December 2013

Investors can take advantage of Investing in Double Indexation FMP’s

Double INdexation Tax benefits, Fixed Maturity Plans, FMP's, Inflation adjusted Bonds

Fixed Maturity Plans are closed ended funds and are available as NFO’s. They are open for very short periods of time (generally 4 – 5 days). FMP’s are ideal tax saving vehicles and suited for investors in the highest tax brackets, who are conservative, looking to park lump sum funds for about 1-2 years, in return for a Fixed Income similar to FD’s.  There is no TDS deduction in FMP’s , which is an obvious drawback in FD’s as the TDS deducted in FD’s does not earn any interest. Thus Longer duration FD’s suffer in terms of returns.

Please note that the drawback of investing in FMP’s is illiquidity, hence only surplus funds should be parked which will not be required to meet any financial goals during the said timeframe.

Double Indexation FMP’s are round the corner which offer tremendous tax advantage vis-a-vis FD’s . Smart Investors take advantage of investing in FMP’s which offer the safety of capital similar to FD’s and also the tax advantages.

What is double indexation and how does it work? Here is a simple example.

Investors can claim double indexation benefit if the holding period is over three financial years. Consider the case of a 500-day FMP, which starts on 20 Dec 2013 and matures on 04 May 2015. Since it is spread over three financial years-2013-14 (investing year), 2014-15 (holding year) and 2015-16 (redemption year)-the indexation will be for two years . In this case, in all probability, one can report a long-term capital loss (instead of gain) and it can be set off against other long-term capital gains reducing the tax liability further.

Leading Asset Management Companies (AMC’s)  like HDFC , ICICI , Birla Sun Life, Kotak, Reliance etc. typically come up with Double indexation FMP’s starting December of every year through March. You can find the open NFO’s at the AMFI Website : NFO’s

Investors having surplus funds which can be locked away for 1.5 yrs should plan on investing in FMP’s

The advantage of investing in FMP’s over FD’s in terms of returns is a no brainer. Current 1 year FD returns are at around 9% and so the post tax returns (for the highest tax bracket) is pathetically around 6%

Here is an ET article dated Dec 20 2013 which talks about the benefits of investing in FMPs : Long term FMP a good bet

The tax advantages of investing in FMP’s is mentioned in detail here (What-are-fixed-maturity-plans-fmps-advantages-disadvantages) and I will not elaborate on that further.

Happy Investing and tax savings this season.

September 2013

Guidelines – Mutual Fund investments in the name of a minor

Guidelines ,Mutual Fund investments,in the name of a minor, KYC requirements for investing in India, HDFC , ICICIOne can invest in a mutual fund scheme on behalf of a minor. In fact, many funds have plans exclusively targeted at investments for minors. Here are the details.

What are the guidelines regarding investments in the name of a minor?

The minor should be the first and the sole holder in an account. That is, there cannot be a joint holder along with a minor. Joint holder details are not considered

The date of birth of the minor would have to be provided in the application form along with a photocopy of supporting documents such as birth certificate/passport/school leaving certificate.

The guardian in the folio on behalf of the minor should either be a natural guardian (i.e. father or mother) or a court appointed legal guardian and this must be mentioned in the space provided in the application form.

Appropriate documentary evidence would have to be provided in case the guardian is a court-appointed guardian.

Details of documents to be provided are available along with the application form/Key Information Memorandum.

In case the documents and details as mentioned above are not provided, the application will not be processed.

What is the procedure to change the status when a minor becomes a major?

When the units are held on behalf of a minor, the ownership of the units rests with the minor. (more…)

June 2013

Increase in Dividend Distribution Tax from June 01 2013 in Debt Mutual Funds – Impact

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In the FY14 Budget the Finance Minister has proposed to increase the Dividend Distribution Tax (DDT) on Debt Mutual Funds (other than liquid and money market funds on which the DDT was already 25%) from 12.5% to 25% (plus surcharge and cess) for individuals and HUFs. The hike is proposed to provide uniform taxation for all types of funds other than equity oriented mutual funds in the Mutual Fund Industry.
This amendment will take effect from 1st June, 2013.

Classification of Funds: As far as tax implications on Indian mutual funds are concerned, they are classified as three parts as ‘Equity oriented Funds’, ‘Liquid and money market Funds’ and ‘Debt Funds other than Liquid Funds’.

In ‘Equity Oriented Funds’, the categories coming under are Equity Diversified, Equity Sector, Hybrid – Equity Oriented (more than 65% equity) and Arbitrage Funds.

Liquid Funds and Liquid ETF are coming under ‘Liquid Funds’ while Ultra Short Term Funds, Floating Rate Funds, Short Term Income, Dynamic Income, Income Funds, Gilt Funds, Fund of Funds, Hybrid – Debt Oriented (less than 65% equity), MIP, FMPs are coming under ‘Debt Funds other than Liquid Funds’.,

Summary of Changes proposed :

Classification of Debt funds , Short term taxation , dividend distribution tax DDT, Effective yield


Tax on distributed income:Given the tax provision on the distributed income, fund houses pay taxes on the dividend distributed to the investors. Fund houses deduct DDT from the Dividend. So the dividends are tax free in the hands of investors.
Existing tax structure on DDT:As per the existing structure, there is no tax levied on the dividend distributed by Equity oriented mutual fund schemes for any investors. But, Liquid and money market Funds are liable to pay the DDT of 25% (plus surcharge and cess) for retail investors while the funds other than Liquid and money market funds are liable to pay DDT of 12.5% (plus surcharge and cess).

For institutions and corporates, DDT on Equity funds is nil while 30% (plus surcharge and cess) in case of the dividends from the investments in Liquid Funds and debt funds other than Liquid funds.

Proposed Structure: From June 01, 2013 onwards, retail investors who invest in all debt funds (other than equity funds) are liable to pay DDT of 25% (plus surcharge and cess) on the dividend income. The DDT for corporate investors has been kept unchanged at 30% (plus surcharge and cess).
Increase in Surcharge: Further, the surcharge on Dividend Distribution Tax for all mutual fund schemes has gone up from 5% to 10%.
Impact: This move will make dividend options in Debt Mutual Funds unattractive for retail investors. Because the net post tax return in the hands of the investors from dividend plans would be lower as the DDT charged on the debt funds has been increased from 12.5% to 25% (plus surcharge and cess). Meanwhile, the Growth options in the Debt Mutual Funds will become attractive for retail investors who redeem the investments after a year, taking advantage of long term capital gains.

Capital Gain: Since the DDT is applicable for Dividend plans, Capital Gains tax is applicable to Growth plans. The gains from the debt mutual scheme (growth option) are taxed depending on the period the investments in the mutual funds are kept. If the debt mutual fund units are redeemed after a year, then the gains thereon are liable to Long Term Capital Gain tax while the proceeds from the investments which redeemed before one year are taxed as Short Term Capital Gain. For long term capital gains in debt funds, the investor has to pay the tax @ lesser of 10% without indexation or 20% with indexation; (plus education cess). Short Term Capital Gain is taxed as per the normal slab of the investors. (more…)

May 2013

February 2013

Time to take double indexation benefit ~ From Now until March 2013

 

Double Indexation Benefit, Save Taxes, Invest in FMP's, Fixed Maturity Plans NFO'sIt is that time of the year when you have a window of opportunity to intelligently invest for just over 1 year and get tax free returns.

The opportunity arises every year from mid-feb until financial year ending i.e March 31

You need to invest in Fixed Maturity Plans (FMP’s) of more than 14 months and which matures in April 2014. By doing this, your investment in a debt product spans over three financial years. And thus enables you to take advantage of double indexation on long term capital gains (which is taxed @20.6% post indexation) .

With inflation running at almost 8 %, the returns virtually becomes tax free. And is ideal for investors in highest tax brackets (30%). (Cost Inflation Index Table)

Fixed Maturity Plans are closed ended funds and are available as NFO’s. They are open for very short periods of time (generally 4 – 5 days). These funds are available from leading Asset Management Companies (AMC’s)  like HDFC , ICICI , Birla Sun Life, Kotak, Reliance etc. You can find the open NFO’s at the AMFI Website : NFO’s

The estimated current yields on these FMP’s should be in the range of 9.5 %.

FMP’s are ideal tax saving vehicles and suited for investors in the highest tax brackets, who are conservative, looking to park lump sum funds for about 1-2 years, in return for a Fixed Income similar to FD’s.  Please note that the drawback of investing in FMP’s is illiquidity.

The advantage of investing over FD’s in terms of returns is a no brainer. Current 1 year FD returns are at around 8.5% and so the post tax returns (for the highest tax bracket) is pathetically around 5.8%

The tax advantages of investing in FMP’s is mentioned in detail here (What-are-fixed-maturity-plans-fmps-advantages-disadvantages) and I will not elaborate on that further.

Happy Investing and tax savings this season.

January 2013

Top ELSS mutual funds for investing in 2013

Top ELSS funds for investing 2013, Mutual Funds, Tax Saver Mutual Funds, HDFC Tax Saver, ICICI Pru Tax saver

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The following ELSS mutual funds can be considered by investors this tax season. Well, actually the best mechanism for investing is to do a SIP throughout the year.

However, incase you are planning on investing in the last few months until 31st March 2013, you can consider the following top performing ELSS funds. And also, if possible continue to SIP for the rest of the year as well for the next financial year.

I have provided the performance measures alongside which will help you make a informed decision.

The article on “How do you compare and evaluate Mutual Fund Performance” might be helpful in case you would like to know more about evaluating mutual funds.

Reliance Tax Saver
Scheme 1 yr 3yr 5yr
Reliance Tax Saver 25.45% 9.34% 8.44%
Inception 22-Sep-05
AUM (31-Dec 2012) 2105 crs
Fund Mgr Ashwani Kumar
Beta 0.98
Std Deviation 19.72%
R squared 89.95
Sharpe Ratio 0.31
Portfolio Turnover 60.80%
Expense 1.90%
Benchmark BSE 100
ICICI Pru Tax Plan
Scheme 1 yr 3yr 5yr
ICICI Pru Tax Plan 24.27% 9.19% 8.51%
Inception 19-Aug-99
AUM (31-Dec 2012) 1468 crs
Fund Mgr Chintan Haria
Beta 0.92
Std Deviation 17.58%
R squared 95.84
Sharpe Ratio 0.26
Portfolio Turnover 148%
Expenses 1.99%
Benchmark S&P CNX 500
Franklin India Tax Shield
Scheme 1 yr 3yr 5yr
Franklin India Tax Shield 22.83% 11.40% 8.37%
Inception 10-Apr-99
AUM (31-Dec 2012) 942 crs
Fund Mgr A Radhakrishnan
Beta 0.79
Std Deviation 15.26%
R squared 95.36
Sharpe Ratio 0.36
Portfolio Turnover 53.60%
Expense Ratio 2.10%
Benchmark S&P CNX 500
Canara Robeco Tax Saver
Scheme 1 yr 3yr 5yr
Canara Robeco Tax Saver 21.82% 6.92% 8.89%
Inception 31-Mar-93
AUM (31-Dec 2012) 456 crs
Fund Mgr Krishna Sanghvi
Beta 0.82
Std Deviation 17.07%
R squared 83.09
Sharpe Ratio 0.15
Portfolio Turnover 45.20%
Expense Ratio 2.33%
Benchmark BSE 100
HDFC Taxsaver
Scheme 1 yr 3yr 5yr
HDFC Taxsaver 17.40% 7.72% 7.17%
Inception 31-Mar-96
AUM (31-Dec 2012) 3448 crs
Fund Mgr Vinay Kulkarni
Beta 0.83
Std Deviation 16.11%
R squared 93.39
Sharpe Ratio 0.17
Portfolio Turnover 25.20%
Expense Ratio 1.85%
Benchmark S&P CNX 500

 ** The Volatility / risk performance measures are of 3 years. Happy Investing.

Understand the Risks in Debt Mutual Funds

risks in debt mutual funds, credit risk, interest rate risk, reinvestment risk, yield curve, YTM, yield to maturity

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Debt funds carry indexation benefits and hence are more tax efficient than FD’s. Many financial planners recommend debt funds as a replacement for FD’s. However the debt funds do carry certain risks.

And it makes sense to be aware of those risks.

Investments in debt funds are subject to various risks like credit risk, interest rate risks, liquidity risks, market risks, reinvestment risks etc. Let us look at what these risks mean and how understanding these risks can make you a better investor.

1. Credit Risk : This refers to the risk that the issuer of a fixed income security may default (which means that, he will be unable to make timely principal and interest rate payments on the security)

2. Interest rate risks : This risk results from the change in demand and supply of money and other macroeconomic factors and creates price changes in the value of debt instruments. Hence, the NAV of the scheme may change due to the fluctuations. Prices of long term securities generally fluctuate more in response to interest rate changes than do short term securities. Thus, this risk may expose the schemes to capital erosion.

3. Liquidity Risk : This refers to the ease with which the security can be sold at or near to it’s valuation yield-to-maturity (YTM).

4. Market Risk : Market perception of interest rate sensitivity, general market liquidity, credit worthiness etc. may cause price volatility and hence lead to capital erosion.

5. Reinvestment Risk : This risk refers to the interest rate levels at which cash flows are received for the securities in the scheme is reinvested. The risk is that the rate at which the interim cash flows can be reinvested may be lower that that originally assumed.

So, how do fund managers try to mitigate these risk factors :

a. Interest rate risk : By keeping the maturities of the schemes in line with interest rate expectations. (Note the key here is expectations, so if the expectations go wrong, the strategy can mis fire).

b. Credit Risk or Default Risk : By investing in high investment grade fixed income securities rated by SEBI registered credit rating agencies. Eg: investing in AA/A rated securities carry a higher credit risk compared to AAA rated securities. Note, historically, though , the default rates for investment grade securities (BBB & above) has been less.

c. Reinvestment Risk : This is limited to the extent of coupons received on the debt instruments, which will typically be a very small portion of the portfolio

d. Market risks : The schemes may take positions in interest rate derivatives to hedge this risk.

Understand the risks, become aware and deal with these risks to make informed decisions towards building wealth.

You can read more about debt mutual funds here.

Top Debt Mutual Funds Performance as of Dec 2012

 Debt Mutual Funds Performance, Balanced Funds, Ultra Short Term, Monthly Income Plans, FMP's, Indexation , Tax Benefits

Here is the Top Balanced & Debt Mutual Fund Performers as of Dec 2012 

Balanced Fund
Scheme Inception Date Return 1 yr % Return 3 yr %
HDFC Children’s Gift Fund ~ Inv Plan Feb 09 2001 17.1 15.79
HDFC Balanced Aug 10 2000 16.83 13.44
ICICI Pru Balanced Oct 07 1999 21.8 12.16
Income Medium Term
Scheme Inception Date Return 1 yr % Return 3 yr %
SBI Dynamic Bond Jan 13 2004 11.99 9.51
Escorts Income May 22 1998 12.16 9.09
Birla Sun Life Medium Term Mar 25 2009 11.1 8.64
Monthly Income Plans
Scheme Inception Date Return 1 yr % Return 3 yr %
Canara Robeco MIP Apr 01 2001 11.54 8.44
SBI Magnum MIP Floater Nov 30 2005 10.66 8.19
Reliance MIP Dec 29 2003 15.52 8.09
Debt Floating Rate
Scheme Inception Date Return 6 mths % Return 1 yr %
FT India Life Stage FOF 50s + Floating Rate Jul 02 2004 6.39 11.14
HDFC Floating Rate Income LT Jan 08 2003 5.33 10.88
L&T Floating Rate Oct 27 2010 5.58 10.67
Debt Ultra Short Term
Scheme Inception Date Return 6 mths % Return 1 yr %
Birla Sun Life ST Opportunities Jun 27 2008 5.77 11.13
HDFC Floating Rate Income LT Jan 08 2003 5.33 10.88
Escorts Short Term Debt Dec 28 2005 5.66 10.73
Debt Income  Short Term
Scheme Inception Date Return 6 mths % Return 1 yr %
UTI Income Short Term Income Builder Jun 24 2003 5.45 10.55
SBI Short term Debt Jul 27 2007 5.52 10.52
IDFC SSI Short Term – Plan D Sep 02 2005 5.34 10.42
Debt Liquid Money Markets
Scheme Inception Date Return 1 mths % Return 3 months %
Escorts Liquid Sep 29 2005 0.81 2.46
Tata Liquidity Management Mar 01 2006 0.71 2.35
Principal Retail Money Manager Dec 27 2007 0.73 2.23

Many investors are ignorant of the advantages of investing debt funds investment avenue as an asset class. They prefer to keep funds in FD’s and other traditional debt instruments like PPF/KVP’s/NSC/Post Office etc ~ primarily due to lack of knowledge. You can know more about this debt funds here.

 

Top Equity Mutual Fund Performance based on 3 years returns

Equity Mutual Funds Performance, ELSS, Large Cap, Mid Cap, Small Cap, Index Mutual Funds, Best Mutual Funds

Here are the Top Mutual Fund Performers based on 3 years returns in the Equity Segment. The Equity asset class has outperformed every other class in the year 2012.

                                             Equity Large Cap

Scheme Inception Date Return 1 yr % Return 3 yr %
ICICI Pru Focused Equity Retail May 07 2008 22.08 11.73
Franklin India Bluechip Nov 30 1993 19.25 9.45
BNP Paribas Equity Sep 03 2004 24.04 9.16

Equity Multi Cap

Scheme Inception Date Return 1 yr % Return 3 yr %
ING Dividend Yield Oct 06 2005 18.09 11.71
BNP Paribas Dividend Yield Aug 30 2005 24.32 11.55
L&T India Special Situation Apr 26 2006 28.87 10.62

Equity Large & Mid Cap

Scheme Inception Date Return 1 yr % Return 3 yr %
Quantum Long term Equity Feb 25 2006 23.69 11.78
UTI Opportunities Jul 20 2005 23.2 11.78
Canara Robeco Equity Diversified Sep 12 2003 24.7 11.51

Equity Mid & Small Cap

Scheme Inception Date Return 1 yr % Return 3 yr %
SBI Magnum Emerging Businesses Sep 17 2004 38.68 24.6
Reliance Equity Opportunities Mar 07 2005 34.07 17.32
Canara Robeco Equity Opportunities Feb 24 2005 33.92 17.21

Equity Sectoral

Scheme Inception Date Return 1 yr % Return 3 yr %
SBI Magnum FMCG Jul 03 1999 53.33 36.11
ICICI Pru FMCG Mar 30 1999 43.05 27.87
Reliance Pharma Mat 26 2004 28.88 20.87

Equity Tax Planning (ELSS)

Scheme Inception Date Return 1 yr % Return 3 yr %
Canara Robeco Equity Tax Saver Mar 31 1993 24.43 12.27
Reliance Tax Saver Aug 23 2005 31.83 12.23
Franklin India TaxShield Apr 10 1999 21.36 11.79

Equity Index

Scheme Inception Date Return 1 yr % Return 3 yr %
HDFC Index Sensex Plus Jul 10 2002 21.45 7.67
Quantum Index Jun 20 2008 22.54 6.45
LIC Nomura MF Index Nifty Nov 28 2002 21.32 6.02

Hope this will help is choosing the mutual funds. Of course, before investing, ensure to check the various Fund management charges involved and other risk performance measures. Read further to understand how do you compare and evaluate MF performance measures.

December 2012

Investment in Mutual Funds & KYC Compliancy requirements

Investment in Mutual Funds ,KYC Compliancy requirements, KYC Change Detail Form, SEBI, in house person verification.

Securities and Exchange Board of India (SEBI) has prescribed the requirements, for the implementation of Uniform Know Your Customer (KYC) process across all intermediaries registered with SEBI.
Pursuant to the above, the existing / new investors of Mutual Funds are required
to take note of the following:

1. Investment by Investors who are KYC Compliant through KRAs (KYC Registration Agency) on or after January 1, 2012 :
No action is required by such investors and they may invest in any Mutual Funds. However,
Non-individual entities like Corporate, Partnership Firm, Trust etc are required to submit their Balance Sheet for every Financial Year on an ongoing basis within a reasonable period to KYC Registration Agency (KRA).

2. Investment in existing folios by Investors who are CVL MF KYC Compliant prior to January 1, 2012:
In case of the existing investors who are CVL MF KYC Compliant through the erstwhile
centralized KYC registration agency i.e. CDSL Ventures Ltd. (CVLMF), there will be no effect
on their subsequent transactions (including Systematic Investment Plan) in their existing folios/ accounts. However, the KYC status of such investors will continue to reflect as “MF – VERIFIED BY CVLMF” in the CVL – KRA system.

3. Investment by new Investor who is CVL MF KYC Compliant:
In case a new investor who is CVL MF KYC Compliant wishes to invest as a sole investor or he wishes to invest jointly with another existing investor/s who is/are also CVL MF KYC Compliant, then such investor/s will have to submit the “KYC Details Change Form” along with the investment application and complete the IPV process.

4. Investment by Non-KYC Compliant Investors (Individual or Non-Individual):

Non-KYC compliant investor/s desirous of investment, are required to submit the duly filled
in KYC Application Form along with necessary documents for completion of KYC certification through KYC Registration Agencies (KRAs) and complete the “In-person Verification (IPV)” at the time of making any investment. 

5. Requirements from CVLMF KYC Compliant investors (i.e. KYC compliant prior to January 1, 2012):

I. Individual Investors:
In case, the individual investor is KYC compliant prior to January 1, 2012, the investor will
have to submit ‘KYC Details Change Form’ with respective applicable documents, (if any)
mentioned therein to update their ‘Missing/Not Available’ details besides completing the IPV process as a one time exercise. After due verification by the respective KRA e.g. M/s CVL, the KYC status will get changed from “MF – VERIFIED BY CVLMF” to “Verified by CVL KRA”.
In case of individuals, ‘missing/not available details’ are as under :
a. Father’s/Spouse Name
b. Marital Status
c. Nationality
d. Gross Annual Income or Net worth as on recent date.
e. In-person Verification (IPV)
II. Non – Individual investors:
In case of all Non – individual investors who are KYC compliant prior to January 1, 2012,
KYC process with IPV needs to be done afresh due to significant and major changes in KYC
requirements.
In case of opening of a new folio with any Mutual Fund, the individual & non-individual investors will have to comply with the respective procedures mentioned above. The above procedure is also applicable for Guardian (in case of Minor) / Power of Attorney
holder as well.

The necessary forms are available on our post – here

Simply visit Central Depository Service (India) Ltd website  , Click on the ‘KYC Inquiry’ and type in your PAN number, in order to check your KYC Status.

All the investors are requested to note that the aforesaid formalities which is mandatory from December 1, 2012 for investing with any Mutual Fund.

 

Taxation (2012-2013) on Mutual Fund Schemes ~ Snapshot

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The Tax Maze never ceases to amaze. There are various options available to investors in equity, debt etc. And each type of investment is taxed differently according to the residential status, period of holding, type of investment & tax bracket.

Here is a snapshot of the taxation (2012-2013) on Mutual Fund Schemes in India. This if of help in understanding the tax implications and judiciously allocating funds across assets.

Dividend
Resident Individual/HUF Domestic Corporates NRI**
Equity Oriented Schemes Tax Free Tax Free Tax Free
Other than Equity Oriented Schemes Tax Free Tax Free Tax Free

 

Dividend Distribution Tax (Payable by the Scheme)
Resident Individual/HUF Domestic Corporates NRI**
Equity Oriented Schemes* Nil Nil Nil
Other than Equity Oriented Schemes 12.5%+ 5% Surcharge+ 3% Cess 30%+ 5% Surcharge+ 3% Cess 12.5%+ 5% Surcharge+ 3% Cess
13.519% 32.445% 13.519%
Money Market & Liquid Schemes 25%+ 5% Surcharge+ 3% Cess 30%+ 5% Surcharge+ 3% Cess 25%+ 5% Surcharge+ 3% Cess
27.0375% 32.445% 27.0375%

 

Long Term Capital Gains (Units held for more than 12 months)
Resident Individual/HUF Domestic Corporates NRI**
Equity Oriented Schemes* Nil Nil Nil
Other than Equity Oriented Schemes 12.5%+ 5% Surcharge+ 3% Cess 30%+ 5% Surcharge+ 3% Cess 12.5%+ 5% Surcharge+ 3% Cess
13.519% 32.445% 13.519%
Money Market & Liquid Schemes 25%+ 5% Surcharge+ 3% Cess 30%+ 5% Surcharge+ 3% Cess 25%+ 5% Surcharge+ 3% Cess
27.0375% 32.445% 27.0375%

 

Short Term Capital Gains (Units held for 12 months or less)
Resident Individual/HUF Domestic Corporates NRI**
Equity Oriented Schemes* 15% + 3% Cess 15% +5% Surcharge # + 3% Cess 15% + 3% Cess
15.45% 16.223% 15.45%
Other than Equity Oriented Schemes 30%^ + 3% Cess 30% +5% Surcharge # + 3% Cess 30%^ + 3% Cess
30.9% 32.445% 30.9%

^Assuming the investor falls into the highest tax bracket
# The total income of the corporate would exceed Rs. 1 Crore

Tax deducted at source pertaining to NRI Investors$
Short Term Capital Gain Long Term Capital Gain
Equity Oriented Schemes 15.450% ## Nil
Other than Equity Oriented schemes (Listed) 30.90% 20.60%@
Other than Equity Oriented schemes (Unlisted) 30.90% 10.30%

*STT @ 0.25% will be deducted on equity oriented schemes at the time of redemption and switch to the other schemes.
Mutual Fund would also pay securities transaction tax wherever applicable on the securities bought/sold
** The tax rates are subject to DTAA benefits available to NRI’s. As per the Finance Act, 2012, submission of tax residency certificate containing prescribed particulars, will be a necessary (though not sufficient) condition for granting DTAA benefits to non-residents
*** These are the tax rates applicable to capital gains, in case the rate of tax is lower than 20% and if the NRI does not have a Permanent Account Number, then for the purpose of TDS, the withholding tax rate would be 20%
## Subject to NRI’s having Permanent Account Number in India
$ As per the Finance Act 2012, with effect from July 1, 2012, a list of transactions is proposed to be specified, wherein the rate for tax deduction at source needs to be determined by the assessing officer. In case the transaction of sale of mutual fund units by an NRI gets covered within such list, then an application would be required to be made to the assessing officer to determine the tax deduction at source rate
$$ As per the Finance Act, 2012, in case of transfer of unlisted securities by non-resident, the tax rates in case of long term capital gains shall be 10% (plus surcharge and cess) without indexation
@ after providing for indexation

The information  is for general purposes only. Please consult your financial advisor before making any investment decisions.

November 2012

What are Fixed Maturity Plans (FMP’s) ~ Advantages & Disadvantages

.Fixed Maturity Plans (FMP's) ,Advantages , Disadvantages, Debt Mutual Funds, Indexation Benefits,

I Came across this note in Economic times about FMP’s and have reproduced it here. It gives a fair idea about FMP’s in general and the advantages/disadvantages of investing in them along with Indexation benefits. There are some obvious benefits of investing in FMP’s over FD’s in terms of post tax returns using the indexation benefits. Investing towards the end of March gives double indexation benefits as well.

A fixed maturity plan (FMP) is a closed-ended debt scheme, wherein the duration of debt papers is aligned with the tenure of the scheme. So a one-year FMP will invest in debt instruments that mature in one year or just before this period.

This synchronized maturing completely eliminates the interest rate or reinvestment risk.

The FMPs invest largely in certificates of deposit (CDs), commercial papers (CPs), money market instruments, corporate bonds, even in bank fixed deposits. Though the yield of these wholesale debt papers is slightly higher than that of the retail FD rates, FMPs charge fund management fees and, therefore, the final return for investors is more or less close to the retail FD rates.

Advantages

So why should one consider the FMPs?

While such plans offer several advantages, the tax benefits stand out. Irrespective of the holding period, FMPs generate better post-tax yield. The length of the holding period matters, especially when one has to decide between growth and dividend options. Investors can go for the growth option if the holding period is more than a year, and for the dividend option if the holding period is less than a year.

Mutual fund investors have the option of paying capital gains tax at 10.3% (without indexation) or at 20.6% (with indexation). Indexation helps offer compensation against the rising inflation and, in this case, one is allowed to increase the value of initial investment as per the cost inflation index provided by the Income Tax Department. On the assumption that the inflation is 6%, the capital gain after indexation works out to just 4%. Since the 20.6% capital gains tax is paid only on 4%, the effective is lesser, taking the post-tax yield up to 9.18%.

As per the current law, investors can claim double indexation benefit if the holding period is over three financial years. Consider the case of a 375-day FMP, which starts on 26 March 2012 and matures on 5 April 2013. Since it is spread over three financial years-2011-12 (investing year), 2012-13 (holding year) and 2013-14 (redemption year)-the indexation will be for two years (6%+6%). In this case, one can report a 2% long-term capital loss (instead of gain) and it can be set off against other long-term capital gains reducing the tax liability further. One can come across several FMPs with double indexation benefits in March.

Disadvantages

Though FMPs offer several advantages, investors should also be aware of the drawbacks. Unlike the bank FDs, where one can opt for premature withdrawal by paying a small penalty, the exit from a fixed maturity plan is very difficult. Though these units are listed on the stock exchanges, most counters are virtually illiquid. Even if random trade takes place, it is usually at a discount to the NAVs. So investors should put in only the money they don’t need till the maturity of FMPs.

Though the FMPs are relatively less risky, investors should not treat these as dream products that offer high return with zero risk. While the structure eliminates interest rate and reinvestment risk, the credit risk (or the default risk) still exists. Since the fund houses are not allowed to give ‘indicative portfolios’, there is no mechanism to make sure that the money will be invested only in high quality papers. While bank FDs come with deposit insurance (for a holding of up to Rs 1 lakh), a similar facility is not available for FMPs. So one should only opt for reputed fund houses. ~ Source ET

Read & become aware about Debt Funds & indexation Benefits.

October 2012

Cost of Inflation Index AY 2012-13 ~ Long term Capital Gains ~ Double Indexation

Double Indexation, FMP, Cost of Inflation Index AY 2012-13 ,To compute Long term Capital Gains Indexation, AY 2012-13, Tax Planning, Fixed Maturity Plans, Debt Funds Taxation, Real Estate Capital Gains
COST INFLATION INDEX TABLE – FINANCIAL YEAR 1981-82 ONWARDS:
Assessment Year (AY)
Financial Year (FY)
Cost Inflation Index (CII)
2014-15
2013-14
2013-14
2012-13
852
2012-13
2011-12
785
2011-12
2010-11
711
2010-11
2009-10
632
2009-10
2008-09
582
2008-09
2007-08
551
2007-08
2006-07
519
2006-07
2005-06
497
2005-06
2004-05
480
2004-05
2003-04
463
2003-04
2002-03
447
2002-03
2001-02
426
2001-02
2000-01
406
2000-01
1999-2000
389
1999-2000
1998-99
351
1998-99
1997-98
331
1997-98
1996-97
305
1996-97
1995-96
281
1995-96
1994-95
259
1994-95
1993-94
244
1993-94
1992-93
223
1992-93
1991-92
199
1991-92
1990-91
182
1990-91
1989-90
172
1989-90
1988-89
161
1988-89
1987-88
150
1987-88
1986-87
140
1986-87
1985-86
133
1985-86
1984-85
125
1984-85
1983-84
116
1983-84
1982-83
109
1982-83
1981-82
100

The cost of inflation index is useful for income-tax assesses in the computation of tax on long-term capital gains (for indexation purposes). In the previous two years, the cost inflation index rose 10 per cent and 12.5 per cent, respectively.

A cost inflation index helps reduce the inflationary gains, thereby reducing the long-term capital gains tax payout for the taxpayer. Currently, the income-tax law allows long-term capital gains to be computed after adjusting for inflation (Debt Mutual Funds, FMP’s, Real Estate Gains etc.) .

The cost of acquisition as well as the cost of improvement is adjusted for inflation between the date of purchase and date of sale (through the cost inflation index) before the long-term capital gain is ascertained. (~ The Hindu)

Assume, if the investor invested Rs 1,00,000 in the growth option on March 30, 2009 and redeemed the investment on April 2, 2010 for Rs 1,10,000 

The investment happened in financial year 2008-09, for which the government has declared cost inflation index of 582.

The investor redeemed the investment in financial year in 2010-11, for which the cost inflation index is 711.

The capital gains is Rs. 110,000 minus Rs. 100,000 i.e. Rs. 10,000.

The holding period is 367 days, which is more than 1 year. Therefore, it is a long term capital gain.

The maximum tax the investor has to bear is 10% (plus surcharge plus education cess) on the capital gain of Rs. 10,000. Thus, the maximum tax payable would be Rs. 1,000 (plus surcharge plus education cess).

Investor can benefit from indexation. The indexed cost of acquisition is Rs. 100,000 X 711 ÷ 582 i.e. Rs. 122,165. This is higher than the selling price of Rs. 110,000. Thus, the investor ends up with a long term capital loss of Rs. 12, 165. This can be set off against long term capital gains, as discussed in the next section.

Another point to note is that although the investor held the investment for slightly more than a year, the investor gets the benefit of indexation for two years viz. 2009-10 and 2010-11. Hence the name “double indexation” for such structures.

Mutual funds tend to come out with fixed maturity plans towards the end of every financial year to help them benefit from such double indexation. 

Largely investors are unaware about this benefit. This benefit can and should be taken by investing towards the end of a financial year, if the investor has surplus funds, because the capital gains virtually becomes tax free due to the double indexation benefit.

What are debt funds ~ Know more about this important asset class

What are debt funds , Yield spread, Interest rate risk, Credit risk, Asset allocation, Mutual funds, How to invest in debt funds, Liquid Funds, FMP, Short term debt, Long term debt, Corporate Bonds

 

Many investors are ignorant of the advantages of investing debt funds investment avenue as an asset class. They prefer to keep funds in FD’s and other traditional debt instruments like PPF/KVP’s/NSC/Post Office etc ~ primarily due to lack of knowledge.

This post will throw some light on the different kinds of debt funds and how they work.

Investment in a debt security,  entails a return in the form of interest (at a pre-specified frequency for a pre- specified period), and refund of a pre-specified amount at the end of the pre-specified period.

The pre-specified period is also called tenor. At the end of the tenor, the securities are said to mature. The process of repaying the amounts due on maturity is called redemption.

Debt securities that are to mature within a year are called money market securities.

The return that an investor earns or is likely to earn on a debt security is called its yield. The yield would be a combination of interest paid by the issuer and capital gain (if the proceeds on redemption are higher than the amount invested) or capital loss (if the proceeds on redemption are lower than the amount invested)

Debt securities may be issued by Central Government, State Governments, Banks, Financial Institutions, Public Sector Undertakings (PSU), Private Companies, Municipalities etc.

  • Securities issued by the Government are called Government Securities or G-Sec or Gilt.
  • Treasury Bills are short term debt instruments issued by the Reserve Bank of India on behalf of the Government of India.
  • Certificates of Deposit are issued by Banks (for 91 days to 1 year) or Financial Institutions (for 1 to 3 years)
  • Commercial Papers are short term securities (upto 1 year) issued by companies.
  • Bonds / Debentures are generally issued for tenors beyond a year. Governments and public sector companies tend to issue bonds, while private sector companies issue debentures.

    Since the government is unlikely to default on its obligations, Gilts are viewed as safe. The yield on Gilt is generally the lowest in the market. Since non-Government issuers can default, they tend to offer higher yields. The difference between the yield on Gilt and the yield on a non-Government Debt security is called its yield spread.

The possibility of a non-government issuer defaulting on a debt security i.e. its credit risk, is measured by Credit Rating companies like CRISIL, ICRA, CARE and Fitch. They assign different symbols to indicate the credit risk in a debt security. For instance ‘AAA’ is CRISIL’s indicator of highest safety in a debenture. Higher the credit risk, higher is likely to be the yield on the debt security.

The interest rate payable on a debt security may be specified as a fixed rate, say 6%. Alternatively, it may be a floating rate i.e. a rate linked to some other rate that may be prevailing in the market, say the rate that is applicable to Gilt. Interest rates on floating rate securities (also called floaters) are specified as a “Base + Spread”. For example, 5-year G-Sec + 2%. This means that the interest rate that is payable on the debt security would be 2% above whatever is the rate prevailing in the market for Government Securities of 5-year maturity.

The returns in a debt portfolio are largely driven by interest rates and yield spreads.

Interest Rates

Suppose an investor has invested in a debt security that yields a return of 8%. Subsequently, yields in the market for similar securities rise to 9%. It stands to reason that the security, which was bought at 8% yield, is no longer such an attractive investment.

It will therefore lose value. Conversely, if the yields in the market go down, the debt security will gain value. Thus, there is an inverse relationship between yields and value of such debt securities which offer a fixed rate of interest.

A security of longer maturity would fluctuate a lot more, as compared to short tenor securities. Debt analysts work with a related concept called modified duration to assess how much a debt security is likely to fluctuate in response to changes in interest rates.

In a floater, when yields in the market go up, the issuer pays higher interest; lower interest is paid, when yields in the market go down. Since the interest rate itself keeps adjusting in line with the market, these floating rate debt securities tend to hold their value, despite changes in yield in the debt market.

If the portfolio manager expects interest rates to rise, then the portfolio is switched towards a higher proportion of floating rate instruments; or fixed rate instruments of shorter tenor. On the other hand, if the expectation is that interest rates would fall, then the manager increases the exposure to longer term fixed rate debt securities.

The calls that a fund manager takes on likely interest rate scenario are therefore a key determinant of the returns in a debt fund – unlike equity, where the calls on sectors and stocks are important.

Yield Spreads

Suppose an investor has invested in the debt security of a company. Subsequently, its credit rating improves. The market will now be prepared to accept a lower yield spread. Correspondingly, the value of the debt security will increase in the market.

A debt portfolio manager explores opportunities to earn gains by anticipating changes in credit quality, and changes in yield spreads between different market benchmarks in the market place. (~ source:NISM)

Remember that Debt funds are more tax efficient that FD’s. You can read about taxation on Capital Gains on debt Mutual Funds here.

Be aware of this asset class and use it to judiciously optimize your asset allocation towards reaching your financial goals. 

This article – Guide to debt funds & article – Debt funds can prove beneficial from Economic times further articulates the tax advantages & other benefits of investing in debt funds. 

Measures of Risk ~ Equity & Debt

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Measures of Risk, Performance, Mutual Funds , Stocks, Standard Deviation, Variance, Beta, Modified duration, Credit Risk, Interest Rate Risk, Weighted Average Maturity  ,Yield Spread,

Investors generally focus on the returns of any asset. They largely ignore the risk factors and most importantly are ignorant of the measures of risk. 

And so, the real Risk comes from not knowing what they are doing ~ Warren Buffett

This post talks about the measures of risks in equities & debt. The awareness of the measures of risk is extremely helpful in designing a comprehensive financial plan, investing, asset allocation etc.

Fluctuation in returns is used as a measure of risk.

Therefore, to measure risk, generally the periodic returns (daily / weekly / fortnightly / monthly) are first worked out, and then their fluctuation is measured.

The fluctuation in returns can be assessed in relation to itself, or in relation to some other index. Accordingly, the following risk measures are commonly used.

Variance

Suppose there were two stocks, with monthly returns as follows: Stock 1: 5%, 4%, 5%, 6%. Average=5%  & Stock 2: 5%, -10%, +20%, 5% Average=5%

Although both stocks have the same average returns, the periodic (monthly) returns fluctuate a lot more for Stock 2. Variance measures the fluctuation in periodic returns of a asset, as compared to its own average return. This can be easily calculated in MS Excel using the following function:

=var(range of cells where the periodic returns are calculated)

Variance as a measure of risk is relevant for both debt and equity.

Standard Deviation

Like Variance, Standard Deviation too measures the fluctuation in periodic returns of a scheme in relation to its own average return. Mathematically, standard deviation is equal to the square root of variance.

This can be easily calculated in MS Excel using the following function: =stdev(range of cells where the periodic returns are calculated)

Standard deviation as a measure of risk is relevant for both debt and equity schemes.

Beta

Beta is based on the Capital Assets Pricing Model, which states that there are two kinds of risk in investing in equities – systematic risk and non-systematic risk.

Systematic risk is integral to investing in the market; it cannot be avoided. For example, risks arising out of inflation, interest rates, political risks etc.

Non-systematic risk is unique to a company; the non-systematic risk in an equity portfolio can be minimized by diversification across companies. For example, risk arising out of change in management, product obsolescence etc.

Since non-systematic risk can be diversified away, investors need to be compensated only for systematic risk. This is measured by its Beta.

Beta measures the fluctuation in periodic returns in a scheme, as compared to fluctuation in periodic returns of a diversified stock index over the same period.

The diversified stock index, by definition, has a Beta of 1. Companies or schemes, whose beta is more than 1, are seen as more risky than the market. Beta less than 1 is indicative of a company or scheme that is less risky than the market.

Beta as a measure of risk is relevant only for equity schemes.

Modified Duration

This measures the sensitivity of value of a debt security to changes in interest rates. Higher the modified duration, higher the interest sensitive risk in a debt portfolio.

The returns in a debt portfolio are largely driven by interest rates and yield spreads.

Interest Rates

Suppose an investor has invested in a debt security that yields a return of 8%. Subsequently, yields in the market for similar securities rise to 9%. It stands to reason that the security, which was bought at 8% yield, is no longer such an attractive investment.

It will therefore lose value. Conversely, if the yields in the market go down, the debt security will gain value. Thus, there is an inverse relationship between yields and value of such debt securities which offer a fixed rate of interest.

A security of longer maturity would fluctuate a lot more, as compared to short tenor securities. Debt analysts work with a related concept called modified duration to assess how much a debt security is likely to fluctuate in response to changes in interest rates.

In a floater, when yields in the market go up, the issuer pays higher interest; lower interest is paid, when yields in the market go down. Since the interest rate itself keeps adjusting in line with the market, these floating rate debt securities tend to hold their value, despite changes in yield in the debt market.

If the portfolio manager expects interest rates to rise, then the portfolio is switched towards a higher proportion of floating rate instruments; or fixed rate instruments of shorter tenor. On the other hand, if the expectation is that interest rates would fall, then the manager increases the exposure to longer term fixed rate debt securities.

The calls that a fund manager takes on likely interest rate scenario are therefore a key determinant of the returns in a debt fund – unlike equity, where the calls on sectors and stocks are important.

Yield Spreads

Suppose an investor has invested in the debt security of a company. Subsequently, its credit rating improves. The market will now be prepared to accept a lower yield spread. Correspondingly, the value of the debt security will increase in the market.

A debt portfolio manager explores opportunities to earn gains by anticipating changes in credit quality, and changes in yield spreads between different market benchmarks in the market place.

Weighted Average Maturity

While modified duration captures interest sensitivity of a security better, it can be reasoned that longer the maturity of a debt security, higher would be its interest rate sensitivity. Extending the logic, weighted average maturity of debt securities in a scheme’s portfolio is indicative of the interest rate sensitivity of a scheme.

Being simpler to comprehend, weighted average maturity is widely used, especially in discussions with lay investors. However, a professional debt fund manager would rely on modified duration as a better measure of interest rate sensitivity. 

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