AMFI guidelines on… Third-party cheques

Mutual fund purchases thus far could be made with cheques from one’s own bank, third party cheques, DDs or Banker’s Pay Order. AMFI recently issued new guidelines for mutual fund investments made through third-party cheques. With effect from November 15, mutual fund investments made through third-party cheques will not be processed. We discuss the new rule and answer investor queries.

What is a third-party cheque?

A cheque issued by and signed by any other person other than the first holder of the investment is a third-party cheque. When a payment is made from a bank account that is not held by the beneficiary investor, that is, the first Holder or the sole Holder, it is referred to as a “Third Party Payment”.

I wish to invest in my minor child’s name. He doesn’t have a Bank account. Can I issue my cheque for such an investment? Are there any exceptions to this rule?

There are exceptions to the rule, as mentioned below:

Parents: Payment may be made by parents/grandparents/related persons on behalf of a minor for a value not exceeding Rs 50,000 (each regular purchase or per SIP instalment)

Employers: Payment may be made by employers on behalf of employees under Systematic Investment Plans through payroll deductions.

Custodians: Payments made by custodians on behalf of FIIs or clients.

Such applications should be accompanied by PAN and KYC Acknowledgement of the person or entity making the payment on behalf of the investor and a declaration mentioning the relationship with the first holder.

These declarations are expected to be part of the application forms issued by mutual funds. Investors may contact the mutual funds for necessary guidance.

Can I provide a cheque leaf through another bank account which belongs to me, but different from the one mentioned in the Bank Mandate column of the application?

Yes. Investors may provide a cheque from a bank account different from the one mentioned in the bank mandate column which belongs to them. However, the investor’s name should be printed on the cheque leaf. If the cheque leaf does not have the name printed, investors should submit a copy of the bank statement, attested by the bank manager as evidence of holding the account.

What if the Bank Account from which payment is made is jointly held?

In this case, the Beneficiary Investor, that is the first / sole holder must be one of the joint account. holders

Can I make the payment through a demand draft / pay order / banker’s cheque?

Such applications will be accepted if the instrument is accompanied with a certificate from the issuing banker stating the account holder’s name and the account number which has been debited for issue of the instrument. The account holder’s name mentioned in the certificate should be that of the first holder. If the said certificate from the issuing banker is not attached, the application will not be processed.

Source: http://www.thehindubusinessline.com/iw/2010/12/19/stories/2010121951660800.htm

 

The importance of retirement plan

P.V. Subramanyam’s maiden book on retirement is not about understanding how the financial market functions or how to time the market. Instead, it deals with the most unexplored issue of retirement planning. Clearly, the book seems to have hit the right chord as it is a bestseller having sold over 45,000 copies.

A trainer, columnist, blogger and now an author Subramanyam spends a few moments with Cafemutual to talk about retirement planning and how IFAs could incorporate this theme as groundwork for advising clients. Edited excerpts….

How did you get the idea of writing this book on Retirement Planning?

I was surprised to find many US based books on retirement planning, but nothing in the Indian context, hence the plunge. I was asked by my friends in Moneycontrol to write the way I speak. Around 70 per cent of the book was already written and stored electronically. So I just had to collate it.

Given the total absence of social security in India, is the vast majority aware of the importance of retirement planning?

Talking about Indians is wrong because there is a huge section of the population that leads a hand-to-mouth existence. But the educated and the upper middle class have earned more than what they would have expected, thanks to the booming economy. But most of their money is parked here and there. They never sat down to plan their retirement. In our culture, we are conditioned to think of life with our children forever, accepting the joint family, and pretending that everything is fine. It suits the government because people invest their money in products that offer around 8 per cent returns. There is no public debate happening on retirement planning.

While the rich and upper middle class are earning and saving enough for retirement, are the middle and lower middle classes prepared?

No. Many of them are not prepared but they will not accept it because they are happy with the feeling that they have much more wealth than their father. They are content saying ‘My father had only Rs 20 lakh while I already have Rs 75 lakh. How much more will I need?’

What are the risks for the people who are ‘under-prepared for retirement’?
Life expectancy has gone up compared to what it was in earlier days. So people live longer and are dependent on children. Medical expenses have gone through the roof. So, not being able to buy adequate medical cover and not having enough money to pay for medical expenses are a cause of concern. Children not having enough money to look after the parents can put the entire family in a tight spot.

What about the people in the unorganised and self-employed categories?

I do not really deal with this category and hence, not the right person to comment. It is very rare that such people can understand a NAV based product. The most important requirement is financial inclusion and financial education before they can be asked to do a long term SIP.

What are the key challenges according to you in retirement planning?

There are four key challenges. First is managing your money. People who claim that they can manage their money actually may muck it up. Second is asset allocation. Too much money is in debt and too little in equity, if there is something at all. The third challenge is rising life expectancy. There is a possibility that a person will outlive his or her savings. And the fourth challenge arises from the absence of long term care insurance in India. This could result in increase in medical expenses.

In helping their clients prepare for retirement, should advisors look at the so-called retirement products (Pension plans by life insurance companies, mutual funds)?

They should look at normal investment products and depending on the age of the customer, park a chunk of the money into equity plans. If a person is retiring in 2-3 years, there is an inherent risk in the aggressive portfolio. They should not consider pension plans from life insurance companies. The plans from mutual fund are slightly better. But the charge structure of the insurance plans offered by mutual funds might hurt.

What investment products in your opinion are best suited for retirement planning?

For any goal which is more than 10 years away, it is equity, equity and always equity. For a lesser duration goal, one can have a mix of equity and debt.

How can IFAs grow their business by helping clients save for retirement?

Almost all clients will want to save for their retirement. Younger clients should be asked to start with smaller amounts in SIPs and as they grow older, increase savings through SIPs in more number of funds. Even for older clients, the shift out of equity should happen only at an age of say 70 years! For the advisor, long term SIPs and long term SWPs will ensure a great trail commission and good leads.

Are IFAs using retirement planning as a theme to talk about retirement and investment products?

IFAs don’t have a product to sell other than the Templeton India Pension Plan which has a withdrawal lock-in. Even IFAs who are doing big ticket SIPs are not much focused. I don’t think earmarking for a goal based investment is happening.

As in the US, retirement planning is nowhere close to becoming a big business in India?

The growth in the mutual fund industry in the US happened because of 401k plus schemes (retirement schemes). There is no such plan in India. No mutual fund company in India ever went to the ministry of finance to demand a product which is 80C deductible and a pension plan. The only two firms who did it were Kothari Pioneer and UTI. There is no choice of how to get your money back in pension products of insurance companies. They decide how much money you will get back and you have to buy an annuity. I got an annuity of five per cent from an insurance company. Now that’s miniscule when I can get nine per cent return on a bond issued by leading banks! Buying a good equity fund from a mutual fund company is better than buying a pension plan from an insurance company.

What room do you think could be there for products that are sold as retirement solutions by mutual funds? How good are products offered by mutual funds which rebalance the portfolio after you reach a certain age?

I don’t know whether the market has the ability to sell such a product. There are very few people selling Templeton’s Pension Plan. The distribution system is still chasing AUM. Not many people are happy to doing an auto pilot mode for 20 years. People think that they can time the market in spite of empirical evidence to the contrary.

National Pension Scheme – how suitable is it?

It’s too complicated as of now. I am not sure about the fund management expertise. The rates are too fine but I guess it will surely change. If that is not done then good fund managers will not be willing to come in. I am willing to talk about it only after I see its performance for 4-5 years. Also I am not very sure how the annuity will be priced.

Your next book?

It is telling doctors about money – Wealth Prescription for Doctors.

Source: http://www.cafemutual.com/News/InnerNews.aspx?srno=29&MainType=Ana&NewsType=Interviews&id=43

 

Why the liquidity crunch?

Liquidity in the banking system has dried up over the past few months. But what does one mean by ‘tight liquidity’?

It means that banks are borrowing for their daily requirements from the RBI. It is widely believed that the outflow of Rs 1 lakh crore from the banking system on account of 3G and BWA spectrum payments by corporates to the Government is the primary reason for the continuing liquidity deficit in the system.

But, the Government on its part had already spent a major part of this money by the first week of September. So the money has been ploughed back in to the system, and cannot be the only reason for continuing tightening of liquidity in the system.

According to us, the liquidity crunch is driven strongly by three major factors that are beyond the central bank’s ability to address.

Negative real interest rates: The current high inflationary environment is resulting in a change in the consumption and savings pattern of the Indian population. . Thus, a large part of the income is concentrated now more on consumption (or you can say fulfilling current expenses) rather than saving.

This structural shift is expected to lead to a drop in the savings rate in the coming few years due to higher inflation.

Also, within his savings, his financial savings (ideally in the form of bank deposits) is fetching him negative real returns. This is the single most important reason for the current liquidity crunch.

Inflation continues to rule in double digits while the Bank FD rates remain closer to 7-8 per cent. This, in turn, leads to lower deposit mobilisation in the banking system.

Thus, the not-so attractive investment returns coupled with the higher cost of living is leading to the common man holding more cash.

Currency with Public: Between March and September 2009, there was an addition of Rs 56,708 crore in the currency with the public whereas for the same period this year, it doubled to Rs 1,01,905 crore. This surge in cash-in-hand for the common man has contributed to the liquidity deficit in the system. People are spending more as cost of living goes up sharply and more money is being put in hands of rural households. NREGA and higher Minimum Support Prices (MSPs) for crops are also ensuring that more money is pushed into the rural areas, which are under-banked, and more and more money is moving away from banks.

Rising Gold Demand: The other big reason for tight liquidity is soaring demand for gold and silver.

Indians, in first nine months of this year, have bought gold worth more than one lakh crore rupees and most of this purchase is funded by savings. According to figures in Gold Demand Trends’ released by the World Gold Council (WGC), in value terms, India’s gold demand grew to Rs. 113,302 crore from Rs.53,196 crore, an increase of 113 per cent. The total demand for gold is expected to touch 700-800 tonnes this year.

Much of this demand is coming on the back of the shift among consumers from financial savings to real savings. Thus, real assets such as gold, real estate, etc., are attracting investor allocation over bank FDs. Going forward, we expect deposit rates to move up by another 100 bps.

With credit growth rates remaining high, banks may raise the deposit rates further; so don’t be surprised if your banker calls you up and offers you 9.5 per cent or even 10 per cent for a 1.5-2 year deposit by next quarter.

What does this all mean for a fixed income investor? Does the above explanation on tight liquidity provide for clues for forthcoming investment decisions? Debt products with characteristics similar to bank deposits may offer attractive returns. Fixed Maturity Plans are a good investment avenue for investors wanting take advantage of rising short-term interest rates. Also, investors should look at adding exposure to gold.

Source: http://www.thehindubusinessline.com/iw/2010/12/12/stories/2010121250270800.htm

 

Don’t just do tax-saving, start tax-planning

It’s that time of the year when you should begin your tax-planning exercise. Towards this end, this week’s article reiterates our annual tax-planning tips.

Most taxpayers tend to defer their tax-saving investments till March and then rush into putting their money into something with the sole objective of saving tax for the year.

As long as investing in the chosen instrument results in getting the tax deduction, their immediate purpose is solved. The instrument of choice is more often than not something recommended by a colleague or promoted heavily in the media.

And if you are senior management or a businessman, then you have already been anointed a high networth individual (HNI) and assigned a ‘relationship manager’ whose sole purpose in life is to force-feed you the latest flavours of the season. As a result, while you end up saving on tax, there isn’t any tax-planning.

Take for example Section 80C of the Income Tax Act, which is anyway the only meaningful deduction left. Under this section, as most of you would know, any investment up to Rs 1 lakh made in certain specified instruments can be reduced from your taxable income.

There is a long list of eligible investments including an employee’s provident fund contribution, tuition fees paid for children, principal portion of housing loan installments, investments made in Public Provident Fund (PPF), equity linked savings scheme (ELSS), National Savings Certificates (NSC), Senior Citizen Savings Scheme, Post Office term deposits, life insurance premiums paid, etc.

If you think about it, these are the very investments that one makes anyway and therefore are no different than one’s regular investments. All you need to ensure is that these are integrated into the larger picture in line with one’s risk profile and financial goals.

So how should an investor choose from amongst the various choices available? Here’s what you should do.

Using Sec 80C optimally
First take into account the mandatory payments such as provident fund, housing loan EMIs and tuition fees if applicable. Reduce the total amount spent from the Rs 1 lakh limit. Distribute the balance in a combination of ELSS and PPF.

If you are relatively young and just starting out, put 70% into ELSS and 30% into PPF. As you advance, lower the ELSS and increase the PPF, eventually reaching a 30% ELSS and 70% PPF combination.

Why PPF? Well, PPF is the best fixed income investment that you can make. An annual contribution of Rs 70,000 will get you around Rs 32 lakh in 20 years. Look at it as a fund for the education needs of your children. If your children don’t need it, get your spouse to invest too and you would have a retirement fund ready.

An ELSS is nothing but an equity mutual fund that offers a tax deduction. On account of the tax deduction, there is a lock-in of three years on the investment. This lock-in enables the fund manager to take long-term calls on the market, which is essential for any equity investment.

ELSS investments are the most preferable way to build long-term wealth. However, this investment comes along with the inherent risk of the stock market. Hence the suggestion that the proportion of ELSS in your total tax-saving investment should come down as age advances and the risk taking ability declines.

Recycling old investments
Take the case of one of my friends, Amit, who is into web design. Amit’s lament was that he had over Rs 5 lakh in receivables but customers in general were holding out for longer credit periods.

Since our income-tax laws tax income on accrual and not on receipt, this means he has to pay the tax on the Rs 5 lakh not yet received. He was having difficulty in arranging funds required to pay his employees for the month, so to keep anything aside for tax-saving was a long shot.

In such cases, one can use another tax-planning tool. We call it recycling. Amit can simply withdraw an earlier investment (say from ELSS or PPF) and redeposit the money, even in the very same instrument. He will get the tax deduction for no additional outlay —- in other words, his savings remain the same, but without investing a rupee, he can avail of the 31% tax-saving.

Last but not the least
As mentioned earlier, your tax-saving investments are no different than your regular investments. Consequently, the basic principles of investing remain the same for both sets of investments.

Therefore, next year, instead of waiting till the fag end, start by investing in tax-saving avenues in the very beginning of the financial year, even on the 1st of April. Doing so has a two fold advantage.

First, these investments would earn a return from the beginning of the financial year (April-March). Secondly, it obviates a situation where you may end up simply not having the lump sum required at one go for 100% tax-saving.

Realise that there is no compulsion to make tax-saving investments towards the end of the year. A more efficient strategy is to invest throughout the year in a staggered manner such that by the time the year comes to an end; full advantage of the tax-saving opportunity is taken. And don’t worry about how much or how little you save each month. As Benjamin Franklin has so succinctly put it, “A penny saved is a dollar earned!”

Source: http://www.dnaindia.com/money/column_don-t-just-do-tax-saving-start-tax-planning_1478185

 

Making MF transfers easy — Nominee for your funds

Registering a nomination facilitates easy transfer of funds to the nominee on the demise of the investor.

What is a Nomination?

An investor can nominate a person(s) called nominee(s) to whom his/her Mutual Fund Units will be transferred on his / her demise.

Mutual Fund units get transferred to the nominee registered in the folio on the demise of the Investor.

What are the benefits of registering a nomination?

Registering a nomination facilitates easy transfer of funds to the nominee(s) on the demise of the investor. In the absence of the nominee, a claimant would have to produce a host of documents like a Will, Legal Heir-ship Certificate, No-objection Certificate from other legal heirs etc. to get the units transferred. The process is simple if a nominee is registered in the folio.

How can an investor make a nomination?

Nomination can be registered at the time of purchasing the units. While filling in the application form, there is a provision to fill in the nomination details.

Alternatively, an investor may register a nomination later through a form which may be submitted with relevant particulars of the nominee.

The forms are available on the mutual fund websites.

Investors may also request the registrar and transfer agent to send a form.

Can an investor make multiple nominations?

Yes! An investor may make up to three nominations and even specify the percentage of the amounts that will go to each nominee.

If the percentage is not specified, equal shares will go to the nominees.

Can a minor be a nominee?

Yes! A minor can be a nominee. However the guardian will have to be specified in the nomination form.

Can a nomination be changed?

A nomination can be changed and even cancelled. The relevant form should be filled and submitted to the Registrar or Mutual Fund Office.

If an investor has different schemes in a folio, will all units of all schemes be transferred to the nominee?

A nomination is at folio level and all units in the folio will be transferred to the nominee(s).

If an investor makes a further investment in the same folio, the nomination is applicable to the new units also.

Who can nominate and who is eligible to be a nominee?

Nominations can be made only by individuals applying for / holding units on their own behalf, singly or jointly.

Non-individuals, including societies, trusts, body corporates, partnership firms, the karta of an HUF, and the holder of a power of attorney (POA) cannot nominate.

Nomination can be in favour of individuals, including minors, the Central Government, State Government, a local authority, any person designated by virtue of his office or a religious or charitable trust.

A non-resident Indian can be a nominee, subject to the exchange control regulations in force from time to time.

Source: http://www.thehindubusinessline.com/iw/2010/10/10/stories/2010101051320800.htm

 

Get asset allocation right for better returns

Building a corpus good enough to meet your long-term financial goals is a meticulous process that involves selecting the best from the lot and investing in them on a consistent basis. But you wouldn’t be able to get there if you don’t get your asset allocation right.

Often investors place their bets on seasonal frontrunners only to see them lose steam in a subsequent cycle. Since a plethora of options including equity mutual funds (MFs), ETFs and an entire universe of debt funds are available, investors have to get the mix right not only to maximise returns but also to protect their savings from sudden downturns.

The thumb rule is that the proportion of investments in equities should be 100 minus your age. This is because as you age your risk profile changes. You have to be more conservative with your investments with advancing age. Aggressive investors should have at least 75% of their corpus in equities and those with moderately aggressive outlook must have about 60% in equities, say financial advisers. “Fixed income (returns) is not even matching inflation and real returns (actual minus inflation) are still negative,” says Suresh Sadagopan, certified financial planner, Ladder7 Financial Advisories.

And most persons who come for financial planning understand that they have to invest a large portion of their savings in equity-related instruments to meet their financial goals, he says. “Aspirations have grown now. You can’t meet those aspirations from traditional options such as the post office deposits,” says Sadagopan.

Asset allocation should be arrived at after checking the financial health of the investor, risk profile, time horizon for investments and expected returns. “If the person has liabilities such as a housing loan it would not be possible to create an aggressive portfolio,” says Rupesh Nagda, head, investments and products, Alchemy Capital Management, a wealth management firm. An aggressive portfolio with about 70% of the investments in equities would be able to generate 15-20% returns over the long term, say experts. Even a moderately aggressive portfolio with only 50-60% in equities can bring 12-15% returns, they say.

“A post tax return of 10% would be decent enough for conservative investors above 45 years of age,” Nagda says. Debt should occupy a major part of the portfolio with advancing age. And persons above 45 years of age should slowly start moving money from equities to debt. While aggressive investors can keep their exposure to debt related instruments at 25-30%, conservative investors and persons nearing retirement should have 70% of their surplus in the debt category.

Source: http://timesofindia.indiatimes.com/business/india-business/Get-asset-allocation-right-for-better-returns/articleshow/6588165.cms

 

Decoding Direct Tax Code

Income and Wealth Tax Rates

Increase in tax exemption on income from Rs 1.6 lakh to Rs 2 lakh, with no separate benefit for women.

Income from Rs 2-5 lakh to be taxed at 10 percent; Rs 5-10 lakh at 20 percent and 30 percent thereafter. Currently, income from Rs 1.6-5 lakh attracts 10 percent tax; from Rs 5-8 lakh, 20 percent and beyond Rs 8 lakh, 30 percent.

Tax exemption limit for senior citizens above 65 years to be marginally raised to 2.5 lakh per annum from Rs 2.4 lakh at present.

The changes will save up to Rs 41,040 for those earning more than Rs 10 lakh a year.

Corporate tax to be a flat 30 %. MAT has been increased from 18 percent to 20 percent of book profit of a company. Dividend Distribution Tax will be at 15 percent.

Exemption limit for imposing Wealth Tax raised to Rs 1 crore from current Rs 15 lakh. Wealth tax to be imposed at the rate of 1 percent, except on non-profit organisations which are exempt.

Tax Audit Limits

Tax Audit Limits raised from existing Rs 15 lakh for professionals to Rs 25 lakh, and from Rs 60 lakh for income from business to Rs 1 crore.

Exemptions

Exemption of interest up to Rs 1.5 lakh on housing loan retained. Deduction to be considered only on the interest component and not the principal amount.

EEE (exempt-exempt-exempt) mode of taxation for insurance and pension funds also maintained. Exemption on pension, Provident Fund and Gratuity Funds to be at Rs 1 lakh, while Rs 50,000 exemption provided on pure insurance, including health cover, and tuition fee payment.

LTA

Tax incentives on leave travel allowance to be scrapped.

For Investors

Existing provision of zero tax on long term capital gains to continue. Short-term capital gains tax for annual income up to Rs 10 lakh rationalized to benefit investors in the lower income bracket. Small investors with incomes between Rs 2 lakh and and 5 lakh to pay only 5 percent capital gains tax, less than one-third of the current 17 percent (15 percent + cess). Investors in income bracket of Rs 5 lakh and 10 lakh will pay 10 percent capital gains tax. Big investors having income over Rs 10 lakh to pay short-term capital gains tax at 15 percent.

Investment in equity-linked Mutual Fund schemes and ULIPs to attract 5 percent tax on the dividend paid by these entities. At present, there is no DDT applicable to equity fund schemes or insurers on income distribution to unit or policy holders.

Implication of DTC

While senior citizens benefit marginally, women would no longer be given a special status by the government for a higher exemption. Middle Class will continue to find purchasing a house a lucrative option, as exemptions on interests on home loans will continue. It will also give realtors some relief who are just emerging from a depressed patch.

As for the outcome of personal exemptions, there will be a marginal rise in savings as exemptions have been increased for investment in approved funds and insurance schemes to Rs 1.5 lakh in a year from Rs 1.2 lakh currently.

Raising the limit for imposition for Wealth Tax to Rs 1 crore is likely to improve compliance, which is currently very low. But the Rs 1 crore limit is markedly low compared to the proposed limit of Rs 50 crore, which was originally proposed. The adverse impact of the new provision comes from the fact that Wealth Tax would now include companies in its ambit. So far, they were out of the net.

Small and medium investors will gain substantially by way of saving on taxes on short term gains. DTC is also expected to boost investment flow into capital markets, as the government proposes to retain a zero long-term capital gain tax.

While corporates will get slight reprieve via reduction in Corporate Tax from current 33.22 percent (for incomes more than Rs 1 crore), increased MAT will counter the gain for industry.

Moreover, Special Economic Zones (SEZs), which are notified on or before March 31, 2012, will get income tax benefits, as per the proposed Direct Taxes Code (DTC) bill.

The Bill also proposes profit-linked deductions under the I-Tax Act to SEZ units commencing operations by March 31, 2014. This may have an adverse impact as there is no sunset clause at the moment, but improve commitment levels of players already in the fray.

Asked about overall implications of the DTC, tax expert and analyst R N Lakhotia told Zeebiz.com that one should not over worry about tax implications as the government has evened out losses and gains. That is, a hike in one place would be offset at another, as no government would want to be unpopular with the electorate. So the process is a mere rationalization.

Lakhotia advised that diversification of portfolio using personal discretion could be a good strategy. For example, insurance policies should be treated separately from ULIPs, whose dividend will not invite tax. A policy should be bought more with an idea of an insurance cover than anything else. A Unit, on the other hand, should be picked depending on the returns it is likely to fetch.

Besides Lakhotia asked tax payers to take a broader view of things, “The word ‘income’ comes before ‘tax’. The idea should be income and wealth creation. Tax is a secondary thing.”

We must try and maximize our incomes first using sensible investment policies. When there will be more and more money in your pocket, a person wouldn’t mind shelling out some of it as tax, he said.

As for the government, DTC will result in an estimated revenue loss of Rs 53,172 crore in 2012-13 as gross tax collection from direct taxes will come down from an estimated Rs 5.80 lakh crore to Rs 5.27 lakh crore.

Because there will be firmness and transparency in the tax structure, all in all, we will no longer wait for Union Budget with such baited breath as the personal income tax announcements will no longer be a part of the Finance Bill and thus the FM’s speech.

The tax rates have been reduced to some extent with the hope of widening the base, but the changes seem fairly cosmetic when considered in comparison with the proposals which were considered in the original draft of the DTC. The powers of the tax authorities under the General Anti-Avoidance Rules (GAAR) also remain the same.

Why DTC

As part of its financial reforms process, the government wanted to modernise and upgrade its direct tax laws i.e. the Income Tax Act and the Wealth Tax and bring them more in line with current times. DTC is expected to widen tax base, give moderate relief to tax payers, reduce unnecessary exemptions, and improve compliance thus improving collections.

It also seeks to address new realities like operations of foreign companies in Indian markets, foreign institutional investors and cross-border M&As.

For example, capital gains tax would be imposed on acquisitions made overseas if the acquired company holds over 50 percent assets in Indian company. This would affect companies like Vodafone Group for its acquisition of a 67 percent stake in Hutchison Essar from Hong Kong`s Hutchison Telecommunications International Ltd.

The government has also clarified that foreign companies, which were regarded as ‘resident of India’ if their control and management were wholly situated in India, will now be considered ‘resident’ if the “place of effective management” is in India.

DTC replaces the archaic Income Tax Act, 1961 and Wealth Tax Act, 1957. It will come into effect from April 01, 2012. First return of income under its norms will be filed after March 31, 2013.

Source: http://biz.zeenews.com/interviews/story.aspx?newsid=124

 

Pick the one that suits your needs

Selecting the right mutual fund scheme among a plethora of schemes available in the market is the most daunting task for mutual fund investors’ at all times. Selecting the right scheme based on your appetite is like finding a needle in a hay-stack. Every individual is different from the other when it comes to investment goal, risk tolerance, investment horizon, return expectations and entry-exit load, among other things. There is no ‘one size fits all’ strategy, thus investors’ portfolio should be in sync with their very own personal parameters.

Investment Goal
Know your investment goals. Do you want to preserve capital or to grow it? Is it to earn a certain income or to provide a certain cash flow at the end of a period? The answers to such questions will determine your investment goals in life. Your goals should be in line with your responsibilities in life. For example, a person looking to accumulate funds for retirement or a child’s education may want to invest in a mutual fund whose objective focuses on long-term stock price appreciations instead of dividend payments. On the other hand, someone who’s recently retired may wish to invest in a fund that provides additional income with little risk of loss to principal, such as a conservative stock fund that distributes dividends monthly or quarterly. Still another investor may want to use mutual funds to improve the return on his or her risk-free savings account at a bank. The investment should do at least as well as the overall stock market; therefore, a mutual fund that tracks the overall performance of a benchmark market index might be the most appropriate choice.

Asset Allocation

The groundwork of any portfolio construction is asset allocation. Studies show that over 90 per cent of returns generated by an investor depend on how the savings are allocated across different asset classes. Asset allocation also determines the broad risk level of a portfolio, which should be in accordance with the risk profile of the investor. Risk appetite of an investor depends on various factors like age, income level, etc. While making asset allocation decisions, investors should also keep the concept of diversification in mind. Diversification across asset classes and geographies is a wise idea.

Analyse the performance

A key attribute to mutual fund investing is analyzing the performance of a scheme. However, while evaluating a mutual fund scheme, attention should be given to the consistency of the performance. Investors should select schemes which have performed well over good and even bad markets. Only a long term perspective will help us understand how the fund has fared in unfavorable market scenarios.

Risk-adjusted returns

Returns should always be benchmarked against the risk undertaken by the scheme. A certain scheme could have superlative performance but would have undertaken huge risk to deliver those returns. A good mutual fund not only maximizes returns but also minimizes the risk.

Fund management team

Like an efficient sailor who can take his ship through turbulent weather and come out safe, a large part of a fund’s performance is dependent on the investment management team of the fund house. The ideal sailor whom you can trust with your money is the one who has weathered many a boom-bust market cycles and still have delivered consistent returns. Since the global investing window is now open for every investor, a globally experienced team would then add value to your global investments.

Load and fund expenses

Investors should also get a clear picture of all the funds expenses, including the applicable exit load and annual fund expenses as they also impact fund returns. Since Aug’09, investments in mutual funds no longer attract any entry fee. This now allows investors to decide how much to pay their advisor for his advice.

Typically, mutual funds costs comprise recurring annual expenses and transaction fees each time one buys or sells MF units. The expense ratio of a fund encompasses the myriad costs levied by the asset management company on a yearly basis. This is charged irrespective of fund performance. The basket of costs includes: management & advisory fee, selling and promotion fee, custodial fee, registrar fee, audit fee, etc… The expense ratio varies across different funds. However, SEBI has capped the charges at 2.5 per cent for equity funds and 2.25 per cent for debt funds. This cost gradually goes down as the corpus of the fund rises above a certain level. Equity funds charge2.5 per cent on the first Rs 100 crore of the average weekly net assets collected. This is then reduced to 2.25 per cent for the next Rs 300 crore, 2 per cent on the subsequent Rs 300 crore corpus; it finally comes down to 1.75 per cent for the balance assets. There are some expenses which are not accounted for in a fund’s return and are referred to as ‘loads’. These are deducted at source while buying or selling the units in the fund. SEBI has now abolished the front-end load. So funds can now only charge an ‘exit’ load.

Types of Funds

Mutual funds invest in different asset classes including equity, debt and alternate (gold, real estate, etc…). Investors seeking high return, who do not mind taking risk, should look at equity as an investment vehicle. Short-term investors, who may want to keep money liquid, need some sort of regular income or keep their capital protected, should look at mutual funds that invest in debt products. Investors seeking to diversify their portfolios and guard against inflation buy some gold or real estate through a fund. And then, there are those who want a fund to take care of multiple needs, should look at hybrid products.

Conclusion

In the current market uncertain times, more than ever, asset allocation will deliver better risk reward outcome than trying to time the market. Second, dynamic asset allocation may be preferred over static asset allocation. And lastly, discipline in investing will be more valuable than emotional or ad-hoc investment decisions. Above all, staying away from investing could turn out to be more harmful than investing; hence, invest, if you have a longer term view.

Source: http://www.indianexpress.com/news/pick-the-one-that-suits-your-needs/657759/0

 

Secure your retirement- NPS

Pension regulations have been long awaited for the Indian populace. With the setting up of the PFRDA (Pension Fund Regulatory and Development Authority) and the New Pension Scheme, this has now become a reality. The major aim that NPS seeks to achieve is to bring people from the unorganised sector into the pension fold. Pension space in India has been dominated by employer-sponsored plans with contribution from the employee to a certain extent. In addition to the superannuation plans offered by employers, mutual funds and insurance companies also offer voluntary pension schemes. With the NPS, the government is able to offer flexible, growth-oriented scheme that has the potential to generate by far the best returns compared with the products that are available in the market today. The NPS the most effective tool to accumulate wealth for the life post retirement.

Why do you need NPS?

The conventional retirement options like the Employee Provident Fund (EPF) and the EPS (Employee Pension Scheme) give fixed returns but do not offer sufficient flexibility to the employees during their working and post-retirement years. In these schemes, the neither the subscriber nor the employee can choose how his or her money is invested. Also, the amount collected through all schemes administered by the Employees’ Provident Fund Organisation including the two mentioned above may not be adequate for individuals’ future. The major change that the NPS brings in is the shift from a defined benefit to a defined contribution regime for the government employees.

Structure

The unique option that the NPS gives to subscribers is a selection of fund managers with whom they wish to entrust their funds’ management. Thus, this flexibility and a competitive environment would push the PFMs (pension fund managers) to work for better returns. The scheme currently has six pension fund managers:

*ICICI Prudential Pension Funds Management Company

*IDFC Pension Fund Management Company

*Kotak Mahindra Pension Fund

*Reliance Capital Pension Fund

*SBI Pension Funds Private

*UTI Retirement Solutions

Subscription types

To apply for the voluntary pension scheme, there are two types of accounts:

Non-Withdraw-able account: The tier 1 account is the basic NPS account that is non-withdrawable till retirement or in the case of death of the subscriber. In this type of account, the total corpus at the retirement age is split, whereby a minimum of 40 per cent of the final corpus has to be compulsorily used to buy an annuity while the subscriber is free to withdraw the remaining 60 per cent as a lump sum or in installments.

Withdraw-able Account: A tier 2 account is available to only those who are existing subscribers of the tier 1 account. The unique selling point of the tier 2 account is that money contributed into this account can be freely withdrawn as and when the subscriber wishes except for a minimum balance that needs to be maintained at the end of each financial year.

Investment options

In NPS, there are two types of fund management options available and the contributions can be invested in various ways. The investment decision should be guided by two factors -risk appetite and ability to actively manage money. This makes NPS flexible for the subscribers whereby they can customise returns.

Auto choice - lifecycle fund. Under this option, contributions made by the subscriber are pooled into a lifecycle fund and then invested as per pre-defined asset allocations that change over the life cycle of the subscriber. Up to 35 years of age of the investor, 50 per cent of the assets will be invested in equity index funds and the rest will be in debt instruments. As the person gets older, investment in equities will taper off by a certain percentage every year and get diverted to debt instruments. By the time the investor turns 55, his assets in equity instruments will be contained to 10 per cent and a major chunk (around 80 per cent) will be invested in government securities.

Active choice. Under this facility, investors have the right to choose the investment pattern as well as the pension fund manager. Investors are also allowed to revise their choices once every year in May.

Asset allocation class options:

Asset Class E. Growth option under the NPS that invests in equity (index funds). The cap for equity investment is 50% of the investment corpus.

Asset Class C. Medium-risk option with investments in fixed-income instruments but not necessarily in government securities.

Asset Class G. Low-risk option whereby investments are made only in government securities.

NPS – The cheaper option

Our calculations show that an investment of Rs 1 lakh per annum over the next 30 years yields the maximum returns if invested in NPS when compared with a unit-linked pension plan or pension plan offered by a mutual fund company. This is considering that all three options give similar returns at the rate of 10 per cent per annum. For the sake of this projection, we have considered funds that would match the asset allocation pattern followed by the aggressive portfolio under NPS.

NPS has the lowest set of charges and therefore delivers the highest returns. The table (Your retirement kitty) shows how the progression of the invested amount happens over 30 years. From the initial period, wealth under the new pension scheme grows faster and owing to the low charges levied, the difference between NPS and other products is almost to the tune of Rs 50 lakh towards the end of the 30-year period. For retail investors looking to invest around Rs 1,000 or so monthly, NPS is clearly a better option because it comes with low charges and flexible fund management options. Due to higher charges levied in ulip-based pension plans during the initial years, the difference in the corpus at the end of the tenure is also substantial. In case of maximum allowable lump sum to a pensioner, the mutual fund pension plan would pay out less in comparison to insurance-based plans as they have the advantage of tax-free lump sum. The mutual fund pension plan is taxed at the rate of 20 per cent (without indexation) and 10 per cent (with indexation).

Taxation

NPS allows subscribers to grow their retirement corpus in the most cost effective way possible. However, NPS is taxed under the EET (Exempt-Exempt-Tax) regime. This means that the investment gets tax exemption and so do the returns on investment. However, all withdrawals are taxed under the applicable tax slabs and so is the annuity interest. Even under the current scenario, i.e. the EET regime, NPS competes on an even field with other instruments. With ULIP based schemes there is the advantage that the withdrawn lump sum is tax-free. Even taking into account this loss of money to tax, NPS returns are higher.

When the Direct Tax Code is introduced it would be interesting to see how it changes the game for the NPS. It could well make or break the market for NPS.

Challenges

The major challenge for the NPS remains its distribution. When the NPS was opened for the unorganised sector, it was expected to be profitable to its fund managers by cornering high volumes of subscribers. However, with not so many distributors and barely 4,000 odd subscribers, in the voluntary (non-government) sector, it has been a major disappointment.

The largest pie of investments in this space is cornered by unit-linked retirement plans offered by insurance companies. Comparing insurance based retirement solutions to NPS shows one major point where the NPS scores. The NPS is a savings and retirement security product and as such, it does not burn a hole in the pockets of the subscribers by the charges it levies. ULIP based pension schemes, on the other hand, are in between, they are inefficient routes for buying insurance and as investment. The investment corpus in ULIP based pension schemes takes a major hit especially in the early years with high charges of around 10 per cent in the first five years. There are and have been ULIP based plans with low charges but distributors have not actively promoted them because of lower commissions.

Conclusion

NPS is a safe and effective post-retirement tool. With its lowest charges, it also is the cheapest way to get an exposure to the market. For thousands and lakhs of employees in the unorganised sector, who have negligible or no postretirement social security benefits, NPS is a boon and greater awareness and marketing will not only increase NPS accounts but also make them available to this immense market, this new and yet ignored tool called the NPS.

Source: http://in.biz.yahoo.com/100524/50/bavngz.html

 

Gaining the Gilt Edge

Investors are surprised when gilt funds lose money, finds Ravi Samalad. But the difference between the top and bottom performers of gilt funds is huge

A few weeks ago, one of our readers wrote to us about the performance of a gilt fund he had invested in. He had invested Rs6 lakh in a long-term gilt fund at an average NAV (net asset value) of Rs20.39 in 2008. When he wrote to us, its NAV had fallen to Rs19.13—down 6%. The investor was surprised. How can one lose money in a gilt fund, he complained. If you think that the word ‘gilt’ is synonymous with ‘risk-free’ over all periods of time, it is not.

Gilt funds primarily invest in government securities (G-Secs) issued by the Reserve Bank of India. These funds also invest in corporate bonds, zero-coupon bonds and treasury bills, certificates of deposit, commercial paper and usance bills, as well as derivative instruments like exchange-traded interest rate futures and interest rate swaps. As you know, the NAV of any fund fluctuates on a daily basis just like share prices because the underlying asset—whether bonds or shares—fluctuate on a daily basis. The fact is: anything that is interest-bearing will go up and down with the market. The value of bonds of any kind is primarily influenced by the prevailing interest rates. If interest rates go down, the value of bonds goes up. The daily NAV of a gilt fund is calculated by valuing a variety of government bonds, which a fund has invested in, that are traded in the market. As interest rates change, the value of the securities in which the scheme has invested, fluctuates as well. This, in turn, will be reflected in the changing value of the fund and its NAV.

In the example we started with, the investor had entered the fund at a time when bond prices were high. When interest rates rose and bond prices fell, the NAV of the fund declined. There is nothing mysterious about a gilt fund declining 6% over two years. The same fund has posted decent returns of 7% since inception. In short, buying gilts does not save you from short-term risk of loss due to market fluctuations.

As TP Raman, managing director, Sundaram BNP Paribas Asset Management Company, explains: “The market risk of a debt instrument can be eliminated only in a situation where a security is held till its maturity. Since gilt funds are generally open-ended funds where investors are allowed to enter and exit at various points of time, the funds may be forced to honour the redemption commitment even if it involves booking losses. Further, as all securities are marked-to-market on a daily basis, the NAV of the fund at any point of time recognises the current fair/realisable value of all securities in the portfolio. This recognition leads to losses (principal erosion) or profits for different investors depending on their entry and exit, when analysed at short periods.”

When it comes to gilts, the usual route for an investor is mutual funds. Retail investors do not have access to government securities because these are dealt in large lots which only institutional players can afford to buy. But gilt funds can pool money from retail investors and buy government securities, offering an indirect route to retail investors. However, most investors invest in such funds without consulting a financial advisor and cry foul if the NAV falls.

When To Buy Gilts

“The right time to invest in a gilt fund is when interest rates in the economy are near their peak levels, inflation expectations are likely to go down, growth slowdown is seen in the months ahead and overcapacities get built up in the economy. An ideal time-frame should be two to four years, depending on the clues from broader indicators in the economy,” adds Mr Raman. The past one year has been a time of rising inflation and rising interest rates, leading to falling value of gilts and, therefore, the NAV of gilt funds.

The principal amount that you have invested may erode due to interest rate fluctuations and mark-to-market formula of securities valuation. Although there is no fixed timing for investing in gilt funds, financial advisors believe that one should ideally invest when interest rates are around 8%. Long-term securities react more in response to interest-rate changes than short-term securities.

Gilt funds are of two kinds—short term and long term. “There is no ideal time horizon for gilt funds; it is advisable to invest when interest rates are high but it is very difficult for a common investor to predict interest rates. The best way for an investor is to go for a short-term gilt fund, where the effect of interest rate changes will be nil, so the NAV will not give you nasty shocks,” says Bhavesh Gajiwala, a Surat-based independent financial advisor (IFA).

Of the 29 gilt funds available, 14 have recorded hugely varying compounded annual returns over five years. ICICI Prudential, JM G-Sec Regular Plan and Templeton India GSF have reported the highest returns of 9%. HSBC Gilt Fund and Taurus Gilt Fund have reported the worst performance of 2% and 1%, respectively, for the same period.

So, here again, you will have to time your buying and selling to avoid losing money in a supposedly loss-free product like gilt funds.

No Sheen on Gilt Funds?

Distributors don’t promote gilt funds aggressively due to the meagre commissions offered (usually 0.15% to 0.40%) compared to equity funds and unit-linked insurance plans (ULIPs) which give 30% of the premium plus trail commission of around 5%. Debt funds don’t offer such upfront brokerage. Gilt funds have remained low-profile because fund houses never promote them as aggressively as equity funds. According to data available with the Association of Mutual Funds in India, total assets under management (AUM) of gilt funds were just Rs3,171 crore, constituting 1% of all categories of mutual fund schemes, compared to equity funds which constituted 22% at Rs168,672 crore as of February 2010.

The performance of the scheme depends on a variety of factors affecting capital markets, such as interest rates, currency rates, foreign investment, government policy, etc.

“Volatility in gilt funds is far lower than that in equity. This, perhaps, makes it less glamorous and attractive. Retail participation in government securities has been a non-starter in India—both directly and through the mutual funds route. There are incentives aplenty for equity funds—right from tax-free dividends, low short-term gains and zero long-term gains. Similar incentives to gilt funds will go a long way in achieving the twin purpose of retail participation in government securities through mutual funds and bridging the demand-supply mismatch in government borrowings which the government is keen to address,” says Mr Raman of Sundaram BNP Paribas.

Source: http://www.moneylife.in/article/5294.html