Liquid funds declaring daily and weekly dividends are expected to become unpopular instruments by virtue of dividends becoming taxable in the hands of the investor at prevailing rates.
Fund manager at Pru-ICICI Mutual Fund, Sanjay Garodia said that liquid schemes would stop declaring dividends unless of course the finance ministry allows Section 80M to be applicable to mutual funds units too. Applicable to corporates, this section allows set-off on distribution tax - that is, it allows companies to deduct dividend paid to shareholders against dividend they receive from other companies.
If this is made applicable to mutual funds, then from the tax planning angle it makes sense. In the absence of it, liquid funds - which are targetted primarily at corporates and high net worth individuals (HNIs) - will lose their attractions, industry sources said.
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With liquid funds stopping declaring dividends, the schemes will go for long periods without any dividends being declared, a senior official with a public sector fund said.
It could also encourage investors to go in for the growth option - which defeats the very purpose of dividend schemes since it offers large ticket investors with daily cash flows generated on their investments. Investment of more than Rs one crore can generate considerable income by way of dividends.
Liquid fund investments are typically of a short-term nature, remaining invested for upto a maximum of a week, but there are certain corporates who are known to remain invested for more than a month.
According to fund managers at IL&FS Mutual Fund, none of the funds have as yet begun any planning on how to tackle the dividend issue. "We are still waiting for the ministry's clarification on Section 80M, before we decide on our future course of action," an official said.