A JP Morgan equity research report has stated that recent government policy measures and changes in the tax treatment of various financial products have made equities increasingly attractive compared to other investment options. The report added that this trend is likely to support sustained inflows into Indian capital markets.
Policy and Tax Changes Strengthen Equity Appeal
The report noted that policy and taxation changes have strengthened the case for equity investing, even though market returns have remained subdued over the past two years. According to JP Morgan, equity is now taxed at a 12.5% long-term capital gains (LTCG) rate, and the removal of indexation benefits, along with the taxation of insurance policy proceeds and slab-rate taxation for debt mutual funds, improves equity's relative appeal.
“Policy and tax are also supportive: equity is taxed at 12.5% LTCG, and the removal of indexation, taxation of insurance policy proceeds, and slab-rate taxation for debt mutual funds improves equity's relative appeal,” the report said.
Structural Shifts Driving Inflows
JP Morgan highlighted that these structural policy changes, combined with rising participation through Systematic Investment Plans (SIPs), are expected to continue supporting inflows into equity markets. “The inflows should continue due to tax and policy,” the report stated.
The report observed that despite weak equity market returns and heavy selling by foreign portfolio investors over FY25 and FY26, domestic investors have continued to channel money into mutual funds through SIPs. This reflects a long-term shift in household savings towards financial assets.
Favourable Policy Environment Reinforces Trend
JP Morgan said the favourable policy environment has reinforced this structural trend by improving the attractiveness of equity investments relative to debt-oriented products and certain insurance investments. The report also highlighted that SIPs have emerged as the dominant source of equity fund inflows, helping cushion domestic markets against external volatility.
Future Outlook and Risks
Looking ahead, the global investment bank believes India's capital markets will continue to benefit from the ongoing financialisation of household savings, supported by policy measures and a steady rise in retail participation. However, it cautioned that the investment thesis would weaken if monthly SIP inflows remain below Rs 250 billion for a sustained period or if regulatory changes lead to a more than 20% decline in derivatives trading volumes.
