Union Budget 2020: Worrying Impact For Mutual Fund Industry And Investors

There was no direct recommendations for the mutual fund industry in the Union Budget 2020. A lot of expectations were centered around the fact that Long Term Capital Gains would go and thus benefit the industry. However, that did not come through in the Union Budget.

The strange paradox was that a change in the income tax rates, will affect the mutual fund industry and hence investors. The Finance Minister today revised the income tax slabs, and cut the rates under certain slabs. Now, to come under the new tax regime, with a benefit of reduced tax rates, one has to forego the various tax exemptions. For example, you would have to forego your life insurance premium paid, and almost all of the tax exemptions, including the Equity Linked Saving Schemes.

Now, investors have been pumping money into Equity Linked Saving Schemes to save tax. With the new tax regime, why would investors want to invest in ELSS with no tax benefits. These instruments qualify for tax exemption under SEC80C of the Income Tax Act.

One is not sure what will be the resultant impact on inflows, but, there is likely to be an impact for sure.

If inflows into mutual funds dwindle, we might see a sell-off also in the stock markets. This may not be good news for the stock markets, as steady inflows from mutual funds has kept the markets boat from rocking so far. Already, insurance company stocks fell sharply today on worries that investors may now have the option of going for reduced tax rates and now claiming life insurance premium paid.