The Finance Minister has accepted the Kelkar Committee's recommendations of exempting tax on dividends of debt funds in the hands of investors. The bad news is there is nothing else in the budget for debt fund investors.

Until now, dividends on debt funds were taxed in the hands of investors depending on the tax bracket applicable to him. With the latest budgetary provisions, debt funds will pay a 12.5% tax on distribution of dividend, which will be tax-free in the investor's hands.

There can be no doubt that this is a move in the right direction as far as restoring appetite in debt funds is concerned, especially after last year when dividends became taxable in the hands of investors. However, given the recent volatility in debt markets over the last 3 weeks and debt fund managers maintaining a 8-9% ceiling on debt fund returns (compounded growth) going forward, there is little reason for investors to consider debt funds in a big way.

That is not to say that debt funds are not an ideal investment avenue. Debt funds do make stable and steady investments. But that is just about it. If you are still looking at it from a high growth (capital appreciation) perspective then that party seems to be over. For that investors need to consider investing smaller amounts in equity funds (i.e. if you have the appetite for it). The budget is expected to do more for equity funds than debt funds. Investors are expected to take the hint and invest accordingly.

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