In the Indian capital markets, Mutual Funds have become important investment intermediaries.
Additionally, for retail investors in the nation who have been using the Systematic Investment Plan (SIP) route to build a corpus in a gradual but consistent manner, Mutual Funds have emerged as a vital asset class or investment category.
On the first day of February each year, the Minister of Finance typically delivers the eagerly awaited Union Budget. But, will its influence on the equity markets and your Mutual Fund investments last longer than a few market sessions, is the question that arises each year.
This blog will look at how The Union Budget has impacted mutual Funds in the past few years.
How Has Budget Affected Mutual Funds?
The annual Union Budget is still essential for determining the direction of the government's economic policies and the overall framework of its short- and long-term plans. This is because it provides information on how money is distributed among the different economic sectors.
These are the main points of the Union Budget that will and have contributed to the development of the Mutual Fund industry-
- The ₹38 trillion Mutual Fund (MF) industry is expected to benefit from the Finance Minister's declaration to tax virtual digital assets because it will encourage more millennials to join its ranks.
In addition, representatives of the asset management sector well received the declaration of surcharge rationalization.
- The government held 5G spectrum auctions to acknowledge the importance of telecommunications in general and 5G new tech in particular. This will strengthen the ecosystem in this way.
Additionally, 5% of annual receipts from the Universal Service Obligation Fund will be allocated to promote the proliferation of affordable mobile and broadband services in rural and remote areas. R&D and the commercialization of technologies and solutions are anticipated benefits of this.
- The Emergency Credit Line Guarantee Scheme's (ECLGS) funding for the hospitality industry has been increased by ₹50,000 crores, and its application has been extended.
- To create a level playing field between ULIPs and MF schemes, the Association of Mutual Funds in India (AMFI) has proposed to bring parity in the tax treatment of capital gains on withdrawal of investments in ULIPs of Life Insurance companies and redemption of Mutual Funds Units.
- SEBI emphasized in its "Long Term Policy for Mutual Funds," published a few years ago, that similar products should receive equal tax treatment and that tax arbitrage, which results in the introduction of similar products under the control of various regulators, must be eliminated.
- The Budget upholds policy continuity, taxation stability, and consistency in the strategic course of the economy. Without losing sight of social goals and Covid-impacted sectors, the focus is on infrastructure, logistics, manufacturing, ease of business, Make in India, digital ecosystem, etc. Since the revenue projections are conservative, the financial goals will probably be met.
- Higher spending on Aatmanirbhar Defence Manufacturing, agricultural procurement, tap water access, and affordable housing should be prioritized alongside more significant problems like infrastructure, logistics, connectivity, roads, and PLI-promoted manufacturing.
This demonstrates that the government is attempting to encourage capital spending to reach its $5 trillion economic growth target.
- With a historically high focus on capital spending to boost job creation, the extension of the Emergency Credit Line Guarantee Scheme (ECLGS) by another year, and the proposal to increase guarantee coverage for small businesses by ten times to Rs. 5 lakh crore, the proposed 15% cap on the surcharge on long-term capital gains arising from the transfer of any type of assets, and the overall PM On a longer time scale, equity markets are anticipated to be stimulated by Gati-Shakti initiatives.
The multitude of policies that will have a lasting impact will be advantageous for equity mutual fund investors.
You may also want to know the History of Union Budgets in India
What Can Mutual Fund Investors Expect from Budget?
The announcements made in the Union Budget that set up long-term growth appear to have given the bull new life. Infrastructure, finance, information technology (given the focus on Digital India), education technology, and other new sunrise industries like artificial intelligence, geospatial systems and drones, semiconductors and their eco-system, and renewable energy are likely to benefit the most from investments in these areas.
But right now, it's crucially important to see what monetary policy steps and positions the RBI takes in the face of inflationary pressures. It would be encouraging for economic growth and the Indian equity markets if the RBI maintained the status quo and kept its accommodating policy stance for a while despite the western central banks' policy normalization efforts.
However, if the RBI changes its stance on monetary policy and raises policy rates, that would hurt infrastructure investment and the overall economy's growth. Still, there is a chance that the prolonged policy support could turn inflation into a significant danger to the CAPEX program by amplifying the effects of already increased input costs and supply shortages.
To sum up, investing primarily in safe and risk-free instruments. But since the liquidity crisis brought on by the pandemic, the debt market situation has significantly improved.
However, you can achieve your financial goal when using mutual funds if you comprehend the risk associated with each instrument and assess your risk tolerance.