Debt vs Hybrid vs Multi-asset: A Balasubramanian suggests these mutual funds to make money in FY24

The Finance Bill was passed by the Lok Sabha with 64 amendments on Friday. Now, as per the changes, the gains from mutual funds where not more than 35 per cent is invested in equities will now be deemed to be short-term capital gains, and that's with effect from April 1, 2023. Also, debt funds held for more than three years will no longer enjoy indexation benefits. Additionally, they won't be eligible for a 20 per cent tax rate as well. To understand what it really means for the industry at large and what should be your investment strategy from now on BTTV's Sakshi Batra speaks with A Balasubramanian, MD & CEO, Aditya Birla Sun Life AMC & Chairman, AMFI

BT: Which are the categories of funds that will be most impacted with the new tax rule for debt funds?

Balasubramanian: Existing funds, not much will get impacted. Whatever available investment is there till the 31st of March this year, we'll continue to have LTCG benefit by way of grandfathering. It is only for the new investment that comes from 1st April, the new taxation will be applicable. And then as it comes the capital gains from April 2023 will only be eligible for short-term, not long-term benefit, which was existing. Therefore, existing schemes will not get impacted. 

On the contrary, post this provision, lots of people actually were postponing their investment to April saying they will make it in the middle of April as they have money, they will do it. All such investors now suddenly thinking about investing before the 31st of March itself. I think they are currently now starting to think about how can I actually lock in myself to get it right. But one thing, investors generally don't have the tendency to withdraw the funds unless they have some needs. To the extent, I think I would assume most of the people such as people who have some other plan of action on those investments would come. And secondly, those who actually been going after fixed deposits may move on to mutual funds. And their window is available from now till 31st of March.

BT: Do you expect the flows to increase in debt funds in March?

Balasubramanian: Yeah, flows will increase. It could either move from one scheme to another scheme in order to plan its long-term investing through this route. And second, those who have been parking their money outside thinking that I'm getting a steady state of return about 7-7.5% still there are taxable. The message has been very clear from the MF industry that this is the last opportunity until the next budget. They realize what they have done is actually detrimental to the growth of the industry. It is detrimental to the corporate bond market. If the reverse is done in nothing like it. Let us assume it's become permanent then whoever comes in before March will get the benefit of LTCG because it becomes a differential is actually not very large, but however from a government point of view, the incremental revenue that they will get on the base of this not very significant. 

BT: But you know, given the kind of amendments we are working with right now, is it clear advantage fixed deposits right now?

Balasubramanian: No advantage we cannot say. It comes at par in fact with April. In mutual funds, income becomes taxable by accrual. Therefore, the income that is accrued is taxed by way of income accrual, in the case of mutual fund that comes along with NAV growth. So, therefore, it comes about short-term capital gain in the form of growth in the value. 

So, short-term capital gain tax can also be adjusted in the short-term capital loss, again depending on upon how one does the tax planning by themselves. Therefore, while the tax treatment becomes equal I think the way the accounting is done because fixed deposit income is in the hands of people. The case of mutual funds is actually growth in the NAV becomes not an income, it's a form of growth. The growth today is considered as a short-term capping and therefore, it leads actually get qualified to get adjusted against the short-term capital loss.

BT: Where do you really see most of the money flowing into now? How do you assess this entire scenario to bring this change in money flow?

Balasubramanian: I think that moving into the next financial year, short-term capital gain can only be crystallized in the case of redemption. Any other investment that you make, or especially in FDs , get crystalised every year from an income tax point of view that you'll get an advantage. 

Well, having said that, since almost all products are becoming at par, and then comes the question of taxes applicable, I'm sure some bit of benefit will also go to the insurance, the guaranteed kind of product up to a certain extent. Also and those who are used to putting money of course FDs, those are the lower tax bracket and don't worry about taxation per se, they may continue to go for FDs. But I think the mutual fund would be in a disadvantageous position. At the same time, if you look at the total Rs 16 lakh crore, roughly about 80% of the money comes for one to two years kind of things. I think that remains the same. Only the money that comes in for the long term, which is about 20% and is roughly about Rs 4 lakh crore size. The rate of growth could probably be reduced given the change in tax structures.

BT: What would you advise to the conservative investors out there?

Balasubramanian: So I think those who come in the low tax bracket they can of course continue to be in the FD and given the fact that that gives them a bit of guaranteed return. And, there's an element of safety which they always consider. And those who come with a higher tax bracket, and those who have income taxpayers. Definitely, mutual funds would still be a better option given the fact you do get short-term capital gains tax benefits that can be adjusted against the short-term capital loss. People also make losses in their investments, as we have seen recently, the equity market volatility. So, therefore, it's always better to have that options with them. 

BT: How should you know investors really approach their investments in FY 24? 

Balasubramanian: Equity is something it's a long-term investment avenue. Therefore, our own belief is that this year, equity will remain volatile, no doubt with limited downside risk and limited upside potential. Given the global volatility , therefore is the time to accumulate equity, there's no doubt on that. At the same time, given the fact that rates are pretty attractive, we were quite vocal in actually giving fixed income as an asset class. And that now being somewhat derived from the form of whether taxation change, definitely hybrid funds that will become the way forward from investor's point of view. 

At the same time Multi-asset allocation fund, which invests in all four asset classes equity, fixed income, gold, and silver, are the four asset classes which comes and could also be another good opportunity for investors to look at as part of the asset allocations. When gold is an asset class, our own belief is it will continue to do better not necessarily giving significantly higher returns than fixed income or equity, as an asset class will do relatively better, even silver as an asset class should do better. Therefore, the combination of the four asset classes in the multi-asset fund is something we also believe could be one of the options that could be there for FY2023-24.