In a measure to provide an impetus to the mutual fund industry, the Government has now proposed to allow foreign investors to invest in Indian mutual funds after them having met the KYC norms.

 

This move while it may enable mutual fund houses to garner more Asset Under Management (AUM) as foreign investors participate in the Indian equity markets (through the mutual fund route), we believe that this may also bring in some wild swings in the flow of funds to the mutual fund industry (unless we get long term foreign investors).

 

However upsetting the corporates investing in mutual funds, for liquid mutual funds, the Dividend Distribution Tax (DDT) has been increased from 25% to 30%, but for debt funds it (DDT) has been increased from 20% to 30%, thereby attempting to remove the advantage which the corporates enjoyed by investing in liquid and debt mutual funds (for a period of less than 1 year) over Fixed Deposits.

 

	Dividend Distribution Tax Liquid / Money Market Schemes		Dividend Distribution Tax Liquid Plus / Ultra Short Term Debt / Floating / Income / Gilt Schemes
	2010-11	2011-12	2010-11	2011-12
Resident Individual / HUF	27.681% (25% + 7.5% surcharge + 3% education cess)	27.038% (25% + 5% surcharge + 3% education cess)	13.841% (12.50% + 7.5% surcharge + 3% education cess)	13.5189% (12.50% + 5% surcharge + 3% education cess)
Partnership Firms / AOP / BOI	27.681% (25% + 7.5% surcharge + 3% education cess)	32.445% (30% + 5% surcharge + 3% education cess)	22.145% (20% + 7.5% surcharge + 3% education cess)	32.445% (30% + 5% surcharge + 3% education cess)
Domestic Companies	27.681% (25% + 7.5% surcharge + 3% education cess)	32.445% (30% + 5% surcharge + 3% education cess)	22.145% (20% + 7.5% surcharge + 3% education cess)	32.445% (30% + 5% surcharge + 3% education cess)
NRIs	27.681% (25% + 7.5% surcharge + 3% education cess)	27.038% (25% + 5% surcharge + 3% education cess)	13.841% (12.50% + 7.5% surcharge + 3% education cess)	13.519% (12.50% + 5% surcharge + 3% education cess)

(Source: Union Budget 2011-12, PersonalFN Research)

 

Mutual funds would not find it easy to attract short term surplus funds from corporates who park their surplus funds in liquid and debt mutual funds. However corporate who wish to park their long term funds (for a period of over 1 year) can still look at debt mutual funds by participating in the growth option as it still remains tax efficient (as it will continue to provide indexation benefit on long term capital gains).

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