The Union Budget 2004 contains some measures that will do severe damage to mutual fund investors. The finance minister must correct these aberrations before they become the law.
Select ten people randomly and ask them what the various advantages of investing in a mutual fund are. Chances are strong that one of the reasons that all ten give will be the following: For small and individual investors, mutual funds are safer and more convenient than investing directly in the markets.
However, if one of your ten randomly selected people happens to be named P. Chidambaram, then only nine people will give the above answer. Mr. Chidambaram will instead say to you very clearly and emphatically, "Directly playing the stockmarkets is better than investing in mutual funds." For good measure, he will also add that the debt markets are completely useless and therefore, conditions should be created that they should be shut down.
The fact is that yesterday's budget has, for some strange reason, made it vastly more attractive to play the stockmarkets directly than invest through equity mutual funds. They have also imposed a tax on the trading of securities, which may completely shut down debt trading. Debt trading, by the way, is crucial not only to the management of the Rs 90,000 crore invested in income funds, but also for the day-to-day treasury management of every bank in the country.
Let us take a clear look at these two disasters that have befallen investors;
Equity Fund Taxation
It's as simple as this: the government has drastically reduced the tax on the capital gains that short-term equity investments bring. It has also completely eliminated tax on gains made from long-term equity investments. This is a great measure. However, the government has not extended this new tax regime to investments in equity mutual funds. In effect, the government has made equity fund investments far more taxable than playing the stock markets directly. There can be no possible theoretical or practical justification for this.
Turnover Tax
It appears that all securities trading, including debt, will be taxed at 0.15 per cent of the value of the trade. In equities trading this is a regressive and discriminatory tax, but is probably financially bearable. This is because the gains that equity investors are looking for in a typical trade are many times higher than 0.15 per cent that will be paid as tax. However, in the case of debt, this tax will often be actually higher than the maximum gains possible on a trade.
Everyone knows that the only safe debt investments nowadays are very short-term ones. Typically, such investments are held for 10-15 days and earn at a mean rate of 4-5 per cent p.a. This means that in one transaction, they earn the investor (typically a bank or a mutual fund) around 0.15 pr cent. This 0.15 per cent will now be entirely taken away by the turnover tax, rendering debt-trading a useless activity.
Honestly, if I were a foreigner unaffected and unconcerned with India , I would be laughing sarcastically at the shocking ignorance of investment-related financial matters that our Finance Minister and his ministry have displayed.
As it is, the best hope of the millions of Indians who have come to see mutual funds as the preferred way of growing their savings is that these measures are mistakes that will soon be rectified.
Of course, the Government of our country has a long track-record of making mistakes and then refusing to correct them out of sheer ego and cussedness. Let's hope (and pray, at least those of you who believe that prayers affects governments) that this doesn't turn out to be such a case.
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