Prajna Capital - An Investment Guide

MF industry, which survived a major crisis after the stock market crash, can grow in the coming years. Excerpts... Market risk ratings Until now, we have had only one form of rating for money-market funds — credit rating. Internationally, money-market funds are rated on two parameters – credit rating and market-risk rating. Market-risk ratings are dependent on the duration of the portfolio and the liquidity of the underlying assets the fund holds. While we do not have a full fledged dual rating system in the country, the recently introduced ceiling on the maturities of the fund may be the first step. A dual rating system may make functioning of the industry robust like it has in western countries. But let’s not forget that, even if that is done – you may continue to have problems during abnormal months, like the one we have already witnessed in October 2008. The market risk ratings can only reduce the risk for investors, but it cannot eliminate it completely. Retirement investment ...

When choices are many you could end up feeling confused; it could be over buying a cell phone or for that matter an ice-cream flavour! So imagine, when your mutual fund ( MF ) agent throws an array of questions -- Which fund do you want to invest in? or Which MF option do you want? Chances are you might end up feeling confused. A MF offers three options-- dividend payout , dividend reinvestment and growth . Each of this option has its own pros and cons. We at Wealth tip you off on what's best for you. Let's understand the three options in detail. A. Dividend payout: Assuming you have 100 units in your MF and the net asset value ( NAV ) of the unit is Rs 10. Now, the fund house declares 50 per cent dividend (a dividend is the profit made by a MF that it distributes to its unit holders. These dividends are paid in cash and are a percentage of the unit value) on the scheme. So, for every unit you will get Rs 5 (50% of Rs 10), which makes it Rs 500 for 100 units. You might rejoi...

What is an FMP? FMP stands for Fixed Maturity Plan . These are essentially close-ended income schemes with a fixed maturity date i.e. that run for a fixed period of time. This period could range from one month to as long as two years or more. When the fixed period comes to an end, the scheme matures, and your money is paid back to you. FMPs do not invest in equity. The portfolio is generally invested in debt and money market instruments maturing in line with the tenure of the scheme. The objective is to lock-in the investment at a specified rate of return thereby immunizing the scheme against market fluctuations. Liquidity In most open-ended mutual fund schemes, one can redeem one’s units anytime. However, the structure of the FMP does not lend itself to this kind of liquidity. Invest money you are more or less sure you are not going to need during the tenure of the plan. If you withdraw before the scheme closes, generally a steep exit load is imposed. The reason for this steep load is...

Tax treatment of returns from Monthly Income Plans ( MIPs ) depends on the way you derive them. If you opt for dividend plan, then like all debt funds, MIPs are liable for Dividend Distribution Tax ( DDT ) which is 12.5 per cent for debt funds. If you choose the growth plan, all gains will be treated as short-term or long-term depending on your period of holding. Any short-term gain (less than 1-year holding) from debt funds is added to your income. Long-term gain from MIPs is taxed at 10 per cent without indexation or 20 per cent with indexation, whichever is lower. Deriving gain from an MIPs Growth option through Systematic Withdrawal Plan ( SWP ) could be more tax efficient than dividend plan. SWP is redemption of units worth predefined amount and periodicity. Besides, you will also have a greater control on your cash inflows.