Tax Cut and MF Gains

Most of the global investors might be having a sense of déjà vu when in an unexpected move Finance Minister Nirmala Sitharaman announced cut in Indian corporate tax rates. Earlier, during December 2017, US President Donald Trump overhauled US tax code and cut US corporate tax, which included a series of temporary tax relief measures such as accelerated depreciation and one-off repatriation amnesties as well as temporary personal tax cuts. The impact of such rate cuts was clearly visible in the performance of the high US tax paying companies. A study shows that the basket of high taxpaying US companies have outperformed lower taxpaying companies as well as the benchmarks since then. A secondary effect was an improvement in the US competitiveness and a surge in capex intentions.

Although some of the announcements made by the US President were not the part of our Finance Minister's agenda, we believe that the consequences will remain the same, but it will take a little longer to deliver. We may see companies in the higher tax bracket outperforming their benchmarks and lower taxpaying companies going forward. We may also see a rise in capex intentions by India inc. This will also help increase the competitiveness of the Indian companies.

The equity-dedicated mutual fund investments are also likely to gain by this decision. Our cover story this time identifies these high tax rate companies based on their last three-year average tax rate. Going one step ahead, we analysed how the tax cut will impact the profitability of the companies and boost their earnings and, therefore, their share price. According to their weightages in different funds, we have identified funds that will benefit the most.

Depending upon your risk appetite and investment horizon, you can pick and choose to invest in these funds.

Hope our stories will help you to take wise investment decision. We will be more than happy to receive your feedback and suggestions on our stories.