Mutual fund houses manage more than Rs 7 Lakh crore under liquid and debt schemes, which are then invested in corporate debt securities and money market instruments.
According to industry experts, MFs are concerned that the budget proposals may hit them hard and result in massive outflow.
"With huge outflows from these schemes, it is expected MFs will have to liquidate their investments of over Rs 2 lakh crore, and the burden of this funding will fall on banks," an industry official said.
Echoing a similar view, industry body AMFI said that MFs are expected to see an erosion in debt AUMs (Assets Under Management) in excess of Rs 1.5 lakh crore over time and its burden will eventually fall on banks and increase the funding costs for corporates.
Besides, it said, the move will severely impact liquidity in the debt markets.
In the budget proposals made on July 10, Finance Minister Arun Jaitley said that long-term capital gains tax on debt- oriented mutual funds will go up to 20% from 10%. The move is part of government's effort to bring parity with banks and other debt instruments.
Also, he has proposed to change the definition of 'long term' for debt mutual funds to 36 months from 12 months now.
A fund house said the proposals will result in rise in the cost of funds for the corporate sector which may increase up to 150 basis points per annum.
The Association for Mutual Funds in India (AMFI) has also asked market regulator Sebi to take up the matter with the government for necessary intervention.
In a letter to Sebi, AMFI has also sought immediate measures to ensure that none of the tax proposals made in the Union Budget are brought in force with retrospective effect and asked the regulator to ensure deferring of long-term capital gains tax on debt-oriented MF schemes to the next financial year.
The fund houses have also appealed for restricting the new rules to close-ended debt schemes as against all non equity MF schemes as proposed, as per the AMFI letter addressed to Sebi Chairman U K Sinha.
Besides seeking the market regulator's intervention on these issues, AMFI has also taken up the matter with the Ministry of Finance.