The Union Budget is scheduled to be unveiled by finance minister Arun Jaitley on February 29, 2016. With regards to investing and mutual funds, Aditya Agarwal, chief executive officer at Morningstar India, shared his views briefly with ET Wealth.
Here we present a more detailed perspective on what Morningstar India would like from the Union Budget.
Taxation of funds
At Morningstar, we have always been of the view that asset allocation is the most fundamental of investment decisions. In fact, any security-specific selection decision is preceded, either implicitly or explicitly, by an asset allocation decision. It is the key driver in accounting for the variation between returns on different portfolios.
Unfortunately, investors tend to falter on this front due to either lack of comprehension or credible financial advice, paucity of time when creating a portfolio, or having an undue focus on standalone products rather than taking a holistic view of the investment approach and the resulting portfolio.
In this context, I would like to mention multi-asset Fund of Funds, or FoF, which is a vehicle that can be used by investors to meet their allocation needs in an efficient manner. These could either be multi-manager FoF or a single-manager FoF, both quite popular in developed markets.
In India, such funds have not gained much traction. A bone of contention with these products is that currently these funds are unfavourably taxed vis-à-vis open-ended funds.
In a similar vein, global funds are useful risk diversifiers to pure domestic-focused portfolios. However, the taxation structure is similar to that of a FoF.
Bestowing favorable taxation to these two types of funds should go a long way in helping investors achieve a favorable outcome with regards to their investment goals.
Retirement planning
For an individual to save adequately for retirement depends not only on how much he saves but how skilfully he invests - whether he makes use of the various investment avenues available.
In this area, mutual funds can play a crucial role. Retirement savings form a substantial portion of the assets being managed by the mutual fund industry worldwide. According to U.S.-based Investment Company Institute (ICI), 91% of investors in mutual funds in the U.S. indicated that they use mutual funds to save for retirement.
(ICI is a national association of investment companies - mutual funds, exchange-traded funds (ETFs), closed-end funds, and unit investment trusts (UITs) in the United States.)
This is not the case in India where retirement funds form only a miniscule portion of the total assets under management. A lengthy process of approval for providing tax breaks and an overcrowded Section 80C investment basket are the key reasons for the limited growth in this segment.
We would like to see the Finance Ministry ease the approval process and consider tax breaks for retirement funds over and above the Rs 1,50,000 limit available under Section 80C, to bring it at par with other retirement products like the National Pension Scheme, or NPS.
