In an email interview with SME Times, Garima Tripathi (V Sahai Tripathi & Co Chartered Accountants) said that an increase in Securities Transaction Tax (STT) might impact equity returns, but the core benefits of investments remain intact.
1. How do you expect the increase in STT to influence investor behaviour and trading volumes within the Indian mutual fund market
Garima Tripathi: While the increase in STT and long-term capital gains tax might impact equity returns, the core benefits of equity investments—superior returns, liquidity, and inflation hedging—remain intact. The Economic Survey 2024 had predicted hikes in short-term capital gains tax and STT on futures and options, which were realized in the Budget. Despite these changes, analysts expect no significant decline in investor activity, buoyed by the ongoing market bull run. Historical data supports this, as a 25% STT increase in 2023 did not reduce trading volumes. The recent STT hike on F&O might temper market excesses without severely impacting volumes.
2. In light of the recent budget announcements, do you anticipate any major changes in asset allocation strategies among Indian investors and fund managers? If so, could you provide details?
Garima Tripathi: The reduction in long-term capital gains tax on property and gold from 20% to 12.5% and the modified tax treatment for various asset classes, including changes to holding periods for STCG and LTCG, could lead to significant shifts in asset allocation strategies. The withdrawal of the inflation adjustment benefit, except for properties bought before 2001, may affect overall gains. While the simplification aims to balance tax reductions, the elimination of indexation raises concerns about increased tax burdens and potential illicit financial activities. The slight increase in capital gains tax for shares from 10% to 12.5% may slightly reduce post-tax returns.
3. What is your forecast for the growth and performance of the Indian mutual fund industry over the next 12-24 months, considering the effects of Budget 2024?
Garima Tripathi: The recent changes announced by Finance Minister Nirmala Sitharaman will likely influence the Indian mutual fund industry over the next 12-24 months. The increase in short-term capital gains tax from 15% to 20% for specified financial assets, while maintaining the rates for other assets, may prompt investors to adjust their strategies. Equity mutual funds and shares with a 12-month holding period will now face a 20% tax on STCG and a 12.5% tax on LTCG, compared to the previous rates of 15% and 10%, respectively. The revised holding periods and tax rates for debt-focused mutual funds, equity FoFs, and gold mutual funds could impact investor behaviour and asset allocation.
Despite these changes, opportunities remain in the equity market, especially with bottom-up strategies and a focus on large, mid, and small-cap stocks. In the debt sector, strategies like the Barbell Strategy and increased bond market participation could benefit from favourable fiscal and global bond trends. Overall, while the budget introduces adjustments, the Indian mutual fund industry is expected to continue growing, driven by strategic investment and market opportunities.
4. Which fund categories or investment themes in the Indian market do you think will offer the most attractive opportunities for investors right now?
Garima Tripathi: In the current environment, several fund categories and investment themes within the Indian market present promising opportunities.
Equity Mutual Funds are attractive due to their potential for high returns, particularly with a focus on large, mid, and small-cap stocks. Investors should consider a bottom-up approach to identify undervalued stocks and capitalize on market dips.
Debt Mutual Funds remain a solid choice, especially with strategies like the Barbell Strategy, which balances short and long-term investments to mitigate interest rate risks. Reduced fiscal deficits and global bond market integration may also boost bond market performance.
Gold Mutual Funds offer a hedge against inflation and market volatility. With a reduced holding period for long-term capital gains tax, these funds are more tax-efficient.
Sector-specific funds, such as those focused on technology, healthcare, and renewable energy, are poised for growth due to favourable economic and policy trends. Investors should stay informed and align their strategies with these evolving opportunities.
5. What recommendations would you offer to individual investors in India regarding their mutual fund investments given the recent budget announcements?
Garima Tripathi: With the recent budget announcements in India, individual investors should consider the following strategies for mutual fund investments:
- Tax Implications: Review changes in tax laws affecting mutual funds. The budget may have introduced changes to tax benefits or exemptions, so adjust your investment strategy to maximize tax efficiency.
- Diversification: Ensure your portfolio is diversified across different asset classes and sectors to mitigate risk. The budget may have impacted specific sectors, so realign your investments accordingly.
- Long-Term Goals: Focus on long-term growth rather than short-term gains. The budget’s economic projections and policy shifts can influence market conditions, making it crucial to stay invested for the long haul.
- Expense Ratios: Monitor the expense ratios of your mutual funds. Budget announcements can affect fund performance, so opt for funds with competitive fees.
- Regular Reviews: Regularly review your mutual fund investments in light of budget changes and adjust your portfolio to align with your financial goals.
**The interviewee is Chartered Accountant at V Sahai Tripathi and Co, Chartered Accountants. The views, opinions and beliefs of the interviewee do not necessarily reflect the views, opinions and beliefs of SME Times.
**SME Times and the interviewer assume no responsibility or liability for any views, opinions and beliefs of the interviewee.
