Dhirendra Kumar sheds light on the time specification of ultra-short-duration funds and talks about the buyback tax on listed companies
29-Aug-2019
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As advised by many, investments in ultra-short-duration funds should be held only for three-six months. But is it necessary to redeem your investments after that period? Can we keep our investments in the fund for a longer period of time?
Also, now when listed companies are liable to pay additional tax in the case of buybacks, how will these companies reward their shareholders?
- Santosh
For your first question, I would say that it isn't necessary to withdraw your investments from an ultra-short duration fund within three-four months. It is an open-ended fund, which by design continues to provide you returns on the amount invested. Usually, no losses are incurred in an ultra-short-duration fund.
However, we specify the time horizon of three-four months just to highlight that if one wants to invest for a shorter period of time, then a liquid or an overnight fund is the way to go. Even though these two fund categories might provide lesser returns, they are much safer than ultra-short-duration funds.
Coming to your second question, buybacks will be severely hit by this tax. A company can distribute its surplus in two ways - one is by giving dividends to its shareholders and the other is by repurchasing its own shares from the market, which has the same effect as the equity of the firm reduces while its earnings increase. Now the second way of distributing their surplus was earlier a much better way, as dividends beyond Rs 10 lakh were taxable. So, to avoid this tax, more and more companies started offering buybacks rather than distributing surplus profits in the form of dividends.
To impose closure of this differential tax treatment, the government proposed this buyback tax which will be disadvantageous to the companies because now there is no other option other than bearing the brunt of taxes to distribute their surplus.
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