MFs welcome STT cut in Budget

The Rs 6.75-trillion mutual fund industry today lauded the STT cut in the Budget as they believe the move will provide a fillip to the struggling sector.

Accepting a long-pending demand for lowering the transaction costs in the capital markets, the Budget has proposed a reduction in Securities Transaction Tax (STT) from 0.125% to 0.1% on cash delivery transactions.

STT, introduced in 2004, is levied on the sale and purchase of equities and according to estimates it accounts for 51% of the transaction cost in stock markets.

Tata Mutual Fund Chief Executive Officer Sanjay Sachdev said reduction in STT on delivery transactions will provide much needed impetus to attract small investors.

Expressing similar sentiments, HSBC AMC Chief Executive Puneet Chaddha said, "There is some encouragement for the capital markets in terms of marginal STT changes and the Rajiv Gandhi Equity Scheme."

To further encourage flow of savings in financial markets, the Budget introduced a new scheme -- Rajiv Gandhi Equity Savings Scheme -- which will allow better participation of the retail investors.

The scheme would allow for income tax deduction of 50% to new retail investors, with annual income of below Rs 10 lakh, putting in up to Rs 50,000 directly in equities. It will have a lock-in period of 3 years.

"The Budget is a tight rope walk between triggering a roadmap for fiscal consolidation and managing development and popular sentiment. The increase in service tax by 2% and an increase in excise duty were anticipated and have resulted in some fiscal respite," ICICI Prudential AMC Managing Director and Chief Executive Nimesh Shah said.

"The introduction of the Rajiv Gandhi Savings Scheme is a clear positive for the equity market by way of increased long-term investor participation. In addition, reduction in STT on delivery by 20% has added to the investors' return potential for equity," he added.

The industry, however, expressed concern over the growth targets with the average oil price estimated at USD 115 a barrel for the year.

"The Budget seeks to focus on sustaining domestic consumption demand and promoting capital investment in order to achieve the 7.6% GDP growth target in FY13. This growth rate can be achieved, assuming that there is no significant increase in oil prices hereon or further deepening of the eurozone crisis," DSP BlackRock President and Chief Investment Officer S Nagnath said.

SBI Mutual Fund Chief Investment Officer Navneet Munot said, "Rising oil prices and their potential impact on subsidies may be a threat to the fiscal assumptions."

Calling it as a "credible budget" under the prevailing circumstances, the fiscal deficit number is achievable but contingent on a number of extraneous factors, UTI AMC Equities Head Anoop Bhaskar said.