Thursday, September 29, 2011

Prajna Capital

Prajna Capital

A Model Mutual Fund Portfolio

Posted: 28 Sep 2011 09:27 PM PDT

 

There's no such thing as an ideal mutual fund portfolio that can suit the needs and risk appetite of each and every individual. While there is no dearth of good mutual fund schemes in the market today, building a portfolio depends on the preferences and objectives of each individual. The factors that come into play include - age of the investor, risk appetite, time at hand to let the investment grow, need for money - immediate or latter - and more importantly, the purpose for making such an investment.


The model portfolio that we have put together here for our readers should thus not be construed as the final word. Investors would do well to consider these portfolios as ballpark models and develop their own portfolio on similar lines, based on their own financial preferences and goals.


Given the diversity in the risk appetite of investors, we have designed three model portfolios - - Aggressive, Moderate and Conservative. Each incorporates a different genre of mutual fund schemes to suit the varying needs.

AGGRESSIVE PORTFOLIO….

This is for those who are young, not only at heart but also with age, and have begun to earn but do not share a plethora of financial responsibilities. They are people who can afford the 'invest and forget' attitude, aren't scared of frequent market turbulences and are determined to get the most out of the equity markets.


The finest picks from the mid- and multi-cap segments blend into an aggressive mutual fund portfolio. The model portfolio has nevertheless been hedged to meet tough times by infusing a small percentage of gold. This portfolio can yield fruit, provided, the investor gives it enough time to ripen.

MODERATE PORTFOLIO…

Growing older, but still ready to take some risk with finances. Have financial responsibilities, but can part with a small percentage of savings to let it grow in safer havens…


A moderate portfolio blends the safety of large cap schemes without compromising on occasional opportunities thrown open by a mid-cap rally. The portfolio is hedged to face uncertainties through optimum allocation to balanced scheme and gold, which is considered to be the best hedge against inflation and equities.

CONSERVATIVE PORTFOLIO…

You want to participate in the wealth creation spree of the capital markets, but are scared to venture out. Worried that the catastrophe of 2008 will repeats itself ? With retirement age drawing nearer, you wish to make some decent earnings for the sunset years, but cannot afford the embedded risk of the equity market…

The conservative portfolio blends in the safety of the equity-oriented balanced and debt-oriented monthly income schemes and providing adequate hedge through gold. It also makes sure that you do not lose out on opportunities in the equity market by exposing a small percentage of investment to relatively safe, large-cap schemes.
 

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Also, know how to buy mutual funds online:

 

Invest in DSP BlackRock Mutual Funds Online

 

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Invest in HDFC Mutual Funds Online

 

Invest in Sundaram Mutual Funds Online

 

Invest in Birla Sunlife Mutual Funds Online

 

Invest in IDFC Mutual Funds Online

 

Invest in UTI Mutual Funds Online

  

Invest in SBI Mutual Funds Online

 

Invest in L&T Mutual Funds Online

 

Invest in Edelweiss Mutual Funds Online

 

 

 

Stock split and Bonus and capital gains tax implications on sale

Posted: 28 Sep 2011 08:07 PM PDT

Generally, investments in equities are made for the potential capital gain. Despite this investment in equities is being considered risker than fixed income instruments. However, apart from capital gains, equity instruments can confer other benefits to investors such as bonuses, stock splits and share buybacks. Let us examine the significance of these for investors and the tax consequences of each such corporate action.

BONUS SHARES

Bonus shares are nothing but shares issued free of cost to the shareholders of a company, by capitalising a part of its reserves. Following a bonus issue, though the number of total shares increase, the proportional ownership of shareholders does not change.

Also, the share price should fall in proportion to the bonus issue, thereby making no difference to the personal wealth of the holder. However, more often than not, handing out of bonus is perceived to be a positive sign. It means the company is able to service its larger equity. Considering the strong signal given out by the company, a consequent demand push for the shares causes the price to move up.

Since no money is paid to acquire bonus shares, these have to be valued at nil cost while making calculations for capital gains. The originally acquired shares will continue to be valued at the price paid at the time of acquisition. Since the market price of the original shares fall on account of the bonus, there may arise an opportunity to book a notional loss on the original shares.

STOCK SPLITS

Stock splits are a relatively new phenomenon in the Indian context. Recently, companies such as ONGC, Infosys, and HDFC, among others, have announced a stock split. It is important that investors understand why companies may split their shares and how this is different from a bonus issue. In a stock split, the capital of the company remains the same, whereas in a bonus issue the capital increases and the reserves decrease. However, in both actions, the net worth of the company remains unaffected.

A typical example is a two-for-one stock split. Say, a company announces a two-for-one stock split in a month. That means a month from that date, the company's shares will start trading at half the price from the previous day. Consequently, you will own twice the number of shares that you originally owned and the company, in turn, will have twice the number of shares outstanding. Consider the adjoining table where the price of 100 shares costs 3000. After the stock split, while the number of shares increases to 200, the price also comes down to `1500 .

The question that arises is if there is no difference to the wealth of the investor, then why does a company announce a stock split? Well, the primary reason is to infuse additional liquidity into the shares, by making these more affordable. The shares only appear to be cheaper; it makes no difference whether you buy one share for 3,000 or two for `1,500 each. As far as the tax implications for stock splits are concerned, there aren't any. A stock split, like a bonus issue, is tax-neutral. However, when the shares are sold, the capital gains tax implications are different that what is applicable for bonus issues. Here, the original cost of the shares also has to be reduced. For instance, in the above example, if the cost of 100 shares at `150 per share was 1,50,000, the cost of 200 shares after the split would be reduced to `75 per share, thereby keeping the total cost constant at `1,50,000.

SHARE BUYBACKS

These are a comparatively new phenomenon. Reliance, Siemens and Infosys are some examples of companies which have done so. A buyback is essentially a financial tool in the hands of the company, that affords flexibility in the capital structure. A buyback allows the company to sustain a higher debt-equity ratio. It is also a tool to defend against possible takeovers. Generally, companies do this when they perceive their own shares to be undervalued or when they have surplus cash for which there is no ready capital investment need.

Stock buybacks also prevent dilution of earnings. In other words, a buyback program enhances the earnings per share. Conversely, it can prevent an earnings per share (EPS) dilution that may be caused by exercises of stock option grants and so on.

A buyback also serves as a substitute for dividend payments. This brings us to the issue of tax implications of a buyback. An important consideration is whether the amount paid on buyback is dividend or consideration for transfer of shares. If considered a dividend, the same will not be taxable in the hands of the investors. Also, to what extent, if at all, can the amount paid on buyback be taken as dividend? Is the entire amount paid dividend or is it only the premium paid over the face value? According to a Supreme Court judgement, (Anarkali Sarabhai v CIT, 1997, 90Taxman509 ), the principle that redemption of shares by the company which issued the shares (in this case, preference shares) is tantamount to sale of shares by the shareholders to the company.

The Finance Act, 1999, reiterated this stand. Now, if a company purchases its own shares, the difference between the money received by the shareholder and the cost of acquisition will be deemed as capital gains. Further, this will not be treated as dividend, since the definition of dividend does not include payments made by the company on purchase of its own shares.
 

Mutual Fund Review: HDFC Prudence

Posted: 28 Sep 2011 09:07 AM PDT

This good offering has kept up its torrid pace. Despite being a balanced offering, the fund has outperformed the Sensex and Nifty in 13 years (out of 16) of its existence.


With returns that match that of an all-equity diversified fund, it's not surprising that the fund is managing the highest assets in its category. As on March 2011, the fund had Rs 5,808 crore under its management, equivalent to almost half of the category assets.

 

The returns delivered by the fund are a result of its aggressive equity allocation. With the equity exposure of HDFC Prudence being capped at 75 per cent, it largely remains close to the upper limit and has averaged around 74 per cent since January 2007. It has gone up to a maximum of 76 per cent and has never gone below 71 per cent.

 

The aggression even extends to the composition of the portfolio in terms of market cap allocation. Although recently it has increased exposure to large-cap stocks to around half of fund's assets, it historically has been largely tilted towards mid- and small-cap stocks since 2004. Even during the market meltdown of 2008, its average mid- and small-cap stock allocation was a bold three fourth of its equity portfolio.

 

Jain has no problem moving against the herd, as reflected in his sector selection and even in his stock picks. In 2007, when other fund managers were betting on Real Estate and Energy, he preferred casting his bets elsewhere. In 2007, exposure to Autos stood at around 8 per cent while allocation to Energy was lowered to around 3 per cent by December. BSE Auto delivered 3 per cent while BSE Oil & Gas and BSE Power delivered 115.25 per cent and 122 per cent, respectively.

 

Naturally, he was punished for it. But in 2008, he managed to curtail the fund's fall to the average and bounced back with a vengeance in 2009.


Currently, there are 15 stocks in which less than 10 other funds are invested in. Eleven of these stocks have been in the fund's portfolio for at least two years; Savita Oil Technologies (since 2005) being a case in point. On the flip side, some of the picks popular with its peers are conspicuously absent here. For instance, it was only in February 2011 that the fund added Reliance Industries to its portfolio while prior to that it had invested in it for a brief period (3 months) in January 2009.

 

On the debt side, the fund largely invests in debentures of the Financial Services sector. It also invests in GOI Securities and the allocation to it has recently risen to around 11 per cent. Though the fund sports a diversified equity portfolio of 80 stocks with none having an allocation of more than 5 per cent, it is still an aggressive offering.
 

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Also, know how to buy mutual funds online:

 

Invest in DSP BlackRock Mutual Funds Online

 

Invest in Reliance Mutual Funds Online

 

Invest in HDFC Mutual Funds Online

 

Invest in Sundaram Mutual Funds Online

 

Invest in Birla Sunlife Mutual Funds Online

 

Invest in IDFC Mutual Funds Online

 

Invest in UTI Mutual Funds Online

  

Invest in SBI Mutual Funds Online

 

Invest in L&T Mutual Funds Online

 

Invest in Edelweiss Mutual Funds Online

 

Kotak 30 is renamed as Kotak 50

Posted: 28 Sep 2011 08:23 AM PDT

Kotak Mutual Fund has decided to change the name of Kotak Mahindra 30 Unit Scheme to Kotak Mahindra 50 Unit Scheme, with effect from January 1, 2011.

 

The portfolio will comprise of equity and equity related instruments of around 50 companies which may go upto 59 at any point of time. Review and rebalancing will be done if the number of constituent companies exceed 59.

 

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Also, know how to buy mutual funds online:

 

Invest in DSP BlackRock Mutual Funds Online

 

Invest in Reliance Mutual Funds Online

 

Invest in HDFC Mutual Funds Online

 

Invest in Sundaram Mutual Funds Online

 

Invest in Birla Sunlife Mutual Funds Online

 

Invest in UTI Mutual Funds Online

  

Invest in SBI Mutual Funds Online

 

Invest in Edelweiss Mutual Funds Online

 

Invest in IDFC Mutual Funds Online

 
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