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Mar 01, 2013, 05.53 PM IST | Source: CNBC-TV18

Budget Analysis: Why Budget 2013 was a mixed bag for small investors

In an interview to CNBC-TV18 personal finance expert, Hemant Rustagi of Wiseinvest Advisors shared insights on what the Budget have for average investor on the street.

In an interview to CNBC-TV18, personal finance expert, Hemant Rustagi of Wiseinvest Advisors shared insights on what the Budget offered for an average investor on the street.

"Union Budget 2013 is definitely a mix bag for small investors. However, the major negative for small investor is the dividend distribution tax, which has been hiked for the debt fund," he said in an interview to CNBC-TV18.

Below is the verbatim transcript of Rustagi's interview with CNBC-TV18.

Q: For a small investor, what are the positives and negatives from the Budget speech but one particular negative, which is in a dividend distribution tax (DDT) on debt funds for individuals, has been hiked to 25 percent. Tell us about this and how much of a negative would be for an average investor like you and me?

A: Union Budget 2013 is definitely a mix bag for small investors. However, the major negative for small investor is the dividend distribution tax, which has been hiked for the debt fund.

Let me just clarify here, the debt funds are those funds where equity exposure is less than 65 percent. There again there are two categories of debt funds one is the liquid fund where the dividend distribution tax was already 25 percent. I am talking about individual and hindu undivided family (HUF).

Now, for the non-liquid funds also the dividend distribution tax has been hiked to 25 percent. Over and above there is an education cess and also there is a surcharge, which also has been hiked from 5 percent to 10 percent.

This is a major blow for the mutual fund industry and also for the small investor and the reason being that we are talking about non-liquid funds here. So, these ultra short-term funds, which are primarily used by individuals for parking their short-term funds, typically what happens here is that one get higher returns compared to the savings bank account and also the returns are more tax efficient.

With this hike in the dividend distribution tax that tax arbitrage has definitely gone especially for the higher income tax payers. For the investors who are in the 10 percent and 20 percent what they need to do is now go for growth option so that they pay less than what they will be paying in the dividend distribution tax.

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Another category of fund, which is likely to be impacted, is monthly income plan. These funds are very popular especially for those who want regular income. What has happened is whether one is a tax payer or not a tax payer or 10 percent or 20 percent, the moment one opt for a dividend distribution or a monthly dividend or a quarterly dividend one end up paying almost 28-29 percent as a dividend distribution tax.

So, this is a major negative for retail investor in the times where we are expecting them to move away from the traditional options to market link products so that they can fight inflation. This is a major negative. However, let me also clarify here, it does not impact all those investors who want to invest for the longer term because there the long-term capital gain is still going to be taxed at 10 percent.

As far as the positives are concerned there are few positives there for small investors. To begin with for housing loan up to Rs 25 lakh the interest paid on the housing loan up to Rs 2.5 lakh as against Rs 1.5 currently will be exempt from income tax. However, also let me clarify here that this is applicable only if the cost of the house does not exceed Rs 40 lakh. So, I don’t think it is going to benefit much for investors in places like Mumbai. Second is, it is only for those housing loan which are sanctioned after April 01. It is not applicable to the existing borrowers.

In addition to that the scope for Rajiv Gandhi equity scheme has been expanded. So, all those investors who have an income up to Rs 12 lakh can now invest in this and another major change is that earlier it was going to be one time exemption and now they can claim exemption for three successive years.

Caller Q: The investor has Rs 1,000 to invest and would like to know which mutual fund he can buy?

A: It will depend on what is the time horizon. I would say that if his intent is to invest for a longer term for a goal like creating corpus for children education or retirement then he can go for a well diversified equity fund. In that case he can look at DSP BlackRock Top 100 Fund.

If it is a medium-term maybe five to seven years he can look at a balance fund there he can look at HDFC Prudence Fund.

If it is for a short period say around three years or thereabout he can look at either at debt fund or a debt oriented hybrid fund like Reliance MIP. There of course he should go for a growth option as I just mentioned that DDT tax has been hiked so may not be really useful for him. So, this is how he needs to decide where the money has to be invested.

Q SEBI Regulations for Mutual Funds was formulated in:

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