Monday, February 19, 2018

For regular income - equity funds or balanced funds sahi nahi hai ...

Are you seeking regular income from your mutual funds? In that case, please do not look at equity funds or balanced funds. Do not consider regular dividends or even systematic withdrawal from such funds.

Read my article to know more ...

For regular income, equity and balanced funds sahi nahin hai ...

Read the English translation below:

Recent budget proposed by the Finance Minister introduced a tax on dividends from equity-oriented mutual funds. Some mutual fund investors and distributors were upset with this proposal. Some of them had opted for balanced fund seeking monthly dividend. Now these dividends have become taxable. The tax would impact the net amount received in hands.
First of all, let us understand the tax on dividends. This is not the regular income tax that is payable on the income received in hand. However, this is dividend distribution tax, which would be deducted before the dividend is paid out. The dividend that one receives remains tax-free in the hands of the recipient. This means that although the recipient does not have to add the dividend income in the taxable income and calculate the tax on it, it is received AFTER deduction of tax, which would mean that the investor’s returns are reduced.
This is what has upset those who invested in the balanced mutual funds seeking regular income.
We will not discuss about the merit of introducing such a tax. However, the focus of our discussion would be on the choice of equity or balanced funds to seek regular income. Before we launch the discussion, let us also add that now that the dividend is subject to distribution tax, many have started considering regular withdrawal, known as SWP (Systematic Withdrawal Plans) to get regular income. On paper, such a regular withdrawal strategy looks highly tax-efficient in comparison to dividends. This happens since the entire dividend amount is subject to tax, but in the withdrawal case, only the capital gains are taxable and not the capital withdrawn.
The question to consider should be: is it prudent to invest in equity funds or balanced funds for regular income? Very often, people get carried away with the taxes and try to save taxes, forgetting the true nature of the investment category. In the offer document of equity and balanced funds, an important item is called the “investment objective of the scheme”. In all such cases, the investment objective is “to provide long term capital appreciation” and not “to provide regular income”. In fact, even the nature of the asset does not support the ability to pay regular income.
We do not look at liquid funds when the objective is to create wealth. However, liquid funds are ideal when “liquidity” is the prime objective. Exactly in the same manner, if “long term growth” is the objective, equity could be a suitable asset category, but it is not suitable for short periods of time, or for liquidity, or for regular income.
- Amit Trivedi


Friday, February 16, 2018

Banks and the risk of NPAs

Punjab National Bank is in the news over last few days for wrong reasons. There has been a major fraud, which may lead the bank to lose a whopping amount of more than Rs. 10,000 crores. A slew of jokes and messages have started doing rounds.

One of the messages was: "Bank deposits are subject the the NPA risks."

It highlights that there is risk of NPAs in banks. Was it already there or has the risk surfaced only after the recent event came to light?

This is not about whether the risk is present, but the way we look at risk. We do not see it till something happens. We wrote about this in our article some days back. Click on the link below to read it:

Here’s How Investment Risk and Cricket are Similar…

Wednesday, February 14, 2018

Here’s How Investment Risk and Cricket are Similar…

In the 3rd cricket test match between India and South Africa, we saw something unusual. Both the teams played 5 fast bowlers each. The decision of both the teams was vindicated when the pitch started playing tricks – there was unusual bounce, with some deliveries rising too much and some remaining too low. the pitch kept the batsmen guessing. On the 3rd day of the match, towards the close of play, one delivery from Jasprit Bumrah shot up from just short of length and rose much more than normal. The batsman Dean Elgar was hit on the head. The umpires stopped the play for the day and the players returned to the pavilion.

What has this got to do with investment risks? Click on the link below to read further:
Here’s How Investment Risk and Cricket are Similar…

Tuesday, February 6, 2018

A letter to the Finance Minister

Dear Sir,
In your budget speech, when you introduced tax on long term capital gains from equity and equity mutual funds, you also introduced tax on dividends from equity mutual funds to bring parity between growth plans and dividend reinvestment plans. That was great thinking on the part of you and your team.  The tax law should not provide undue advantage to any section due to tax arbitrage, unless there is a social agenda like promotion of a backward area, or supporting an employment generating industry, etc. Tax incentives can also be used to promote a certain good behavior, e.g. saving for retirement or buying health insurance, or investing in one’s own house, etc.
Removal of disparity should be part of the strategy. However, there is a possibility of missing out on some disparities, which should be brought to the notice of the competent authorities. This is a humble attempt at that:
1.     Disparities within the Income Tax Act:
a.     While the budget introduced long term capital gains tax on equity shares and equity mutual funds, Unit-Linked Insurance Plans still remain outside the ambit of the same. There is a need to restore parity here. In the absence of that, there is a possibility of investors getting wrong investment products
b.     All investment advisors and academicians understand that diversification is a good investment strategy. The income tax act needs to be amended to nudge investors towards diversification. One area that stands out is the bonds v/s bond funds. Capital gains arising out of investing in bond funds (or debt funds, essentially non-equity oriented funds) would be considered long term if the investment has completed three years. On the other hand, if one sells individual bonds or debentures on stock exchanges, the gains are long term on completion of one year. This actually means that a concentrated investment receives better tax treatment as compared to a diversified portfolio. This disparity may be removed through appropriate changes.
c.      The withdrawals from NPS are taxed, but those from pension some other products are tax exempt, e.g. Public Provident Fund or pension plans launched by insurance companies
d.     Let us look at some examples to see how the tax laws are applicable to Long Term Capital Gains:
Minimum holding period
Tax rate
Indexation benefit
Tax saving through investment in capital gains bonds
Equity shares and equity mutual funds
One year
Not available
Not Available
Unit linked insurance plans
One year (though, there could be longer lock-in periods)
Not Applicable
Not Available
Debt funds
Three years
Not available
Listed Debentures
One year
Not available
Real estate (land or buildings)
Three years
Other assets like jewelry, gold bars, coins, etc.
Three years
Not available
Additionally, equity shares and equity mutual funds also attract STT, which is not applicable for the other avenues.
There are too many disparities in case of only capital gains. The purpose behind such disparities does not seem to be clear.
2.     While the following are not about income tax, but these come within the purview of the Ministry of Finance:
a.     The sales and marketing guidelines or the advertising code applicable to mutual funds is extremely stringent, but the same for investment-linked insurance products or the pension products is not so stringent. The law should be the same for all categories of products reaching a particular section of the investors. There should be no disparity.
                                               i.     Take for example: Mutual funds are subject to market risks v/s insurance is a subject matter of solicitation. While the former generates fear in the minds of investors, the latter makes no sense to the reader. The Unit Linked Insurance plans do not have to talk about market even if they invest in equity, but mutual funds must highlight the market risk even if the investments are in money market securities.
b.     While discounts are not allowed for mutual fund and insurance products, the same are offered when the Government of India disinvests its stake in various companies, or when the ETFs (like the CPSE ETF or the Bharat 22 ETF) are launched.
I would only think of just a few at this juncture. Can there be more? I am not sure, as I haven’t spent enough time. I propose an expert committee may be formed to study all disparities and then the same may be discussed among the various constituents including the ministry, various regulators, market intermediaries, investors, et al.
The committee’s objective should be to bring parity across all sections.

Monday, February 5, 2018

It is important to spend more time on one’s household budget than the Union Budget.

A lot of people routinely ask the common question, “budget kaisa hai?”
So, let us see if someone has to watch the budget, what are the important things one may look for that may impact one’s personal finances.

Pay attention to your household budget ... it is more important than the union budget

The English translation of the article is as under:

It is that time of the year when the Finance Minister presents the Union Budget in the Indian Parliament. A few days before and after are then spent by lots of people trying to analyse the budget proposals.
At the end of all the analysis, one may be left with a feeling that “The budget has nothing for those who can analyse it, since it tried to give lots to those who cannot.” Very often, the most common comment is that the budget was a non-event. The game has been going on for years and still presentation of the Union Budget remains one of the most awaited annual ritual. Union budget is a great business for the financial media. The common man also gets infected and starts to bother about the proposals of the budget.
Some of the financial planning experts have a sarcastic view of this situation that people spend more time discussing the Union Budget than they spend on their household budget.
Yet, a lot of people routinely ask the common question, “budget kaisa hai?”
So, let us see if someone has to watch the budget, what are the important things one may look for that may impact one’s personal finances.
Let us start with understanding what the budget is.
The Union Budget of India, referred to as the Annual Financial Statement in Article 112 of the Constitution of India, is the annual budget of the Republic of India, presented each year on the last working day of February (for last two years, the date is changed to 1dst February) by the Finance Minister of India in Parliament. The budget, which is presented by means of the Financial Bill and the Appropriation bill, has to be passed by the House before it can come into effect on April 1, the start of India's financial year.
This is essentially an account of how the money of the public was spent last year and how the Government proposes to spend the same in the coming year. The whole exercise is an opportunity for the Government to announce various means to raise resources to fund the expenses. It is here that the Government may modify certain tax heads either with the objective of increasing the Government receipts or with an objective to promote certain behaviours like spending. The changes in taxation may also be done with an objective to promote or support certain sections of the industry.
It is these changes in the tax structure that the people are interested in. what kind of taxes would be introduced, whether there would be any increase / decrease, which industries may be impacted, which companies may be impacted.
The financial planning experts discourage small investors doing such intense analysis of the Union Budget. Such detailed analysis may be carried out by expert investors, but those who may not possess the expertise may be better off with a diversified portfolio. In a diversified portfolio such changes by the Government may have positive impact on some part while some other part may be negatively impacted.
Then, is the budget of any relevance for personal finances? Yes and no. The union budget will not change one’s lifestyle or one’s responsibilities towards the family. One’s dream also would not be impacted by the budget proposals. At the same time, any changes in the personal income tax rates or slabs would have a bearing on the take home salary, thus impacting the cash flow for the family. Apart from that, the Income Tax Act already incentivizes people to take care of their personal finance needs.
·       To cover basic household expenses, the Income Tax Act has a provision for standard deduction
·       We need life and health insurance. There are provisions in the Act that help us save tax when we pay premium for these insurance policies.
·       We need to build a corpus for retirement. Investment in retirement plans; PPF, NPS, etc. have tax saving features.
·       Buying a home is almost every family’s dream. The EMIs paid on loan can bring down your tax liability. Both the components of the EMIs, viz. principal repayment as well as the interest paid offer tax deduction under different sections of the Act.
·       Every family wants to get the children educated. There is a tax deduction on the amount of fees paid for the education.
You look at various needs and there are provisions in the Act.
Given that, one has to forget about the Union Budget while planning one’s finances. It is only at the product buying stage that one may need to check the budget provisions. Consider the following questions after one’s plan is ready:
1.     Is there a more tax-efficient product?
2. Does the budget provide for launch of some new scheme, e.g.,
·       One of the earlier year’s budget made announcement for launching inflation-indexed bonds or
·       In another year tax-saving infrastructure bonds were introduced, which were later replaced by infrastructure bonds giving tax-free interest income
·       Few years ago, Rajiv Gandhi Equity Saving Scheme was introduced, which was modified later, and then discontinued
3. Are there any changes in the tax laws that may have an impact on one’s income for the current year or any of the future years?
·       Long term capital gains tax has been reintroduced. Should one be concerned? Yes, the returns from equity would be lower to the extent of the tax from now onwards. At the same time, should one reduce the allocation to equity due to this? Well, allocation to an asset class should be considered based on the investor’s need and the product’s characteristics and not on the basis of taxation.
·       Similarly, dividend distribution tax has been introduced on equity-oriented schemes. In one of our previous articles, we have highlighted why one should consider growth option and not dividend while investing in equity-oriented schemes. So, once again the budget changes nothing.
These are the basic questions that one may consider. Else, Union Budget should be a non-event for most of us and life should go on irrespective.
It is important to spend more time on one’s household budget than the Union Budget.

Sunday, February 4, 2018

Deewar - the wall

Last few days reminded of this word - Wall (दीवार  in Hindi) at least twice. One of course was when the Indian under-19 boys lifted the ICC U-19 Cricket World Cup - a lot of people gave due credit to the coach - the wall, Rahul Dravid.

Another time I remembered this was while reading (or listening to) the reactions of many people about the reintroduction of tax on long term capital gains on equity.

Since the finance minister made the announcement regarding the LTCG Tax on equity, there is a wild reaction from a few. One of the most common reactions is to demand tax on income from agriculture.

This reminded me of the scene from the film Deewar:

"Bhai, tum sign karte ho ki nahin?"
"Jao, pehle uss aadmi ka sign le ke aao ..."

Incidentally, the third example is the Wall Street that saw heavy selling.

Over all, February seems to have started with a strong wall.  Seems there is something about walls this February.

Friday, February 2, 2018

Union Budget 2018 - A satirical interview

Union Budget 2018 - A satirical interview 
After the union budget was presented in the parliament, there was an interview on a TV channel. This was conducted by an Interviewer (I), who was answered by a Market Expert (ME). In other terms, this was a discussion between I and ME.
Below is an excerpt of the interview:
I: What is your overall assessment of the budget?
ME: I am very happy. This budget has taken some very bold steps. There are some big positives from this budget. It generated employment, was environment friendly and also in line with Indian ethos. I salute the finance minister.
I: Could you please elaborate on this environment friendly bit?
ME: I am referring to the introduction of standard deduction in lieu of medical and conveyance reimbursements. It is an environment friendly move.
I: I did not understand. Please explain.
ME: Oh, it is simple. You see, the budget proposes to reintroduce standard deduction in lieu of the reimbursement of medical and conveyance expenses. Now, there is no major benefit to the employees, one may argue. However, look at the impact on the environment. In the earlier regime, the employees had to submit the bills – paper. Now that would not be required. You see, so much paper would be saved. Isn’t that good for the environment?
I: And what about employment?
ME: Oh, this is actually not new. Almost all the finance ministers have succeeded at that. You see, before the budget day, on the day itself and for a few days thereafter, so much temporary employment is generated for armchair economists and analysts. You can see it for yourself. If in doubt, please look at any business TV channel.
I: Ah, that’s a smart one. However, I am most intrigued by your statement regarding the Indian ethos. Please throw some light on that.
ME: How could you miss that? The budget was so much in line with Indian traditions. I must make a special mention to the Guru-Shishya parampara. Modi ji offered guru dakshina through the budget proposals. The budget offered many benefits to senior citizens and the members of parliament. One of the most senior parliamentarian happens to be the Guru of Modi ji.
I: That was really enlightening. There are reports that corporate employees are not happy since they did not get any tax reductions.
ME: It amazes my to see the perseverance of the employees. They do not give up the hope. I think India has a bright future.
I: Sorry, what about hope? They did not get tax incentives and they are unhappy.
ME: Yes, that they are. However, this happens with the employees twice a year. They still continue to keep their faith intact. Isnt’ that amazing?
I: Twice a year? But the budget is presented only once a year.
ME: You have to see the bigger picture. See these employees expect the finance minister to roll out some sops for them every year. Even if the budget repeatedly ignores them, they still keep the hope – that is once a year. The second time in the year is their appraisal time. They expect high ratings, high bonuses and large increments. The bosses do not give and the hope still springs eternal.
I: Now, let us come to some stocks and sectors. Please let me know which sectors are likely to be negatively impacted?
ME: FMCG should have a negative impact. Especially, the sales of “anti-aging” creams should go down, since many benefits are offered to senior citizens.
I: In light of this budget, what is the best tax saving strategy according to you?
ME: File an affidavit in the court to change your date of birth. Become a senior citizen. Alternately, contest and win an election and become an MP. And if you really want a big one, become a senior citizen and an MP.
I: Thank you sir for your valuable insights.

Message for the readers:
Dear readers, as you can see. This was just a satire on the entire process of discussions on the union budget – a great activity pursued by so many people. Please do not take the above interview seriously.
For majority of us, the budget proposals do not mean much. We do not stop living our life just because the finance minister tweaks the tax code.
You know what, the government must keep doing something as they struggle to balance their budget. They can’t, in spite of hiring the best minds in the country. We are better off. It is far easier for individuals and families to live within our means and generate surplus.
So, forget the union budget and enjoy your life.