The Hindu Business Line : `Save addl dividend distribution tax by switching funds'

Kolkata May 8 If you are a sharp-witted investor, making your way through the maze of debt and liquid funds, this is your chance to steer clear of paying additional dividend distribution tax (DDT), courtesy distributors who are intelligent enough to help you spot the opportunity.

Recommendations

At the core of the strategy, being recommended these days by intermediaries, is the difference in DDT treatment between liquid/money market funds and other categories such as liquid plus and long term floaters.

The recent Budget had made it clear that (from April onwards) the former category will attract a 25 per cent DDT, which, inclusive of surcharge, effectively becomes 28.32 per cent. The other categories, however, still attract a 20 per cent DDT, which, inclusive of surcharge, effectively becomes 22.66 per cent.

Previous-day NAV

For investors quick on the uptake, liquid and money funds (including the so-called pure liquid funds and short-term floaters) can be specified as giving previous-day NAV for investments, the cut-off time for which is 10 am for high-value cheques and 12 noon for transfer cheques.

For other categories debt funds, the specifics include giving same-day NAV for investments, the cut-off time here being 3 pm. The categories in question include liquid plus, long-term floaters, short-term bond funds. Fixed maturity plans may also be included in this set.

Fund distribution company SKP Securities has the following prescription: An investor may wish to put in money in pure liquid funds, take previous-day NAVs and switch to funds in the second category, say, to liquid plus funds.

In the process, the extra 5.66 per cent DDT need not be paid.

"Investors should keep in mind that some of the liquid plus schemes have exit loads within 7-15 days of exit from the date of investment," the intermediary has informed, adding that clients should be scheme-specific and consider their own cash flow requirements before deciding to switch.

A number of funds levy exit loads for very short-term investments, it is pointed out. DWS Money Plus Fund, the distributor has mentioned, will charge 0.1 per cent for allocations up to seven days for both retail and institutional investors.

For a big-ticket customer, the minimum requirement is Rs 5crore while for a retail investor, it is Rs 5,000.

Some liquid plus funds do not charge such loads, it may be mentioned. Among these are DSP Merrill Lynch Liquid Plus Fund and HSBC Liquid Plus Fund. These require a retail applicant to put in Rs 25,000 and Rs 5,000 respectively. A big-ticket client needs to shell out Rs 5 crore and Rs 1 crore respectively.

HSBC MF incidentally offers an Institutional Plus option, the minimum requirement being five-times the amount.