The changes have taken away the long-term tax advantage these funds had over bank deposits and are likely to push money away from most debt mutual fund products, including corporate bond funds, the investors said.
"Corporate bond products like target maturity funds, actively managed fixed income and other funds which are not (used for) cash management will be impacted," said Radhika Gupta, managing director & chief executive officer at Edelweiss AMC. Indian companies had outstanding corporate bonds worth around 41 trillion rupees ($497.69 billion) as on December 2022, while mutual funds held around 4.4 trillion rupees of corporate debt, as on February, according to Securities and Exchange Board of India.
Though mutual holdings may be comparatively smaller to other long-term investors - mostly banks, insurance companies and pension funds, they trade more actively and provide liquidity to the market.
"The decision may severely hamper the corporate bond market liquidity... With reduced investment in both passive and active debt MF, the depth and breadth of corporate bonds looks doubtful," said Sandeep Yadav, senior vice president, head fixed income at DSP Mutual Fund. Fund managers expect mutual funds to focus more on actively managed funds which can allow for higher returns and balance out the impact of higher taxes. "Active funds is something where energies would be diverted from fund management's perspective," said a Mumbai-based fund manager. Managers also said that post the amendment, inflows in equities will rise, which could also dampen demand for debt funds.
"People will invest in schemes with more allocation for
equities. Hybrid schemes will see allotment towards equities
being raised to above 35% going forward and is not a good step
for development of corporate bond market," IDBI MF's Sharma
added.
($1 = 82.3800 Indian rupees)
(Reporting by Dharamraj Dhutia and Bhakti Tambe; Editing by
Nivedita Bhattacharjee)
