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Opt for dividends
Shanthi Venkataraman
The Budget proposal to increase short-term capital gains tax to 15 per cent will be applicable to equity mutual funds as well. This means that investors who exit their equity fund units within a year of purchase will have to shell out tax at 15 per cent on their capital gains, instead of the present 10 per cent. This move is in one way positive for the MF industry as it provides an incentive for investors to hold mutual funds for a longer period. For investors, a longer horizon may help increase overall returns from your investment.
Cash-in on gains
However, once these proposals take effect, investors with a shorter investment horizon may benefit if they opt for the dividend option of equity funds, as dividends will continue to be exempt from tax. This will permit you to cash in on your gains in a tax-efficient manner. Equity funds might also be more inclined to declare dividends as a way of rewarding their investors, as there is no dividend distribution tax on equity funds.
There were no other major measures for the mutual fund industry. However, efforts to improve the corporate bond market might have long-term implications for debt mutual funds. Most debt funds are typically invested in liquid or money market instruments and short-term commercial paper at one end, and long-term government securities on the other, due to a paucity of good medium-term corporate paper.
Access to a more liquid corporate bond market with a variety of paper (aside from AAA bonds that are currently available) will provide better yielding investment options to debt funds.
Investors too would have access to a wider variety of debt products which could capitalise better on declining interest rates.
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