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If you are filing your income tax returns for the year 2018-19 and you also have made sell or switch transactions in mutual funds during that year, you are then required to calculate, show and pay your capital gains taxes.

I have been getting questions too about capital gains report for mutual funds.

Now, if you have your email ID mapped to your MF investments, here is a simple way to download your capital gains reports.

The capital gains report are available with CAMS, Karvy, Sundaram BNP Paribas and Franklin Templeton. Each of them provides for the AMCs that it serves. (Unfortunately, they don’t offer a consolidated report yet.)

CAMS

With CAMS, which serves some of the largest AMCs, you can go to this link.  and select the Consolidated Realised Gains statement (includes LTCG on Equity Mutual Funds).

When you click, you will come to a new page with a form. In the form, select Previous Year (for FY 2018-19), fill other inputs and click on submit. The capital gains report will arrive in your email from where you can download. 

Karvy

For Karvy serviced MFs, use this link . The fields are self explanatory. Note the password requirement as mentioned on the page.

Franklin Templeton

If you are an investor with Franklin Templeton, use this link .You can also access this link from its website and then go to investor services->Instant Mailback.

It is important that you use your folio number and email id combination on the above page. Once you submit, you will see an option to select the capital gains report.

If you have multiple folios, then a separate report has to be downloaded for each one of the folios.

Sundaram

Now, if you have investments with Sundaram MF, this is the link to use. The same link can also be accessed from its website on the right hand side panel with the link “Request Statement”.

On the subsequent page, select capital gains report and use the rest of the form to download your statement.

All these reports are served only in PDF formats, so if you have a huge set of transactions, you could have a tough manual task ahead (for you or your CA).

You can also use one of the online platforms for a consolidated capital gains report. In that case, I suggest that you still cross check the numbers once with the RTA reports before filing your tax returns.

Remember, all these reports only tell you the capital gains only. The taxes (including any exemptions) have to be calculated by you.

Any other way you are aware of to deal with the capital gains reports?

The post Here’s how to get all your Mutual Fund Capital Gains statements for filing IT returns appeared first on Unovest.

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You are well aware of the problems debt funds have been facing in recent times. I won’t be surprised if you say that you don’t trust debt funds anymore. In fact, I would agree.

There are pros and cons to all investments. Debt funds are no exception. Over time, SEBI has introduced various measures to ensure that the investment vehicle continues to inspire confidence in the investor.

In 2017-2018, the debt funds were categorised in a way that they could help most investors understand what they were getting into. In 2019, in the wake of the credit events that affected several debt funds, SEBI has announced a spate of measures specially with respect to liquid funds.

As SEBI puts it in the June 2019 circular, “…take necessary steps to safeguard the interest of investors and maintain the orderliness and robustness of Mutual Funds.”

In short, safer debt funds. I will summarise the measures here.

  1. Liquid funds are required to now keep at least 20% of the AUM in liquid assets such as Cash, Government Securities, T-Bills, Repo instruments. This will ensure that if there is a sudden redemption pressure, the funds can meet it.
  2. The limit on investment in any one sector is now revised to 20% from 25% earlier. Limits on exposure to Housing Finance companies has been reduced too.
  3. Valuation of debt and money market instruments will now be completely mark to market. What does it mean? Hitherto, if you have noticed, you used to see a 0.02% daily increase in your liquid or ultra short term fund. That was the amortisation method where the gains were added to the portfolio consistently over time. In case of mark to market, the instruments will reflect the current market value. So expect to see a different increase/decrease in your funds.
  4. Liquid and overnight schemes will not be allowed to invest in debt having structured obligations or credit enhancements. The other debt funds will now limit this exposure to 10% of the AUM.
  5. There will be an exit load if you plan to redeem a liquid fund within 7 days. (So, if you are looking for a shorter period, money market / overnight funds is your answer)
  6. Group exposure by a scheme is now limited to 5%. So, an ILFS or Essel, is expected to have a lesser impact.
  7. The security cover for Loan against Promoter shares will have to be 4 times.

Hopefully, these will take care of the issues that debt funds suffered from and ensure that they continue to offer a diversified investment alternative.

Having said that, there is no cure to the investors taking blind decisions and chasing superior returns with no understanding of risk. As an investor, it is your responsibility to know what you are getting into.

The post Will you get safer debt funds with SEBI’s new measures? appeared first on Unovest.

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ICRA, the credit rating agency, yesterday made rating downgrades to two NBFCs, Piramal Housing Finance and Edelweiss Group companies. The reason cited is that they have a significant exposure to real estate sector.

The last 1 year has witnessed several rating downgrades. ILFS, DHFL, Reliance Capital and now Piramal and Edelweiss.

That is our RA – RE event. Rating Agencies – Real Estate.

Real Estate exposures are responsible for this stress at most companies, NBFCs and Banks.

Any rating downgrade for a company impacts its ability to raise / service short term or long financing. Usually, if the rating is downgraded, the risk perception goes up and the cost of fresh funds increases, which, in turn, adds more pressure to the company. Double whammy!

There is bigger fallout elsewhere too.

Mutual Funds take a hit because of rating downgrades

It is common knowledge now that several debt mutual funds have exposure to such NBFCs or Real Estate Lenders.

As per SEBI norms, if there is a downgrade in one of the debt instruments held by a fund, it is required to write off the value (in line with a predefined scheme). A Default rating means 100% write down of value, immediately. The fund’s NAV reflects that too.

A recent episode pertains to downgrading of DHFL bonds to Default rating, thus forcing all mutual fund schemes holding this bond to write it off 100%. Earlier in June 2019, about 10% of the NAV in UTI Treasury Advantage was written off. Any gains for one to two years were wiped off. Some of the recent investments were even looking at a loss of capital.

With the rating downgrades Piramal and Edelweiss, the schemes holding bonds from these companies are taking a hit too. The bonds are currently held by several AMCs – Franklin, UTI, Reliance, Axis, etc.

As of now, the rating downgrade is just a notch, say from AA+ to AA or AA-, and so the funds are taking a very small hit. If for any reason, there are further downgrades, there will be more write offs, which will decreasing the value of your investment in the fund.

What should mutual fund investors in schemes that hold these bonds do?

When investing in a bond fund / debt fund, I expect at least my principal investment will remain intact with a reasonable return. This is specially true for the short term variety – liquid, ultra short, low duration, etc.

The only way to do it is to be with funds that invest only in Govt bonds – short term or long term.

If there is any attempt to look for a higher return, the fund manager will step outside and add risk with corporate bonds. In fact, another category, Credit Risk Funds, as the name suggests, knowingly adds risk to the portfolio for higher returns.

So, then you ask – why do fund managers, with all the fees they charge, not do a proper assessment before letting any bond enter the portfolio? Fair question.

Well, my view is that good fund managers do their homework. Yet, they can make mistakes. The idea is to find out who is a repeat offender and stay away from them.

Of course, no one escapes the impact of a rating downgrade, even when the fund manager’s assessment may show that the money is coming back. As a market linked instrument, the write-off rules apply.

Will Piramal and Edelweiss repay the bonds and any interest on those they have issued?

If it serves any purpose, DHFL, despite the downgrade to Default rating, has been repaying its obligations in tranches. Will it be able to pay it all? We don’t know.

Let me say this. As investors, we are into rough waters. To redeem your investments now may be a knee jerk reaction.

What you should care about is the fund scheme you are invested in and your primary investment objective.

A bad scheme (if you are in one) deserves no chance. Get out while you can.

If your primary objective is capital protection and not higher returns, then you should not leave the money in a fund which seeks to generate a higher return (such as a credit risk fund). Take it out now. There might be a capital gains tax but you still get out before there is a bigger hit.

Put the money back into liquid funds that hold only sovereign bonds or use your good old fashioned Fixed Deposit.

However, if you are willing to stay put for the next 12 months or so with the right fund, it will may turn out to be a little rough but you are likely to get to the other side.

The post The RA-RE event hits debt mutual funds appeared first on Unovest.

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Quantum Mutual Fund has announced the launch of its new fund scheme, Quantum India ESG Fund. ESG stands for Environment, Social and Governance, 3 parameters which together define sustainability. For the new scheme, the ESG criteria will play a key role in selection of stocks for the scheme’s portfolio.

Why ESG?

As the world gets hotter, ESG too is becoming the hottest thing in the investing world. World over, trillions of dollars are invested under the ESG guidelines specially by the millennials, high net worth individuals who care about working towards making a better world.

To put it bluntly, our planet is going to the dogs. There are individuals and businesses that don’t care for how their actions affect the planet. Issues like emissions in air or water, data privacy, gender balance, labour policies, etc. are gaining foothold.

When investors start using the ESG criteria, it will force businesses to bring attention to areas that not only focus on the above issues making them sustainable and responsible but also have positive financial impact. In shareholder meetings of US based companies, resolutions around these issues are already being put to vote.

While quality is the most touted theme in investing, ESG criteria adds the conscience layer to quality.

What is the Quantum India ESG Fund?

Here’s an excerpt from the Key Information Memorandum of the NFO –

Quantum India ESG Equity Fund is a step towards ensuring that investments flow into greener and cleaner business. The focus of this scheme would be on investing in businesses, which are ensuring sustainable management of natural and human resources, diversity within the organizational structure, prudent management and socially responsible framework of business. 

The investment strategy of the Scheme will be to invest in a basket of stocks after intensive analysis on the environmental, social and governance aspects of the company. The aim is to follow a comprehensive ‘ESG Framework’ in order to develop deeper understanding into a company’s management practices, sustainable businesses and risk profile, which would thereby help us in understanding the impact on long-term sustainability that drives performance.

The primary focus of the Scheme will be on companies based on two criteria. First is for selecting companies under coverage and second is for selecting companies in the portfolio. The first criteria is selecting companies generally trading with liquidity of minimum US $1 million on an average over the last 12 months and second criteria based on their ESG score.

Each security, which is filtered on the basis of first criteria, will be scored on ESG parameters using data sources such as sustainability reports (GRI Framework), Business Responsibility Reports (BRR) and other publicly available documents. Active weights of a security within their respective sector will be determined by a composite ESG score.

A higher ESG score of a security within the sector will have higher relative weight and vice versa. The selection process ensures eliminating exposure to companies that rank poorly on ESG criteria completely. The sum total of the weights of securities in a sector will equal to track sector weights of broad well- diversified indices. The allocations focus on governance and sustainability; hence will be agnostic to valuations.

Quantum India ESG Fund will benchmark itself to the Nifty 100 ESG Total Return Index. You can read more about it here.

Quantum is not the first fund house to have an ESG fund. In 2018, SBI MF also renamed / recategorised its SBI Magnum Equity Fund as SBI Magnum Equity ESG Fund. The SBI scheme has Rs. 2300 crores under its management. I doubt though how many of the fund owners invested / held on for the ESG criteria, specially after the renaming.

While there is no bar on the kind of sector that the fund can go to, Financial Services (Banks, NBFCs) and IT (Software) are likely to dominate the portfolio. They have a natural edge on the ESG criteria. Having said that, HUL representing consumer goods is likely to be a top holding too.

On the other hand, manufacturing is going to have a hard time finding its place. Maruti does not appear in the NSE 100 ESG Index as a top holding nor in the SBI’s ESG fund. Asian Paints does. Titan does.

Overall, when done right, an ESG portfolio is likely to be a ‘clean’ portfolio.

Should you consider this fund?

Quantum already runs the Quantum Long Term Equity Fund – a value style fund that builds its portfolio predominantly from the top 200 stocks. Read more about it here.

Given Quantum’s approach to investing, they are likely to do a good job on this one as well. Quality with low volatility as well as turnover along with focus on preservation of capital mark the key aspects of its approach. It avoids shareholder unfriendly companies.

As for the new fund, we are still not clear on the costs. Their equity fund charges 1.25% + GST, annually. At one time, it was the lowest cost active equity fund but since then many other funds have taken over its advantage.

It will be great if Quantum can operate this fund at a lower expense ratio.

Another thing. While the existing equity fund tends to hold cash and take a call on valuations, the ESG fund is not going down that road. As per the SID extract mentioned earlier, the scheme portfolio will reflect sectoral weightage of the popular market indices. It will be ‘agnostic to valuations’.

In any case, a thematic fund has to invest 80% or more of the AUM in stocks representing the theme.

ESG theme is the extra layer of quality introduced in Quantum India ESG Fund.

Should you invest during the NFO?

Now, you need not invest during the NFO. Wait for the fund to go live and see the first few portfolio disclosures to understand where it is heading. If the fund aligns with your investing criteria, you may consider investing.

Frankly, good investing should not require a new theme based fund. Hopefully, in the future, the difference will disappear as 100s of ESG funds make their presence felt.

How do you see this new fund offering? Do share your views and comments.

The post Quantum India ESG Fund NFO – an extra layer of quality? appeared first on Unovest.

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ICICI Pru Mutual Fund has just launched its ICICI Pru MNC Fund. The NFO is open from May 28 to June 11, 2019. Should you invest?

What is an MNC?

MNC stands for multi national corporation. If you thought it refers to only foreign brand companies such as Hindustan Unilever, Nestle, Colgate and you cannot be more wrong. Even India has home grown MNCs. Tata companies, Birla companies, Mahindra companies, Maruti, Airtel, etc. have businesses in several other nations of the world.

The word MNC has a sort of aura around it. Most people want a job with an MNC, buy MNC products and some even want to buy MNC shares. Surprisingly, not many in the investment industry have milked this aspect of our thinking.

There are 2 known funds with the theme. One is UTI MNC Fund and the other is Aditya Birla SL MNC Fund. And now, we have ICICI Pru MNC Fund.

What is the ICICI Pru MNC fund all about?

ICICI Pru has created a detailed presentation on the MNC fund offering. Click here to view. Hence, I will spare you the details.

In my understanding, the fund will invest predominantly in companies which have business operations in more than one country. This includes foreign companies in India as well as Indian companies having foreign operations.

MNCs, historically, have tended to represent high quality. In most cases, as a group, they have delivered better returns for the shareholders. They are also present across the spectrum of market cap as well as sectors.

So, does this fund deserve your money?

The key difference of this fund though (from the other two) is that it can invest in MNCs listed outside India too. Think Alphabet (Google), Amazon, etc.

Questions: Is quality restricted to an MNC stock? Are there no opportunities outside of it? Why would a fund restrict its mandate to just MNC?

I also wonder why would ICICI Pru not do a smart rules based system for this fund to reduce the expense ratio dramatically. DSP Quant fund just did that.

More to it than meets the eye

ICICI Pru is on the top list not just in terms of AUM but also in terms of the number of schemes it offers. Yet, they keep launching fund after fund. Now, there’s one more. I don’t see any reason but to appease some distribution channels as the key reason for the launch of the fund.

I suggest, AVOID this new fund offer. Any good multi cap fund will build a quality portfolio, MNC or no MNC.

In fact, we have an existing alternative fund with a similar mandate, which you read about here.

The post ICICI Pru MNC Fund – NFO – What’s new? appeared first on Unovest.

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A new fund offer currently asking for your money is the DSP Quant Fund. What is this fund about and does it deserve to be a part of your portfolio? Let’s find out.

When it comes to fund management, there are 2 broad ways to build a portfolio. One is passive, the other is active. Click here to read the primer on active vs passive.

Somewhere in between the passive and active, there is a branch that intends to bring the best of both the worlds – the low cost nature of index funds and the quality and outperformance aspect of active funds. Call them smart passive funds.

A lot of research has been done on what makes a portfolio perform / out perform. Essentially, what are the factors responsible for stock portfolio performance. There are about 7 to 8 factors including

  • Value
  • Quality
  • Momentum
  • Size
  • Liquidity
  • Low Volatility

At various points of the market cycle, one or more of these are likely to drive the performance of a portfolio.

Fund managers and investors in their zeal to chase alpha picked up on these and started a new set of funds also known as factor funds. While they have been a rage globally, in the Indian context too, we have seen a few. They are very little interest today. Some such funds/ETFs are –

  • Kotak NV 20 (based on Nifty 50 Value 20 TRI Index)
  • ICICI Pru Nifty NV 20
  • SBI ETF Quality (based on Nifty 200 Quality 30 TRI)

DSP Quant Fund is yet another factor based fund, which is expected to operate by rules around the factors.

The making of DSP Quant Fund

DSP has taken a leaf from the playbook of its earlier partner, BlackRock, which has a big presence in the factor funds space.

DSP Quant Fund positions itself as a rules driven fund based on good investing principles. It applies factor based scoring and an optimisation formula around growth, quality and value. It expects to outperform the BSE 200 benchmark over 7 years plus time horizon.

Since the benchmark is BSE 200, this is more of a large & mid cap fund. It is categorised as a thematic fund since the fund house already has an active fund that occupies the large & mid cap category (as defined by SEBI).

On the BSE 200 stocks universe, the fund uses the following factors to filter and optimise its own portfolio.

Source; Fund presentation by DSP

On the face of it, they appear like what any sensible fund manager would apply to his portfolio. The difference is that they are converted into rules thus eliminating space for personal judgement.

The fund will use percentile rank to avoid overweighting large market cap stocks, which is one of the issues with the existing indices. What is the likely difference once can see in the portfolio?

Using the above factors, this is the difference one can see in the portfolio vis-a-vis the benchmark. This is the result as on March 31, 2019.

Source: Fund Presentation by DSP

The fund is likely to have lower drawdowns too. On the other hand, the rise in comparison to the index may remain a bit muted.

Proof of passive – the fund will rebalance once every 6 months.

Should you invest in DSP Quant Fund NFO?

What do I like about this fund?

One of the key concerns with active funds has been that they are driven by a fund manager’s whims. It has been observed in the past that several funds flounder once the star fund manager leaves. Looks like the DSP Quant Fund is unlikely to face this issue. As it says, “the rules, rule”. That’s a good thing and prevents acting on bias. (Mind you, only the fund has rules. It can’t prevent you from behaving irrationally, though!)

Another key concern with active funds is the high costs (even though they are hardly ever beating the marked index). These costs can be as high as 2%. The DSP Quant fund cost or expense ratio is expected to be 0.4% per year for the direct plan. There is no reason to complain about the expense ratio and hopefully they will have a glide down path for it with rising AUM.

Well, you can still go for just an index fund with a much lower cost and no fund manger to bother. But that wouldn’t be smart, right? That’s why you might consider a rules based, smart passive fund like this.

What I don’t like about this fund?

For starters, it is a beginning. It’s a new fund. While they have back tested their strategy, I am not a big fan of back testing. The real world always turns out to be different. The strategy has not gained experience of its own, specially over a 7 year period it claims one should invest for.

Having said that, the fund house does have the experience of various other schemes over 10 years or more.

I also don’t know how much tweaking have they allowed in the strategy / optimisation. Basically, can they change the rules? How frequently? What basis? Because, if that happens, it is no different than any other fund.

The fund warns those who have less than 7 years investment horizon or desired to invest in a momentum style of investing. They should avoid.

Long story short, if you are willing to make this fund a core holding in your portfolio (with at least 10% allocation), you may consider investing in the fund. This means you need good conviction.

There is no hurry though. This is going to be an open ended fund and once it opens you can take your call after seeing the fund behaviour in the real world. I would do that.

Remember this is not a plan vanilla passive index fund but a smart passive fund.

Over the next decade or so, I believe the passive and smart passive will occupy a larger portion of your MF investments because the active fund mangers will fail to justify themselves.)

Trivia 1: The Quant in the fund name is confusing. It goes against the purpose of the fund and suggests that the fund will operate on algorithms, may be use high frequency trading.

Trivia 2: The S&P BSE 200 index is designed to measure the performance of the top 200 companies listed at BSE Ltd., based on size and liquidity across sectors.

The post DSP Quant Fund NFO – Should you invest? appeared first on Unovest.

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Principal Small cap Fund offering comes from the underlying belief of fund houses that there is money to be made in small caps. Whether this money is for the fund or for you the investor, remains a question.

Having worked with 100s of clients and interacted with many others, my view is that most investors are not ready for a dedicated small cap fund.

The patience that is required to make money with a small cap fund is plain absent. The investor is not ready to face the drawdowns – sometimes as much as 50%. If the fund performs poorly on past 3 year or 5 year returns basis, there is an urge to move out and invest in another fund with a better performance.

The fund houses / AMCs understand the investor behaviour very well and play it accordingly. Just a little portion invested in large caps or mid caps, over and above the mandatory 65% into small caps, does the job. It smoothens the NAV, lowers the volatility and dresses the ratios well.

You still get compared with other small caps and stand out. The perception management is as important as fund management within the universe.

A pure small cap fund which gravitates towards micro caps, and is subject to more pain than the other finely adjusted similar fund, loses out in the perception battle.

In this scenario, when being a pure small cap can spell your doom and take the investor away, the only way investors will stick is by being upfront and transparent about what you stand for, what the fund stands for and clearly telling who should not invest?

Where does Principal Small cap Fund stand?

As a regular reader of the blog, you know the answer already. In fact, I had written a Funny Money note on a small cap NFO or New Fund Offer. I am humoured to say that the note as it is applies without change to the Principal Small cap fund NFO.

The no. 1 reason Principal MF is doing this NFO is because it has a vacancy to fill. For all the funds allowed by SEBI, the fund house does not have a fund in the small cap category. Time to do it!

The no. 2 reason is that there is a general view in the market about small cap valuations moderating from earlier. Some of them are good businesses available for adding to the portfolio. For all the fundamental talking, professionals also find it difficult to ignore macro events / non events. In this case, it is the elections 2019. A lot of them are banking upon a post-election uptick to take their careers forward.

The no. 3 reason is that the distributor community needs to be kept engaged with a new product, new offering, something new to talk about. The investors keep asking “what’s new” and the distributor can reply “here’s something for you.” (Rhyming is incidental)

From an investor’s point of view, none of these are good reasons to invest in a small cap fund, more so in this fund. Of course, the bigger reason is that you are not ready for a small cap fund.

Like it or not, investor seeks a straight line return even from an equity investment. A time horizon of 5, 10 or 15 years is easy to say but difficult to put into practice. A few months or years of staying behind makes you nervous.

Avoid the pain now, don’t invest.

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If you have come across an FMP sales pitch, it almost always is that “it is as safe as a Bank FD”, yet, “it will give higher returns than an FD.” An easy lure for most investors since ‘safe returns’ is a primary criteria.

You don’t like that FMP word any more. Do you?

In 2016, I wrote how FD returns have reduced and fund houses are doing the best to offer an alternative to the ‘safe but higher return’  seeking population.

People did invest then. And the ghosts have come back to haunt. One of the FMPs launched then, HDFC Fixed Maturity Plan – 1148 Days – Feb 2016 is due for maturity. Unfortunately, it has exposure to the Zee group (almost 20% of the FMP investments), which is doubtful of recovery for now and the Zee group promoters have asked for time to pay up.

The fund house along with other lenders has complied to their request believing that it is in the investor’s best interests. And so, it asked its investors to make a choice – take the money on maturity with a cut for the bad investments OR rollover (delay the maturity) for a chance to recover the full money.

Unfortunately, that is not what the investor signed up for. Her idea of an FMP was a safe return product, which gave better return than an FD as also better taxation. Turns out she was wrong!

No good time than the current crisis to rebuild a fresh perspective on FMPs and ask if they should be a part of your portfolio?

What is an FMP or a Fixed Maturity Plan?

If you have invested in a Bank FD before, you know that it comes in for different tenures of 1 year, 3 year, 5 year, etc. 

Now, you have probably also heard of a debt mutual fund.

If, no then you should read about debt mutual funds here.

An FMP is sort of a hybrid of the two. It is a debt mutual fund but with a defined tenure or period like a Bank FD.

To take some examples of names of FMPs –

  • HDFC Fixed Maturity Plan – 1148 Days – Feb 2016
  • DSP BlackRock Fixed Maturity Plan – Series 155 – 12 months
  • Birla Sun Life Fixed Term Plan – Series LQ – 368 days

So, an HDFC Fixed Maturity Plan – 1148 days – Feb 2016 means that it is a FMP that is going to start in Feb 2016 with a maturity of 1148 days or roughly 3.14 years.

Similarly, the Aditya Birla Sun Life FMP is for 368 days.

But is an FMP as good as a Bank FD?

Yes, that is the top question on your mind. Frankly, an FMP resembles a Bank FDbut only in the way it is structured. They come in several tenures too including 1 year, 3 years, sometimes longer.

Recently, 3 years+ tenures have become a norm and that is because of the long term capital gains implication. You get cost indexation benefit and hence pay lower tax.

Now, to list some of the differences between an FMP and a Bank FD:

  1. Bank FDs offer guaranteed returns in the form of interest. There is no guarantee of returns in FMPs.
  2. The principal amount that you invest in Bank FDs is also guaranteed by the government to the extent of Rs. 1 lakh. No such guarantee with FMPs.
  3. FMPs have a daily price unlike FDs and are affected by changes in interest rates. FDs are a straight line.
  4. If something goes wrong with one of the investment made by an FMP, it has to reflect in its value, which is adjusted (usually downwards) and affects you as an investor. With an FD, even while NPAs are the norms with banks, an FD continues to pay its promised interest and principal back.
  5. But let’s look at another side too. FMPs are more transparent in terms of disclosures about where they invest the money, average maturity and credit quality of the portfolio, and other details. On transparency basis, Bank FDs are a black hole. But then who cares?

You would also find that with an FMP, the average portfolio is of a reasonably high credit quality that is AA / AAA. That means lower risk.

Does an FMP give you better returns than Bank FDs?

It could but that is not guaranteed. Most fund houses attempt to generate a higher return than a Bank FD, since that becomes a major selling point.

To generate higher returns, an FMP would have to invest in not so high credit quality instruments, thus taking on relatively higher risk.

Now if you see, a year ago, the 1 year Bank FDs were available for 6 to 7% interest rates. (Senior citizens get half to 1 % more.) The return generated by FMPs in the last one year has been in the range of 7% to 8%.

Returns do not look like a differentiator for FMPs.  

What about taxation?

With Bank FDs, you have to add the interest that you earn as a part of your income and it is taxed accordingly.

As you would know, debt mutual funds such, as FMPs, attract short term and long term capital gains tax. If you sell or redeem your debt mutual fund or FMP within 3 years, you will attract short term capital gains at the marginal rate of your income tax bracket. The same would be long term capital gains tax of 20% after indexation, if you sell or redeem after 3 years.

For High Net worth Individuals or corporates, using debt mutual funds turns out to be more tax-effective. By paying indexation based long term capital gains on debt funds instead of tax on FD interest, they are able to save a precious rupees.

Does the lock-in make sense?

If you look at comparative data between Liquid, Ultra short term funds and FMPs, the former turn out to be better.

As you would know, liquid funds and ultra short term funds are open ended, that is, you can invest or redeem any time you want. There is no lock in.

Liquid and UST funds also hold an equally good credit quality (investment grade AA / AAA) in their portfolios.

As for returns, they have in some cases delivered a better return than FMPs.

So, getting into a lock-in with an FMP has no additional benefits.

What should one do – invest or not?

If we were to summarise the key aspects of an FMP, it would be:

Liquidity – Lock-ins with windows of redemption, but with exit loads;

Safety – Depends upon the kind of instruments the fund invests in; Typically is investment grade quality. Current experience has started to point otherwise.

Returns –  No significant difference in returns with reference to Bank FDs or Liquid / Short term funds. Remember, every bit of extra return comes at a cost, usually lower quality of portfolio (higher risk).

Taxation – Can be tax effective on an indexation basis for HNIs and Corporates. For a retail investor in the lowest tax bracket, this too ceases to be a differentiator.

As a retail investor, you are better off ignoring the marketing noise. Avoid FMPs. Based on your time horizon and risk appetite, choose a Bank FD or a liquid fund or an ultra short term fund. You will sleep well.

Between you and me: Have you been affected by the recent FMP crisis? Or you are simply a Bank FD fan? How do you go about making your fixed income / debt investments? Do share in the comments.

The post The FMP mess – Should you invest in a Fixed Maturity Plan? appeared first on Unovest.

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The year 2018 saw the introduction of long term capital gains tax on equity investments (mutual funds or direct stocks) at the rate of 10%+surcharge. As you file your tax returns, here are some key points to wade through the calculations.

If you have sold your equity investment (held for more than 1 year) in the financial year 2018-19, you are required to calculate your long term capital gains and pay taxes on them.

Before you start cursing the government for introducing one more tax, do know there’s a breather in the law. If you invested in mutual funds on or before Jan 31, 2018, any gains made till that day are exempt from this tax.

For the purpose of calculation of your capital gains, you can take the higher of your ‘actual buy price‘ or ‘price as Jan 31, 2018 as your actual cost‘ and calculate your gains accordingly.

The set off against long term capital loss!

The other benefit that has come out of from this tax is that you can now also set off your realised long term capital losses against your realised long term capital gains.

Means, that if you invested in Mutual Fund A and sold it after one year at a loss of Rs. 10,000, then you can deduct this loss from another Mutual Fund B, that you sold for a profit of Rs. 20,000. The net capital gains in this case is (Rs. 20,000 – Rs.10,000) = Rs. 10,000.

What is the capital gains tax that you pay?

Here’s how it works.

  1. In any financial year, long term capital gains on equity mutual funds are exempt till Rs. 1 lakh.
  2. Over this Rs. 1 lakh, you pay 10%+surcharge as long term capital gains tax.

So, in the above example, assuming that the total capital gains is only Rs. 10,000, there is no tax payable as the net capital gains is less than Rs. 1 lakh.

What if the total gain was over Rs. 1 lakh?

Suppose, the total gain is Rs. 1.5 lakh. In this case, the first Rs. 1 lakh is free of tax. For the balance Rs. 50,000, the tax amounts to 10.4% of Rs. 50,000, that is, Rs. 5,200.

What if there is an overall realised loss?

Good question. Suppose, you sold some of your long term investments in the past year and overall you made a loss of Rs. 50,000.

First thing, you don’t need to pay any tax on the loss.

Second, you can note down the loss and set it off against any future gains, till the next 8 years.

How? Suppose, the next year, you end up realising a gain of Rs. 175,000 on sale of your equity mutual funds. You can now set off the earlier Rs. 25,000 loss against this gain. This reduces the overall gain to Rs. 1.5 lakhs. Isn’t that great?

Can I set off my short term capital loss against long term capital gains?

Yes, of course. If you have made a short term capital loss (STCL), that is, on sale of equity mutual fund held for less than 1 year, you can set off this loss against long term capital gains.

The rule to note is that you can set off STCL against Short Term Capital Gains first and if there is still a balance in STCL, then against Long Term Capital Gains.

Phew!

I know this sounds like a lot of work but most investment tracking platforms can help you get these numbers. If you are using the services if a CA, s/he will help you with the same.

Your primary job is to ensure that you have the calculations done correctly basis the transactions you have carried out in the financial year ending March 2019.

Read more: Long Term Capital Losses

Further reading: Capital Gains Tax – All that you need to know in a single place

The post How to calculate your Capital Gains Tax on Mutual Funds in 2019 appeared first on Unovest.

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The rising popularity of mutual funds has got more investors interested. They are now asking questions and making comparisons to other investment products. Mutual funds for beginners is a comprehensive list of resources for  new investors  to clear doubts and provide answers to questions.

For others, this is a good recap of what you have known. Expertise is all about repetitive practice.

Let’s begin with the basics. Here are 21 facts that you must know about mutual funds.

Mutual funds for beginners – 21 facts you must know

You have been watching your friends / colleagues investing in mutual funds / stocks. You also realise that you need to plan for a better financial future. You are ready to make your first mutual fund investment.

Your first mutual fund investment – Why, what and how?

What was the original purpose of Mutual Funds? What problem do they solve?

Revisiting the purpose of investing in mutual funds

Finding a good mutual fund scheme, relevant to your needs, is like finding a needle in a haystack. There are more chances of doing it wrong than right. Here’s what you should not be doing.

How not to select mutual funds?

If you have ever read or heard a mutual fund advertisement in print or radio or TV, the final words are – “Please read the scheme information document carefully before investing.”  Really, but how?

How to read a fund factsheet?

A new investor can tend to look at lower NAV as a signal for a good mutual fund. Nothing can be further from the truth. This is a big myth that exists around using or understanding NAV.

The Myth of the mutual fund NAV

When comparing funds, the past performance takes the centerstage for most investors. However, this needs to be done right. A trailing return or point to point return may not be a relevant number in most cases, since you are likely to invest over several years and not just one time. Let’s find out more.

Mutual Fund Performance: Rolling Returns vs Trailing Returns

Recently, there has been a mayhem in debt funds with the ILFS, DHFL, Essel Group issues coming forth. This also points out how little investors understand debt funds as a category. They are taking huge risks for little marginal gains.

This section will help you revisit some of the key facts about understanding debt mutual funds.

10 things to know about debt mutual funds

Liquid Funds – Make your cash work harder

Are Ultra Short Term Funds alternative to a Bank FD?

Year 2017 and 2018 were about the popularity of direct plans. Most investors still don’t understand it and think of it as a way to save full costs. The reality is that direct plans can provide a smart investor a way to clearly distinguish to costs of advice and the cost of transactions. Thus ensuring, no conflict of interest.

Direct Plans of Mutual Funds – all that you want to know

I still get to see questions such as “which SIP I should invest in?” The marketing overdrive in mutual funds to promote SIPs, made investors believe SIP as an investment product than a method to invest in mutual funds. Let’s understand what SIP truly is.

SIP – Understanding the Systematic Investment Plan

This is a big one. Investors believe mutual funds can bring them 15%, 20% or 30% returns. The past is being extrapolated to the future. The disappointment came in soon. What’s the right expectation on returns from mutual funds?

How much returns to expect from Mutual Funds?

Should I go for dividend option or growth option? Which is better? This is one question every new mutual fund investor asks.

Growth vs Dividend option – what should you choose?

Not just mutual funds but you can use XIRR to calculate performance of your entire portfolio. Here’s everything.

XIRR – How to evaluate your mutual fund portfolio performance?

Rajeev Thakkar, CIO of PPFAS answers some key questions about investing in mutual funds. Must read.

Investing in Equity Mutual Funds – an insider’s perspective

After you have gone through all of the above, you may still end up asking, what is the best mutual fund? Here’s my funny take on it.

Best Mutual Fund – The Funny Money Show

After you are done with all, you can now start building your own winning mutual fund portfolio. Here’s a step by step guide. 

The post Mutual Funds for Beginners – Old lessons for new investors appeared first on Unovest.

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