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| February 26, 2016 |
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Impact 
With the Union Budget 2016-17 around the corner, many observers consider the railway budget as the trailer of things to come. And though trailers can be misleading sometimes, mostly they are not. The railway budget this year appears to be high on promises and low on governance. But that’s not all, the Government has waived off all service charges (not to be confused with Service Tax) for card transactions and online payments.
What’s coming?
A Cashless economy would be the climax. The Government is keen on discouraging cash transactions, being the root cause for black money creation within the economy. The growing reach of smartphones and rising acceptability of card payments among masses has fueled new-found hope to the Government’s intent of making Indian economy less cash dependent.
So where are you going to save your money?
- Next time when you book your movie tickets, you may not have to pay the convenience fees or the transaction charge.
- You will save money while booking train tickets as well.
- And you will save a few bucks every time you are performing all other transactions, where you are currently paying service charges or convenience fees.
The Government is of the view that encouraging cashless payment discourages the tax avoidance. However, for cashless payments to become more popular, they need to be made more secured and less burdensome for vendors, payment gateways, and the customer. Security measures against Debit/Credit card fraud, identity theft, etc. will have to weave a safety net for customers to enjoy such an economy.
PersonalFN is of the view that the amount you will save per transaction may not be high enough to look attractive right now, yet small savings made thousands of times may make a huge difference as we grow older and reach retirement age.
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Impact
Business honchos and industry experts must be eagerly waiting for crucial budgetary announcements affecting the business environment. Although the common man always hopes that the Indian economy should flourish, he is mainly concerned with the announcements pertaining to the taxation.
Taxability is a critical part of any investment decision and when it comes to investing in debt funds, taxation becomes even more important. As the equity markets have come under pressure lately, the flow of retail money in equity mutual funds has slowed down. Debt funds have been the beneficiaries of this trend. Taking advantage of this, mutual fund companies have been racing to sell new products, a majority of them being debt oriented funds.
Here’s the list of mutual funds that have filed the draft offer documents with SEBI
| Date of filing |
Fund house filing for NFO |
Scheme Name |
| 1-Jan-16 |
DHFL Pramerica Mutual Fund |
DHFL Pramerica Fixed Duration Fund - Series 27 to 36 |
| 5-Jan-16 |
Birla Sun Life Mutual Fund |
Birla Sun Life Banking ETF |
| 7-Jan-16 |
ICICI Prudential Mutual Fund |
ICICI Prudential Retirement Income Fund |
| 19-Jan-16 |
Indiabulls Mutual Fund |
Indiabulls FMP Series V - 3 Plans |
| 19-Jan-16 |
Reliance Mutual Fund |
Reliance Korea Equity Fund |
| 19-Jan-16 |
Sundaram Mutual Fund |
Sundaram Value Fund (Series (IV -VI) |
| 20-Jan-16 |
Peerless Mutual Fund |
Peerless Investment in Debt Equity and Arbitrage (IDEA) Fund |
| 22-Jan-16 |
ICICI Prudential Mutual Fund |
ICICI Prudential Capital Protection Oriented Fund Series -X - Plans A to H |
| 22-Jan-16 |
DSP BlackRock Mutual Fund |
DSP BlackRock Dual Advantage Fund - Series -44 to 48 |
| 22-Jan-16 |
SBI Mutual Fund |
SBI Debt Fund Series B – 31 |
| 25-Jan-16 |
ICICI Prudential Mutual Fund |
ICICI Prudential Fixed Maturity Plan – Series 79 Plan A to Z |
| 10-Feb-16 |
Peerless Mutual Fund |
Peerless Balanced Opportunities Fund |
| 15-Feb-16 |
Kotak Mutual Fund |
Kotak India Growth Fund Sr 2 & 3 |
| 17-Feb-16 |
DHFL Pramerica Mutual Fund |
DHFL Pramerica Money Market Fund |
| 22-Feb-16 |
DSP BlackRock Mutual Fund |
DSP BlackRock FMP Series 199-203 |
| 22-Feb-16 |
Tata Mutual Fund |
Tata FMP 51 Scheme A to C |
| 23-Feb-16 |
JM Mutual Fund |
JM Financial MF- JM FMP -Series XXVII Plan A to C |
Data as on February 25, 2016
(Source: SEBI)
From the beginning of the calendar year 2016; fund houses have launched 18 NFOs in all, of which 9 are debt oriented ones. Within debt funds, 5 are the Fixed Maturity Plans (FMP). There’s reason for this dominance of FMPs in the list of New Fund Offers (NFOs). Usually, around this time of the year, mutual fund companies launch a number of NFOS in FMP category to offer investors the maximum advantage on tax provisions, helping them lower their tax outgo on their gains.
Here’s how it works…
Suppose ABC Mutual Fund launched an 1100-day FMP on March 04, 2013 and accepted the subscription upto March 06, 2013. The scheme will mature on March 10, 2016. Let’s assume the issue price per unit was Rs 10 and the FMP will have a Net Asset Value (NAV) of Rs 13.0 per unit at maturity.
In other words, a person holding 10,000 units would generate a profit of Rs 30,000. But for taxation Rs30, 000 is not the amount on which one needs to pay 20% tax. Indexation allows you to raise your buying price, shielding you against the effects of inflation. In other words, you would pay 20% tax on the profit arising after deducting the indexed cost from the selling price.
Impact of inflation on your profits
| Financial Year |
Cost Inflation Index |
| 2012-13 |
852 |
| 13-14 |
939 |
| 14-15 |
1024 |
| 15-16 |
1081 |
(Source: Income Tax Department)
In the example above, you remained invested for a little over 3 years (1100 days), yet you are eligible to claim the indexation benefits of 4 years. Let’s not forget, you made your investment of Rs 1,00,000 (10,000 units X 10 Rs per unit) in the last month of the FY 2012-13. If you receive Rs 1,30,000 at maturity, you can calculate capital gains by doing this 2-step calculation.
Step I
Inflate the original cost of acquisition. This can be done by (1,00,000 *1081)/852 This gives you the index cost of Rs 1,26,878
Step II
Now deduct this from the sales proceeds which are Rs 1,30,000 in this case. Therefore, your inflation adjusted profit is not Rs 30,000 but just Rs 3,122. On this amount, you will pay 20% capital gain tax.
Had this FMP been floated in April 2013; you would have used the index value of 939 (and not 852) to calculate your inflation adjusted cost of acquisition; which would have been Rs 1,15,122 (and not Rs 1,26,878). This shows you how 25 days can make a difference to your profits.
PersonalFN is of the view that you should seek a 360 degree perspective on any investment proposal before committing your hard earned money to it. As for the question of investing in FMPs at this juncture, choose them very carefully. Ideally, consider going with fund houses that don’t compromise on the credit risk profile of the issuer.
In case you want to invest in debt funds at this juncture, FMPs clearly appear to be outscoring other debt funds. Choose one that comes from a fund house with a decent track record in managing debt schemes. Since FMPs are close-ended debt schemes, you should have a time horizon concurring with the maturity profile of the FMP.
And what about investing in NFOs of equity oriented schemes? Our views remain unchanged --- Avoid them. A country specific overseas fund should also be avoided.
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Impact
If they do it often, it isn’t a mistake; it’s just their behavior—Dr. Steve Maraboli
It seems mutual funds are proving Dr. Steve Maraboli right. They are displaying exactly the same trait—repeating mistakes too often. In the asset manager’s fraternity and even in investor’s community it is assumed that fixed income bearing instruments are safer than equities. Although there is a lot of merit in this argument, it’s not always true. Debt securities issued by a fallible borrower are as risky as equities issued by a half-baked promotor.
It would be impossible to find a person who has never committed any mistake. It’s perfectly fine to make mistakes; but not learning anything from them is not acceptable. Psychological studies suggest that people tend to do same mistakes time and again mainly because of factors mentioned below.
- Lack of ability to deal with stress
- Poor assessment of the situation
- Overconfidence and self-obsession
- Impulsiveness
Some mutual funds have a lot to answer. Are they impulsive, poor judge of the situation or simply over confident of their abilities? Investors invest in debt funds perceiving them safer than equity oriented funds but when even debt funds start giving them sleepless nights, they feel dismayed, disgusted and betrayed.
New Episode
Memories of Amtek Auto are still fresh. A responsible fund house such as JP Morgan apparently failed to recognise the weakness in Amtek’s ability to repay loans. Investors of two schemes of the fund house that had exposure to debt securities of the troubled companies made heavy losses. Eventually the fund house successfully recovered most of its money but what was lost (close to 15% of the total exposure) wasn’t acceptable either, especially for debt fund investors. It appeared that, at the time of investing, the fund house solely depended on the credit rating provided by the independent rating agencies which is why it flunked when credit rating agencies couldn’t provide updates on the creditworthiness of the company and changes therein.
Would you invest in debt securities of this company?
(Source: AMFI, PersonalFN Research)
History seems to be repeating itself. Before, you learn about the better version of Amtek Episode; please relook at the chart above, in case you missed that out or simply felt you may ignore it.
The chart is based on the facts. It shows how company’s fundamentals have deteriorated. From a profit making it has turned into a loss making company. Debt pile has made the situation scarier. Debt to equity ratio of 2.35 suggests that company has borrowed Rs 2.35 against every Rupee of equity. Would you invest in this company’s debt? Very few of you might.
By the way the company in discussion is Jindal Steel and Power Ltd. And all figures quoted in the chart are taken from the annual reports of the company. Going by quarterly results for first 3 quarters so far, the company is unlikely to report profits even in the Financial Year (FY) 2015-16. In first 9 months of the current FY, the company has incurred a little over Rs 1,600 crore of losses.
To ready more about this story and PersonalFN’s views over it, please click here.
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Impact
In a democracy, the opinion of the people matter, and it should. Any policy which is said to be formulated to achieve higher economic growth or other social objectives has to find the support of the majority. Otherwise, even a well-strategized policy can fail. But when you have various interest groups expecting a lot from one event, policy makers really struggle to strike a balance. To ensure they can’t keep satisfy one group while dissatisfying the others, policy makers tend to adopt the approach of inviting suggestions from all of them. Eventually, the decision makers may give preferences to those suggestions that are likely to make the policy effective.
The Government rolls out its fiscal policy at the Union Budget, affecting almost all Indians to a greater or lesser extent. Adopting a unique approach, the Government welcomed suggestions from the people through various social media platforms. Moreover, the Government is collecting public preferences concerning the sectors (such as Agriculture, Industry or services) they feel should get priority in the Budget 2016-17. So far, this feedback the Government has received, indicates that there should be more focus on farmers and the middle class.
Farmers and the middle class are the two pillars of Indian economy. Unfortunately, policy makers have failed to address issues troubling these two sections of society.
To ready more about this story and PersonalFN’s views over it, please click here.
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The Third quarter results of Public Sector Banks (PSBs) for the current Financial Year (FY) 2015-16 suggests that they aren’t out of the woods yet. As per Business Standard dated February 24, 2016, gross Non-Performing Assets (NPAs) of Indian banks stand at around 5.0% of total advances, while stressed assets (including NPAs)stand at nearly 11.0%. Fund managers have begun lowering exposure to banking sector. From November 2015 to January 2016; fund houses have slashed exposure from Rs 88,000 crore to Rs 78, 644 crore.
PersonalFN has always believed that investors should avoid investing in sector funds for this very reason. You may be unable to gauge the risk involved in a particular sector. Let professionals take the call. Think about investing in a fund with a proven track record. In case you are unsure about the funds you want to invest in, you may try the unbiased research services provided by PersonalFN.
Downgrade A downgrade is a negative change in the rating of a security. This situation occurs when analysts feel that the future prospects for the security have weakened from the original recommendation, usually due to a material and fundamental change in the company's operations, future outlook or industry.
(Source: Investopedia)
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Quote : “Investment success does not require glamour stocks or bull markets.”
John Neffh
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