Amfi data suggests LTCG tax is no hurdle for investments in mutual funds

Investors in Indian equity funds are keeping faith unfazed by Long Term Capital Gains tax, on stock holdings, Punjab National Bank fraud scandal and turmoil in global markets.

Equity funds took in Rs 163 billion ($2.5 billion) in February, after pulling Rs 154 billion in January, data from the Association of Mutual Funds in India show.

Investors held their nerve even after the government’s decision on February 1 to impose a tax on equity gains and dividends from stock funds, a move that coincided with the selloff in markets from the US to Japan. The liquidity has provided a buffer against outflows sparked by the risk-off mood: mutual funds bought $2 billion of shares last month, countering sales of $1.9 billion by their global peers.

“Going by the way things are, 2018 looks to be a bumpy ride and equities will need this support,” said Andrew Holland, chief executive officer at Avendus Capital Ltd. in Mumbai.

A widening probe into the $2 billion fraud that engulfed state-run lenders and worries over a global trade war sparked by US President Donald Trump’s threat to impose tariffs dragged Indian stocks to a three-month low this week. Continued support from local funds will lend markets a cushion, Holland said.

There was concern that a move to end the tax break on equities would affect flows from retail investors, who’ve flocked to mutual funds since Prime Minister Narendra Modi took office in 2014. The influx of cash has been aided by policy changes, including the currency clampdown in 2016, which hurt returns from property and gold, the traditional favorites.

“There aren’t many options that can give decent returns but stocks,” Vidya Bala, head of research at FundsIndia, said by phone. “Retail investors are not going to pull out from equity funds unless there’s a prolonged correction. It has been proven that they can digest short-term declines.”

Some takeaways:

Local stock funds received Rs 1.64 trillion of net inflows in the first 11 months of the year that began April 1, more than double those of the year-earlier period: AMFI.

Inflows into balanced funds, which buy stocks and bonds, fell to Rs 50 billion in February from about Rs 77 billion in January, the data show.

The reduction was anticipated as “these funds are packaged in a way as to entice fixed-income investors through monthly dividend options. The budget imposed a 10 per cent tax on dividends distributed by equity funds,” CLSA India Pvt. said in note.

While the full impact of the capital-gains tax on the sustainability of flows would be best gauged in the next couple of months, the February data is “reassuring,” CLSA said.

“We believe that the $25 to $30 billion — 5 to 6 per cent of annual household savings — of domestic inflows into equities should easily sustain and are also needed given the large equities supply,” the brokerage said.