In case of debt funds and closed ended equity funds, though the dividends will not be taxable at the hands of unit-holders, the funds would have to pay dividend tax. These appear to be sound measures as any fiscal encouragement to equity funds can normally be expected to revive investor interest.

However, the minister's belief that these fiscal measures will bring the small investors back to equity market may be misplaced. This is because a large number of such investors do not fall under the tax bracket.

Even if they do, they already have a shield in section 80L of the Income Tax Act which exempts them from paying taxes on dividends earned from mutual funds up to Rs 10,000 per year (Rs 13,000 in case of UTI dividends). Besides, theaverage small investor is risk-averse and even if exempting him from paying taxes on all dividend earned from mutual funds did make a difference, they would prefer to invest in debt funds. Especially since interest rates on small savings and PPF are still high.

It is the corporates that stand to benefit most from the sops for mutual funds. Even they can be expected to prefer investing in debt funds rather than open ended equity funds unless a quid-pro-quo is involved. This could be an equivalent investment by the mutual fund in the investing company's interest-bearing debt offering. So all that may ultimately happen as a result of finance minister's initiatives for mutual funds is a shift in corporate investment portfolio.