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Debt mutual fund tax tweak a setback, but AMC profit driven by equity schemes: Vikas Khemani


Most people may not abandon debt funds and that could turn into a long-term asset base, but creating new assets in the debt segment may be a challenge, says Vikas Khemani, founder of Carnelian Asset Advisors


The change in tax norms for debt mutual funds may be a setback for asset management companies but more than three-fourths of their profitability is driven by equity-oriented mutual fund schemes, Vikas Khemani, founder of Carnelian Asset Advisors, told Moneycontrol in an exclusive interview.

Shares of AMCs slumped on March 24 after the finance ministry said the benefit of long-term capital gains tax will not be available for those who invest in debt mutual funds from April 1. The change applies to debt mutual funds with less than 35 percent of their assets in equities.


The former CEO of Edelweiss Securities also doesn’t see any structural change on account of the 25 percent increase in the securities transaction tax (STT) on the sale of futures and options. Edited excerpts:


How do you read the tax amendment that brings debt mutual funds on par with bank fixed deposits?


This has been a little bit of a setback, but if you see the profitability of AMCs, they are largely, almost 70 to 80 percent, driven by equity-oriented mutual schemes. So, not to say that debt is not important, but to that extent, whatever rules have come, have impacted them. But I'm assuming the current assets should hold steady… Most people will not redeem them very often now and probably that could turn into a long-term asset base, but new assets can be kind of challenging.


Of course, from a retail perspective, it is still an important option, but FD becomes equally at par. So to that extent, it is a setback as far as fixed income is concerned. So, these things can change, but as of now, it looks like that. But I guess equity continues to remain a robust profile if you look at a slightly longer term view.


Will the hike in STT on futures and options discourage traders or is it more like a sin tax?


I am in general not for STT because you can't have twin taxes. You have business income or capital gains, as the case may be, and the transaction tax. There's no reason for it to be there, especially in the asset class. So I think that should not be there.

But I'm assuming that it will get absorbed. I don't think there'll be major structural change from the markets' perspective. Of course, short term, there might be a little bit of kneejerk reaction, but I don't think there's a major change there.


Let's talk about the defence sector. A huge order win by Bharat Electronics. In terms of the overall basket, not just the order book, how do you view the top line space and overall valuation profile of these companies?


Of course, defence is definitely a long-term, very big opportunity… But the challenge with defence as an investment opportunity is that… I think most defence stocks are overvalued. To that extent, one has to be very, very cautious. There will always be ups and downs.


I mean companies don't perform in a linear fashion. There will be periods when they will disappoint. So when those things come, you will see those companies where there's a high expectation and over-ownership, they tend to come down sharply. So I would always put a word of caution on the valuation side for most defence stocks. Yeah, but otherwise, long-term opportunity seems to be in place.


With the banking crisis and management rejigs among frontline stocks, how do you look at IT in terms of valuations and earnings potential?


We like IT because valuations have come down sharply in the past 12 months. The sector continues to do well – we are not seeing much slowdown despite talk of the US recession. So far, the order book is very, very strong. And, in fact, most companies have guided their growth, including Accenture last week.

Given their valuations, they are definitely in favour. As and when the US economy settles down, with some pointers towards interest rate cuts, I think IT could be one of the big winners from that perspective.


On new-age companies. Nykaa said that employee exits are only to be expected and that some are part of the annual appraisal and transition process. How do you look at companies like Nykaa?


Every company has its own business model, every company has a different management. Of course, what we saw, a period of extreme euphoria and excess getting built in so-called new-age companies, I think a large part of that got corrected and some probably is still left.

Still, one has to see whether companies can grow profitably, companies can sustainably deliver numbers. So they were valued on a concept – those times are over. Now, I think it'll be visibility of cashflow, visibility of growth that will drive valuation.


And I feel whenever such corrections happen, the euphoria gets over. You will see a churn and that churn will happen in these so-called new-age companies, where many won't be around in the next four to five years, and some companies will come out well.

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