The mutual fund industry clearly focuses on this segment for its debt and liquid fund products. Every debt/liquid product comes with a dividend and growth option, as well as the facility to reinvest the dividend. Therefore, depending on the investor’s tax situation a suitable option can be chosen to optimise taxes. About 40 per cent of the industry’s AUM is in liquid and debt funds, and this number was much higher before the equity boom of the last 3 years brought a large corpus of equity funds in. The opportunity provided by the DDT regime has been well optimised by the industry and the investors are not complaining. This time around the axe has fallen on liquid funds, though the 25 per cent DDT still leaves some room for tax arbitrage by corporate investors.

Not all debate about DDT should be about tax arbitrage. The other side of the story is that liquid funds today provide an efficient treasury option to several corporate investors and has emerged a niche product. Liquid funds enable investors access diverse markets for CPs, CDs, CBLOs and PTCs and offer liquidity intermediation. Liquid funds service investors in a 24-hour time frame. If a large investor is today looking for a market-linked return on his treasury funds, the liquid fund would wins hands down for competitiveness, efficiency, cost and service. Not everything about mutual funds needs to be about small investors. The industry needs large investments by corporate investors to be able to acquire size and cross subsidise small investors. Liquid funds that serve large investors and the other funds that serve retail investors have emerged as two equally important segments for the industry. It is then time to recognise these segments as such and look at DDT as the much required incentive, both for the industry and for the investor.

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