Asset Management Companies are optimistic that the Finance Minister will address the existing tax disparities between equity mutual funds and Unit Linked Insurance Plans (ULIPs). Additionally, the mutual fund industry is advocating for equitable treatment between foreign portfolio investors (FPIs) and foreign investors investing in Indian Alternative Investment Funds (AIFs).
Stocks likely to be impacted by any sector announcements include HDFC AMC, UTI AMC, Nippon Life India Asset Management, and Aditya Birla Sun Life AMC.
Christy Mathai, fund manager at Quantum Mutual Fund said that the tax rates for both ULIPs and equity mutual funds should be the same because ULIPs are essentially investment products providing some risk cover.
Currently, the returns are not taxed for ULIPs, if the annual premium is less than Rs 2.5 lakh.
The government should also revise the definition of equity-oriented mutual fund schemes to include equity Fund of Fund (FoF) schemes, said Mathai. He said that Equity FoFs should be treated on par with equity-oriented mutual funds for taxation purposes. Currently, equity FoFs are classified as debt-oriented for tax purposes.
Vinod Joseph of Economic Laws Practice said that there should be tax parity for investments made by foreign investors through the FPI route, and the investments made through Indian Alternate Investment Funds(AIFs). FPIs benefit from Double Tax Avoidance Agreements (DTAs) because they are often based in tax-friendly jurisdictions like Mauritius and Singapore. Joseph said that when an Indian AIF tries to raise money from overseas investors their biggest competitor is an FPI. So, if overseas investors want to invest in Indian equities, they can do it as an FPI or via an AIF. But they go for the former route because of tax benefits due to DTA.
He also suggested that the pass-through status should be extended to category 3 AIFs, ensuring that business income is taxed only in the hands of the investors, not the fund.
How is the sector looking?
Over the past year, asset management companies (AMCs) have enjoyed margin expansion thanks to a more favorable equity mix, spurred by growth in the equity markets. Investors have consistently preferred equity mutual funds over debt and other categories, leading to steady inflows. In June, Systematic Investment Plans (SIPs) crossed the Rs 21,000 crore mark, and new fund offers (NFOs) also drew substantial inflows. According to the latest AMFI data for June 2024, active NFO equity inflows jumped 54.1 percent month-on-month to Rs 151.4 billion.
However, analysts caution that valuations in the AMC sector seem pricey. AMCs are trading at a 40-50 percent premium to broader markets, according to a report by Kotak Institutional Equities. The report highlighted that while AMCs have strong cash flows and growth potential, their profits can be vulnerable to market downturns. Despite stronger markets supporting AUM growth for all AMCs, this is not always reflected in earnings multiples.
Mathai noted that at some point, inflows will slow, and the current valuations might not be justified, leading to a potential de-rating. Jignesh Shial of Incred Capital pointed out that while HDFC AMC appears overvalued, other companies in the sector still show potential for growth.
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