Higher and lower NAV: What does it imply for an investor?

NAV or Net Asset Value of a mutual fund scheme that underlines the performance of a particular scheme is computed by decreasing total liabilities of a fund by the total assets held under the scheme divided by the number of outstanding shares. More precisely, NAV that reflects funds intrinsic worth moves higher or lower depending on the investments made by the fund manager as well as for how long the fund has sustained its existence in the market.

Generally speaking, new investors in a scheme shall prefer a lower NAV value as in that case investors shall realize more number of units. But, in case the portfolio of the two mutual fund schemes under consideration is the same than even though lower NAV corresponds to you being allotted more number of fund units, the overall portfolio value that is computed by multiplying NAV of the scheme with the number of units by investment in either of the schemes shall remain the same.

In any case, the most important thing is the quality of stocks in the portfolio that form part of the NAV.

So, the NAV should not be the criteria for you to select a mutual fund scheme. And, NAV of the scheme cannot be taken to be synonymous to share price and determine investment direction of the investor. Instead other factors should come to play while you decide to bet on a mutual fund scheme, including funds Performance over a similar time frame, your own risk appetite and management style adopted by the fund house among other relevant criterion.

Nonetheless, when talking about dividends (in case you have not opted for cumulative schemes), scheme at a higher NAV shall result in the realization of a lesser dividend amount for the investor as the higher NAV that correspondingly translates into lesser scheme units means lowered dividend as dividend distributor is done on face value or on unit basis and with lesser units in hand, the subscriber in a scheme whose NAV is currently high is entitled to lower dividend.

So, despite you realizing lower absolute dividend in the case when the mutual fund scheme has a higher NAV, total returns in case of the two schemes with different NAV values but having similar portfolio allocation will yield same returns.

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Debt funds: Why we should not ignore the same?

Come to think of mutual funds, there is a perception that debt funds are for institutions and most individuals park money in schemes that invest bulk of the proceeds in equities. While it's not such a bad idea, it's always a risky proposition. To hedge against a slide in the stock markets, it's best to invest some proceeds of your capital in debt mutual funds.

Often the question that occurs in the mind of investors is: I can invest in bank fixed deposit. Why a debt mutual fund? The answer is simple - if you take into account taxes, you would realise that debt mutual funds are more tax efficient.

Interest earned on a bank deposit is added to your total income and taxed accordingly. For example, if you are in the 30 per cent tax bracket, then, 30 per cent of the interest earned on a bank fixed deposit would go towards payment of taxes, lowering your yield.

In case of debt mutual funds, you could opt for dividends distribution which is tax free in the hands of the investor. However, it's important to note that a Dividend Distribution Tax of 25 per cent is to be paid by the Asset Management Company and same is obviously recover from you, reducing the dividend payout.

The best part of a debt fund is that if you hold onto it for the long term (more than 1 year) the long-term capital gains tax without indexation is 10 per cent. This is certainly beneficial, if you are parking money in fixed deposits and are in the 30 per cent and 20 per cent tax bracket.

Debt funds are relatively safe, as they park their money in government securities and extremely safe corporate bonds. So, to hedge against equity risks, you might want to consider debt funds.

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Should you avoid close-ended schemes?

Should you avoid close-ended schemes?

Take a look at the three-year rolling returns based on the Sensex below, the returns can be highly volatile.

In a close-ended scheme, there is no option to invest systematically, which is the ideal way to invest in equities. Therefore, before investing, one would have to take a long term view of where the market is headed and this is something which even many experts can’t predict accurately.

More importantly, close-ended schemes do not have a track record. Of course, if such schemes have been launched in the past from the same fund house, you would get a view of the performance, but such information for schemes which are closed are hard to find. The market conditions and the strategy employed by the fund over those conditions would have been different. Therefore, unlike open-ended schemes, making an investment decision based on past performance would be difficult.

Even if you have reviewed similar schemes in the past, it is not necessary the scheme would invest in a similar portfolio. Different series of close ended schemes would have completely different portfolios.

Liquidity is another issue. If an investor would like to exit before the maturity date, they would have to do so through the stock exchange, i.e., they would have to get their units converted in dematerialised form if not already done and find a buyer for their units held.

Do you still think close ended schemes are a better choice?

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Don't discontinue SIP in a lean phase

Don't discontinue SIP in a lean phase

Patiently make good investments, regardless of economic conditions

It’s time in the market--not ‘timing the market’ that matters. By staying in the market and not trying to time its highs and lows, you can grow your investments significantly over the long-term

The point of SIPs is discipline. You continue to invest through highs and lows, no matter what your instincts urge you to do

Markets move in cycles, they go down and then climb up; the best way is to make the most of a full cycle

Good investments should outperform in the long-run, regardless of the macroeconomic environment

Keep faith; as an active SIP investor, you will face instances when your SIPs in even the best funds will turn losers

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Cost Inflation Index (CII) How it impacts Capital Gain Tax on Real Estate & Mutual Funds

Cost Inflation Index (CII) How it impacts Capital Gain Tax on Real Estate & Mutual Funds

 A string of numbers like 939, 852, 785, 711, can you guess what these are?   These numbers have potency to save a lot of money particularly if you are investing in Mutual Funds or Real Estate. And to answer the question- these numbers are value of Cost Inflation Index (CII) from year 2013-14 to year 2010-11. As the term suggest it refers to the cost of asset, which faces inflation. Let’s try to understand the concept and application in detail.

Cost Inflation Index – The Concept

There are 2 terms to calculate gain on any investment. One is the simple (nominal) return and second is called the real returns. The difference between the two is inflation. For eg a house purchased in 2005 for Rs 4 Cr in Mumbai and sold for 5 Cr in 2013 the gain is Rs 1Cr. Or simply:

Nominal Gain = Selling Price of Asset – Purchase Price of Asset

But is the concept right? Was Rs 4 Cr in 2005 a smaller amount? It is not equivalent to Rs 4 Cr of present times as the value of money has eroded due to country’s inflation. So would it be right by the Income Tax department to charge tax on entire gain? Instead they should be charging the tax on Real Return, which are returns minus the inflation.

Real Gain = Selling Price of Asset – Inflation Adjusted Purchase Price of Asset

So how do you calculate the Inflation Adjusted Purchase Price? If let on investor, each person will have his own view in inflation, hence the CBDT (Central Board of Direct Taxes) comes out with a unique number, which is used for calculating indexed cost. For the year 2013-14 the number is 939 vis a vis 852 for year 2012-13. This means CBDT thinks that in this year inflation eroded value of assets by 10.2% ((939-852)/852 multiply by 100). The table below shows the indexation figures for 1981 when the base was taken as 100.

Cost Inflation Index (CII) 2013-14           939

Hence CBDT standardizes the calculation for purchases price of an investment. They started giving this number for year 1982-83. For all purchases before 1981, the factor used is the base factor which is 100. (but if its real estate you have to bring some documents which provides rates of property in that area in 1980 – registries that were done in that period)

CII – The Implication

In case of long term capital gains an investor can reduce his tax payment by using the indexation benefit. The rules are a bit different for real estate and securities:

1)      For investments in Property: The Long Term Capital Gain (LTCG) is calculated when property is sold after 3 years otherwise it is a Short Term Capital Gain.

Tax payment= 20% of gains after taking indexed purchase cost

(It is mandatory to take the indexed cost as purchase price)

2)      For investments in Securities: The Long Term Capital Gain (LTCG) is calculated when investments is sold after 1 years otherwise it is a Short Term Capital Gain.

Without Indexation Tax Payment = 10% of Gain

With Indexation Tax payment= 20% of gains after taking indexed purchase cost

Calculation for above example:

Indexed purchase price = Purchase cost multiply Index Factor

Indexed purchase price = (4 Cr * Index Factor of 2013)/Index Factor of 2005-06

Indexed purchase price= (4 Cr * 939)/497

Indexed purchase price= 7.56 Cr

Since purchase price is more than the Selling price, the investor is making a loss hence no tax is payable.

Applicability

The cost inflation index can be used for calculating long term capital gains (LTCG) for investments in securities and real estate. Since LTCG is nil for investments in Equities, hence it has no relevance for calculating LTCG for investments in shares and equity mutual funds. But it is useful to calculate LTCG in debt oriented mutual funds (especially Bond funds and Fixed Maturity Plans).

Ground rule:

• In case of Debt Mutual Funds LTCG can be claimed only if the holding period is more than 1 year.
• In case of property LTCG can only be claimed if the holding period is more than 3 years. 

It cannot be used to:

• Calculate STCG in case of property if sold in less than 3 years of holding period.
• Calculate LTCG on equity investments as they are tax free as per current rules.

An example above showing how this is used in property transaction.  How this can be used in debt funds. The concept is widely used in FMPs from mutual funds. The reason you of FMP issues of 13 months or 25 months in March month. The idea is to get a double indexation or triple indexation benefit. So if a 13 month FMP allotment date is on 25 March 2012 and maturing on 26 April 2013, it passes through two 1 April dates hence it can claim a double indexation benefit and will use indexation figure of 2011-12 and 2013-14 for calculating the LTCG. 

So if one invests Rs 7.5 Lakhs in a 367 day FMP in March 2012, and gets maturity in April 2013 the working under Double Indexation Benefit will be as mentioned below. Also a comparison with the fixed deposit of similar tenure has been tabulated:

Calculation with Indexation Benefit
	FMP	Fixed Deposit
Amount of Investment	7,50,000	7,50,000
Annualised Yield	10.35%	10.35%
Tenure	367 Days	367 Days
Maturity Amount	8,28,077	8,28,077
Gain	78,077	78,077
Indexed Cost	8,26,585	NA
Indexation Gain/Loss	(76585.00)	NA
Income Tax	Nil	Gain will be added to income.

So indexation can be used to save a good amount of tax payment especially if a person comes in higher tax brackets. This is the reason Fixed Maturity Plans (FMPs) and bond funds have seen a rise in issue and subscription. This benefit can and should be taken by investing towards the end of a financial year, if the investor has surplus funds, because the capital gains virtually becomes tax free due to the double indexation benefit. A major number of investors are unaware about this benefit.

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What is rupee-cost averaging? (SIP)

Rupee Cost Averaging (SIP)

What is rupee-cost averaging?

Investors generally tend to speculate on the right time to invest. But it is a known fact that no one can predict where the market is going to move-upwards or downwards. Rupee-cost averaging has been the answer to such a scenario.

With rupee-cost averaging, an investor invests a specific amount at regular intervals irrespective of the investment’s share (unit) price. By investing regularly, the investor takes advantage of market dips without worrying about when they’ll happen. Their money buys more units when the price is low and fewer when the price is high, which can mean a lower average cost per unit over a period of time.

The key factor of rupee-cost averaging is commitment. How frequently an investor invests (weekly, fortnightly, monthly or quarterly) is not that much relevant in long term? What matters is to stick to his investment mode in tougher times like we experiencing now.

How does Rupee Cost Averaging works when prices are moving upwards and downwards?

Below are the two examples to see what an investor’s average price per unit would be when prices are rising and when prices are falling.

Unit price is rising scenario. Rs.1000 is invested in a mutual fund on the first of each month. The investor in this example would methodically acquire 244.53 units at an average cost of Rs.24.54 each

Rupee-Cost Averaging (unit price rising scenario)

Month	Amount Invested	Unit Price	No. of units purchased
15-Jan	Rs 1000	20	50
15-Feb	Rs 1000	22	45.46
15-Mar	Rs 1000	23	43.48
15-Apr	Rs 1000	25	40
15-May	Rs 1000	30	33.33
15-Jun	Rs 1000	31	32.26
	Total: Rs 6000	Avg Cost:Rs 24.54	Total:Rs 244.53

Unit price falling scenario. Rs.1000 is invested in a mutual fund on the first of each month. The investor in this scenario would have bought 204.87 units at an average cost per unit of Rs.24.91.

By comparing, someone who invested the entire Rs.6000 in January at Rs.35 per unit would have owned only 171.43 units, and the investment would have been worth only Rs.4285.75 at the end of the period.

Rupee-Cost Averaging (unit price falling scenario)

Month	Amount Invested	Unit Price	No. of units purchased
15-Jan	Rs 1000	35	28.57
15-Feb	Rs 1000	33	30.30
15-Mar	Rs 1000	30	33.33
15-Apr	Rs 1000	28	35.71
15-May	Rs 1000	27	37.03
15-Jun	Rs 1000	25	40
	Total: Rs 6000	Avg Cost: Rs 24.91	Total: Rs 204.87

Advantages of Rupee Cost Averaging (SIP) 

Averaging reduces the risk factor associated with lump sum investing. For example we all are familiar with the scenario where investors who invested their money at one go when market was at its peak in the year 2007-2008 what their plight was when market crashed drastically in the year 2008. With RCA, investors get a buying opportunity when the NAV falls as he will be able to accumulate more units of the mutual fund scheme.

 RCA frees investors from the onus of monitoring stock positions on a daily basis which would be the scenario in case of lump sum investment or VCA. It serves as a cushion against the downward trend of the market.

 Investor no longer needs to look at dates, markets or anything. Investor no longer needs to monitor external factors like economy condition, interest rates, inflation etc.

 It is a disciplined approach towards investing regularly in mutual funds. - 

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What should you do when stock markets hit a speed bump?

What should you do when stock markets hit a speed bump? 

Some investors become fearful and take their money out. Others wait on the sidelines until the outlook becomes clearer. Why put in money or stay invested when stock prices could fall further, you may ask?

Don’t worry it is the nature of stock markets to move up and down, which is not in our hands to have control over it. A stock market fall is not a permanent thing, and this is not end of the world. The stock market and Government lawmakers will continue to be unpredictable. Trying to predict their movement is hard, if not impossible. And markets often do the opposite of what you think they should. 

Don’t be hasty with your investments by doing what everyone around is doing. After all, what works for others may not work for you. Currently we see shares are falling substantially, resulting in certain shares trading far below their realistic fair Value. Recognizing opportunities where others see risks is what separates great investors from good ones. So your best bet is to stay the course, even during periods of volatility.

Research suggests that a Systematic investment approach is often more profitable than one in which human judgment is allowed to play a role. This is where the Systematic Investment Plan (SIP) comes in.

The great thing about an SIP is you fix the amount you want to invest; you decide where you want to invest; and you can stop and re-start the plan at any time. It's not a magic solution but it can help you avoid a lot of the common investment mistakes.....

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 TDS on immovable property

(Starting 1 June 2013, the…)

1. Starting 1 June 2013, the 1% tax deducted at source (TDS) has been applicable on the value of transfer of immovable property worth Rs 50 lakh and above.

2. The immovable property includes assets such as a house, commercial property and land purchased for commercial or residential purposes.

3. It is the responsibility of the property buyer to deduct theTDS and deposit it with the government. However, he need not procure the Tax Deduction Account Number (TAN), which is used in other TDS payments.

4. The permanent account numbers (PAN) of both, the buyer as well as the seller, are required. In case the valid PAN of the seller is not available, the tax deduction will be at a higher rate of 20%.

5. The buyer needs to generate the TDS certificate (Form 16B) from www. tdscpc.gov.in and provide it to the seller within 15 days of the deposit.

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How variation in interest rates alters the returns in debt funds

ET SPECIAL

Every time there is a fall in the net asset value (NAV) of debt funds, there is renewed panic. The simple question in the investor's mind is: if there is no default and the fund is receiving its interest income, how and why should the NAV fall? A drop in the NAV of a debt fund can trigger alarm and lead to a precipitous closure for some, as happened in 2008. The market risks in mutual funds are not widely understood, leading to accusations that these should have been avoided somehow.

Investing in a debt fund is quite different from doing so in a bond or fixed deposit. In the case of a fixed deposit, the investor agrees to an unrealistic freeze in rupee return, in exchange for convenience and simplicity. The government no longer determines interest rates in oureconomy, nor are they dictated by powerful institutions. We have transitioned to a market for interest rates, and this market enables money to be lent and borrowed based on the needs and views of a large number of participants.

In such a market place, there are only prices and clearing. There is no right and wrong. If a borrower is willing to pay 8% for a year, and a lender agrees to it, the exchange of money is cleared at the agreed rate. The borrower needs the money; the lender has the money. The market just brings them together and enables the clearing. Alternatively, the borrower might be in the market today believing that the rates are set to rise and, therefore, wanting to borrow today; the lender might be in the market with a view that rates are set to fall and, therefore, eager to lend. We will never know the motivations, nor will we be able to identify why rates move up or down. At the end of the day, as long as everyone keeps their promise, we have a market where rates are determined efficiently and fairly.

When an investor chooses a bank deposit, he does not select the market. This is the reason he settles for a 4% rate on his savings bank account, while the bank itself would be lending its surplus balance for 8% in the call market. The bank is in the market for overnight funds, lending and borrowing as needed, while the saving bank depositor is standing out, content with a fixed rate. The market does not matter to this simple investor. He may get a lower or a higher rate. He is happy with a fixed rate and unwilling to look beyond.

What happens when such an investor chooses a debt fund? He simply steps into the market place for borrowing and lending. In this market, the rates change dynamically based on demand and supply and the views of various players. What is in the market is what he gets. This investor makes 9% on his liquid fund, when the money market rates are high; he makes 4% on his gilt funds, when the interest rates have risen; he makes 12% on his income fund, when credit spreads fall; and he makes 16% on his short-term fund, when rates correct sharply. Mutual funds are subject to market risk.

A debt fund also pools in money and creates a portfolio much like an equity fund, except that it buys debt securities issued by governments, banks and companies. If a five-year bond is issued at an interest of 10%, and the fund buys it, it earns this interest just like any other investor. However, since a debt fund is an open-ended product in which investors can come and go as they please, it accounts for the interest income on a daily basis. Therefore, the NAV of all debt funds will hold a component that represents this steady accrual income.

This income will come to the debt fund unless there is a default. However, if the interest rates in the market move up to 11%, while this bond continues to pay 10%, you cannot have a market where the same good (same issuer, same structure, same rating, same tenor) has two prices. The old bond is less valuable since it pays lesser than the current market rate of 11%. Its price falls. The NAV has to correct for this new value. This is the market risk in debt funds.

Why do the interest rates change? In the normal course, if market participants expect inflation to change, they will modify their expectations for rates. Or if they desperately need money, they will offer a high rate, as they do in March every year. Or, they may seek a different rate given their preferences arising from their own balance sheets. These changes are anticipated, tracked and acted upon by market participants and reflect in prices.

The rates can sometimes change unexpectedly. Last week, the RBI decided to curb speculative positions that may be abetting the rupee's depreciation against the dollar. It wanted to make the rupee scarce, to arrest its slide. A 2% hike in bank rates and in marginal standing facilities was announced. This hurt liquidity in the market and, in response, the rates went up sharply.

What happened to debt funds? They were holding bonds and debt instruments, including money market instruments that were issued at historical rates. The RBI action also precipitated a change in market expectations, where players began to think that the RBI would increase the policy rates too. An increase in market rates meant that the value of debt securities in the portfolio of debt funds fell. A debt fund's steady accrued income of, say, 2p a day (that is 7.4% a year), may not be enough to cover steep changes in the value of bonds arising from variations in interest rates. However, the steadiness of 2p will also ensure that these losses are recovered over time. The funds with longer tenors have too many cash flows in the future and, therefore, correct more when the interest rates increase. The shorter tenor funds typically correct less when the rates change. However, if the change is both unexpected and steep, as happened on 15 July, the correction is significant. Some investors will continue to dislike market risks and seek deposits; others will take the ups and down in their stride as long as they know the pricing is fair. Each to his own.

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Know Your Client (KYC)

Know Your Customer (KYC)  Effective January 01, 2011, KYC has been made mandatory for all category of investors who wish to invest in the schemes of Mutual Fund irrespective of investment amount for all transactions. What is the Regulation? Securities and Exchange Board of India (SEBI) has issued guidelines under The Prevention of Money Laundering Act, 2002 (PMLA) which requires Mutual Funds to follow enhanced Know Your Customer (KYC) norms. What is the Prevention of Money Laundering Act (PMLA)? The Prevention of Money Laundering Act, 2002 ("PMLA") created under the aegis of Financial Action Task Force ("FATF") forms the core of the legal framework put in place by India to combat money laundering required to be followed by banking companies, financial institutions and intermediaries by administering KYC and other reporting requirements such as suspicious transactions reporting, etc. What is KYC? KYC is an acronym for "Know Your Customer", a term commonly used for Customer Identification Process. SEBI has prescribed certain requirements relating to KYC norms for Financial Institutions and Financial Intermediaries including Mutual Funds to 'know' their clients. This entails In-Person Verification (IPV), verification of identity and address, financial status, occupation and such other personal information as may be prescribed by guidelines, rules and regulation. TO SUMMARIZE: Step 1 Download and Fill-up the revised KYC form (effective January 01, 2012) For Individuals            :   Please Click here for (New) KYC Form  For Non-Individuals    :   Please Click here for (New) KYC Form Step 2 Attach the following documents: For Individuals and Non-Individuals: Documents evidencing Proof of Identity and Proof of Address  (List of requisite KYC documents for individuals and non-individuals are mentioned in the revised KYC Application Form) Step 3 In-Person Verification (IPV): Complete IPV from any of the following: ·           ·         NISM/AMFI certified distributors who are KYD compliant Step 4 Submit the KYC form along with necessary documents At our office. Please Note:   Please download (See attach file) and print the KYC Details Form both sides on A4 SIZE PAPER i.e front and back on same paper.    Fill in the information as mentioned above in Sections of the Form with black pen.   Complete IPV by producing your original ID, Pan Card, Proof of Address ,with a copy of documents on A4 Page (Self Attested) for verification   and submit the Form . ·         Investor(s) must note that KYC compliance is mandatory at the time of submission of each subscription request with the designated Official Points of Acceptance. ·         Applications by investors without valid KYC are liable to be rejected. ·           ·         We strongly recommend all our Investors to be KYC Compliant by completing the KYC formalities, in accordance with applicable KYC rules in force from time to time, at the earliest so they can continue to invest with us smoothly.

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