The Indian government recently announced several tax proposals aimed at encouraging investment in mutual funds.

The country's finance minister proposed late last month continuing for three years an exemption from dividend taxes on all mutual funds that invest over 50 percent of their holdings in equities. There is also a proposal to cut the capital gains tax rate from 20 to 10 percent. The Indian Parliament is expected to vote on both proposals within six weeks.

Sources at several U.S. fund companies that offer mutual funds for Indian investors said the tax incentives could mean greater interest in a mutual fund industry that has been struggling recently.

Alliance Capital Management has three funds available to Indian investors, with total assets under management of about $75 million in U.S. dollars, said Duff Ferguson, a spokesperson for the company.

"It's a sign that the mutual fund industry is continuing to grow and be helped by the government," Ferguson said of the tax incentives. "We are indeed hopeful this change will result in more interest in investing, and investing in mutual funds in particular."

The Alliance 95 Fund is a balanced fund of $22 million in assets that qualifies for the exemption from dividend taxes, said Ferguson. It has earned 19 percent this year. Alliance Capital Manager, a money market fund, has about $4 million in assets. The firm's largest offering in India is the Alliance Liquid Income Fund, a fixed-income fund, with assets of $40 million. Since the proposals were made, Alliance has seen the inflows into its funds quadruple, said Ferguson.

Ferguson said it was unclear whether the proposed tax changes would lead to the introduction of new funds in India. The Indian mutual fund industry "has not been a raging success as of yet," he said. But, Alliance is pretty happy with the products it has now, he said.

Vijay Advani, managing director of three Indian-based funds for Franklin Templeton, said the tax breaks could be good for the industry.

His funds, which have a total of about $65 million in assets under management, are Templeton India Growth Fund, which invests in equities, Templeton India Income Fund, which invests in debt instruments, and Templeton India Liquid Fund, a money market fund.

"We hope that the Indian public will use the mutual fund path for their savings," Advani said. "Savings in India are high at around 24-26 percent. However, it is invested directly into the debt and equity market. Many investors have lost as they have invested based on tips.' This should give a push to the mutual fund industry."

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