Synopsis:
- The Securities and Exchange Board of India (SEBI) has recently put forward a proposal to introduce a new category of high-risk debt mutual funds. This initiative is designed to appeal to retail investors with a higher risk appetite and a more nuanced understanding of risk.
- The funds within this proposed high-risk category are expected to benefit from relaxations in sectoral and exposure norms, along with the flexibility to employ high-risk investment strategies. These allowances are anticipated to enable these funds to generate relatively higher returns, thereby positioning them competitively in the market.
- Although this proposal is still in its preliminary phase, CareEdge Ratings views it as a positive development for the debt mutual fund sector. Over the last few years, debt mutual funds have been facing headwinds amid credit crisis, Covid-19 led liquidity disruptions, regulatory shifts followed by cycle of rising interest rates and subdued returns.
- Furthermore, the Finance Bill of 2023 introduced amendments to the taxation of debt mutual funds. Under these amendments, mutual fund schemes with no more than 35% of their assets invested in equity shares are now classified for short-term capital gains, effectively removing the indexation benefits previously available.
