Rise in stamp duty to hurt short-term MF returns

Liquid, overnight investors to face maximum impact

Mutual fund (MF) investors are bracing for lower returns after the introduction of stamp duty charges from July 1.

A stamp duty of 0.005 per cent will be levied on issuance of units, and 0.015 per cent on transfer of MF units. An issue of units includes purchase, switch-in and dividend reinvestment, whereas a transfer implies off-market transactions. Investors who issued units in liquid and overnight funds, as well as those with a short-term holding of less than 30 days, are likely to be impacted the most, say experts. The Centre had notified the amended stamp duty regime on the issuance and transfer of shares, debentures, futures, options, currency, and other capital market instruments, in December last year.

This was supposed to take effect from January 9, but implementation was first deferred to April 1, and subsequently to July 1. The Association of Mutual Funds in India (Amfi) has written to the finance ministry for further deferment, said people in the know. “If you are a frequent churner and your holding period is less than 30 days, you will have to factor in the stamp duty cost,” said a senior MF official.

Investors in liquid funds have a tendency to churn their portfolios and switch between funds every seven days, in search of higher returns. “This behaviour does not make sense anymore, because investors will now have to factor in the stamp duty impact. It is in their interest to stay invested for a longer period and plan their flows accordingly,” said the official.

For instance, an investor who has pooled in

~100,000 in liquid funds will have to bear ~5 as stamp duty upfront, and will get units worth ~99,995 allotted to him. If the fund provides annualised gross returns of 5 per cent — for a 7-day holding period — the return will whittle down to 4.74 per cent, implying a hit of 0.26 per cent. For higher holding periods, however, the impact will reduce.

Lower returns may prompt investors to park money in bank fixed deposits, in which returns have dipped as well. SBI, for instance, is now giving 2.9 per cent for deposits of 7-45 days for investments below ~1 crore. Axis Bank gives 3.25 per cent for the same period.

Net assets under management for overnight and liquid funds stood at ~67,299 crore and ~4.69 trillion, respectively, as on May 31.