DTC will have ‘no impact on the market' : CEO, Motilal Oswal AMC Ltd

Most participants had expected long-term capital gains tax to remain at zero: Motilal Oswal.

In India, equity as a percentage of financial savings stands at just 3 per cent today. This number has nowhere else to go but up. Mr Nitin Rakesh, MD and CEO, Motilal Oswal AMC Ltd

The roller-coaster ride the markets had since the new Direct Taxes Code (DTC) was introduced in Parliament could have unnerved some tepid investors. But for the long-term market buffs, the DTC comes with a load of goodies and for the retail investors, stock market investment should now come as a means of wealth generation.

True, the proposal to levy a 5 per cent tax on dividend payout that comes on the top of the SEBI diktat on dividend being paid out of the realised gains, and not from unit premium reserve, may come as a dampener to some of the investors looking for MF dividend as a dependable income stream, particularly in retirement. But this has been off-set by the proposal to exempt equity and equity-based MF units from long term capital gains tax.

With the Indian economic growth story intact, equity should form part of any retirement planning and regular investment in MFs would help in building a sizeable retirement corpus.

In an interview to Business Line, Mr Nitin Rakesh, Managing Director and Chief Executive Officer, Motilal Oswal AMC Ltd, Mumbai, shares his thoughts on the impact of DTC on mutual fund investments. Excerpts:

The latest tax code retains the long-term capital gains tax exemption on investment in equity and equity-related funds. Will that not be a huge relief to the investors? The continuance of long-term capital gains tax exemption has come as a relief. There is no impact on the market as most participants had expected the long-term capital gains tax to remain at zero.

The code proposes levy of 5 per cent tax on income distributed by equity-oriented MFs. Will this make mutual funds less inclined to distribute dividend, particularly as SEBI has mandated that the dividend should be paid out of profit made?

No, I don't think that would make a big difference as to alter a MF decision to declare dividends. There would be different schemes, and reinvestment option or growth option ‘would be much more popular' than dividend option.

Do you feel that in view of the tax changes, the growth option would score over dividend option in so far as MF investment is concerned? Which will be more tax efficient in the long term?

Yes and the growth option would be more tax efficient in the long term.

What is the likely impact of the removal of ELSS from the investments eligible for tax deduction? Do you expect the MFs to phase out these funds post -2012?

I don't think it will get phased out in FY12. People will start getting used to EET instead of EEE.

Don't you think that equity investment — direct or through MFs — should become an essential long-term investment strategy?

Markets don't have daily movements based on long-term view. They are guided more by sentiments. In India, equity as a percentage of financial savings stands at just 3 per cent today. This number has nowhere else to go but up. Direct equity investments, mutual funds and ULIPs would all be responsible in taking this number higher.

Source: http://www.thehindubusinessline.com/2010/09/06/stories/2010090650910400.htm