The mutual fund industry, weighed down by heavy redemptions, is hoping investors will return if the government goes ahead with a proposal to provide fiscal incentives and allow them to launch long-term retirement or pension schemes.

Local fund houses, which manage Rs 7.80 lakh crore of assets, are waiting to see if the government will approve plans by mutual funds to offer pension schemes with tax benefits to help boost business.

The recent rebound in stocks has prompted thousands of investors to exit schemes they had entered four years ago when the markets were high only to lose money after the global financial meltdown.

Asset management companies have reported investor folios have declined by as much as 60 lakh in the last three years. New regulatory norms providing for direct investment by large institutional investors — cutting out intermediaries — will also impact the industry, which banks on some of the top metros and cities to draw in a pool of funds.

That is why mutual funds are waiting for the budget, hoping for tax breaks and possibly for the government to nudge state-run companies sitting on a cash pile to park part of their funds in mutual fund schemes.

"The government should extend tax benefits to promote long-term investments in mutual funds through pension and retirement-oriented products, which will help increase retail particip- ation," said Nimesh Shah, MD and CEO, ICICIBSE 1.95 % Prudential AMC.

The industry is also pitching for a pension scheme under the New Pension Scheme with tax benefit besides amendment to the IRDA Act to allow insurance companies to invest through asset management companies. Currently, subscribers who invest in NPS schemes are eligible for a tax deduction of up to Rs 1 lakh.

"Expansion in the scope of the Rajiv Gandhi Equity Savings scheme, and rationalisation of dividend distribution tax and long-term capital gains tax in debt schemes could help mutual funds bring in long-term resources in both equity and debt capital markets in tune with national priorities," said Debasish Mallick, MD & CEO, IDBIBSE 0.28 % Asset Management.

SBIBSE 0.17 % Mutual Fund chief investment officer Navneet Munot said the finance minister should take measures to ensure household savings start moving back to financial markets, reducing the country's vulnerability to external flows.

"The policy environment must be conducive for enhancing savings and channelising them into productive uses through a vibrant capital market," he said. Mutual funds have been seeking approval for products on the line of the 401K Plan, popular in the US as a longterm investment option offering tax breaks.

"We expect the finance minister to provide clarity on double taxation issues. Currently, when domestic fund managers are managing overseas funds from the country, they are taxed in both the countries," said A Balasubramanian, chief executive officer, Birla Sun Life AMC. Fund houses also want double taxation of securities transaction tax, or STT, to be done away with.

Currently, STT is levied on investors while redeeming units of an equity mutual fund even though the AMC also pays STT on every buy and sell transactions. The argument is this adds to the fund's expense ratio and, in turn, hurts investors.

The industry says infrastructure development funds launched by asset management companies should be given tax benefits similar to those enjoyed by NBFCs gets of a lower withholding tax of 5%. Fund houses also want the government and the regulator to dispense with the need to insist on a permanent account number or PAN Card requirement for qualified financial institution or QFIs.