Large investors hold bulk of MF assets

Large investors have a share of 78.73 per cent in the assets of mutual funds. Retail investors account for the remaining 21.27 per cent.

Corporate houses, banks, financial institutions, foreign institutional investors and high net worth individuals (HNIs), investing around Rs 5 lakh or more, are the large investors.

According to the Association of Mutual Funds in India (Amfi), of the Rs 4,18,764.80 crore managed by the industry at the end of March, assets worth Rs 3,29,694.56 crore belonged to institutional investors and HNIs, while the retail investors’ share was Rs 89,070.24 crore.

However, the number of folios of retail investors was 4,63,94,283, which is 97.5 per cent of the total accounts.

In other words, large investors and HNIs were the biggest beneficiaries of the tax advantages in mutual funds.

Under the current provisions of the Income Tax Act, mutual funds have certain tax advantages over other instruments.

For example, dividend income from mutual funds is tax-free. If it is an equity scheme, the fund house doesn’t have to pay a dividend distribution tax; if it’s a debt scheme, the fund house will have to pay a dividend distribution tax of 14.45 per cent for individual investors and 22.66 per cent for corporate investors. For liquid and money market funds, the dividend distribution tax is 28.33 per cent.

The long-term capital gains tax for a period of more than 12 months is nil for equity schemes. For debt schemes, the tax is 10.3 per cent without cost indexation and 20.6 per cent with cost indexation.

Thus, for an institutional investor, or an HNI paying income tax at the rate of 30 per cent or more, mutual funds are always a better option. Till 2007-08, corporate houses and other institutional investors preferred to park their money that they might need in 10-15 days in money market schemes instead of current accounts of banks. In doing so, they earned 7-9 per cent annual return.

In 2007-08, the government increased the dividend distribution tax in liquid/money market schemes to 28.33 per cent from 22.44 per cent. This reduced the scope of tax arbitrage for institutional investors. Mutual funds then came up with “liquid plus” schemes that were positioned between liquid/money market funds (ultra short-term) and short-term debt funds.

The dividend distribution tax on liquid plus funds was 14.45 per cent for individual investors and 22.66 per cent for corporate investors. These schemes caught the fancy of the investors, along with exchange-traded funds.

After the crisis in money market funds and fixed maturity plans in October, institutional investors had slashed their portfolios. But with the liquidity condition improving, their interest has revived.