MFs expect liquid funds to find favour

One day after the Budget, mutual funds (MFs) are upbeat that the proposals are loaded heavily against banks, which means investors would find MFs more appealing.

The Budget has scrapped Section 80L of the Income Tax Act. This section exempted interest income of up to Rs 12,000 per annum from tax.

This means that all interest income is now liable to be taxed. However, dividend income from liquid mutual schemes is tax free and such investments are almost as liquid as bank deposits, the industry is arguing.

"We expect money to flow into liquid funds," said Sandesh Kirkire, head of debt funds at Kotak Mutual Fund. He expects 'savvy' investors, who understand tax implications to make the first move.

Mutual funds are understandably gung ho about the Budget proposal as they have a talking point with investors now.

Further, the Budget proposal to tax withdrawals of more than Rs 10,000 from banks could also tilt the balance in favour of mutual funds, industry sources said, adding that liquid funds offers them more liquidity than a fixed deposit.

As against a maximum of around 5 per cent offered by a one-year fixed deposit, liquid funds can yield returns of up to 7 per cent.

Ashutosh Bishnoi, chief marketing officer with UTI Mutual Fund said, "Whether there will be a rush or not is a moot point, but that is a segment which offers opportunities."

Industry circles pointed out that the Budget proposals, and especially the omnibus ceiling of Rs 1 lakh on investments in savings instruments, gives the industry to break out of the stagnation of the last few years.

Assets under management of the entire industry has been stagnant at Rs 1.5 lakh crore for a considerable time now. In fact, during between August and November 2004, there was a significant dip in assets to around Rs 1.4 lakh crore.