The Union Budget 2026 - Takeways for Mutual Fund Distributors

The Union Budget is a key document that lays out the Centre's intent and sets the tone for the year(s) to come.

While we cover the key budget direction (in an easily consumable format) in our bi-monthly newsletter, here is a brief summary of things that could impact Mutual Fund Distributors (MFDs) and their decision making:

• Support for the upcoming and/or underserved sectors in the budget could present sector specific opportunities, which can be captured through sectoral/thematic or focused funds. While some sectors (like biopharma) have specific budgetary allocations, for a lot of sectors, the budget only lays down intent (with frameworks to be developed later). There have been instances in the past where frameworks developed were not efficient or did not work as expected – so MFDs need to be mindful while betting on a particular sector or theme. The same also applies to the overall infrastructure development push in the budget.

  
  

• Establishment of SME growth fund and overall support to MSMEs could help in elevating the overall income levels in the economy – particularly in Tier II and Tier III cities (which have some additional incentives as well). This in turn means greater opportunity for MFDs to help channelize the higher savings to mutual funds.

  
  

• The intent for banking reforms, development of debt markets could help develop the overall debt ecosystem in India. However, it is easier said than done – as multiple attempts to make Indian debt markets more developed have not yielded expected results. There were some expectations around bringing back indexation benefit for debt mutual funds based on budget recommendations of AMFI, but no such measures were announced.

  
  

• Higher STT on F&O transactions means mutual funds deploying F&O (particularly Arbitrage funds and SIFs) could see some impact on returns. As per an article in the Economic Times (quoting Mr. Deepak Shenoy), the impact on investors’ returns from these funds could be ~0.5%. The overall intent of the government is to curb retail speculation.

  
  

• Another likely move to curb leveraged investments in equity markets, budget has proposed to remove the deduction of interest on amount borrowed to earn dividend income or income from equity mutual funds. The erstwhile provisions allowed interest deduction of up to 20% of such income.

  
  

• The budget provides for capital gains exemption on maturity of SGBs only to buyers of the original issue of SGB, and who held it till maturity. This implies secondary purchase of SGB results in tax implications on maturity and closes the gap between taxation on redemption of SGB and gold MF/ETF. As a result, individual choices may now tilt towards gold ETF over SGB, on account of better liquidity.

  
  

• The macro picture:

  • The govt has continued its path of fiscal consolidation, while maintaining a double digit 10% nominal GDP growth for the economy in FY27. What this means – 1. the government is borrowing more responsibly; 2. Economy is still growing strongly.

  • Headline capex for FY26 was ₹11 lakh crore and is planned at ₹12.2 lakh crore in FY27, implying ~10% growth y-o-y.  Headline capex as a % to nominal GDP is expected to be range-bound at ~3% for FY27. What this means – While the infrastructure spending is increasing, it is growing in line with GDP (and not aggressively).

  • Govt is targeting debt to GDP ratio at sub-50% in the medium term, while govt target for FY27 is ~55.6%. This corresponds with the gradual decline trend over the last 5 years. What this means - India’s debt levels are trending downward relative to GDP, signalling improving balance sheet strength.