Budget 2024: Experts weigh in on impact of capital gains tax hike on investor sentiment, mutual fund growth

Finance Minister Nirmala Sitharaman's announcement to hike taxes on short-term capital gains has sparked debate among financial experts, raising crucial questions about its potential impact on investor sentiment, the relative appeal of various asset classes, and the long-term implications for the growth and development of India's mutual fund sector.

Experts weigh in on the implications of capital gains tax hike on market stability and the future of the mutual fund industry. 

Speaking to Mint, financial experts have expressed mixed reactions to the Finance Minister's announcement on July 23rd. While some experts have played down the potential impact of this decision, others have cautioned about its potential ramifications on investor behaviour and market stability.

Edited excerpt from experts' opinion on mutual funds outlook

Expert insights on asset allocation, investment strategies

Kaustubh Belapurkar, Director of Manager Research at Morningstar Investment Research India, believes these changes will not significantly alter asset allocation strategies among investors and fund managers. He emphasized that investment decisions should be driven by risk-return objectives and investment horizons rather than tax rates. 

Belapurkar said, “We don’t expect any major shifts in asset allocation for investors or asset managers. The risk-return objectives and investment time horizon drive asset allocation for investors. Tax rates should not be the basis for making investment decisions.” He remains optimistic about the growth of the Indian mutual fund industry, citing the increasing financialization of savings as a key driver.

Umeshkumar Mehta, Chief Investment Officer at Samco Mutual Fund, suggested hybrid funds and Flexi funds for new investors. For a lump sum investor, only invest an amount that they will not require for the next five years. Additionally, he recommended the Systematic Transfer Plan (STP) route divided over a 9-12 month period for those who are starting afresh.

Impact on investor behaviour and trading volumes

Rahul Ghose, Founder and CEO of Octanom Tech Pvt Ltd, highlighted that the increase in the Securities Transaction Tax (STT) aims to moderate the heightened activity in the derivatives market. Ghose noted, “The increased STT is aimed at moderating the heightened level of activity in the F&O market, thereby fostering a more sustainable pace of growth in the stock markets.” 

He added that the change is unlikely to significantly impact overall trading volumes, as retail participants may view the increase as a minor deterrent. Despite the tax increases, Ghose believes equity mutual funds remain an attractive investment option compared to other asset classes.

Promising investment themes, sectors

Gaurav Dua, Head of Capital Market Strategy at Sharekhan by BNP Paribas, emphasized that the budget supports India's multi-year economic growth upcycle. 

Dua said, “The budget only reinforces and supports India's multi-year economic growth upcycle. So it does not impact the structural growth and investment opportunities over the medium term.” He also stressed the importance of sticking to plain vanilla schemes over thematic funds due to sector-specific volatility, advising, “As a portfolio strategy, it is always advisable to invest a bulk of money in plain vanilla schemes rather than focus too much on thematic mutual funds.”

Advice to individual mutual fund investors

Aditya Agarwala, Co-founder and Head of Investment at Invest4Edu advises individual investors not to overreact to the budget announcements. He encourages continued investment in mutual funds for long-term wealth creation, emphasizing that equity remains the most profitable asset class. Agarwala said, “I would advise individual investors to continue to put a portion of their savings in mutual funds for long-term wealth creation. Equity as an asset class should be considered for long-term wealth growth.”

Regulatory Perspective

Madhabi Buch, the SEBI chairman, had previously warned about the high level of retail participation in the F&O market, pointing out that it often leads to significant losses for traders. Buch has emphasized that “the F&O loss is not just a stock market issue, but a social issue”, highlighting the need for regulatory action to protect household savings.

Outlook for the mutual fund industry

Suresh Soni, CEO of Baroda BNP Paribas Mutual Fund, is optimistic about the mutual fund industry's growth trajectory. He attributes this to rising investor awareness and strong market performance. Soni commented, “The retail investor drives the secular growth in Indian mutual funds, and thorough SIPs are expected to continue for the foreseeable future.” He also highlighted that the budget's tax changes are unlikely to impact fund flows significantly.

Anand K Rathi, Co-founder of MIRA Money, noted that the mutual fund industry is poised for significant growth despite changes in taxes or regulatory regimes. Rathi said, “India's mutual fund industry is poised for significant growth and not affected by changes in taxes or regulatory regimes.” He also mentioned that the recent STT increase is not expected to have a significant impact on trading volumes, as new traders continue to enter the market.

Abhishek Tiwari, Executive Director and Chief Business Officer at PGIM India MF, highlighted the industry's impressive growth, pointing out that mutual funds provide the best platform for individual investors to create long-term wealth. Tiwari said, “The MF industry has grown at a CAGR of 20% in the last five years. We believe the industry will continue to grow healthy as mutual funds provide the best platform for individual investors to create wealth over the long run.”