September 20 is a day that most corporates or stock market observers will not forget in a long time to come. Finance Minister Nirmala Sitharaman announced the slashing of corporate tax rate from 30 to a little over 25 per cent — a big bang reform. The stimulus, worth Rs 1.45 trillion in tax cuts, immediately set the BSE Sensex jumping 1,921 points at the closing bell, while NSE Nifty rose 569.40 points, both recording their best day in the last decade.
Experts underline that the cuts have now brought corporate tax rates on par with other economies in Asia, and will encourage investment.
That Friday, many equity mutual fund net asset values (NAV) registered a rally of over 8 per cent in one day. As professional fund managers and experts always note, mutual fund investments are goal-related. Short-term highs and lows in the market should never alter the strategy of a mutual fund investor. Of course, considering the rally the markets experienced on September 20, the schemes have registered extra returns. The best advice for investors would be to continue investing and focus on their long-term goals rather than be swayed by the changes.
This, however, does not take away from the infusion of the much-needed boost in market sentiment, which by itself is great news. The Finance Minister also announced tax rate cut to a competitive 15 per cent for new manufacturing units starting operations before March 2023. The effective tax rate, at 17 per cent, is one of the lowest tax rates for manufacturing units around the world. This move is a huge step towards attracting foreign firms to India. For firms looking to shift from China, this is a red carpet being rolled out by India. Typically, companies relocating from China opt for Vietnam or Mexico, according to a survey by the American Chamber of Commerce in China .
The quicker the revival of demand, the more sustained will be the growth mutual funds. According to the report, ‘Trade war and India’ by economist Radhika Rao published by DBS Bank Ltd, the fallout of the US-China trade war is that India could benefit from diversion in investment flows. US FDI into India rose in 2018, making up for 6 per cent of all investment flows, the report notes. Also, larger gains are predicted in the medium-term as India eases FDI regulations, it notes.
Also, surcharge on capital gains tax on sale of equity shares and units and units of equity-oriented MFS has been done away with. This will enthuse the capital market. In a press conference, the Finance Minister said, “in simple words, the enhanced surcharge on FPI goes, surcharge on domestic investors in equity goes. Pre-budget position is restored.”The withdrawal of surcharge on foreign portfolio investors is aimed at stimulating capital inflows.
The tax restructuring will ensure big companies to report higher net profits and earnings per share. This means more investors looking to buy them. Better fund performance will ensure that investors will feel encouraged to invest in mutual funds. The move will add thrust to mutual fund inflows.
The assets under management (AUM) of India’s mutual fund industry has seen a 2.5 times rise in the last five years, from Rs 10.13 trillion in August 2014 to Rs 25.48 trillion in August 2019. The cut in corporate tax rate is likely to be one step in the direction of further AUM increase in the coming years. According to aN AMFI-BCG Vision Document, the Indian mutual funds industry is looking at a four-time AUM rise to Rs 100 trillion in the next decade.
Back to the current scenario. Yes, there’s a bull run, but it’s best to keep long-term financial goals and risk profile in mind while investing. If you have invested only recently, just sit tight and allow the changes to take full shape. The same applies to those who may have looked at the recent rally to get out of some schemes and make the most of it. The best plan is to remember why you invested in the first place. All talk of balance and long-term doesn’t mean the investor shouldn’t exult in the infusion of positivity and cheer in market sentiment. This definitely is one time when a long-term investor pauses to note the gains. Cautious optimism is a good approach to take.
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