Budget 2019 Expectations: Need measures to restore investors' confidence, says Tejas Khoday of FYERS - Free Investment Zone

Considering the fiscal situation and revenue requirements, expecting that the finance minister would rethink on LTCG in the upcoming Budget would be a futile thought.

Expecting any major changes in the Budget, incorporating exemptions or relief to retail investors would not be appropriate, considering the fact that the government needs hefty revenues. Image source: zeebiz.com

The stock market has been very volatile over the year. Since the start of the year, the market has seen many ups and downs. As Budget 2019 is going to be presented by Finance Minister Nirmala Sitharaman on July 5, investors and market experts are eager to see what is in store for them in the Budget. Tejas Khoday, CEO and co-founder of FYERS - Free Investment Zone in an email interview spoke about his expectation from this upcoming Budget.

What is the step that the Finance Minister may take in Budget 2019 that may cheer up the stock market?

After a volatile year between 2018 and 2019 Budgets, when more than 75 percent of BSE All Cap Index gave negative returns, the stock market has shown a little life and colour over the last couple of months with equity fund flows seeing a minor rise, accompanied by retail investor participation. Any measures to boost investor sentiment would be greeted with cheer, which could include:

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* Reducing LTCG tax arising from sale of equity shares (without indexation benefit) from the current 10 percent to a level of 5 percent.

* Increasing LTCG exemption gain from the current Rs 100,000 to Rs. 200,000 and above.

* Removal of current 10 percent LTCG tax on equity mutual funds.

Alternately, any move to increase the time period of LTCG tax from the current 1-year period to a 2 or 3-year period would severely dampen the stock market sentiment.

Do you think the government should rethink on LTCG in the upcoming Budget?

During the Budget 2018 speech, former finance minister Arun Jaitley said that LTCG tax imposition would garner close to Rs 20,000 crore in the first year of implementation. A very volatile year for the stock market in FY19 would surely ensure minimal LTCG tax collections for FY19. Considering the fiscal situation and revenue requirements, expecting that the finance minister would rethink on LTCG in the upcoming budget would be a futile thought.

Tax collections are the need of the hour and the government is looking at ways and means to collect more. Hence, not expecting any increase in exemptions or relief in taxes is a foregone conclusion.

What steps, according to you, may be taken to increase the participation of retail investors in the stock market?

The stock market has been listless over the last 18 months with retail investors losing heavily due to severe volatility in mid and small caps. Also, the stock market has been besieged with news of corporate frauds or poor ethical and corporate governance by many companies which has resulted in stock prices crashing by 70-80 percent in a short period of time. Equity fund flows have been severely dented and are way below the 10,000 crore per month, the average mark seen in 2018. Trust deficit and credibility issues are the couple of reasons for retail investors to shy away from stock market investments. The government needs to adopt and enforce stringent measures to restore investor faith and confidence in businesses, laws and regulations.

In the context of SEBI's re-categorisation and implementation of TRI, should investors look at Index Funds over large-cap mutual funds?

SEBI circular of January 4, 2018, informing all the asset management companies (AMCs) to mandatorily benchmark every scheme’s performance against Total Return Index (TRI) instead of Price Returns Index (PRI) is very apt. Since TRI captures capital gains along with dividends and other pay-outs, unlike PRI (which captures only capital gains), it would be a true representation of an overall investment performance.

The Nifty 50 index’s 5-year PRI stands at 10.52 percent while its TRI stands at 11.93 percent, a good 141 bps higher. This changeover makes it a higher threshold for the fund managers to beat the index, to show outperformance.

Barring a few schemes, most large-cap mutual fund schemes in the regular category have underperformed their respective TRI returns. As per SPIVA India scorecard of June 2018, 88 percent of the large cap equity funds underperformed the S&P BSE 100 over the past one year. Between three and five-year periods, these numbers stood at 78 percent and 63 percent, respectively. Going forward, well-researched space of large cap stocks will see deterioration in outperformance.

However, the same may not be necessarily true in the case of small and mid-cap mutual fund schemes.

Anything else you wish to share on Budget 2019?

Expecting any major changes, incorporating exemptions or relief to retail investors would not be appropriate, considering the fact that the government needs hefty revenues, through direct and indirect tax collections as well as other windfall gains. The government has severe challenges ahead and the Budget 2019 might not offer much to retail investors. I have moderate expectations from this Budget.

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