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Journalism of Courage
MUMBAI, MAR 3: The investment scenario has changed suddenly with mutual funds becoming more attractive than bank deposits after the union budget and interest rate reduction by the Reserve Bank of India (RBI). Funds are likely to flow out from banks to mutual funds following the latest developments.
Banks would be adversely affected by the tax exemptions to mutual fund schemes in two ways. “First, the deposits collected by the banking system would suffer as the savings shift towards mutual funds to take advantage of these tax breaks. Second, banks themselves cannot invest in mutual funds beyond five per cent of the incremental deposits collected in the previous year, limiting them from routing their investments to gain the tax advantage,” said ICICI Securities.
In fact, according to stock-brokers, one reason for the buoyancy on the markets is the sops given to mutual funds. Sensex had already gone up by nearly 400 points after the presentation of the Union budget. “Mutual funds are likely to pump moneyinto stock markets as they get more tax incentives for higher equity portfolio,” said a fund manager.
After the cut in bank rate, repo rate and cash reserve ratio by the RBI, banks have already started reducing their prime lending rates and deposit rates. “Investors have been putting money in bank fixed deposits and small saving schemes in the last two years as stock market returns and investments in mutual funds were found less attractive. Now the situation will change,” said a banker.
Banks, on the other hand, were facing a peculiar problem with credit offtake remaining sluggish and deposits rising. Post-interest rate cut, the fixed deposit rates of all banks are likely to be scaled down by around 50-100 basis points. The coupon rates on the bond offerings of institutions (like ICICI and IDBI) as well as corporates will also be slashed by around 50-75 basis points.
“Tax exemptions for mutual fund investments in the 1999-2000 Union budget will have far-reaching implications and has already resultedin post-tax interest rate structure moving up. This would result in an increase in yields on instruments not getting income tax and dividend tax exemptions,” I-Sec said.
The budget has proposed exemption from income tax the income distributed by Unit Trust of India (UTI) and mutual funds — on US-64 and all open-ended equity oriented funds with at least 50 per cent of the investible funds in equity shares — for three years.
Analysts said large-scale routing of investments through mutual funds would be resorted to in order to increase post-tax returns and felt it would make sense to float instrument-specific mutual fund schemes to take advantage of this behaviour. The imposition of 10 per cent dividend tax on income schemes will make debt schemes less attractive.
Banks and other bodies with restrictions on deployment of their investible resources would be the losers as the tax differential between direct investments and investments routed through mutual funds would be 28.5 per cent and 38.5 per cent.Currently, the income received from mutual funds are subject to tax at the marginal tax rate for individuals and the corporate tax rate for corporates. The new proposals make it attractive to route all investments through a mutual fund.
