If LTCG is reduced - cascading effect on MFD

Everyone is praying for LTCG reduction and now the Ministry of Finance has also come up with similar thought line about the LTCG taxation structure revamp.  The investor community is stuck with rebalancing portfolios and even exiting low-return products due to this LTCG lock-in. No one wants to pay tax despite a significant increase in portfolio gains since 2020, and also no one wants to exit the low-return portfolio since 26^th September 2024 9, when the market started falling.

Hence, there is a huge waiting list of investments to witness churning once the LTCG taxation gets revamped. Direct equities, PMS, and AIF all these products will witness churning and profit bookings. At the same time, we will witness reinvestments also growing, creating opportunity for business for wealth houses, family offices and most importantly, for independent financial advisors or so-called Mutual Fund Distributors.

But when the same story gets applied to mutual funds, the tone of the story changes dramatically. We will witness significant money getting out of MF regular schemes to direct schemes, as investors will prefer investing based on their own knowledge rather than herd mentality. The MFD segment will witness significant outflow of investments, and many of the same will not come back as the next generation of investors prefer DIY.  There will be a significant reduction in revenues for the MFDs, and the battle for direct and regular will grow substantially once the LTCG is revamped.

Today’s investors have less patience and more knowledge and easy investment process steps for direct investors.  Further, with the new PMS rules, the gateway of opportunities will grow significantly for direct investment options compared to regular. We are not dealing with Rs 1000 sip type clients, but a large pool of investors whose wealth has grown by 4x to 5x, and the churning of the same from regular to direct will have a huge impact on the MFD revenue side. This churning might blow out many of the MFDs in the coming years since today's clients' portfolios change very fast due to the ease of investment options.

SIF options have also grown significantly, and this category will witness huge growth in asset base in the coming years once the taxation rules are changed. MFDs have suffered significantly since 2018, with expense ratios coming down, along with tighter rules and regulations, plus marketing costs and the stupendous growth of Direct scheme promotion.

Direct scheme platforms and promotions have grown stupendously, and the same will be leveraged to pull business towards direct schemes. No doubt the listed platform business and private equity will pour into this space in the coming years once the rules of taxation come into play.  On the other hand, the current volatility and the problem with active fund management performance will drive business to passive funds, where we will witness significant jump inflows in the coming years

On the other hand, MFDs who are still in the traditional business will witness the heat of the switch-out. We believe these game-changing rules and regulations will keep happening, and the best way to beat them is to adopt new products into the system and change the rules of the game accordingly. Those who are dependent on sole Mutual Fund business revenue will face the heat, and it's high time to adopt new models of business to grow.

Time is going to be a test for the MFD community once the LTCG reforms get into place.  Shifting investments into direct plans and the new PMS industry will witness huge growth.  Don’t be surprised if the revenue comes down by 10 to 15% for the MFD, along with the recent expense ratio revamp. The GST burden also creates a big hole in the pockets of the MFDs.Overall, the LTCG will be a game changer for the Indian financial market, where inflows will grow, and wealth will get accumulated in real terms in the bank account of the client, which will drive a consumption boom and GDP growth.