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 since it is also the largest cash generating company in India.
In fiscal 2014, it invested around R35,421 crore of its surplus cash in mutual funds. Around 70% of this was parked in FMPs. A sizeable portion of RIL?s remaining investment in mutual funds was in other open-ended debt funds as well.
RIL?s chief financial officer Alok Agarwal said that unless things changed and as the provisions surrounding FMPs stood at present, RIL would have to move its investment out of FMPs and into other products like short-term bank deposits.
?There is no tax advantage in investing in FMPs anymore since the tax liability arising out of investing in fixed deposits and FMPs are more or less the same,? says A Subbarao, group chief financial officer of RPG Enterprises. ?The government did this to remove tax arbitrage opportunities between bank deposits and FMPs and to shore up its tax revenues. Companies will much rather invest in short-term deposits and liquid mutual funds that provide the flexibility of redeeming the investment earlier.?
?One to three-year FMPs might see either redemptions or reduced inflows and overall inflow in this segment could see a 10-20% decline,? says Niranjan Risbood, director of fund research at Morningstar India. ?According to estimates, the current size of the one to two-year FMP book is around
R1.5 lakh crore.?
The other factor that could lead to a withdrawal of corporate money from mutual funds ? both debt and equity-linked ? is a revival in the capital expenditure cycle, that had suffered due to a slowdown in the economy over the last couple of years.
Companies like RIL and the Aditya Birla Group?s cement making arm Ultratech Cement have either embarked on or announced large capital expenditure programmes for the current fiscal.
Agarwal of RIL said that his company would be investing R35,000 crore in fiscal 2015 towards augmenting capacity across its petrochemicals and refining businesses, strengthening its retail venture and rolling out its telecom initiative. Aditya Birla Group?s cement making arm Ultratech Cement has announced an outlay of R10,000 crore over the next year-and-a-half to expand capacity.
Dwijendra Srivastava, head of fixed income products at Sundaram Mutual Fund, said that if inflation came under control and savings rate moved up, money from high net worth individuals may move into mutual funds, partially offsetting the impact of institutional money flowing out of the industry.
