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Assign equity status to international funds with over 65% exposure outside India: Arindam Ghosh, CEO, Mirae Asset

Arindam Ghosh, CEO, Mirae Asset Global Investments says that the budget should grant equity status to international funds with over 65% exposure outside India. This according to him will be a definitive step to persuade Indian investors to take exposure to other financial markets through the mutual fund route.  

What key priorities and concerns should the budget address?

FY13 budget will be a crucial event considering that India stands at cross roads today with the economic growth engine showing clear signs of slowdown amid several headwinds. A declining fiscal health, high interest rates, low business confidence leading to weak investments as well as the fear of rebound in inflation amid high crude oil prices have dented the country’s growth prospects despite the long term structural growth factors being in place. Against this backdrop, the budget would play a vital role in improving the economy’s fiscal health as well as pursuing new reforms to propel capex investments.

The other key areas that need attention include dealing with supply side bottlenecks, surging inflation, along with reforms to attract FDI inflows, strengthen the talent pool and labor reforms. One would also like to see perceptible measures being taken towards encouraging private consumption through higher tax exemption limits while simultaneously expanding the tax net to avoid any additional burden on the exchequer. Further, policy actions to accentuate planned savings into areas like retirement, education and health would positively influence long term investing thereby ensuring prudent financial planning by the populace at large. Thus a pragmatic and long- term sustainable road map towards fiscal consolidation and growth would be the key deliverables expected from the budget.  

What measures do you think are needed to make our capital markets stronger?

India enjoys among the highest savings rate in the world, however a disproportionate portion of household savings is invested in asset classes like gold, real estate and the ubiquitous savings account. As such a substantial portion of one’s resources are not channeled prudently thus missing out on asset classes like equity especially in a high inflation scenario. Another peculiar behaviour displayed by investors is the short term outlook towards equity investing while showcasing patience when it comes to gold and real estate investments. In the process, several miss out on the long term benefits of equities. The budget can play a pivotal role in influencing this behaviour through appropriate measures to promote long term investing especially in equity mutual funds. On a different note, measures to reduce levies like STT could help broad base the capital markets by encouraging more retail participation.

With mutual funds still accounting for a tiny fraction of household savings what needs to be done to make MFs, from a policy perspective, to widen their reach?

Mutual funds are one of the most preferred avenues globally for retail investors to take exposure to capital markets. As highlighted earlier, measures that facilitate investing in equity with a long term perspective would ensure that retail investors are able to derive maximum benefit from this promising asset class. The budget would do well to extend tax benefits under ELSS which ensure that retail investors are able to participate in the wealth generation process through one of the most affordable and convenient means to equity investing.  On a separate note, while India’s economy has increasingly become coupled with global developments, Indian investors continue to focus only on domestic opportunities thereby missing out on diversifying their portfolio as well as losing out on investment opportunities in other promising economies. The right policy measures e.g. assigning equity status to international funds with over 65% exposure outside India would be definitive steps that would persuade Indian investors to take exposure to other financial markets through the mutual fund route.  

How will the proposed borrowing programme in budget likely to affect bond markets? What would be its impact on debt funds?

The key challenge for the government will be to move closer towards fiscal consolidation which is a complex exercise given the various on-going social security schemes coupled with high subsidiary bills on oil products.

The government`s gross borrowing for next financial year is expected to be in the range of Rs. 6,00,000 cr which implies Rs. 15,000 cr of government auction every week in the first half of the financial year. This would keep market liquidity in negative territory thereby negating the impact of any rate cuts that are initiated. In addition, the central bank would be forced to depend on OMOs (Open Market Operations) for successful completion of government borrowing. In such a scenario, G-Sec yields would be range bound i.e. 8.00% to 8.40%.

From a debt funds prospective, the category would continue to witness volatility across the yield curve. As the government borrowing programme would keep liquidity in negative zone, short term yields would trend higher. Short term funds, especially those with low duration would therefore perform better vis-à-vis longer duration funds until the structural issues pertaining to liquidity and inflation are addressed.

A single trading platform for debt & equity would lead to increased penetration: Sandesh Kirkire

Sandesh Kirkire, CEO, Kotak Mutual Fund says that there is a need for consolidated trading platform for equity and debt asset classes; operating within a single (or a coordinated) regulatory framework to increase penetration within the retail investors segment.

The upcoming Union Budget for financial year 2012-2013 has importance more than what is ordinarily attributed to this already very critical annual event. In the current context, the high borrowing cost in the economy has restricted private sector consumption and investments. Therefore, the main policy thrust of the budget must aim primarily at creating a positive investment climate by reducing capital and borrowing costs for productive sectors.

Recourse to Fiscal discipline by a two-tiered application of frugal expenditure and ingenious resource generation may be required. The government should lay down a path to move towards a fiscal deficit of under 3% of the GDP. In this context, there is a need to revisit the Reddy Committee report of 2004 on these borrowings.

The planned detangling of myriad of taxation laws and rules through GST and DTC too has been stalled.  Policy movement on that front too is highly anticipated in the upcoming budget.

The Budget must particularly seek to emphasize investments in the infrastructure sector, which is in requirement of investments of US$ 1 trillion in the next 5 years.  To address this (amongst many things), a comprehensive and strategic outlook on energy security may be needed.

From the capital markets point of view, there is a need for a consolidated trading platform for equity and debt asset classes; operating within a single (or a coordinated) regulatory framework. The availability of equity and debt assets through a single trading platform may lead to increased penetration and higher capital mobilization within the economy.  

ELSS has been a highly effective mechanism to popularize equities investment within the retail segment and also promote relatively long-term savings commitment from the investors. Therefore, the tax-savings status of ELSS must be continued under the new tax codes.  

Moreover, the empowerment of the Mutual funds to provide a scheme that allows the investor an avenue to invest for retirement and annuity, is needed.  This would also promote long-term savings behavior. Granting EET status to such a scheme may prove to be an effective feature, and may widen the market participation.  The enactment of the PFRDA and a consequent thrust for bringing it within the EET status would drive long term investments.

Finally, it has been a long standing demand of the industry has been to align the taxation status of Fund of Fund’s (FoF) with the underlying scheme, rather than the current - ‘debt status’. An Equity FoF investor is essentially investing in equity schemes, and as such, should be able to avail the tax benefits which would otherwise accrue to him/her, had they invested directly into those schemes. The rectification of this imbalance would greatly improve the acceptance of the product segment, as also bring the FoF investors at par with regular investors.

Reduce supply side bottlenecks in order to rein in inflation: Rahul Pal, Head - Fixed Income, Taurus AMC

Rahul Pal, Head - Fixed Income, Taurus Mutual Fund says that the upcoming budget should simplify tax legislations to make the investment process easy to understand. He suggests that the policy should be aimed at reducing supply side bottlenecks to rein in inflation.  

What key priorities and concerns should the budget address?

What measures do you think are needed to make our capital markets stronger?

With mutual funds still accounting for a tiny fraction of household savings what needs to be done to make MFs, from a policy perspective, to widen their reach?

How will the proposed borrowing programme in budget likely to affect bond markets? What would be its impact on debt funds?

If the fiscal arithmetic proves correct, we may see an outperformance in long term bond funds; however the horizon for such outperformance may be small. We believe that short term funds can outperform other categories of debt funds over a longer time frame.

The budget needs to give an overall boost to sentiments: Debasish Mallick, MD & CEO, IDBI MF

What key priorities and concerns should the budget address?

The primary concern facing the economy today is the slowdown of growth and deceleration in investment flow. The IIP numbers are not yet encouraging, though the PMI index is up. India Inc is perhaps ready for investment but uncertainties are holding back. Overall inflation numbers have come down but core inflation is yet to reduce significantly. Further, low inflation needs to be sustained paving the way for rate cuts. The key priority in the budget is to spell out fiscal consolidation measures so as to keep the deficit manageable.

What measures do you think are needed to make our capital markets stronger?

Measures/regulations have been announced, from time to time, which have made capital markets more transparent. SEBI has announced a more unified KYC guidelines for all segments of the capital market. It would be desirable to move to a unified KYC for the entire financial services sector. There are certain follow up measures to be completed to get investment from Qualified Foreign Investors (QFIs). Infrastructure Debt Funds (IDFs) could attract subscription/ investments from large investors, but a close look at the tax implication is necessary. The Budget needs to take measures to give an overall boost to sentiments. 

With mutual funds still accounting for a tiny fraction of household savings what needs to be done to make MFs, from a policy perspective, to widen their reach?

Mutual Funds have been equated with equity market movements, with investors anticipating high returns. As is usual, such expectations could become unrealistic in times of protracted downtrend in the equity market. The industry should work around to correct these perceptions/expectations. The industry would do well to design products which limit the downside. Investors have to realize that mutual fund is essentially a story of prudent asset allocation with an aim to generate wealth over the medium/ long term. It is important that investors are not disillusioned with MFs and turn their back on the industry, which is happening at every downturn today. These measures along with a suitable company specific strategy to widen the geographical reach would make mutual funds an important vehicle for investment.

How is the proposed borrowing programme in budget likely to affect bond markets? What would be its impact on debt funds?

If the government borrowing is significantly higher than market expectations, bond yields will trend upwards. Debt schemes having higher duration may possibly underperform those with lower duration. Investors could then look at flexible debt products/ schemes, which could adjust duration based on the underlying market movements/ macro circumstances.  

Tax breaks needed in retirement, children’s savings and health care: Harshendu Bindal

Harshendu Bindal, President – Franklin Templeton Investments (India), suggests that documentation for investing in mutual funds should be relaxed by enabling the use of UID cards so that people who don’t have PAN cards can invest in MFs.

What key priorities and concerns should the budget address?

Given the current macro-economic scenario and recent poll election results, this year’s budget will be closely followed for an insight into the government’s stance on various pending reforms, steps towards fiscal consolidation and policy measures to facilitate a recovery in capex cycle. The roadmap on fiscal consolidation is crucial as it holds implications for monetary policy, as clearly indicated by RBI. It will need to be seen how the government strikes a balance between spending on inclusive growth initiatives and moving forward on fiscal agenda.

Other areas needing attention include tackling supply bottlenecks, pushing up inflation and infrastructure, along with reforms to attract FDI flows, bolstering talent pool and labour reforms. There is likely to be an increased investor focus on the fine print for clarity on implementation of various announcements and their underlying assumptions. The government is likely to augment revenues through expansion of tax net and increase in indirect taxes. Increase in tax exemption limits for individuals could be used as a tool to boost private consumption. Any tax breaks to encourage savings into basic needs such as retirement, children’s education and health will be a positive.

What measures do you think are needed to make our capital markets stronger?

While the household savings rate is high in India, most of these savings find their way into unproductive physical assets such as gold and real estate. And while there has been a gradual increase in the share of financial assets, this could be further encouraged by providing tax benefits to channel the high savings into capital markets and financial institutions such as bank, mutual funds and insurance, and also to fund infrastructure development. Such efforts can reduce India’s dependence on foreign capital flows and help expand the investor base.

Another aspect is enhancing the market regulatory and infrastructure framework for corporate bond markets in India. A liquid bond market can help companies reduce their financing costs and also help them raise long term funds. Higher participation and liquidity can be brought about by doing away with investment restrictions on pension funds and insurance companies – these entities play a key role in developed markets and are also critical for financing long-term infrastructure development programmes – as well as reduction/ rationalization of the stamp duty structure for bond issuances.

With mutual funds still accounting for a tiny fraction of household savings what needs to be done to make MFs, from a policy perspective, to widen their reach?

There are mainly three things that can help increase industry penetration:

Enhance financial awareness – there is clear need for increasing awareness for various financial products amongst masses and policy should adopt D. Swarup Panel recommendation to set up FINWEB (Financial Well-Being Board of India).

Relaxation of documentation norms – enabling usage of UID cards apart from PAN cards for the purpose of documentation will help, given that a large chunk of the population does not pay taxes and therefore does not have a PAN card.

As mentioned earlier, tax breaks for retirement, children’s savings and health care investing, as is the case in the West would be useful. This would encourage financial planning and savings for important life stage needs of all investors.

How is the proposed borrowing programme in budget likely to affect bond markets? What would be its impact on debt funds?

It is difficult to predict the exact quantum of government borrowings for FY13. In our view, the government is cognizant of the economic benefits that would trickle through from fiscal consolidation and would look to augment revenues as well as curb expenditure where possible. Revenues could get a boost from telecom auctions. On the flip side, the situation will be keenly tracked for impact from Food Security Bill and State Electricity Board losses. A credible fiscal consolidation plan will certainly help bond yields edge lower as well as strengthen the case for monetary policy easing.

In our view, given the current macro-economic situation, investors are better off investing in open-end fixed income funds. RBI is likely to wait for clarity on various factors before it cuts policy rates. Despite the weakening growth trends, RBI has been wary of reversing the rate hikes due to the high fiscal gap and structural supply-demand imbalances that are pushing up inflation. Policy statements indicate that the tightening cycle is behind us, though the timing of reversal rests on government efforts to control the fiscal deficit and sustainable moderation in inflation. The recent rise in international crude oil prices could push up inflation as also any efforts by the government to curb subsidy bill. Actively managed open-end funds would be better positioned than closed-end fixed maturity products in navigating the current uncertain environment and delivering superior, risk-adjusted returns.

Tax structure should be rationalized for small investors in mutual funds: Sundeep Sikka

Sundeep Sikka, CEO, Reliance Mutual Fund feels that the 2012 budget should rationalize tax structure to encourage long-term savings in equity markets through mutual funds.

What key priorities and concerns should the budget address?

The recent Q3 figures were certainly lower than expected. Domestic economy is facing headwinds from high inflation, high interest rate, anemic investment, series of government scandals, slow pace of market-friendly reforms and poor confidence against the backdrop of dismal global outlook. The growth in the next fiscal will also remain around 7%, unless RBI starts slashing rates and government rolls out reforms along with some fiscal consolidation.

This can definitely create hurdles in the India growth story. However, I am very hopeful as India has great potential. The government must take timely action so that investor sentiment is not affected.

The key issues that the budget should address is injecting growth stimulus to maintain stability in growth.

What measures do you think are needed to make our capital markets stronger?

Money from institutional investors is one of the key factors responsible for market volatility and liquidity. I strongly believe that encouraging long-term savings from retail investors in asset classes such as equity, debt and gold will be the right step in bringing stability to the capital markets.

With mutual funds still accounting for a tiny fraction of household savings, what needs to be done to make MFs, from a policy perspective, to widen their reach?

Overall, though salaries of the common man have increased, inflation has resulted in the decliningvalue of money. The government needs to focus more on rationalization of tax structure in favour of small, individual investors to long-term savings in equity markets through mutual funds.

The budget should retain tax benefit on ELSS: S. Naren, CIO-Equity, ICICI Prudential AMC 

What key priorities and concerns should the budget address?

The most important and crucial area is clearly going to be a road map for fiscal consolidation. Fiscal consolidation will be imperative for providing comfort to RBI on initiating monetary easing through rate action. Also, increased focus on investment in infrastructure by utilizing revenue received through effective taxation and disinvestment will benefit the economy and facilitate growth sustenance.

What measures do you think are needed to make our capital markets stronger?

Removal of STT for equity markets will help the capital markets by increasing and improving return potential. This apart, any initiatives towards economic growth will have an impact on long term capital markets as well by way of increased participation.

With mutual funds still accounting for a tiny fraction of household savings, what needs to be done to make MFs, from a policy perspective, to widen their reach?

Mutual funds today are one of the best investment options for retail investors to participate in equity markets and, at the same time, partner in India’s growth story. From the budget perspective, policies that encourage investments in mutual funds like retaining tax benefits in ELSS will help maintain and improve penetration of mutual funds over the long term.