Funds breathe easy as investors roll over FMPs for tax gains
August, 11th 2014
Investors in fixed maturity plans (FMPs) of mutual funds pulled out less money than expected in July in reaction to the government's decision to tighten the rules for long-term capital gains tax on debt schemes.
Many holders of FMPs—which were scheduled to expire in July—extended their investment tenure in the product to three years from one year to avoid paying capital gains tax on redemptions before three years, said fund officials Finance minister Arun Jaitley, in the Budget, changed the definition of 'long term' in respect of capital gains tax for debt mutual funds to 36 months from 12 months. He also increased long-term capital gains tax to 20 per cent from 10 per cent.
The mutual fund industry feared mass redemptions from close-ended debt schemes with tenure of more than a year. These products were designed to help investors save on taxes.
FMPs, which constitute a major chunk of the assets under management of close-ended debt products, were expected to take the maximum hit because of the new decision. Jaitley later clarified the new tax regime would not apply to debt scheme units sold between April 1 and July 10. While high net worth and retail investors stayed put in FMPs, many corporate investors pulled out and invested in liquid schemes.
According to Crisil, close-ended income funds (mostly fixed maturity plans) posted outflows of Rs 4,926 crore. The income fund category's assets stood at Rs 4.72 lakh crore in July. Liquid funds' assets rose 13.07 per cent, or by Rs 28,225 crore, toRs 2.44 lakh crore.
"We have seen more than 60 per cent of FMPs being rolled over. If investors have completed 18 months in debt fund investment, they'd rather wait for another 18 months," said Nimesh Shah, MD & CEO of ICICI Prudential AMC.
According to unofficial estimates, assets under management under FMPs would be around Rs 1.75 lakh crore. The industry's AUM is roughly Rs 10 lakh crore. At the time of the announcement, industry officials had felt a chunk of this money would move to bank fixed deposits as the steps align taxes of mutual fund debt schemes to that of bank fixed deposits. But, there is respite as of now.
"Corporate investors are putting their money into open-ended debt funds as they get a choice to take a call on investment horizon. Unlike bank fixed deposit schemes, there is no penalty in redemptions from open-ended debt funds," said A Balasubramanian, chief executive officer of Birla Sun Life Mutual Fund.
"We have not seen any redemption pressure. The corporate clients are still trying to get a clear picture of the whole matter," said Milind Barve, managing director at HDFC Asset Management Company.