Personal Finance: A Mutual Bonanza

Personal Finance
A Mutual Bonanza

As a result of Budget 99, the attractiveness of the more equityoriented schemes has shot up.

You wouldn't guess it from our stockmarkets, but Budget 99 actually doesn't have much in store for corporates. Sops for investors in the mutual funds are, of course, another matter altogether.

All your income from mutual fund schemes will be exempt from the income-tax in future. Until now, only income upto a ceiling of Rs 15,000 per annum was exempt under Section 80-L.

Dividends from the open-ended equity funds with more than 50 per cent of their investments in equity, including the Unit Trust of India's (UTI's) US-64, will be exempt from the Dividend Tax for the next 3 years. In the case of open-ended funds whose equity investments are less than 50 per cent, however, the 10 per cent Dividend Tax will apply.

And the long-term capital gains tax has been reduced from 20 to 10 per cent, at par with non-resident Indians, computed with reference to the Cost Of Inflation Index.

As a result, the attractiveness of the more equity-oriented mutual fund schemes has shot up. However, the Dividend Tax is a dampener for the other closed- and open-end schemes since their Net Asset Values (NAVs) will fall by 10 per cent of the dividends they pay out. To maximise the benefits from the changes in the budget, I would suggest that:

If you are an aggressive investor, you should invest in a higher allocation to the open-ended equity funds, and remember to choose the dividend option. If you don't need the dividends, reinvest them. Most schemes will soon start offering dividend reinvestment plans.

Another short-term strategy should be to invest in the dividend plan of an open-ended scheme, and wait for the tax-free dividends. Dividend-stripping will allow you to earn tax-free income as well as book capital losses. The best opportunities: US-64 and Kothari-Pioneer Infotech Fund. One caveat with US-64: your calculations could go awry if the UTI reduces the dividend in terms of the July, 1999, repurchase price. The other special case is Mastershare, which has a 13-year uninterrupted dividend-paying track-record. Although the dividend itself will be tax-free this year, the fund will have to pay the Dividend Tax, thus reducing its NAV. Ideally, Mastershare should turn itself into an open-ended scheme to save this outflow.

If you are a conservative investor, you should look for balanced funds albeit with higher equity-allocations than debt. Two attractive options: Alliance and Magnum Open End, given their portfolios and track-records.

Since the fixed-income investor's options have become less attractive post-Budget 99, he should immediately shift from dividend to growth plans. Only investors in guaranteed-return closed-end funds are protected as they will continue to get their returns even though the fund will have to pay the Dividend Tax. For such investors, 2 attractive options have emerged with the relaunch of Canbank's Cancigo and Cangilt, which assure you returns of 12.50 per cent and 12.25 per cent per annum, respectively, and carry lock-ins of just 1 year. With the fall in interest rates, they look even more attractive.

Finally, a word about US-64. While the post-tax returns to investors in the scheme will get a boost because of the tax-exemption--if the UTI maintains its dividend-ratio and repurchase-price--the long-term outlook remains uncertain since the Deepak Parekh Committee has recommended changes in its structure: the realignment of pricing with NAVs, and the active management of its equity portfolio. Given our past experience with the UTI's equity funds, this is, well, a Rs 64,000 question--to which there are no answers yet.

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