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February 28, 2001                                       Feedback  

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Mutual funds, clear winners from this Budget

BS Markets Bureau

The mutual fund sector is unabashedly celebrating the reduction in the 20 per cent dividend tax imposed in last year's budget to 10 per cent.

The move has softened somewhat the disappointment over the promised pension sector reforms not taking place.

According to industry players, the slash in dividend tax to 10 per cent in conjunction with the 1.5 per cent cut in small saving rates will lead to an increase in money inflows into the sector.

"With small saving rates just 150 basis points above the bank rate, investors will be encouraged to divert their savings into mutual funds," said Niamatullah, managing director, State Bank of India Mutual Fund.

Shailesh Bhandari, chief of Prudential ICICI MF, had no qualms in admitting that mutual funds should be clear winners from this budget, with debt funds in particular benefiting from the "reduction in dividend tax to 10.2 per cent from the earlier 22.4 per cent".

Hemant Rustagi, head of marketing at ING Asset Management Company, agreed that the reduction in dividend tax was good for the wholesale segment, which would be paying only 10 per cent against the 35.7 per cent earlier, while investors in the high tax bracket would be paying 10 per cent against the earlier 30.6 per cent.

"So, both the segments will witness significant gains as this goes in their favour," he pointed out.

According to Nikhil Johri, chief executive of Alliance Capital Mutual Fund, the tax cut will increase inflows into debt funds, while the move would have no impact on equity funds.

In the last six months, debt funds have seen 90 per cent inflows compared with equity schemes -- but most of this can be attributed to the lack of stability in the equity market.

Sandesh Kirkire, fund manager in charge of debt schemes at Kotak Mahindra Mutual Fund, said: "It is a positive development and now we will see a lot of funds flows into the sector, especially in income funds."

The cut in rates in the administered prices, which is going to have an impact on small savings rates as well as bank rates, has infused the sector with fresh hope that a lot of money from the household sector will be channelised to mutual funds.

The reduction in rates comes at a time when the government security prices are rallying and the debt market is also on an uptrend. With the equities market being characteristically fickle, and investment options becoming narrower due to the all-round cut in rates (including bank rates), mutual funds and especially income funds hold out hopes of steadier and better returns.

As on January 31, 2001, the total assets under income funds were Rs 519.18 billion, while assets under management by growth funds was Rs 182.91 billion. In January income schemes saw a 38 per cent growth in funds compared with the figure in December, while outflows in the month were also lower.

Source: Business Standard

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