After the budget, the Finance Ministry made an unexpected change to the Finance Bill that took away the indexation benefits that were previously available to debt mutual funds ( 35% in domestic equities). These debt mutual funds (MFs) will be subject to taxation at the marginal tax rate beginning with the next fiscal year, regardless of the holding period.
On the margin, HDFC Securities is of the opinion that this has structural implications for mutual funds, corporations (NBFCs, HFCs, and other corporations), insurance companies, and banks as alternative sources of capital infusion.
“A capital pool of 2 to 3 trillion is arbitrage-sensitive, as suggested by our conversations with bankers and participants in the debt market. However, we anticipate credit spreads for highly rated issuers to ease in the near future before widening in the second half of FY2024 due to the increase in debt MF inflows in response to this revision.
Aditya Birla Sun Life AMC (ABSLAMC) shares have been given a buy rating and target price by the brokerage. 525, with a UTI AMC target price. 950 for each share
In the meantime, it has given Motilal Oswal Financial Services Ltd. (MOFSL) a tag and established a Rs. target price. With a target price of $985 per share for Nippon Life India Asset Management Ltd. (NAM), 350.
According to the brokerage’s analysis, NBFCs and HFCs are only about 4% of their total borrowings exposed to debt mutual funds through NCDs, so this exposure is unlikely to significantly raise the blended cost of funds.
After the IL&FS crisis and the Covid pandemic (a cheaper source of funds through bank borrowings), risk aversion has significantly decreased. Due to the limited supply of high-quality paper, the increase in debt MF inflows since the announcement is likely to reduce near-term spreads for AAA-rated issuers. However, due to the dominance of debt mutual funds with maturities of two to three years, NBFCs are likely to be asymmetric with assets with shorter durations,” the note stated.
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