Dubai: The Union Budget for 2024-25, to be presented on Tuesday at 11am in India, will outline the government’s financial plan to drive economic growth, enhance infrastructure, and promote social welfare. But what will mutual fund investors look to gain from this series of updates tomorrow?
“As always, the Budget in India has significant implications for various sectors, especially India-based mutual funds – go-to investments for Non-Resident Indians (NRIs) worldwide,” said Brijesh Meti, a UAE-based consultant who decodes tax norms for residents in India and abroad.
“This involves not just delving into expectations of Budget 2024-25 and analysing their impact on the mutual funds sector, but also rethinking tax on long-term equity investments for NRIs. If the upcoming Budget will reconsider taxes incurred, for instance, this will get more NRIs to invest in Indian markets.”
How NRI mutual fund investments are taxed currently
For long-term investments, the mutual funds are taxed at a rate of 10 per cent as per the long-term capital gains taxation rules. For equity schemes, short-term capital gains are taxed at a rate of 15 per cent and long-term capital gains at a rate of 10 per cent if the gains exceed Rs100,000 (Dh4,496).
How are Indian mutual funds expected to perform tomorrow?
Stocks and mutual funds represent distinct investment avenues, each offering unique features and potential benefits. While stocks signify ownership in individual companies, mutual funds pool funds from multiple investors to invest in a diversified portfolio of assets, including stocks, bonds, among others.
Let’s first understand how India-based equity or stock mutual funds, which are essentially a fund pool purely targeting Indian stocks, are affected by tomorrow’s Budget session:
• Equity or stock mutual funds
“The increased capital expenditure on infrastructure is expected to benefit equity mutual funds with significant exposure to sectors like construction, cement, steel, and engineering,” evaluated Brody Dunn, an investment manager at a global asset advisory firm based in Abu Dhabi.
“Infrastructure-focused funds could see enhanced performance due to the boost in government spending. The budget’s emphasis on green initiatives and technology adoption may lead to higher returns for funds invested in renewable energy, electric vehicles, and tech sectors.”
• Debt mutual funds
The ‘fiscal deficit’ target, an amount which indicates India’s focus on fiscal discipline, may result in stable interest rates. This environment is favourable for debt mutual funds, particularly those invested in long-term bonds, as bond prices tend to rise when interest rates are stable or falling.
What are debt mutual funds?
“With increased government spending and economic growth – another indicator the Budget will provide on Tuesday – the overall market environment for credit or debt is expected to improve, reducing risk and benefiting funds invested in such bonds,” added Dunn.
• Tax-saving mutual funds (ELSS)
Meti further explained that a new tax regime with revised income tax slabs revealed on Tuesday can result in higher disposable income for individuals, potentially boosting investments in tax-saving instruments like Equity Linked Savings Schemes (ELSS).
“ELSS is the most preferred tax-saving option for most tax payers because of the shortest mandatory lock-in period and its potential to offer superior returns. Even for NRIs, it works out as the best option as one can claim up to maximum deduction of INR150,000 (Dh6,585) in a year,” he added.
What type of mutual fund will stand to benefit post-Budget?
“If more funds are set aside for agriculture and rural development, this could benefit mutual funds focusing on these themes,” noted Suleiman. “For instance, funds investing in agritech, rural infrastructure, and related sectors may see positive performance.
“Additionally, increased funding set aside from the India Budget 2024-25 for healthcare infrastructure and research could boost mutual funds with significant investments in the healthcare and pharmaceutical sectors.”
Final thoughts..
The upcoming India Budget’s focus on growth, fiscal prudence, and sustainability is likely to boost investor confidence, agreed the experts, while adding that this positive sentiment could lead to higher inflows into mutual funds as investors seek to capitalise on the anticipated economic growth.
The Indian Budget 2024-25 is expected to have a positive impact on the mutual funds sector, with significant opportunities for both equity and debt funds, in particular, added Dunn. “Investors should also consider aligning their investment portfolios to benefit from the government’s session tomorrow.
“The session’s focus will be on infrastructure, sustainability, and fiscal prudence. By staying informed and strategically adjusting their investments, mutual fund investors can potentially enhance their returns in the post-budget period.”