On Friday, the Lok Sabha passed the Finance Bill 2023 with some amendments. According to the Bill, mutual funds having less than 35% assets under management in domestic equity will lose the indexation benefit and the returns will be taxed as short-term capital gains according to the tax slab of the individual.
Banks will benefit from the amendment, said Suresh Khatanhar, deputy managing director at IDBI Bank. “High net worth individual (HNIs) ultra-HNI and institutional money are invested in these funds, which may get diverted to bank deposits. Also, mutual funds were using such investments to fund the working capital and non-convertible debentures of companies. It will be also positive for the banks, as this business will flow into banks for refinance,” he said.
Suresh Ganapathy, head of financials research at Macquarie Capital, said the tax proposal will remove the advantage debt mutual funds had over bank fixed deposits and end the tax arbitrage that existed. “So, some retail investors will move money to bank FDs. Again, positive for deposits …It’s a great time to add India banks,” he said in a research note.
Ganapathy was analysing bank balance sheets in light of the recent collapse of banks in the US and Europe.
“A typical bank in India is funded almost 85-90% by domestic deposits. Though as per RBI’s LCR (liquidity coverage ratio) rules, the retail deposits are around 60% of overall deposits; effectively wholesale deposits for major banks are around 20-25% of overall deposits. Indian banks largely remain a retail domestic deposit funded market with very less reliance on wholesale bond markets,” he said, adding that banks in India have sufficient liquidity cushions.
Analysts said investors will now weigh options based on their risk-taking ability and expectations of returns. “The clear advantage that mutual funds had due to the indexation benefits has now gone away. But investors will still need to decide whether they want to take the risk of debt schemes for the slightly higher returns of mutual funds,” said Siddhartha Khemka, head of research, retail at Motilal Oswal.
