B-15 out, LTCG in – way forward for IFAs now

Brijesh Dalmia, Dalmia Advisory, Kolkata

For the last two years, I had been mentioning that B15 incentives won’t stay forever. It’s a subsidy and subsidies don’t lasts forever. And so, IFAs who were in the B-15 cities (upto T-30) are going to see their revenues going down from April’18. However, for B-30 IFAs nothing changes as of now but this is a clear signal that the party won’t last for them forever too.

Stand on your own feet

While encouragement and support is good, depending too much on outer factors makes a healthy person limp. It’s time to stand on our own feet. IFAs from T-15 have grown without the extra incentives. And so can B15 IFAs.

Focus on new business

Though it doesn’t apply to all IFAs, many of them focused too much on B-15 incentives rather than new business to grow their revenues. Average age of assets was not healthy for many IFAs. It’s time to focus on new clients and new business to compensate for lost revenue.

LTCG Tax on Equities – A silver lining

While LTCG on equities will reduce some returns for the clients, it can actually help them and the IFAs in the long term, exactly the way it happened with debt funds when LTCG was increased from 1 year to 3 years and rate of taxes were increased too. Many clients and IFAs were doing profit booking and churning the portfolio once the asset crossed 1 year. With the introduction of LTCG, clients are more likely to stay invested for longer term as they don’t like paying actual taxes on gains. This is expected to increase the age of asset for IFAs thereby fetching higher rewards.

It will be fatal to switch to ULIPs

After introduction of LTCG on equities, there is a lot of buzz that ULIPs will gain traction since they continue to enjoy tax free returns. From the tax arbitrage perspective, ULIPs now definitely have an edge over equity mutual funds but it will not be a wise idea for IFAs to switch to selling ULIPs. The fund management charges in ULIPs are lower than equity mutual funds but the initial costs take the shine off them. On an average, it takes 6-7 years for an ULIP to come at par with equity mutual funds in terms of cost. Further, many clients may not be comfortable paying mortality charges (they may not want life coverage) just to get tax free returns. ULIPs as an investment may score better only if held for over 15-20 years and premiums are paid regularly. Few clients are keen to hold a major allocation of their investments for 15-20 years in ULIPs.

Further, from a revenue perspective, the long term trail in mutual fund still beats long term rewards from ULIPs. Also, who knows ULIPs may also lose their tax benefit going forward. Changing the business model again and again will do no good to IFAs. All in all, it will be fatal for IFAs to shift into selling ULIPs against mutual funds on the pretext of tax free returns. Stay with mutual funds.

The way forward

When things change, the short term perception is always extreme. Imposition of LTCG on equities and cutting down B-15 incentives is creating a dilemma in the minds of IFAs. Before IFAs jump to a conclusion about such changes and think negatively about the future growth, they should give it some time to settle down. Like previous regulatory changes, dynamics and challenges, this too can prove beneficial for the IFA in the long term. Stay focused, sell mutual funds.

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