Thursday, December 15, 2011

Prajna Capital

Prajna Capital


Despite Higher Rates on NSC, PPF, ELSS is Still most effective way to Save Tax

Posted: 15 Dec 2011 02:29 AM PST



As we approach the annual taxsaving investment season, the landscape of available avenues has changed decisively. As things stand, I would expect investments for tax-breaks to be biased heavily in favour of the government's small savings schemes as opposed to an equity-based tax-saving option like ELSS mutual funds.

There's a push as well as a pull for this. The small savings schemes have got a lot of attention lately after the government raised interest rates on these across the board. Rates were raised by margins ranging from 0.5% to 1.45%.

Among the instruments whose returns were enhanced, the PPF (Public Provident Fund) and the NSC (National Savings Certificates) are heavily used as tax-breaks. For PPF, the rate of return has been enhanced from 8% a year to 8.6%. For NSC, it's up to 8.4%. The government has also introduced a new 10-year duration for the NSC.

On the other hand, equities are getting as bad a press as there possibly can be. It's now been more than three years since the stock markets have given any meaningful and sustained gains. What's more, with the shadow of slowing economic growth, declining corporate profits and the threat of economic doom emanating from Europe, it's hard to consider ELSS mutual funds as a serious alternative.

However, I'd like to argue that this is the time to actually act contrary to instincts. Firstly, the increased interest rates are not all that there are to the small savings story. What the government has actually done is to switch to flexible, floating rate mechanism for these instruments. The interest rates have been linked to what the government is paying for its debt in the larger market for government securities. Every year in April, the rates will be reset according to what the market yield for government debt is. While the interest rate for NSC will stay locked at the rate when the investment is started, PPF returns will change every year.

The government's motive is clear — it would like to collect as much funds as possible while paying as little as possible. Over the last five years, these instruments were less attractive than other products. As a result, inflows had suffered. The current set of changes are aimed squarely at ensuring that the government gets good inflows while holding rates as low as possible and still be competitive. In the new arrangement, interest rates will be automatically lowered or raised every year.

Practically speaking, the way these things work, you can expect returns to always be slightly lower than the real inflation rate. Your money will erode, but very slowly. And that's the price you pay for a government guarantee.

On the other side of the table, I think this is a good time to be buying equity with the three year horizon that tax-saving funds have.

Investing in equity always makes sense when the markets are as beaten down and pessimistic as they are now. Sure, they could still decline sharply over the next few months, but the solution to that is cost-averaging.

All things considered, here's the best recipe for this years' tax-saving investments. Whatever amount you have left over after deductions so far, divided it by four. Invest each part in a good ELSS mutual fund at a one-month gap over the next four months. This will give you a good average entry point no matter what happens in the equity markets during the period.

In fact, this could well be the last year when savings from ELSS are possible. If the government manages to pass the new Direct Tax Bill in the winter session of Parliament as promised, then this year is the last one when you can save taxes with an equity investment of only three years' lock-in. From next year onwards, the only way to save tax with equity investments will be through Tier I NPS deposits, which come with a lock-in till retirement.
 

 

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Change in Fund Manager - Birla Sun Life Enhanced Arbitrage and Birla Sun Life Infrastructure Fund

Posted: 15 Dec 2011 01:12 AM PST

 

Birla Sun Life Mutual Fund has announced the change in the fund management responsibilities of Birla Sun Life Enhanced Arbitrage Fund & Birla Sun Life Infrastructure Fund, with immediate effect.

Now, Birla Sun Life Enhanced Arbitrage Fund will be managed by Mr. Ajay Garg. While, Birla Sun Life Infrastructure Fund will be managed by Mr. Mahesh Patil and Mr. Naysar Shah.
 

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Online Investing in Mutual Funds

Posted: 14 Dec 2011 11:05 PM PST

Invest In Mutual Funds Online, at your comfort, from this single location.


Your one-stop solution for buying and investing in mutual funds from the comfort of your home / office / any location.

Buy Mutual Funds Online by selecting the Mutual Fund Schemes.

 

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Should you choose a mutual fund scheme with lower NAV ?

Posted: 14 Dec 2011 08:40 PM PST

Some of the investors have the tendency to prefer a scheme that is available at lower NAV compared to the one available at higher NAV. Sometimes, they prefer a new scheme which is issuing units at Rs. 10 whereas the existing schemes in the same category are available at much higher NAVs. Investors may please note that in case of mutual funds schemes, lower or higher NAVs of similar type schemes of different mutual funds have no relevance. On the other hand, investors should choose a scheme based on its merit considering performance track record of the mutual fund, service standards, professional management, etc. This is explained in an example given below.

Suppose scheme A is available at a NAV of Rs.15 and another scheme B at Rs.90. Both schemes are diversified equity oriented schemes. Investor has put Rs. 9,000 in each of the two schemes. He would get 600 units (9000/15) in scheme A and 100 units (9000/90) in scheme B. Assuming that the markets go up by 10 per cent and both the schemes perform equally good and it is reflected in their NAVs. NAV of scheme A would go up to Rs. 16.50 and that of scheme B to Rs. 99. Thus, the market value of investments would be Rs. 9,900 (600* 16.50) in scheme A and it would be the same amount of Rs. 9900 in scheme B (100*99). The investor would get the same return of 10% on his investment in each of the schemes. Thus, lower or higher NAV of the schemes and allotment of higher or lower number of units within the amount an investor is willing to invest, should not be the factors for making investment decision. Likewise, if a new equity oriented scheme is being offered at Rs.10 and an existing scheme is available for Rs. 90, should not be a factor for decision making by the investor. Similar is the case with income or debt-oriented schemes.

On the other hand, it is likely that the better managed scheme with higher NAV may give higher returns compared to a scheme which is available at lower NAV but is not managed efficiently. Similar is the case of fall in NAVs. Efficiently managed scheme at higher NAV may not fall as much as inefficiently managed scheme with lower NAV. Therefore, the investor should give more weightage to the professional management of a scheme instead of lower NAV of any scheme. He may get much higher number of units at lower NAV, but the scheme may not give higher returns if it is not managed efficiently.

 

 

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ICICI Prudential Regular Gold Saving Fund vs ICICI Prudential Gold ETF

Posted: 14 Dec 2011 09:27 AM PST

ICICI Prudential Regular Gold Savings Fund and ICICI Prudential Gold ETF comparison

ICICI Prudential Regular Gold Savings Fund

IPru Gold ETF

The Scheme primarily invests in IPru Gold ETF

ICICI Prudential Gold ETF directly invests in Gold.

This scheme is not proposed to be listed on stock exchange and hence it facilitates the investment by investors across India who do not have demat account, to invest in this fund through physical mode.

ICICI Prudential Gold ETF is listed on exchange.

Ease of availing add on facilities like Systematic Investment Plan, Systematic Transfer Plan, Systematic Withdrawal Plan and switch etc.

ETF mode does not have these facilities

As the Scheme is not listed on any stock exchange, investors need not depend on stock exchange liquidity to exit or redeem from the Scheme. Investing in gold through ICICI Prudential Regular Gold Savings Fund, the investor can directly subscribe/ redeem units through the physical mode at the various designated investor service centre across the country thereby making it easily accessible and convenient.

Investors are dependent on stock exchange liquidity to exit or redeem from the Scheme.

Investing in gold through the ICICI Prudential Regular Gold Savings Fund in physical application mode enables the investors to invest in a low cost manner as the investor does not have to incur the charges applicable for investing through the dematerialized mode.

Charges applicable for investing through the dematerialized mode.
1. Annual Maintenance charges of  Demat Account
2. Delivery brokerage charges
3. Transaction charges

 

 

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