How DDT will impact mutual fund investors

The budget presented by Finance Minister, Arun Jaitley has few surprises for mutual fund investors, especially for equity oriented mutual fund investors. The budget has proposed to introduce a tax on distributed income by equity oriented mutual fund at the rate of 10%.

The intention behind such move is to provide level playing field across 30 growth-oriented funds and dividend distributing funds. This is expected to garner revenue of Rs 20000 crore for the government this year, which is expected to increase subsequently.

This will impact primarily to investors who rely on dividends from equity funds. There are many retirees and otherwise who have invested in balanced funds with dividend options. They will feel the pain as they must bear 10% tax on dividend and hence will get lower amount in hand. This will be deducted by the fund houses before distributing it to investors.

This will lead to investors switching from dividend option to growth option, however, it will be like exiting from fund and making fresh purchase. Therefore, it will attract all the cost involved while exiting and investing in a fund. This will also promote systematic withdrawal plan (SWP) options, where investors withdraw invested corpus in a phased manner.