Tax change means balanced funds will tank up on equity
Budget provision calls for 65% equity to escape tax net
Vivek Kaul
Mumbai
The budget-induced change in dividend distribution tax rules could force many balanced funds to increase their equity investments to avoid having to pay this tax. Balanced funds are supposed to balance their investments between debt and equity, with some tilting towards equity and the other towards debt.Mutual funds have to pay a dividend distribution tax of 12.5% to the department of income tax every time they declare a dividend. This, however, does not apply to open-ended equity-oriented funds. These are defined as mutual fund schemes wherein more than 50% of investible funds are invested in the shares of domestic companies. The budget for the year 2006-07 has raised this level to 65%. This amendment comes into a play from June 1, 2006. When this happens, it will affect those mutual fund schemes whose equity components constitute between 50% and 65% of the assets - that is, mostly balanced funds. These funds will have to pay a dividend distribution tax as and when they declare dividends. When a mutual fund scheme declares a dividend, its net asset value (NAV) goes down. On top of that, if the scheme also needs to pay a dividend distribution tax, the NAV will come down further. To avoid the tax, balanced funds will have to increase their equity exposures, making them less balanced in the process. As on January 31, 2006, there were 36 balanced funds in the market. Of these, 15 schemes have an equity component between 50% and 65%. The total assets under management (AUM) of balanced funds as on January 31, 2006, was Rs 7,088 crore. This forms 8.7% of the total AUM of equity-oriented schemes, which include schemes that are not debt, gilts, income or liquid. The AUM of balanced funds whose equity component is between 50% and 65% comes to around Rs 4,368 crore. This forms around 5.4% of the total AUM of the industry. Given this statistic, the conclusion one can draw is that the change in the regulation will not rock the mutual fund industry. “The impact will be less. Most of the balanced funds have an equity component in the range 60%-70%. Also, the AUMs of these funds are not much”, says Sameer Kamdar, National Head - Mutual Funds, Mata Securities India Pvt Ltd.
Vivek Kaul
Mumbai
The budget-induced change in dividend distribution tax rules could force many balanced funds to increase their equity investments to avoid having to pay this tax. Balanced funds are supposed to balance their investments between debt and equity, with some tilting towards equity and the other towards debt.Mutual funds have to pay a dividend distribution tax of 12.5% to the department of income tax every time they declare a dividend. This, however, does not apply to open-ended equity-oriented funds. These are defined as mutual fund schemes wherein more than 50% of investible funds are invested in the shares of domestic companies. The budget for the year 2006-07 has raised this level to 65%. This amendment comes into a play from June 1, 2006. When this happens, it will affect those mutual fund schemes whose equity components constitute between 50% and 65% of the assets - that is, mostly balanced funds. These funds will have to pay a dividend distribution tax as and when they declare dividends. When a mutual fund scheme declares a dividend, its net asset value (NAV) goes down. On top of that, if the scheme also needs to pay a dividend distribution tax, the NAV will come down further. To avoid the tax, balanced funds will have to increase their equity exposures, making them less balanced in the process. As on January 31, 2006, there were 36 balanced funds in the market. Of these, 15 schemes have an equity component between 50% and 65%. The total assets under management (AUM) of balanced funds as on January 31, 2006, was Rs 7,088 crore. This forms 8.7% of the total AUM of equity-oriented schemes, which include schemes that are not debt, gilts, income or liquid. The AUM of balanced funds whose equity component is between 50% and 65% comes to around Rs 4,368 crore. This forms around 5.4% of the total AUM of the industry. Given this statistic, the conclusion one can draw is that the change in the regulation will not rock the mutual fund industry. “The impact will be less. Most of the balanced funds have an equity component in the range 60%-70%. Also, the AUMs of these funds are not much”, says Sameer Kamdar, National Head - Mutual Funds, Mata Securities India Pvt Ltd.
posted by Vivek at 9:40 PM
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