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Stamp duty on MFs will reduce short tenure returns


Mumbai: Parking money with liquid mutual fund schemes–a product used by investors to hold their idle cash— for shorter periods will end up squeezing returns further. From July 1, a stamp duty of 0.005% will be levied on every mutual fund purchase—be it through lumpsum or Systematic Investment Plans (SIPs). Lower the holding period of investments, the higher will be the impact. The move could impact large institutional investors who mostly put their money in liquid schemes for shorter time periods.

“The shorter the holding period the higher will be the impact on returns,” says Kaustubh Belapurkar, Director (Fund Research), Morningstar India.

Many corporate treasuries deploy money for a short period of time as they need money for working capital requirements. A report by ICICI Mutual Fund shows that the annualised returns could be lower by 1.82% due to stamp duty for holding period of a day. For seven days, the returns reduce by 0.26%. As the holding period increases the impact would reduce. If the investments are held for 15 days, the investor could take a 0.12% hit, while for 30 days, the impact would be 0.06%.

While this could deter corporate investors from putting money in liquid schemes for a day or two, they would still be forced to park money in this product for 15-30 days.

“Corporates would still continue to deploy money into liquid and short-term funds as they do not earn anything in a current account in the bank and short-term FD rates are even lower,” says Amol Joshi, Founder, Plan Rupee.

Average returns from the liquid scheme category have shrunk to 5.2% in the past one year, according to Value Research. While returns have fallen because of fall in interest rates, tighter regulatory requirements and levies like the stamp duty are contributing to the cap on gains.

The move by Securities and Exchange Board of India to hold at least 20% of liquid funds’ corpus in liquid assets like cash and government securities from July 1 could squeeze returns further in the wake of recent credit crisis.

“Holding 20% in liquid assets means compromising my returns by 7-10 basis points,” said the Chief Investment Officer at a domestic fund house. “This added to the stamp duty cost of 26 basis points for 7 days could reduce returns by 36 basis points.”





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