Debt fund managers' careers at stake

At least 20% cuts in jobs anticipated with Budget change in tax treatment, with heavier impact on sales teams; sector mulls options

At least a fifth of debt fund managers in the mutual fund (MF) sector might lose their job with the change in taxation for their segment in Union Budget 2014-15, say executives.

Worse hit will be sales teams in the debt category, where the job cuts could be as much as 40 per cent, say sources.

The most impacted will be fund houses with higher concentration of fixed maturity plan (FMP) assets in their debt assets under management (AUM). These are likely to be smaller entities, heavily dependent on institutional money flows.

There is talk that fund houses are already preparing options such as bank treasuries and insurance for debt fund managers.

The Budget has proposed to increase the rate of tax on debt funds to a flat 20 per cent. Further, the tenure for claiming long-term capital gains has been increased to 36 months from the existing 12 months. The new norms will be applicable to units of MFs other than equity-oriented funds.

“What will my people do. Sit idle? It’s very tough to increase AUM for a small fund house like ours. In one stroke, the government has made us rethink. I am sure things will be the same with peers in my category," said one chief executive. He said the government action would have far-reaching repercussions, with the sector having reached a precarious stability after long years.

When a senior vice-president & fund manager (equity) at one of the top five fund houses was asked about the fate of debt fund managers, he said, “I do not know what will happen to them but I am happy that I am not one of them."

Gautam Mehra, sector leader (asset management) at PricewaterhouseCoopers has a contrarian opinion. “While the tax changes would impact the flow of funds into the FMP segment, it is unlikely that this will result in a flight of debt fund managers, since the FMP product comprises only one of the segments of debt fund management. The other related segments, including money markets and other liquid funds would continue to be operative, albeit with a higher income distribution tax rate,” he said.

Fund houses say they have the option to offer upcoming FMPs with 36 months as maturity but are sceptical about the subscriptions. “Corporate money is less likely to be back. But we are hopeful that the percentage of retail money will improve,” says the chief executive of a mid-sized fund house.

According to an optimistic chief marketing officer, “Fund houses are like a cockroach. We can survive even a nuclear attack. We have to evolve debt schemes to keep these attractive.”

“What is at stake?” asks a chief executive. “What we need to concentrate upon is the asset at risk due to the change in norms and how to save it.” According to executives, FMPs and duration funds (short term, income and monthly income plans or MIPs) make up around Rs 2.75 lakh crore.

According to them, they will be able to retain assets worth Rs 1.1 lakh crore by rolling over and extending tenures and have to lose the rest.

The Association of Mutual Funds in India (Amfi) has already taken up the matter with the market regulator and the finance ministry. It says the change in taxation was targeted primarily at FMPs, as these schemes were directly competing against bank fixed deposits. “But it appears that through an oversight, all open-ended debt funds and all non-equity schemes like gold, fund of funds and gold savings have also come under the purview of this change,” Amfi said in its letter to the capital market regulator.

It argued that non-equity funds do not mean only bond funds. There are MIPs, gold exchange-traded funds and gold savings funds, debt-oriented hybrid funds, overseas fund of funds and others mostly used by individual investors.

As on end-June, MFs had an AUM of Rs 9.74 lakh crore, with nearly Rs 1.7 lakh crore of assets in FMPs.