The mutual fund industry had emerged as the major beneficiary of the Union Budget 1999-2000 with major sops given to the industry. The budget proposed that for the next three years dividends distributed by mutual funds particularly of the open-ended equity schemes (with equity component more than 50 per cent of the corpus) would be tax-free in the hands of the investors.

Moreover, the equity funds and US-64 will not pay 10 per cent withholding tax for the next three years. In other schemes, which distribute dividends, no tax will be paid by the recipients, but a withholding tax of 10 per cent will be paid by themutual funds and UTI. "The mutual fund industry was really looking forward to the future with expectation of a revival of the industry after a gap of a number of years. Now, with the fall of the government the industry is going to be a major loser from being the major beneficiary of the budget", said the managing director of a private sector mutual fund.

The finance minister had given a very strong package to the mutual fund industry with a number of measures. This was by way of exempting the dividends distributed by equity funds of mutual funds (with equity component more than 50 per cent) being exempt from tax in the hands of the investor. These sops accounted for a substantial saving of more than or around 30 per cent for the individual in the highest income tax bracket.

The exemption also implied that looking at the healthy net asset values the funds declared dividend to all the unitholders and adjust that to the NAV.This way unitholders would have got a continuous flow of funds as well as stayinvested into the scheme. "This package had come at a time when the mutual fund industry was really hanging in tethers and needed a booster dose very badly", he added. The finance minter had heard the industry and given it all that it desired.

But, now with the fate of the Finance Bill in abeyance and doubts on whether it will be passed in the present form holds on firm ground. The new government might not pass the Budget in the same form. So, for sometime to come no matter what government comes in the vote-on-account budget would not get passed.

This would certainly spoil the sentiment of the investors towards the mutual funds as in the absence of any tax breaks the investors would look at the mutual funds as any other form of investment. "With the inflow of funds into the mutual fund industry substantially reducing the money chasing in the stock market through the institutional route will also reduce.