Debt MF changes: Negative for MFs; marginally positive for life insurance

This is negative for MFs – debt (ex liquid) contributes 19 per cent of AUMs and 11-14 per cent of revenues, said global brokerage firm CLSA in a report.

For Life insurers, the brokerage said that there seems to be no change to the taxation proposed in the budget and status quo remains with life savings taxed at marginal tax rate (over ₹0.5 million of premiums) but tax arbitrage in favour of competing products such as MFs is gone now which at these valuations is a small positive for life insurers.

“NBFCs get a material part of their funding from MFs – funding proportion from banks will go up. Marginally positive for bank credit/deposits,” the note said.

Impact on Life insurers – Positive at the margin:

– There is no amendment to the tax changes proposed in the budget and hence status quo remains with returns on incremental premiums >Rs0.5mn will be taxed at individual tax rate.

– While this will impact non PAR savings sales vs pre budget levels, the change in taxation for debt MFs now bridges the tax arbitrage and brings all debt products at par.

– So Life insurers from being a superior product pre budget (no tax on debt savings) moved to being an inferior product post budget (full tax on premiums >Rs0.5mn) and now it is neutral as alternate debt investments are also taxed at marginal tax rate.

– At these valuations, we believe this is a marginal positive for Life insurers. Link to post budget downgrade and recent upgrade on comfortable valuations.

Impact on banks – small positive:

– Post the budget changes in insurance and amendment changes proposed for debt MFs, tax arbitrage vs bank deposits is gone.

– Earlier interest on bank deposits was taxed at individual tax rate and debt MFs enjoyed LTCG of 20% with indexation and life savings products enjoyed tax free returns.

– At the margin this is positive for banks but quantum cannot be very high as bank deposits’ market size is Rs180trn vs total debt MF size of Rs8trn.

Impact on NBFCs:

– NBFCs/HFCs would have some reliance on their funding from mutual funds. With potentially lower inflows in debt MFs, NBFCs/HFCs may have to rely more on bank funding vs funding from MFs.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.