, it is disheartening to note that only 2.5% of the financial savings of the household sector are actually getting diverted into mutual funds. A more detailed look at the data points show that during the time period that is 2010-11 and 2011-12, the above number was in the negative territory, to be more precise, -1.1% in both the periods. This data point is a clear indication that amidst all these celebrations, the reality is that the industry has still not penetrated into the pockets of retail investors. Hence, my endeavor in this column is to put forward a few suggestions to the Finance Minister which will help in making mutual funds an acceptable investment option among retail investors, for whom entering directly into the equity markets will only make them feel like a fish out of water. 1. Section 80 C should be made more favourable for mutual fund investments One of the biggest problems that the mutual fund industry is facing is that it has still not been able to become the first choice for investors when they wish to enter the equityy markets. The data points quoted above is a clear indication that there is a long way to go for mutual funds to be the first recall when investors wish to park their surplus in an instrument which will help them in achieving their long term goals. The question that needs to be asked at this juncture is this: “Will investor awareness programmes so rigorously conducted by fund houses or even putting up hoardings on the advantages of mutual funds in every nook and corner of the country really help in the penetration of this industry”? The answer is a definite no and the solution to this problem is to make the mutual fund route more lucrative so that investors will invest their hard earned money without much compulsion. For this, North Block will have to seriously think of increasing the limit under Section 80 C and in addition to this also allow more categories of mutual funds to take advantage of this benefit. Here, the reference is to categories like large cap funds, multi cap funds and even balanced funds. We believe that these categories of funds will be an ideal choice not only for first time investors but even for those who have burnt their fingers while dealing with equities directly. As the norm is to subject tax saving options to a lock in period, we would prefer volatile categories like mid cap funds, sectoral funds, etc. to stay out of this race. 2. Dividend Distribution Tax should be reduced for liquid funds and ultra short term funds As per the Reserve Bank of India’s Annual Report (2012-13), more than 50% of the financial savings of the household sector is parked into deposits of commercial banks during the year 2012-13. This means that the banking industry is getting a good chunk of investor surplus which we believe can be easily diverted into the mutual fund industry via liquid funds and ultra short term funds. These funds can compete with deposits on various parameters like liquidity, risk, returns and taxation. Normally, when investors park their surplus into these funds for a time period of less than a year, they would ideally go in for the dividend option. In this case, the Dividend Distribution Tax (DDT) is 28.325% and we can safely say that this is still lower than the taxation applicable on deposits especially when we consider investors in the highest tax bracket. However, we feel that there is a need to bring in a drastic reduction in DDT so that investors belonging to all tax brackets can take advantage of investing into liquid funds or ultra short term funds. 3. Conducive policy for all players in the mutual fund industry In the last few years, the mutual fund industry has been going through a phase wherein, foreign fund houses which were launched with a lot of fanfare to take advantage of the huge potential provided by India actually packed their bags and left Indian shores. Although we have been telling investors that they need not worry about this trend as these fund houses are actually getting sold to domestic giants, we strongly believe that the mutual fund industry should not be subject to Charles Darwin's “Survival of the Fittest” theory. The Government should bring in strong measures which are conducive not only for the survival of foreign fund houses but also smaller domestic fund houses which are struggling to stay afloat in this tough environment.
Mr. Finance Minister, these are only a few instances of how our investors are being taken for a ride and hence the Government should make sure that smaller fishes are allowed to survive in an industry which has the capacity to absorb more than 50 players. I firmly hope and believe that the Finance Minister will give a serious thought to these suggestions that have been given as it will not only help the industry in the long run but also our retail investors who continue to follow their parent's footsteps of investing into fixed deposits. |
Disclaimer: iFAST and/or its content and research team’s licensed representatives may own or have positions in the mutual funds of any of the Asset Management Company mentioned or referred to in the article, and may from time to time add or dispose of, or be materially interested in any such. This article is not to be construed as an offer or solicitation for the subscription, purchase or sale of any mutual fund. No investment decision should be taken without first viewing a mutual fund's scheme information document including statement of additional information. Any advice herein is made on a general basis and does not take into account the specific investment objectives of the specific person or group of persons. Investors should seek for professional investment, tax, and legal advice before making an investment or any other decision. Past performance and any forecast is not necessarily indicative of the future or likely performance of the mutual fund. The value of mutual funds and the income from them may fall as well as rise. Opinions expressed herein are subject to change without notice. Please read our disclaimer on the website.Please read our disclaimer in the website. |
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