Indian companies are looking to withdraw their investments in debt-oriented mutual funds, including so-called Fixed Maturity Plans (FMPs), offered by mutual fund houses and park them elsewhere as these funds now attract greater tax and need to be held for a longer time to qualify as long-term investments, according to the new provisions in the 2014 budget.
Companies typically park their surplus cash in returns-yielding instruments through their treasury operations, especially at a time when the intensity of capital expenditure is low, like it was in the last two years. Mutual funds are a preferred investment for such companies since it usually allowed them to earn returns higher than what they would get through bank deposits.
FMPs are debt funds schemes that offered by asset management companies. These funds invest in corporate debt and offer investors a fixed return on investment over a fixed period of time.
With the choppiness in the Indian equity markets, debt products like FMPs offered by fund houses had become increasingly attractive for firms to invest their money since they offered assured returns over a fixed period of time, along with a tax advantage compared to other forms of investments like fixed deposits with banks.
Not surprisingly, FMPs formed the highest subset of mutual fund NFOs (new fund offers) in 2012 and 2013.
As on June 30, the assets under management (AUM) of debt-linked funds stood at
R7.07 lakh crore, more than the three times the AUM of equity-linked funds of R2.08 lakh crore, according to data available with Value Research, an independent mutual fund research company.
But the 2014-15 budget announced by finance minister Arun Jaitley on July 10 had reduced the attractiveness of debt-linked mutual funds like FMPs for Indian firms. The rate of tax on long term capital gains arising out of redemption of investment in debt funds has been hiked to 20% from 10%. Jaitley has also increased the tenure for which these investments have to held to qualify as long-term investments from one year to three years, which means that if units in these debt funds are sold before three years, they will attract short term capital gains tax, which is linked to the income slab of the investor and therefore highest for companies.
Oil-to-yarn and retail conglomerate Reliance Industries (RIL), for instance, is the biggest investor in mutual funds among Indian companies, which is not surprising