Tax hit on debt funds is just the latest punch to reeling mutual fund companies

• The latest hurdle that shook the mutual fund companies was an amendment in the Finance Bill that proposed to do away with long-term capital gains tax benefits on debt investments.
• Along with this, tightening SEBI norms and heightened competition in the 42-player industry has also been impacting the growth of asset management companies.
• Stocks of four listed AMCs have been deeply battered in 2023, especially after the government proposed FY24 Budget amendments on March 24.

Shares of asset management companies have been sliding this year as regulatory changes and a challenging market environment weigh on their smooth growth.

The latest hurdle that shook the mutual fund companies was an amendment in the Finance Bill that proposed to do away with long-term capital gains tax benefits on debt investments. As per the proposed changes in the Finance Bill, investors in debt funds will have to pay tax according to their income slabs. Investors have so far benefited from indexation while calculating long-term capital gains from debt funds but this will now longer be available from 1 April, 2023.

Along with this, tightening norms by Securities and Exchange Board of India (SEBI) and heightened competition in the 42-player industry has also been impacting the growth of asset management companies (AMCs).

Stocks of four listed AMCs have been deeply battered in 2023, especially after the government proposed FY24 Budget amendments on March 24.

“AMC stocks are under pressure mainly because of heightened competition, SEBI restrictions on expense ratios, slow growth in asset under management (AUM) and now the budget provisions on debt schemes is an additional factor stressing them. Adding to the pressure, most equity schemes by asset management companies have underperformed benchmark indices recently,” said Deepak Jasani, head of retail research at HDFC Securities. The benchmark Nifty50 index is down 6.7% so far this year.

The removal of taxation benefits on debt funds have been seen as a negative for mutual companies – analysts believe debt funds will no longer be attractive for the long term as fixed deposits or FDs will replace them.

“After the change in Finance Bill, most debt funds will be used for short-term investment while FDs for the long term,” added Jasani.

While analysts believe change in debt fund taxation is negative for mutual funds, according to CLSA, the measure would have a moderate to low impact on profitability as bulk of the revenue/profitability for AMCs accrues from equity assets and non-liquid debt AUMs are neither higher growth nor higher profitability segment.

For AMCs under our coverage, revenue contribution from non-liquid debt products is 11-14%. We believe this is moderate to low impact as bulk of the revenue/profitability for AMCs accrues from equity AUMs and non-liquid debt AUMs are neither higher growth nor higher profitability segments.

Apart from these expected downturns for the industry, the prevailing market volatility has also impacted the share prices of these companies.
Source: NSE

"In debt mutual funds, indexation was the most important narrative for the industry’s efforts to retailise debt. With the proposed amendments, surely the overall ecosystem will get impacted, especially the NBFC space,” said DP Singh, deputy managing director and chief business officer at SBI MF.

Besides, as per reports, the Securities and Exchange Board of India (SEBI) is considering taking action against big fund houses that charge very high expense ratios from their customers.

Currently as per SEBI’s rules, mutual funds can charge a total expense ratio (TER) of up to 2.25%, if the AUM reaches ₹500 crore. However, the regulator might now reduce this expense amount to benefit investors.

Also, since distributors earn more commission by selling new funds, there are cases of mis-selling. Hence to protect investor interest, the regulator is looking to bring a uniform expense ratio for mutual fund schemes.


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