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Finance Bill amendment: Impact on debt mutual fund investors

by Tavaga Invest

Markets this week 📊

Indian equities remained volatile as central banks of the US, the UK continued to raise rates, signaling to investors that inflation remains top priority.

The US banking turmoil and interest rate hikes have aggravated the possibility of a global recession. Gold price typically does well in times of stress and uncertainty. The metal has had a remarkable run last year but the party still continues. 

Its just not Gold. Bitcoin too is having the time of its life, up 20% in last 1 month. The cascade of bank’ crisis has actually caused Bitcoin to have a moment of glory. They have truly cashed in on this antibank sentiment. 

Markets are expected to remain volatile for some time and may need a bird’s eye view of exactly what’s happening.

Book a call and we will hand hold you to build your portfolio in these troubled times. 

Let’s now give you a heads-up on some of the important news that made headlines this week. 

Government delivers shocker for investors 😱

Big blow: In a surprise move, the government proposed an amendment to the Finance Bill 2023 which is likely to take away the benefit of 20% tax with indexation benefit that debt mutual funds enjoyed earlier. 

What has changed? Now you have to pay tax as per your slab rate irrespective of your holding period on gain from your Debt, Gold, international, FOFs Mutual Funds (any MF which will have 35% or less AUM in domestic equity). This is applicable from 1 Apr, so whatever amount invested till now and investments done before Mar 31 will not get impacted. 

Logic behind it: Deposit rates have not generated inflation-beating returns for a long time. This along with juicy returns offered by MFs and the stock market has made it difficult for banks to get a steady flow of deposits. So, here comes the govt to save the Indian savers. This move brings parity in all fixed-income products. This means debt MFs to be taxed similarly to FDs. 

What was it earlier? Currently, if you held these funds for more than 3 yrs, they were considered as Long term capital gain and eligible for 20% tax after indexation (effective taxation was thus around 15%). If held for less than 3 yrs, it’s short-term capital gain and taxed as per income slab rate.

Our Take

Migration of money from debt MFs to FDs could be likely. There are still some benefits of debt MFs like:

> Tax liability arises only when you redeem the debt fund

>Set off and carry forward gains and losses

>More flexible than FDs

BUT, tax arbitrage was undoubtedly the biggest selling point. 

Debt MFs played an important role in building the bond market. Gold & Debt MF helped Indians move beyond physical gold and FDs. Financial planning has sure gone for a toss. Banks are having the last laugh.

PVs face a speedbump 🚗

Yellow light: Passenger vehicles (PV) were the growth driver of the automobile industry in FY23 but sales are expected to moderate in FY24. Apart from that major PV producers are dead set on hiking prices, and PV sales being very ” sentiment-driven” shall take a hit.  Maruti has already hiked these prices and the others are bound to follow. The market expects a growth of 6-9% in FY24 which is less than a third of what they saw in the previous year.

End of an era? Sales for PVs were down and the entire automotive market took a major hit during the pandemic, however, post lockdowns the pent-up demand and the need for private transport due to safety concerns led to a very good year for PVs. The sector did well and will close the year at 24% growth y-o-y but this was due to tractor and 2-wheelers sales being lower than usual. 

The lull: Demand is expected to be down because the IT layoffs, global economic slowdown, and the stock market have all hit the common folk. The market being price and sentiment driven will experience a lull in sales. Car dealerships have a record 8-10% lower walk-ins and inquiries already and they are already considering discounts as inventory levels are building up. 

Other segments: Heavy vehicles and commercial automobiles are expected to see a healthy growth of about 10% due to the replacement of equipment which tends to create organic growth for them. With the good infra push and increased spending, they expect the need for heavy vehicles to rise as well. Two-wheelers are expected to continue to be beaten down for the next year and recovery is expected only after FY25. 

Our Take

All good things must come to an end, looks like the dream run the PV sales had post-pandemic has also ended. Sales will be down and may slip further if the world falls into an economic crisis. On a brighter note, the increased focus on EVs might lead to some organic growth as people choose to switch to sustainable options.


Asia packed with action 🎬

Diplomatic visits: This week saw two powerful Asian leaders with completely diff agendas for shaping the regional geopolitics travelled westward. First was Japanese PM Fumio Kishida’s visit India to pursue more than a decade old Indo-Pacifc strategy. Second was Chinese President Xi Jinping’s visit to Moscow to reiterate growing Sino-Russia bonds. 

Japan’s stance: In a tough message to China, Japan called India an indispensable partner. Particularly in a year when Japan is the chair of G7 and India has the G20 presidency, two imp platforms for cooperation and future planning. $75 billion of public and private funds have also been committed by 2030 

No peace path: Xi’s 3 day visit was packed with action. China came out in open support of Russia and this visit cemented the “no limits” partnership that the two leaders announced last February, weeks before the invasion. Meeting culminated in more than a dozen agreements to bolster cooperation in trade, technology etc. Their own autocratic agendas and a shared animosity against the US remained the highlight with no interest in resolving the ongoing conflict in Ukraine.

Our Take

Despite the obvious similarities of their autocratic nature and their tenuous relationship with the west, this friendship hardly has common interests. Russia has grown increasingly dependent on China for its import of oil and gas and export of electronics after being slapped with sanctions. Russia does offer market opportunities to China but that is minuscule compared to the Europe and US markets. In a nutshell, Russia is asking a lot from China, but has very little to offer in return. Xi should not be mistaken as Russia’s knight in shining armour and will likely dictate the terms of this “so called” friendship.


Clock’s ticking for TikTok ⌛

US ban: Tik Tok has been facing an existential crisis. Biden government has demanded TikTok’s owners to divest their stakes in the video popular video app or face a possible ban. TikTok has over 150 mn users in the US. The app has been banned on all government devices and a nationwide ban is being proposed. This ban has till now not extended to personal devices. 

Why ban? Chinese ownership seems to be the main issue. US has accused the parent company ByteDance of passing user info data to Beijing and are calling for removal from app stores till ByteDance sells the US business to a US buyer. India too banned the social media platform in 2020, after the government cracked down on 59 Chinese-owned apps, claiming that they were secretly transmitting users’ data to servers outside India.

CEO chimes in: TikTok CEO Shuo Zi Chew testified in US court for 5 hours about potential Chinese influence over the platform. All his efforts to convince members of the US Congress against the ban went in vain. The clamour for sale has just gone louder. But China has rejected the idea of a sale. Beijing, where ByteDance is headquartered, could potentially retaliate by blocking a forced sale using a 2020 export control law. 

Our Take

In democratic governments, you just can’t ban free speech or expression without having very strong grounds to do so. Even if TikTok is sold to an American buyer, concerns will remain. The real issue is general data security and who ultimately has access to that data. China will clearly prefer for TikTok leave the US market rather than surrender its algorithm.

What else made the news?

⏸️Time for pause?: The US Fed announced a rate hike of 0.25% but indicated that this might be one of the last few rate hikes for now.

👎Tax on traders: Securities Transaction Tax (STT) on selling options has been increased to 0.062% from 0.05%. STT on the sale of futures has been increased from 0.01% to 0.0125%.

💧 Tata watered down: Tata’s acquisition of mineral water giant, Bisleri fell through. The company will now be controlled by the founder’s daughter. 

🚫 NSE crackdown: NSE scraps the Do Not Exercise (DNE) facility for stock option traders.

🌐 Plan for 6G: India is gearing up for the introduction of 6G internet services and says full adoption will be complete by 2030, 5G is still not available to everyone. 

💰 Stock on sale: GoI plans to sell a 3.5% stake valued at INR 29 bn in defense and aerospace company Hindustan Aeronautics.

🚨Tough times ahead: Accenture announced 19k job cuts over the next 18 months and also cut its FY23 revenue target. This could be an indicator of a slowdown ahead for Indian IT companies.

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Ruchi Mehta



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