"As of now, it is only a proposal. Let us wait and see until the finance bill is actually passed," said Anurag Madan, director (marketing and operations) of Sun F&C Asset Management. The annual budget for 2000-01 contained the proposal for hiking tax rate on dividends from the current 10 per cent to 20 per cent, at the mutual fund level.

It is understood that the mutual fund sector under the aegis of the Association of Mutual Funds of India (Amfi) will be making a representation to the government to this effect. Mutual funds, coming out with debt schemes, will encourage investors to go in for the growth option, rather than income option, thus hitting at retired citizens, who depend to a considerable extent on such incomes.

Mutual funds are also apprehending a fall in collections due to this - as this will make monthly fixed income deposits of banks much more attractive, especially with the abolition of tax on bank interest rates.

As has been already widely reported, the debt complexion of income schemes could become diluted putting more pressure in the equities market, fuelled by a rush for equities, as debt funds get transformed into balanced funds, if not outright equity oriented schemes.

There could be an interesting fallout of this - mutual funds in India have been relatively small players in the stock markets, barring Unit Trust of India, which has the capability of single-handedly turning the market through its purchases in sales.

Even the boom phase in the sector witnessed last year, since when mutual funds have become aggressive buyers and sellers in the market, has failed to put them in the role of market movers through trading volumes.

But now, due to this step by the government, if funds move away from debt oriented schemes to balanced and equity oriented schemes, the demand for equities will rise. More schemes will be chasing the same pool of scrips - the result could be an unnecessary rise in the prices of shares totally out of sync with their real valuations.