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Vishwanath Kulkarni
Aarati Krishnan

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Bangalore/Chennai March 2 Information technology firms sitting on huge cash piles are now considering newer options to park their surpluses with the move to hike dividend distribution tax (DDT) on liquid and money market mutual funds (MMMFs).

Cash-rich IT firms are among the largest investors in liquid mutual funds. A rising interest rate regime has also made bank deposits attractive in recent months.

"Bulk deposits are looking attractive in the current scenario. We are looking at the bank deposits seriously," said Mr V. Balakrishnan, Chief Financial Officer, Infosys Technologies Ltd.

Infosys currently has investments of close to Rs 500 crore in liquid mutual funds as of quarter-ended December 31, 2006.

Liquid and money market mutual funds currently offer a return of around 6.5-7 per cent. These returns will get trimmed to about 6 per cent after the increase in DDT (from an effective rate of 22.4 to 28.3 per cent), effective April 1. However, corporate treasury managers feel that bulk deposits may offer higher returns.

Even smaller companies like Sasken are also examining a switch to bank deposits. Sasken, which has close to Rs 30 crore invested in liquid mutual funds, is looking at bank deposits as an option, said the company's Chief Financial Officer, Ms Neeta Revankar.

Tax arbitrage

While the tax arbitrage window has narrowed, sources in the mutual fund industry point out that investments in liquid funds still score over other options in terms of any-time liquidity and that will certainly be valued by treasury managers.

According to Mr Rajnish Narula, CEO of DBS Chola Mutual Fund, "Money market and liquid mutual funds may not lose their investors to bank deposits. Investors who put in money in these mutual funds are usually corporates, who park surplus funds with mutual funds temporarily, so that they might be able to retrieve the money as and when required." Bank (time) deposits do not offer this flexibility, Mr Narula said.

Another take on the issue is that liquid funds will still suffer a lower tax incidence when compared to bank deposits, because dividends from the former will be taxed at 28.3 per cent, while the corporate tax rate including surcharge, will be at 33.9 per cent.

"Though the tax arbitrage between liquid funds and bank deposits has narrowed, a 5-6 percentage point differential continues and corporate treasuries will take note of this,'' points out the Chief Investment Officer of a leading mutual fund.

More Stories on : Budget | Fixed Deposits | Software | Mutual Funds

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