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DDT Dampener for Funds

The Divided Distribution Tax has risen for liquid and money market funds. Banks will benefit because their deposits will not be relatively as unattractive as they are now compared to such funds

The dividend distribution tax (DDT) on money market mutual funds and liquid funds has been increased in the latest Union Budget to 25%. Earlier, the DDT was lower for a retail investor (12.5%) and higher for a corporate (20%). Now it is a uniform 25%.

How It Works
The investor does not pay this tax. It has to be paid by the one declaring and distributing the dividend (in this case, the mutual fund). But ultimately, the investor is the one who bears the burden of this tax.

The mutual fund will look at the profits made and decide how much of a dividend to declare. From this amount, it will set aside the amount required to be paid as DDT. The balance will be paid as net dividend to the investors. Therefore, this tax amount is indirectly paid by the investors who end up getting lesser dividend than they would have if there was no tax. This DDT is directly paid by the mutual fund to the government before making the dividend payout.

The Effect
This will definitely reduce the effective yields offered by the liquid funds. Banks will benefit because their deposits will not be relatively as unattractive as they are now compared to such funds.

According to Ashu Suyash, Managing Director & Country Head, Fidelity Fund Management Pvt. Ltd, "The increase in dividend distribution tax on dividends paid by money market mutual funds and liquid mutual funds will have a near term impact on funds in these categories."

Funds That Might Be Hit
For a lot of AMCs, their bread and butter comes from liquid funds.

The mutual fund that tops the list with a substantial lead is Prudential ICICI Mutual Fund with Rs 12,594.23 crore in cash. But yet it will not feel the heat as much as Lotus India MF. Though the latter has just Rs 538.29 crore in liquid funds, it comprises of 83.17% of its total assets. Whereas, for Prudential ICICI MF, just 36.25% of its total AUM are in liquid funds.

LIC MF and ING Vysya MF are the other two fund houses that will be hit. The percentage of their liquid fund assets to their AUM is 64.15% and 57.80%.

In absolute numbers, Birla Sun Life MF and HDFC MF follow Prudential ICICI MF with Rs 9,771.55 crore and Rs 9, 315.36 crore respectively. Birla Sun Life MF will not be too badly hit since just 46.11% of its total AUM fall into the liquid funds. HDFC MF will also not feel the pinch too much with just 29.64% of its total assets in liquid funds.

Sahara MF, Fidelity MF, Escorts MF, Benchmark MF and Taurus MF will be the ones least hit since less than 10% of their assets are in liquid funds.

Mutual fund data as on January 31, 2007