mutual funds: Tax reforms in Budget can boost long-term wealth creation: Anthony Heredia

“I think there is a role the industry can play and if there are tax reforms that can help that process, that would be welcome. And in terms of equity, we play a big role in terms of long-term wealth creation for investors and so any tax proposals that help that process will also be, to my mind, a welcome step for the industry,” says Anthony Heredia, CEO, Mahindra Manulife AMC.

Let us start by AMFI’s 16-point proposal that has been sent and there are a lot of expectations in terms of rationalising the tax structure and the capital gain structure and what according to you are the pressing issues which are actually highlighted in the 16-point proposal sent to the finance minister from AMFI?
Anthony Heredia: So, I would not put it as concerns. I think the thing that the industry looks forward to firstly continuity of reform of the progress we have seen, so I would say that would be the primary expectation. But we do believe we have a very significant role to play in terms of the ability for corporate bond markets to grow and one of the requests we would have is perhaps a rethink on the tax changes that happened on debt funds a couple of years back. I think there is a role the industry can play and if there are tax reforms that can help that process, that would be welcome. And in terms of equity, we play a big role in terms of long-term wealth creation for investors and so any tax proposals that help that process will also be, to my mind, a welcome step for the industry.

So, talking about other issues, I specifically wanted to highlight on the debt taxation changes which we saw happening some time back. How important it is for you for it to be changed considering the kind of inflow we are seeing in mutual funds and the equity participation that is also going up. We know that the debt taxation…, in fact, debt category in mutual funds was actually gaining momentum. But any specific demand for the change in taxation as far as debt mutual funds is concerned?
Anthony Heredia: So, we are having said that at a point where we believe over the next 12 to 18 months, and I am saying this more from a fund house perspective, that interest rates will start to come off and which is why debt fund investing makes sense. But genuinely, if you want investors to look at risk return asset allocation, debt funds can play a very significant role and any element of taxation that can help the process, we accept that it can be long-term.

So, for example, if an investor invests in a debt fund for a three-year or five-year period, a similar tax structure or framework that exists for direct bonds and debentures being made available to debt mutual funds would be, I think, a very helpful step for us to be able to broad-base debt investing to retail investors.

One long-pending demand over here is also about taxation parity across asset classes. When we talk about this, what do you exactly mean and what is the exact demand that AMFI has also presented?
Anthony Heredia: The parity point is more in terms of the fact that, like I said, with bonds, debentures, etc, the fact that you hold that as a capital asset over three years has a particular tax element to it. Parity for that to be extended to debt mutual funds is really what the concept is about. So, this also includes your capital gains on gold and especially international funds. This is also one area where we are looking at the capping, which has been a long-pending demand again to be increased.
Anthony Heredia: Yes, so essentially the point being made is, and I just extend it beyond just international funds, for funds which are investing overseas primarily in equity or more importantly fund of funds which typically offer solutions to investors where the underlying funds are typically equity funds to the extent of 80% or 90%, we believe deserve to be taxed similar to equity products and that is the parity also that we are requesting to be given adequate consideration.

Focusing more on the international investment limit and the long-pending demand, it has not been met. There are various factors and a lot of consultation papers also from industry stakeholders which has been taken. So, any specific demand on raising the limit on international investments?
Anthony Heredia: I would see it is that I think that is more a prerogative of the central bank to think about in terms of how it matches with their management of the reserves, etc. I think we have come a long way in terms of the currency stability, etc.

And our request has always been through both our securities market regulator and directly as an industry platform to perhaps that this is now time that this limit can be extended because really the concept is about offering investors a chance to diversify and therefore diversify beyond what they are used to investing in terms of Indian equities and fixed income to potentially products available overseas that do bring that element of risk diversification.

So, we continue to hope that the central bank does take a position at some point in the near future that we do have a situation where this limit can be adequately expanded.

One interesting observation and maybe you might want to comment on this. Banks are demanding or they want fixed deposit to get the same tax treatment as mutual funds. What is going to be your comment on this?
Anthony Heredia: So, I have seen some commentary and some edits on the fact that perhaps mutual funds are playing a role in therefore perhaps deposit collections not being what they are. But the reality is that every rupee that comes into a mutual fund eventually finds its way into the banking system, so that is the fundamental point that people need to recognise. Number two, if you look at the extent of flows, particularly from individual investors, they have predominantly been in varieties of equity products and equity is a very different asset class from the asset class that fixed deposits represent.

So, we do not think that we are in competition. In fact, we are a complement. Every rupee that is coming into a mutual fund eventually finds its way into the banking system because we do not accept cash. So, effectively, every rupee that comes eventually is invested in securities and is prevalent within the banking system.

So, the banks have a valid request in a sense that obviously they play a very-very critical role in the economic journey and anything that the government can perhaps do to facilitate deposit growth is always welcome. But I would like to stress the point that mutual funds are not competition in that space to banks. In fact, to my mind, they are a complement.

Anything to encourage women investors since we have seen a tremendous participation from women investors also and the trajectory is just going up post COVID. So, any specific demand on those lines?
Anthony Heredia: I would say besides the women investor, I would be quite encouraged, although I am not sure exactly how that can be achieved, for something to be done to enable the lower and the lower middle-income investor to invest much more in equity products because genuinely speaking if we talk very proudly of the economic journey, the fact that we potentially will become the third largest economy in the next five or six years, per capita income will rise, etc, etc, to me genuinely it is successful if every citizen is able to participate in that wealth creation journey and so something similar to the Jan Dhan movement in banking if that can happen on the investing side, I would believe that is a far more powerful proposition to look forward to.

And obviously, women investors, I have seen a very significant increase in the number of women investors investing. I think our industry anyways has a role to play in spending time, energy and money on educating and awareness of that investor segment.

But broadly speaking, if I was to take the liberty of deviating from your primary question, I think more than the woman investor, how do we enable the person at the absolute bottom of the pyramid or maybe not the bottom of the pyramid but towards the lower end of the pyramid to invest in equity products and create wealth, maybe not just wealth, but just create a lifestyle for themselves that make their lives better is for me a far bigger, I would say, expectation or shall I say, dream that I would want the policymakers to think about.

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