Will ULIPs and bank FDs threaten MFs now?


The Union Budget has made some significant changes in taxation of investment avenues. 10% DDT has been imposed on equity oriented funds, while ULIPs continue to be tax free. For senior citizens, bank FDs have become a whole lot more attractive, with a 4 fold increase in tax free exemption limit on interest income. Will ULIPs now gain market share at the expense of equity oriented funds? And will bank FDs win back the share they are losing to MFs in the senior citizen segment? We asked these two questions to leading IFAs from across India – here are their responses.

Q1: 10% DDT on equity oriented schemes, no tax on ULIPs: Will this put a brake on sales of balanced funds with monthly dividend payout and a shift towards ULIPs or do you see this 10% DDT being shrugged off and business-as-usual mode continuing in equity oriented funds with monthly dividend payouts?

Sunil Jhaveri, MSJ Capital, Gurgaon: Yes. Mis selling in balanced funds with dividend payout should stop. Will this divert funds to ULIP? I guess not. As I have been mentioning, SWP from Growth option is the ideal way. However, Insurance Companies will make capital out of this anomaly and hard sell ULIPs as a tax free alternative to MFs.

A K Narayan, Chennai: First easy flow of money in to balanced fund will slow down. Investors won’t mind getting 8 to 9 % tax free returns still. I feel growth and SWP will gather momentum. I don’t think ULIP will garner more as investors have been educated to a large extent

Mukesh Dedhia, Ghalla Bhansali Securities, Mumbai: Business will continue as usual. People can go for SWP after one year ( no exit load after one year). But ULIP is not a substitute if you require regular income.

Ashish Chadha, Chadha Investment, Delhi: Most clients migrating from FDs find a monthly dividend to be manna from heavens, with fixed income battered I think it will be business as usual.

Raj Talati, ABM Invesment, Vadodara: It will be shrugged off and business will be as usual as person who is mis-selling is least concerned with tax instance.

Dhiraj Mittal, Ace Wealth Managers, Delhi: I expect some (say 33%) fall in the business in equity oriented funds with monthly dividend payouts. Insurance agents may however benefit from another angle: tax compliance has not become more stringent as Chapter VI deductions will be disallowed if returns are not filed on time.

Deepak Khemani, Mumbai: Ulips as a category comes with Risk Cover(for it to be tax free) which may not be available to senior citizens if they want to take advantage of ULIPS being Tax Free, so I dont think it will be a big problem, however 10% DDT will be a dampener.

Mohsin Bijepuri, Chennai: It is definitely a big dampener on equity funds overall. Churning may start getting resorted to cap gains below Rs.1,00,000. Dividend payouts will have to be substituted with SWPs.

Viksat Rohatgi, Blue Circle, Delhi: Business should be as usual. 10% DDT may not be a big damper. If markets continue doing well, yields post DDT will still be attractive enough for long term investors with scope for capital appreciation. ULIPS – do not offer cash flows back in the hands of investors like dividend payouts from MFs. Moreover lack of liquidity is a major issue with ULIPs. I must add however that I am against this monthly/quarterly payouts in equity oriented funds.

Ramesh Bhat, Aniram, Chennai: 10% DDT is most reasonable to contribute - country is passing through structural change - 10% is very less tax. MF selling was overheated – if there is a slowdown, it will allow all stakeholders to understand better what they are selling/buying. Time for some introspection wherever we have gone overboard.

Saurabh Mittal, Circle Wealth Advisors, Mumbai: It will surely impact the dividend payout business. Also its an inefficient way of paying tax as one will not be able to setoff capital loss if any at the time of exit of any other scheme or may be even the same scheme.

Amit Mehta, Jamnagar: 10 % on ddt will not effect, we now will try to convert to systematic withdrawal plan.

Prabin Agarwala, Siliguri: The market scenario has changed a lot in the last few years and investors are more attracted toward specific investment products, like balanced funds, rather that bundled products such as ULIPs. So the 10% DDT on equity oriented schemes will not dramatically change investor's mindset and will certainly not help ULIPs to cover the lost grounds.

Shifali Satsangee, Funds Vedaa, Agra: Firstly, we at Funds Ve’daa, never believed in advocating monthly cash flows from Equity asset class for a regular/primary income. Having said so, the announcement of DDT on equity oriented schemes to our opinion, is in line with LTCG on broader equity asset class. ULIPS and MFs are two separate instruments as one gives life cover and other gives pure investment benefits, hence we are unable to comment on this one.

Pramod Saraf, Swan Finance, Indore: Sales of Balanced Funds will not get disturbed but definitely the monthly dividend option may not be as attractive as it was till now.

Sanjeev Govila, Hum Fauji Initiatives, Delhi: It will definitely stop the mis-selling of balanced funds as regular Dividend Schemes. But shift towards ULIPs may not come due to the still-high commissions in them and the unnecessary bundling of insurance with investments.

Sunil Bhagat, Pondicherry: 10 % DDT on equity oriented schemes will certainly slow down the sales on balanced funds but I do not see a shift towards the ULIP products because of this. No doubt the DDT is impacting the overall returns ( growth + dividends) but ULIPs do not pay any monthly dividends and cannot be prematrurely closed before 5 yrs. The cost factor in ULIPs is much higher due to the high cost structure in the 1st 3 yrs + additional mortality chgs every year.

Brijesh Dalmia, Dalmia Advisory, Kolkata: I think it will put meaningful brake on the monthly dividend payout strategy. ULIPs will do well as a section of distributors will move towards it. Also, the timing is perfect for distributors to get distracted and/or focus a bit on ULIPs considering increased regulatory risks.

Gajendra Kothari, Etica Wealth, Mumbai: This would not put brake on sale of equity oriented funds with dividend payout but will certainly dent the sales momentum. Some portion of this business will certainly be pulled by Insurance companies as they will launch new ULIPs or make changes to existing ULIPs to take away business from MFs.

Abhenav Khettry, Vyana Wealth, Kolkata: Tax arbitrage on equity oriented funds continue and infact are now more highlighted. Even the tax on dividends will actually highlight the gap in taxation than hide it. Ulip sales will not rise as there is enough media attention on MF returns which have been much more than ulips. Also customers are aware of the charges on ulips and thus MFs will remain attractive.

Q2: Retirement solutions for retail savers: With bank FD interest exempt upto Rs.50,000 and LIC's 8% product now available upto Rs. 15 lakhs per senior citizen, senior couples can invest upto Rs. 12 lakhs in bank FDs tax free and another Rs.30 lakhs in the 8% taxable LIC product. Does this mean that MFs for senior citizens with Rs. 30-40 lakhs corpus now become unattractive? Will MFs for seniors be relevant only in the mass-affluent and HNI categories?

Sunil Jhaveri, MSJ Capital, Gurgaon: Only MF Industry can break this myth that interest on FDs is really not the right way for Senior Citizens to invest their funds. If during 30 years of Professional Life, equity created wealth, then why can't equity create wealth during 30 years of retirement life. Message for Senior Citizens: Infuse flavors of equity thru Rebalancing schemes and generate tax efficient cash flow thru SWP

A K Narayan, Chennai: Yes TDS provision is an additional incentive for senior citizens to park money in fixed deposits. I feel asset allocation, growth, SWP should be the focus going forward apart from SIPs. We need to understand lot more efforts required to keep investors educated

Mukesh Dedhia, Ghalla Bhansali Securities, Mumbai: Partially true. You even have 7.75% RBI Bonds to be invested without any limits.

Ashish Chadha, Chadha Investment, Delhi: No. MF will always stay relevant once clients cross an income of 8 Lakhs or so, even senior citizens need equity, more so now as inflation will likely climb.

Raj Talati, ABM Invesment, Vadodara: Yes, practically it should when interest rate will again start moving up.

Dhiraj Mittal, Ace Wealth Managers, Delhi: Yes – mutual funds as retirement solutions for retail investors can become less attractive.

Deepak Khemani, Mumbai: Yes Retirement solutions for Seniors will have to first factor in the 50,000 interest ( IF IT IS ACTUALLY TAX FREE) first and then if there's anything left only then MF will be a preferred solution

Mohsin Bijepuri, Chennai: Definitely yes. Debt funds are already made unattractive with heavy capital gains taxation. Now equity funds also suffer.

Viksat Rohatgi, Blue Circle, Delhi: In the short term, bank FD interest exemption upto Rs.50,000 and enhanced limits on LIC 8% product may result in slow down in debt funds / equity oriented funds from senior citizens with 30-40 lakhs corpus. Rather, this may turn out to be a blessing in disguise as huge mis-selling has been happening in this segment with monthly/quarterly dividend payouts under equity oriented funds. This can be a great clean up in the MF industry.


Saurabh Mittal, Circle Wealth Advisors, Mumbai: Yes, as it gives peace in terms of capital safety also

Amit Mehta, Jamnagar: FD can give maximum of 8 % and no appreciation and our mutual fund in next few years will give more return than bank FD.

Prabin Agarwala, Siliguri: The Finance Minister has certainly offered an attractive investment option, by increasing the tax-exemption limit for bank FD interest and significantly enhancing investment limit in LIC's 8% product, for senior citizens who are generally risk-averse. These 8% guaranteed tax-free return products will definitely fetch higher allocation from senior citizen investors. However, with rapidly changing lifestyle and life-expectancy, there is a genuine need for senior citizens to focus on growing their corpus even after retirement. The senior citizen investors are becoming quite savvy and they understand the importance of it. Hence, I believe that although some portion of their investment will go to FDs and LIC's 8% product; however, there will still be the market for hybrid and equity mutual funds. But, pure debt mutual fund products will be relevant only in the mass-affluent and HNI senior citizen investors.

Shifali Satsangee, Funds Vedaa, Agra: This would in continuation to our response on the first question – we believe in asset allocation and on a standalone basis, in our opinion, it is not prudent to advocate Fixed Income natured money (preservation of Capital) to come in to Equity asset class (accumulation) for senior citizen retail savers. Having said so, duly considering the risks associated with equity mutual funds, it would be relevant only for the mass affluent and HNI categories, of course after considering the risk profile and asset allocation needs.

Pramod Saraf, Swan Finance, Indore: MF schemes still offer some good products which are far better than the mentioned schemes. It is true that for an investor of above mentioned age group who wish to become in 100% debt only, better options are available now to compare and take prudent decision.

Sanjeev Govila, Hum Fauji Initiatives, Delhi: It is only the TDS which is exempt on FD interest and not the tax per se. 8% taxable product is very lucrative for risk averse and the ones in Nil/low tax brackets.

Sunil Bhagat, Pondicherry: Yes it seems so. Mfs as retirement solutions for senior citizens with Rs 30-40 lakhs corpus makes a lot of sense in the 8% LIC and bank Fds. However keeping inflation in mind we can still pitch in the balanced mutual funds or even large or mid caps with a measured asset allocation even after the 10% LT capital gains tax to give a booster returns to this kind of an investor. Also the FD rates may inch up in the short to medium term but may not be able to sustain even 8%

Brijesh Dalmia, Dalmia Advisory, Kolkata: Yes. It will make more sense for senior citizens to explore FDs, also because of increased volatility in recent times in debt.

Gajendra Kothari, Etica Wealth, Mumbai: Yes this could be big blow as senior citizens were quite unhappy with the lowering of FD rates and lot of this money was coming to mutual funds as their FDs matured. Someone with Rs 40 - 50 Lakhs of FD money may not now be lured to put in MFs particularly funds like Equity savings funds as there is not much of return differential post LTCG on Equity funds. Hence senior citizen in the retail category may not be very excited with mutual funds but someone who is looking for higher double digit returns or is more informed will continue to come through mutual funds.

Abhenav Khettry, Vyana Wealth, Kolkata: Frankly the budgetary proposals are good to the extent that they have simplified taxation rules for senior citizens and given them much needed relief. Investing in MFs for tax arbitrage would always be mis-seling or misbuying. You have to invest on the merit of the product and it's alignment to your needs. Taxation can never be the only clincher.

What’s your view?

What do you think? Do you see MFs becoming less competitive in the retail senior citizens segment? Will ULIPs now give stiff competition to equity oriented funds? Share your views by posting your comments in the box below: its YOUR forum!

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