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‘Taxing dividends will boost medium to long term investing…’ - Views on News from Equitymaster
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  • Mar 2, 2002

    ‘Taxing dividends will boost medium to long term investing…’

    This is the second leg of our interview with IL&FS Mutual Fund. In the first part , we had interviewed the fund house before the budget to assess their expectations from the budget and draw up a budget wishlist. This time around we spoke to them to get their post-budget assessment and see how the budget has measured up to their expectations. Mr N K Sharma, COO, IL&FS Mutual, who answered the questions on behalf of the fund house, gave his frank appraisal of the budget and had some advice for investors who were affected by the re-introduction of dividend tax.

    PFN: Your views on the budget must be positive as most points in your pre-budget wishlist have been addressed by the finance minister.

    Mr. Sharma: The budget is more positive than negative, as it focuses on the neglected sectors of the economy like agriculture, textile, and infrastructure projects. Further, it continues its focus on second generation reforms and consolidates the reforms already initiated. Relief by way of reduction in income tax and excise duty could not have been possible because of the state of government finances, lowering taxes to GDP ratio as well as the need to focus on some key areas rather than each and every area.

    PFN: Very briefly, what’s your view on the budget from the perspective of the retail investor?

    Mr. Sharma: The small individual investor may feel a little let down as he will find it difficult to accept the market realities. The market realities indicate a reducing interest rate environment, which started about 18- 24 months ago. Along with this, he may find that budget has not given him tax relief but may have extracted somewhat more than he was so far paying. The removal of dividend distributor tax will also increase paper work, which could be an irritant in the system.

    PFN: The decision to tax mutual fund dividends in the hands of investors is a big blow to the industry. What do you think is going to be the immediate impact of this over the short term and the long term?

    Mr. Sharma: The provisions related to tax benefits on dividend on mutual funds were valid till the current financial year. The industry enjoyed this benefit for three years. The Finance Minister has not extended the benefit except for the tax benefit for one more year in respect of equity/equity-oriented funds.

    However, this has got to be seen in the overall context where the corporate dividend has also been treated at par. From an investor point of view there is no difference between a dividend from company and dividend from mutual fund. It may however be noted that investments in units are capital assets and they enjoy the indexation and capital gains tax benefit. The impact of the changes will give a boost to investing for a medium to long term investing as compared to the short term perspective and churning which had become the order of the day in the recent past. The basics of mutual fund investments remain unaltered like risk management by professionals, diversification, liquidity, and convenience and of course the benefits of capital gains.

    PFN: What would be your suggestion to investors who had hitherto been choosing the dividend plans for their mutual fund schemes? Choosing the growth plan is obviously one option.

    Mr. Sharma: The situation does not change for investors paying marginal rates of tax. It may be beneficial for those who were below threshold limits or who were enjoying tax exemption status.

    However, the investors who were in the middle to high slab tax bracket now have the option to move to growth plan and continue to enjoy the benefits of investing into mutual funds

    PFN: From the perspective of equity investments in your schemes, which sectors and companies look particularly attractive now?

    Mr. Sharma: Reducing the benefits under section 88, putting a ceiling on the investments of RBI relief bonds, could result in high flows into mutual funds. Further, with reducing returns from debt investment and economy looking up as a result of thrust on agriculture, infrastructure and other reforms, equities provide attractive investment avenue and hence diversified equity funds investing in growth businesses as well as undervalued companies have the potential to provide healthy returns.

    The budget has not significantly altered the positive outlook for PSU, Cement, Pharma, software and automobiles.



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