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- Capital Protection Oriented Funds
- Bank FDs after Budget 2014
- Debt Funds - Tax doubles and Tenure trebles
| Capital Protection Oriented Funds Posted: 08 Aug 2014 05:10 AM PDT Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Leave a missed Call on 94 8300 8300
Capital Protection Oriented Funds
Erosion of capital is one of the key concerns for investors wanting to invest in equity mutual funds.
These have an asset allocation com parable to monthly income plans (MIPs) which have a similar investment pattern. A crucial difference, however, is that an MIP is an open-ended fund where the fixed income portion is actively managed. Hence, an MIP does not provide capital protection like CPOFs. A plain vanilla CPOF with its hybrid mandate thus provides an equity and debt portfolio package, without the inherent volatility of MIPs.
These are comparatively a new concept. These products continue to invest 70-80% in fixed income securities for capital protection. The remaining portion is used to buy nifty call options with tenure matching the maturity of the fund. The leveraged nature of options helps these funds to participate to the extent of 80-100% in the upside of nifty during the tenure of the fund.
For example, if nifty delivers 50% returns during the tenure of the fund, these funds would deliver returns of 40 50% depending on the level of participation provided to the investor. The flip side is that if the equity market does not move up or is negative after the tenure, the investment in nifty options would be rendered worthless and the investor would get only the capital back at maturity. In such a situation, it would have been better to invest in a plain vanilla fund, which would have given relatively higher returns.
It is important to note that liquidity in CPOFs is very poor. In case an investor requires money before the maturity of the fund, it's difficult to exit. While these instruments are listed on the exchanges, the possibility of finding a buyer is low.
What are the tax benefits available?
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| Posted: 08 Aug 2014 04:50 AM PDT Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Leave a missed Call on 94 8300 8300
Bank FDs after Budget 2014
While the Budget bats for bank FDs, investors can still find ways to benefit from debt and gold funds
A tax benefit of ₹ 1,300- 3,000 a month isn't huge, but the Budget proposals on individual taxation came as a huge relief as the benefit came after many years in the form of increase in the basic exemption limit to ₹ 2.5 lakh (₹ 3 lakh for senior citizens); increase in the 80C and public provident fund limits to ₹ 1.5 lakh and in the higher home loan interest benefit of ₹ 2 lakh.
The middle class would also heave a huge sigh of relief after the Union revenue secretary's assurance on Saturday that there would be no retrospectively in the flat 20 per cent tax on debt mutual funds.
But the doubling of the tax and the higher holding tenure for getting long- term capital gains benefits would still remain a sore point.
Now, if the investor sells the units in less than 36 months, capital gains will be added to their income and taxed as in their tax bracket, much like bank fixed deposits (FDs). There isn't any clarity on the inflation indexation benefit that investors used to get in their investments in debt instruments.
It would be unfair on debt investors if the indexation benefit is taken away." But there are many others who suggest ways out of the tricky situation. Here's how.
Tenure critical for highest tax bracket
From the tax rate point of view, investors in the highest bracket will not lose if they stay invested for three years. For, at 20 per cent, debt funds are still better than the FD tax rate of 30 per cent. However, if they take out the money before three years, they will have to pay the tax at the same rate of 30 per cent. Earlier, they benefited from the 10 per cent without indexation and 20 per cent with indexation regime.
Rate of return key for middle tax bracket
For investors in the 20 per cent tax bracket, things will be trickier. Both FDs and debt funds will be taxed in the same way, both in the short and long term. Here, the rate of return will come into play. At present, State Bank of India offers nine per cent for FDs of one year and above, whereas debt MFs have returned eight to 11 per cent. Income funds and gilt funds have suffered in the past year, returning only two to six per cent, according to data from Value Research.
If retail investors in the medium tax bracket choose good schemes, they will earn higher returns. They could, in fact, look at hybrid debt funds, which invest a little over 65 per cent in debt and the rest in equities. While their tax treatment will be like debt funds, some of them are returning a good 15- 20 per cent or even more. Investors who put money in hybrid funds will give themselves the opportunity to negative the tax impact partially due to higher returns.
Lowest tax bracket should go for fixed deposits
Investors in the lowest tax bracket ( 10 per cent) should not show any interest in debt funds, especially if the intent is to invest for more 3 years, as long- term capital gains will be taxed at 20 percent. If they invest for less than 36 months, short term capital gains will be taxed at 10 percent, which is the same as in the case of fixed deposits. However, by investing in high yielding debt hybrid funds, they can get higher returns than traditional options like bank deposits and bonds.
How to still enjoy debt funds
If you are in the highest tax bracket but your spouse or family member is, say, a senior citizen getting the benefit of the higher basic exemption of ₹ 3 lakh, or ₹ 5 lakh if he/ she is over 80, and don't have any income, you could invest in their name to get tax benefits. The capital gains could even become tax- free if the amount is below their exemption limits.
Arbitrage funds emerge winners
This is one category likely to benefit from the new tax treatment. These, by their nature, are debt funds but they get the tax treatment of equity funds because they invest in equities.
Typically, if the stock price of Reliance Industries is ₹ 967 on the BSE exchange and ₹ 970 on the National Stock Exchange, the fund manager will buy the stock on BSE and sell on NSE. Similarly, if there is a price difference between the spot and futures market, again, the fund manager will take advantage of that. These funds do quite well in volatile market conditions.
Since the strategy implies buying and selling at the same time, these funds aren't risky but the returns are low at nine to 10 per cent –similar to returns from most debt schemes and bank deposits. The advantage is, there will be no tax if the investor exits after one year, as the long- term capital gains tax for equities is zero. On the other hand, if the investor exits before one year, there will be a short- term capital gains tax of 15 per cent.
If your policy is maturing after October 1, the insurer will deduct a tax at source (TDS) of two per cent from the proceeds of your life insurance policy for both unit- linked insurance plans and traditional plans. The taxation will be on the entire sum, including the sum allocated by way of bonus, provided the premium paid towards the policy is more than 10 per cent of the sum assured.
Currently, under Section 10( 10D) of the Income Tax ( I- T) Act, any sum received from a life insurer is not taxable if the premium payable is up to 10 per cent of the sum assured. Tax would be payable as on your applicable slab if the premium exceeded the 10 per cent amount. However, since there was no TDS, several assessees avoided the tax. This TDS will, however, not apply if the amount is less than ₹ 1 lakh. What this means is that if your sum assured is less than 10 times the annual premium, you will need to pay a tax on the maturity proceeds. But the death benefit in this case will continue to be tax free.
For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call
Leave a missed Call on 94 8300 8300
Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com
--------------------------------------------- Invest Mutual Funds Online
Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund Application Forms ---------------------------------------------
Best Performing Mutual Funds
B. Large and Midcap Funds Invest Online
C. Mid and SmallCap Funds Invest Online
D. Small and MicroCap Funds Invest Online
E. Sector Funds Invest Online
F. Tax Saver Mutual Funds Invest Online 1. ICICI Prudential Tax Plan 2. HDFC Taxsaver
G. Gold Mutual Funds Invest Online
H. International funds Invest Online 1. Birla Sun Life International Equity Plan A 2. DSP BlackRock US Flexible Equity 3. FT India Feeder Franklin US Opportunities 4. ICICI Prudential US Bluechip Equity 5. Motilal Oswal MOSt Shares NASDAQ-100 ETF |
| Debt Funds - Tax doubles and Tenure trebles Posted: 08 Aug 2014 03:27 AM PDT Download Tax Saving Mutual Fund Application Forms Invest In Tax Saving Mutual Funds Online Leave a missed Call on 94 8300 8300
Debt funds - Tax doubles and Tenure trebles
Retail investors who have been looking at debt funds for good short- term returns and tax benefits will now have to go for other options. The Union Budget has increased the rate of tax of debt funds to a flat 20 per cent. Importantly, the tenure for claiming long- term capital gains has been increased to 36 months from the existing 12 months.
Earlier, the long- term capital gains tax was 10 per cent without indexation and 20 per cent with. The Union Budget is marginally negative from the debt fund perspective. But it will also ensure that people willing to stay for three years and above will come in. The fund manager will also benefit from this because they will get money for the long term. The rise in the tax rates will bring these products on a par with fixed bank deposits in which the income is taxed on the tax bracket.
Mutual fund experts say besides the rate, the lock- in tenure increase of one to three years might have a wider impact. This is because, at present, the short- term capital gains tax ( for which the gains are added to the income of the investor and taxed as per the income- tax bracket), is applicable for investments of less than one year. Under the new regime, the investor will have to pay short- term capital gains for a period of less than three years — much like real estate investors. In other words, the tenure for availing long term capital gains tax has been trebled.
This will hurt the appetite of retail investors in short- term debt instruments. "Now investors will have to pay 10- 30 per cent ( according to the income tax bracket) if they exit the scheme in less than three years; this will hurt sentiment,
Investors will now get more interested in schemes like arbitrage funds, where the annual returns are 910 per cent, in tune with the debt fund returns. Arbitrage funds invest in equities and benefit from the price difference of shares in the cash and future market or between two exchanges. Since the buying and selling happens at the same time, these funds are ideally like debt funds because there is no risk. However, the tax treatment of these schemes is according to equity guidelines. That is, there is no tax in these schemes if you have stayed invested in these funds for over one year and 15 per cent short- term capital gains tax.
Another marginally negative move for investors is the dividend distribution tax, which has gone up by 2.47 per cent due to the new method of calculation.
Both mutual funds and stock investors will now get lower benefit. In the past, the company used to deduct dividend distribution tax at 16.9 per cent. This number will now go up to 19.4 per cent.
Both these moves will impact risk- averse investors, who prefer debt funds and dividend income, as they do not want to participate aggressively in equities. An increase in these rates will hurt these investors.
Fixed maturity plans will be worst hit, dividend pay out will decrease marginally, arbitrage funds should benefit
For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call
Leave a missed Call on 94 8300 8300
Leave your comment with mail ID and we will answer them OR You can write back to us at PrajnaCapital [at] Gmail [dot] Com
--------------------------------------------- Invest Mutual Funds Online
Download Mutual Fund Application Forms from all AMCs Download Mutual Any Fund Application Forms ---------------------------------------------
Best Performing Mutual Funds
B. Large and Midcap Funds Invest Online
C. Mid and SmallCap Funds Invest Online
D. Small and MicroCap Funds Invest Online
E. Sector Funds Invest Online
F. Tax Saver Mutual Funds Invest Online 1. ICICI Prudential Tax Plan 2. HDFC Taxsaver
G. Gold Mutual Funds Invest Online
H. International funds Invest Online 1. Birla Sun Life International Equity Plan A 2. DSP BlackRock US Flexible Equity 3. FT India Feeder Franklin US Opportunities 4. ICICI Prudential US Bluechip Equity 5. Motilal Oswal MOSt Shares NASDAQ-100 ETF |
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