Budget 2026: Mutual Fund Investors Seek Reforms Over Tax Relief

After a year of muted performance across equity mutual fund categories, investor expectations from the Union Budget 2026 are shaped less by short-term tax relief and more by structural reforms, stability, and measures that enable smoother long-term investing. While participation in mutual funds has remained resilient, the lack of meaningful returns over the past year has made retail investors increasingly impatient, prompting a sharper focus on how the Government will support the industry and processes.

Over the last year, mutual fund returns have been subdued across categories. Large-cap funds delivered around 7 per cent, mid-cap funds were nearly flat, and small-cap funds saw negative returns, even as some categories like multi-asset funds performed relatively better.

According to Rajeev Gupta, Executive Vice President & Business Head – Third Party Products, Religare Broking Ltd., this has begun to weigh on investor sentiment. “While investor participation has remained resilient, retail investors are increasingly getting restless as equity mutual fund portfolios have not delivered expected returns in the past year,” he said.

Against this backdrop, investors are looking to the Budget for reforms that can revive growth and earnings. “After a year of muted performance, investors expect inflation-beating returns, typically around 12–14 per cent over a full market cycle,” Gupta said, adding that from the Union Budget 2026, “investors and the industry ardently expect wide-ranging reforms to boost economic growth, which can translate into improved corporate earnings growth and higher long-term returns for equity investors.”

One key concern highlighted by Gupta is taxation around portfolio rebalancing. He pointed out that the applicability of short-term and long-term capital gains tax discourages investors from redeeming or switching schemes, even when performance is poor.

“Retail investors often get stuck with poor-performing schemes due to the applicability of tax frameworks if they decide to switch or change the scheme,” he said. As a result, investors are seeking structural changes rather than incremental tweaks. “Investors expect seamless and tax-free switching from poor-performing schemes to better-performing ones,” Gupta noted, suggesting that the government “should introduce the concept of portability across mutual fund schemes to enable frictionless portfolio rebalancing and make long-term investing more investor-friendly.”

At the same time, not all expectations are centred on tax relief. Manish Gadhvi, CEO-B2B, FundsIndia, said that ahead of Budget 2026, “mutual fund investors are primarily looking for clarity and stability rather than tax cuts.” While discussions around capital gains tax rates and deductions continue, “the focus is increasingly on predictability, especially around equity and debt taxation, so long-term financial planning is not disrupted,” he said.

Gadhvi also cautioned investors against overestimating the impact of Budget announcements on portfolio returns. “Investors can look beyond tax savings for more substantial gains,” he said, highlighting SIPs, diversification, and cost-efficient products like index funds and ETFs as more meaningful drivers of returns. He added that even if minor adjustments are proposed, “they should not alter core asset allocation strategies.”

Looking ahead, Gadhvi expects “greater attention on passive investing and simplification of investment structures,” which can improve transparency and accessibility for retail investors. Ultimately, while the Budget may influence near-term sentiment, “long-term wealth creation depends on disciplined investing, realistic return expectations, and staying invested through market cycles,” he said, emphasising that goal-based investing matters far more than Budget-day reactions.