Stamp duty to pinch liquid fund returns further

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 lump sum or systematic investment plans (SIPs). The 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 it 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 fall by 0.26%. As the holding period increases, the impact would be less. 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 stamp duty, are contributing to the cap on gains. The move by the 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.

“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.”

Stamp duty impact on liquid funds

Investment amount (Rs)100,00,000100,00,000
Stamp duty0.005%0.005%
Stamp duty amount (Rs)500500
Amount invested (Rs)99,99,50099,99,500
Return on amount invested in MF3.5%3.5%
Number of days730
Absolute returns (Rs)6,71228,766
Market value at redemption (Rs)100,06,212100,26,288
Actual returns (%)3.243.44

Source: B&K Securities