Importance of fixed income schemes has been growing quite consistently: A Balasubramanian

“I think one has to look at the entire bond market price discovery mechanism and the funding of most of the need for Indian corporates and non-bank financial services, most of the government sponsored PSUs institutions such as NABARD, NHB and PFC, REC, they have been the large borrowers in the market and mutual funds have been the primary subscribers to this market, giving them money at best possible rates by helping them price discovery,” says A Balasubramanian, Aditya Birla Sun Life AMC

AMC stocks have plunged. Everybody is now worried that the mutual fund industry will be hit substantially. And it is a major setback for schemes which have a very strong debt portfolio. What is your understanding of the new amendment to the Finance Bill? And how will this change life for AMCs?
I think, first and foremost, I must mention that this new provision has come as a surprise given the fact that there was absolutely no mention about this in the budget, whether it is related to the removal of long-term capital gains tax or the indexation benefit which mutual fund fixed income schemes have been enjoying for the last number of years. Therefore, it came all of a sudden as a surprise. There is absolutely no doubt on that. And even we never expected, given the fact that mutual fund industry plays a very key role in both development of the equity market on one side and the bond market on the other side quite substantially for a very long period of time and therefore, it came as a surprise. I also believe that the way the mutual funds have been playing the development role on the bond market, which I think is one of the most needed for the country as a whole, in addition to the equity market. I think one has to look at the entire bond market price discovery mechanism and the funding of most of the need for Indian corporates and non-bank financial services, most of the government sponsored PSUs institutions such as NABARD, NHB and PFC, REC, they have been the large borrowers in the market and mutual funds have been the primary subscribers to this market, giving them money at best possible rates by helping them price discovery.

At the same time, also the mutual funds have been playing a very large role in the government securities borrowing programs. Therefore, the importance of fixed income schemes in the country has been growing quite consistently. And from investors’ point of view, this becomes one of the best asset class as an alternate to any of the risky assets that one may have and continue to the large pool of growing needs of conservative investors. But that came as a surprise, no doubt. And something we will have to just see given the fact that how in the new world scenario it remains and how one has to get position because asset class does not go away from the importance point of view.

But some would also argue and say that look, we should not be surprised at all. This is in spirit with the fact that the government is working towards simplifying the tax regime. All asset classes, they should not be prioritized. And right now, if you have money in fixed deposit, you do not get a tax advantage. If you are putting in debt fund, you get a tax advantage. Nor for a fixed deposit owner or a fixed deposit investor, why should they not get the same advantage which a mutual fund gets? And then why should mutual fund get an advantage? So it is in spirit with what it just normalises the regime.
I think one has to look at the asset class of two different things. One, of course, when you go to the fixed deposit of bank, there is a guaranteed return that comes in and with of course, whatever the guarantee that is being given under the protection is up to about two lakh rupees. Above that, anyway, you run the risk on the FD as well.

At the same time, FD as an asset class gives you a fixed return, no doubt whereas a mutual fund that does not give you the guaranteed return, the mark to market is there. But yet, because of the large component of portfolio is of accrual nature, therefore from investors’ point of view, it gives a longer term benefit. Those who are coming to the mutual fund, they always come to the mutual and fixed income schemes after exhausting all their options going for the FDs and other things. Therefore, that is something need to be kept in mind because mutual fund, the capital gains tax is coming because one, there is a mark to market risk you take, instrument that you take on a various instrument that you take, it reflects on the risk that is available on those instruments in the portfolio in terms of valuation.

Therefore, it has always been getting the tax benefit. That is one. Second is from the bond market point of view, I think there is one of the areas where there is a huge effort that is being put by SEBI and Ministry of Finance. Often they have indicated we need a vibrant bond market in the country in order to progress to the next level in addition to the equity market.

And who have been playing the bigger role in this? Mutual funds have been playing a bigger role in this for number of years, for price discovery, drawing the yield curve, giving the money at the lowest possible rates in the market. The entire interest rate reduction that happened, the pass-through of the interest rate reduction largely was passed through the mutual funds assets, which was growing at that point of time.

And that is the way the bond market got the significant benefit, reading the cost of borrowing for Indian companies and we become one of the alternate source of financing. And that cannot be taken away. I think it is unfair to link it to FD or other thing, therefore we need to have uniform policy. But instruments have to be understood what role they play and on what basis which the tax benefits are being given.

What happens in this case? I mean, is it a clear advantage FDs for that matter, equity saving funds, hybrid schemes and then I want to talk about gold as well. But first, where do you think the money is going to flow into?
Naturally, of course, the alternates will become the hybrid funds. FD funds and increasingly, people will like take more risk in the equity itself now. In that sense, of course, the prominence of other asset classes will increase then.
While corporates have been large investors, especially at a time when the equity market turned extremely volatile even from retail and HNIs investors’ point of view, we have been, of course, dreaming that their own participation in the bond market had to go up quite significantly as part of their portfolio balancing and that is something that would remain one of the most sort of trusted asset class from investors’ point of view.

But having said that, naturally, it will give an edge for funds like hybrid funds, which has got a mix of both equity and fixed income and it would actually gain more prominence.

But I think one has to still keep in mind whatever mark to market the fluctuation will be there which otherwise is there in the fixed income schemes as well, that is something one cannot assume that will go away.

At the same time, industry, of course, has to think about building this business, though at this point of time when I compare that India versus US and US bond market is as big as an equity market and catering to the growing needs of investors, even recently as all of us clearly remember the recent crisis in the financial market in US, one of the beneficiary in the US has been the money market funds because they are the ones having given the interest rates which are prevailing at this point of time to the investors compared to even the banks who have been giving the lower deposit rates to the investors and that is the kind of role which these mutual funds have been playing.

They are true reflection of the market prevailing yield which kind of actually goes to investors and these are the importance and my own belief is this cannot be taken away and kill one of the asset class which can play a very big role from investors’ point of view, as well as from the bond market development point of view.