Wednesday, November 9, 2011

Prajna Capital

Prajna Capital

Before exiting an equity fund check your tax liability

Posted: 09 Nov 2011 03:47 AM PST

MUTUAL fund investors often have a tendency to hold on to their investments for a long time without ever looking at it.


There are several problems with this kind of approach.


There could be a situation where the actual investment might be performing badly and the additional holding period does nothing to help the situation.

At the same time, there is also the risk that such a long holding of the lossmaking investment can even take the tax benefit away that otherwise might have been possible on the investment, especially in case of equity-oriented funds.

Here is a look at the issue and why investors need to regularly look at their portfolio to see if some action is required.


Long term: The first thing to constantly keep in mind is about the nature of the investment holding.


When it comes to various investments, including mutual fund units, they can be either long term or short term in nature. If the mutual fund units have been held for 12 months or less, then these would be classified as a short-term asset.

When the holding period exceeds 12 months, then it becomes a longterm asset. The classification of the holding is necessary because this determines the entire issue of whether the position of a loss can actually be salvaged to some extent.


Loss making: There are times when the investment does not work out as expected. It is easy to deal with the situation when there is a gain that is earned on the investment because this will mean just looking at whether there is a tax to be paid and how much the tax amount is.

In case of a loss, there is a far more complicated process at hand that one has to deal with and this includes the act of calculating the exact loss and then ensuring that there is some set off available. The first thing that many investors have to do is to actually accept the fact that there is a loss that they are incurring.

The next part involves looking at the nature of the loss and whether it is something that can be recovered. This is very difficult to judge because nobody knows how the future will actually turn out, but there is always something that often gives an indication to the investor.

A small amount of loss, which takes place due to short-term market movements, is not something serious in an equity oriented fund.

However, if the markets have collapsed and the fund is showing a 3040 per cent loss, then it might just be very difficult to recover for a long time to come. Nature and tax: In case of equity-oriented funds, if there is a long-term loss that is recorded on the sale of the units, then there is no tax impact.

This happens because of the fact that the equityoriented funds have a zero rate of tax on long-term capital gains, so there is no set off available for the loss that has been recorded.

On the other hand, if the units were sold before a year is complete, then there would be a loss all right, but the loss would be available as a set off against some short-term capital gains that has been earned. These are reasons why there has to be a constant evaluation of the portfolio.

It will give the investor an idea whether they need to take any immediate action or they can just sit back and watch the performance of the fund. In cases where the situation does not hold out much hope, the investor would be better off taking the loss in the short term, so at least, there is a set off available for them.
 

Infra Theme - With 3-5-yr horizon will find it rewarding

Posted: 08 Nov 2011 11:09 PM PST

   Infrastructure was touted as the most happening sector in 2008. Every big fund house launched an infrastructure fund, and investors were more than happy to pour money into them. But now, three years later, it is a different story. Infrastructure funds are languishing at the bottom in terms of returns and many disappointed investors are pulling out money from these schemes. The CNX infrastructure index has slipped 21.3% in the past year compared to an 11.6% fall in the Nifty. While Reliance Infrastructure Fund has lost 39%, most other funds have lost more than 20% over the past year.

THE GROUND REALITY

The infra segment has been going through a rough patch for the past 18 months due to several reasons. Primary amongst them are issues related to land acquisition and an increase in project costs and higher working capital.

Land acquisition continues at a snail's pace, posing problems for several infrastructure projects. In the power sector, there are delays in payments by state electricity boards, especially to power generating companies. Last but not the least, costs of raw material such as coal have increased and there are issues regarding their availability. All this has severe repercussions for any infrastructure project. Project costs across power, roads are going haywire and companies need higher working capital. Infrastructure projects are extremely capital intensive. If companies need more money to manage their working capital, they will have to borrow more. This pushes up their interest costs and affects their margins. Funding is another issue for infrastructure projects. Banks generally don't fund projects with very long gestation periods. The interest rate cycle is on an uptick, adding to infrastructure companies woes. The central bank, in an attempt to control inflation, has raised interest rates 10 times since March 2010. "The cost of finance is the major problem for infrastructure projects. The cost of funds is too high and makes many infrastructure projects unviable. Finally, the infrastructure segment, to a large extent, depends on spending from the government as well as its policies. Over the past year, the government, beleaguered by many issues, has been slow in rolling out infrastructure projects. A crucial bill relating to land acquisition is still stuck. This has led to a delay in sanctioning and closure of new projects in the infrastructure space.

IS THERE A WAY OUT?

Infra funds have been underperforming the broader indices for three years. As per data available with Valuersearchonline.com, which tracks the mutual fund industry, while the universe of infrastructure funds returned 2.45% per annum, the Nifty returned 4.15% per annum. Worse, many experts believe the immediate future of these funds don't look bright. In the short term, there could be more downside," says Vishal Dhawan, founder, Plan Ahead Wealth Advisors.

However, many still swear by the theme. Their argument is simple: For the India story to roll on, infrastructure building is a must. The country can't do without a robust infrastructure if it has to grow the GDP at 8%. Be it roads, ports, water, power or metro rail systems, all of these are crucial to support growth.


Good infrastructure is a basic support system of the economy and is needed to facilitate high growth rates. Hence, it is imperative that the government resolves issues relating to infrastructure growth.


Secondly, the cost of funds, a major input for the sector, may come down soon.
The cost of finance is the major problem for infrastructure projects. We need a situation where we can finance projects easily. Many now believe that the interest rates are close to their peak levels.


As of now, there are indications that there may be at best one more rate hike before the central bank pauses. Clearly, if rate hikes slow down, companies in the sector will heave a sigh of relief.

SO WHAT SHOULD YOU DO?

Investors in these funds are disappointed. Infrastructure funds have severely underperformed for three years, with many investors losing 20%-40% of their money in the past year alone. However, many experts don't want you to exit these schemes, as they believe they can deliver in the long term. There is no point in exiting your investments at this point at a loss when the future is bright. Long-term investors should stay put. Investors should realise that though investment in infrastructure starts early, returns often come in late but at a faster rate and, hence, investors must be patient and have a 3-5-year time horizon while investing in such funds.


New investors should first figure out if sectoral funds, especially infrastructure funds, will meet your requirements. Sectoral funds carry high risks and are meant for individuals with a higher-risk appetite. Investment advisors do not recommend such funds to investors with a low-risk appetite. Unlike in a diversified equity fund, where the fund manager takes a call, in a sectoral fund, an investor should be in a position to understand or assess the fundamentals of the sector before choosing one. Invest not more than 10% of your portfolio in sectoral funds. Those with a low-risk appetite may consider large-cap diversified equity fund.

Finally, if you have decided to invest in the infrastructure theme, you need to screen the fund portfolios carefully before selecting your fund. Be sure, that it follows the infrastructure theme and is in line with your objectives before you commit your money. Do not commit money in one go, invest in phases over a six-month period, using a SIP.
 

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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

 

 

 

Loans On Credit Cards – Say NO

Posted: 08 Nov 2011 08:45 AM PST

Recently, a number of credit card customers received a pre-approved loan mail, from a leading private sector bank. The customer was entitled to a loan over and above his existing credit limit, at 15 per cent on a reducing balance.

Sounds too good to be true, especially in a market where interest rates are on the rise. Also, for those already burdened with expensive debt (such as credit card debt, which charges over 40 per cent annually), this could be a good way to reduce the burden.

However, if planning to use this debt for other purposes, like buying the latest iPad or mobile, things could go very wrong. The equated monthly instalments (EMIs) are added on the card, escalating the bill. And, the loan is over and above the credit limit. One will over leverage himself/herself. That is, the loan will be treated separately but come as a part of the monthly credit card bill payment.

Bankers said they typically target rotators – ones who pay the minimum or slightly more every month – with such schemes, as it helps such customers reduce their dues at one go. But, if misused, this would worsen your credit score, limiting future chances of securing any credit.

There are similar products in the market which offer a personal loan at a lower rate within the credit card limit. Under one such scheme, if your credit limit is `30,000, you can avail a loan of `15,000 at 17 per cent for one year, 16 per cent for two years and 15 per cent for 36 and 38 months.

Though such schemes can be used to reduce the interest burden and retiring high cost debt, financial planners are not enthused. There are other ways of raising cash. A loan against fixed deposits, which cost two per cent above the deposit rate, can work out cheaper. He even advises using the gold loan route if one does get the right rate. At present, gold loans come at 12-24 per cent.

In the worst case scenario, it is better to retire investments and use the proceeds. Once the debt is paid, you can restart your investments. Ideally, your total instalment-to-income ratio should not be more than 4050 per cent. Many exceed this limit; as a result, they keep on borrowing to retire earlier loans, a classic debt trap.

Once caught in a debt trap, clearing the clutter isn't easy, as you will have little or no cash in hand. You would have spoilt your track record as well.

Loan on credit card is a pre-approved personal loan

Interest charged is 15 per cent and more

Processing fee is minimum sum or a portion of the loan amount

Many banks give prepayment facility but at a cost

The EMIs will be billed to the credit card every month
 

To Retire rich Start saving and Investing early in life

Posted: 08 Nov 2011 07:52 AM PST

 

THOSE of us who still have many years to go before retiring tend to think of retirement in terms of fuzzy clichés like tending to the roses, long walks by the sea, playing golf on weekdays, pottering around the house and so on. But those staring retirement in the face, invariably, think of grimmer things like steep medical costs, shrivelling income stream, taxes, inflation and the rising cost of living, and of whether their savings can meet all these expenses. When it comes to planning retirement, the bottom line is this: You either are in a saving mode or you are in a spending mode.

The pre-retirement phase of life includes many financial responsibilities and goals, such as building a house or providing for children's education, besides planning your own retirement. Yet, many of us remember retirement just a few years ahead of the `Rday'. Arriving at how much retirement savings you should have is a tough one, but one can fairly estimate one's needs depending on the lifestyle one maintains after retirement. It will help to prepare a budget that lists what you spend on necessities so that you know how much your monthly or annual expenditure will be in the future. Account for inflation keeping a rough estimate of 7-8 per cent inflation every year. Also, consider expenses that are bound to increase, such as medical and transport expenses. Then again, calculate the expenses that may cease to exist, such as your children's education or repayment on a home loan.

The accumulation phase, where you can save and invest for your golden years can start anytime from the day you start earning and, while, there are many ways that one can save; life insurance is a component that plays an important role.
It is a protection tool that safeguards the interest of your financial dependents in case you die; it also helps you build a cosy retirement egg that you can utilise after your own retirement.

Of course, if you start at a late age, you will have to increase your savings substantially and even cut down on any superfluous expenses. Starting early will help you benefit through the power of compounding, that is, you have more time for your money to grow.

The advantage with life insurance is that it instills a regular savings habit that is systematic with regular payments towards premiums and offers tax benefits on savings, as well as withdrawal on maturity. There is also professional money management that insurance products offer, which is far better than handling it ourselves.

As you approach retirement, you need to assess how long your savings can last in retirement and lead your retired life.


With increasing life expectancy, we are facing a situation where our years in re tirement can be as long as or more than our working years, depending on when one retires.

Reality is that once retirement is reached, the saving period is over. The balancing act at this point is between the desire to enjoy retirement and the fear of running out of money prematurely.

The way the retirement life insurance plans are structured; you get a tax-free lumpsum to withdraw from your accumulated savings with the balance paid as a monthly annuity acting as a regular income stream. But there are ways to supplement this income stream; one can consider working beyond retirement, which could be part time, or, in the immediate future make illiquid assets pay better.

Research indicates that a majority of Indians owning a house much before they retire, the reverse mortgage facility makes the house that one owns, pay a regular income stream for a fixed number of years or through the life of the homeowner.

One can tactfully opt for an insurance policy in retirement that will swap the value of the house on the reverse mortgage option on the insured's death, with the house ownership being bequeathed to the insured's family. This way not only can one earn income from one's house; one can also pass the house to the next generation.

At the end of the day, retirement is a journey and what matters is that you get to your destination with a clear road map and make sure you enjoy the journey.
 

NCDs - High Returns at the Safety of Debt

Posted: 08 Nov 2011 06:50 AM PST

Investors are queuing up for NCDs due to volatile markets. But, not all offers are good


   NCDs or non-convertible debentures are suddenly flooding the market. The month of August has been, and is, witnessing back-to-back NCD issues from IIFL, Shriram City Union Finance, Mannapuram Finance and Muthoot Finance. Besides, there are several NCDs like those of L&T Finance, SBI, Tata Capital and Shriram Transport, which are already listed and traded at attractive yield in the secondary market. Investors' sudden interest in these instruments is mainly because of the attractive rate of returns (a little above 12%) and the slump in the equity market. However, every NCD may not be as attractive as the return it offers. Investors should do their homework if they want good returns along with the safety of capital.

CHECK THE FINANCIALS

Every NCD on offer comes with a prospectus. Investors should go through it carefully before investing. If the company is listed, investors can also check its annual reports and latest financial statements. Reputed companies keep their annual reports on their websites. Quarterly numbers are available on stock exchange websites.


Always pick a company that is making profits and with a healthy dividend-paying record. In the case of NBFCs, check their exposure to various sectors. This is because high exposure to sectors like real estate and capital markets may not augur well for the company. You can also find out whether the company has borrowed from banks and financial institutions, as it increases your margin of safety as banks are large institutions and would have done their due diligence before giving a loan to the company.


Also, check out the various ratios, like profitability ratios and debt-to-equity ratio to see if they are in line with the industry norm. One ratio that can help investors make a decision is the interest service coverage ratio. It shows how easily the company can pay interest on outstanding debt. It is arrived at by dividing the earning before interest and taxes (EBIT) with the interest expense. Higher the number, the better it is from an investor's point of view. A number less than 1.5 is a sign of risk, as the company may find it difficult to service debt in the near term if rates move up.


Since NCDs can be both secured and unsecured, one should prefer to invest in secured NCDs. A secured NCD necessitates that the company creates a charge on its assets. In case of liquidation of the company, NCD holders will be paid first over other entities who lent money to the company, which gives further safety for the investor.

RATINGS AND INTEREST RATES

NCDs are rated by credit rating agencies. Rating gives a fair idea about the company's financial strength and its debt repaying capability. So while an NCD of SBI was rated AAA, indicating highest degree of safety with regards to timely repayment of principal and interest, the NCDs from Mannapuram Finance were rated AA-, indicating a high degree of safety. One also needs to remember that ratings can change from time to time. If you are holding NCDs, you need to keep that in mind. Any downgrade in rating could lead to lower returns. You trade risk for return. A company with lower rating has to pay higher interest rates to raise money while a company which enjoys a higher rating, pays lower interest rates. Besides, one should also compare the coupon rate with other fixed-income instruments. So, while AAA-rated NCDs give a yield of 9.4%, AA- rated NCDs pay 12.25%, which is 285 basis points higher to compensate for the lower rating.


This is the premium the issuer is paying to get people invested and is good for the investor. Also keep the taxation issue in mind before buying NCDs. Interest earned on the bonds comes under income from other sources and investors are liable to pay tax on the same. Any sale done in less than a year is subject to shortterm capital gains tax, which is the marginal rate of tax of an individual. For long-term capital gains, the tax, according to current norms, is lower of 10.3% without indexation or 20.6% with indexation.

CHECK LIQUIDITY

Whenever you buy bonds, buy it with a perspective of holding it to maturity. This is because though NCDs are listed on the stock exchange, they may not necessarily be liquid. Volumes generally are low and there is a vast difference between bid and ask price in many cases.


In addition, bonds are subject to interest rate risk. When interest rates move up, bond prices move down and vice-versa. In a rising interest rate scenario, the NCD price can go below the face value and the investor may be forced to exit at a loss.

PUT AND CALL OPTIONS

A put option means the investor has the option to sell the NCD back to the issuer at a particular time, while a call option means the company has the option to repay the NCD money before it matures. In a rising interest rate scenario, a put option will work in the investors', favour while in a falling interest rate scenario, it will work in the company's favour. While the first issue of Tata Capital launched two years back had a put and call option at the end of 36 months, the issues of Muthoot Finance and Mannapuram Finance do not have these options.

TERM

If you are keen to invest for the long term and can hold on till maturity, you better go for it now, as interest rates are said to be peaking. As global economy turns weak, interest rates may come down. So, if you are comfortable investing and holding for a term of five years, it can be a better bet. There is a hidden benefit for a long-tenure NCD, say of five years and more.


These instruments are more sensitive to changes in interest rates. If the rates were to fall, the prices of NCDs on bourses may move up, offering room for capital gains if you decide to log out before maturity.


Last, but not the least, keep diversification of portfolio in mind. Do not get carried away and put all the debt component of your portfolio in NCDs, just because they are paying a high interest rates. Investors need to diversify across other fixed income products and at best should allocate 10-15% of their debt portfolio to NCDs.
 

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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

 

 

 
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