Prajna Capital - An Investment Guide

The tax treatment in the mutual fund is categorised on the basis of: i) Equity and Debt funds ii) Long term and Short term Capital Gain iii) Dividend and Capital Income Equity, debt & the tax impact Equity oriented funds are those funds where more than 65 per cent of the corpus is invested in stocks of Indian companies. Debt funds are those which invest more than 65 per cent in the debt market. Now let's say you hold the units of an equity scheme for more than a year, in that case you are eligible for long-term capital gains, which is zero. In other words, you pay no tax. But if you sell the units within a year, you have to pay short-term capital gains. In the case of debt funds, if you sell the units after a year, you will have to pay a long-term capital gains tax, either with or without indexation, whichever is lower. Indexation is used to calculate tax when inflation is taken into account. This is good because it reduces the amount of capital gain and subsequently, the am...

The securities market regulator, SEBI, has proposed radical changes in the way mutual fund distributors are compensated. SEBI seems set to enforce complete flexibility and transparency into the commission paid to the distributors. The changes are long-anticipated and many ways logical. However, they are likely to lead to a deep transformation in the way mutual funds are sold, and I think many distributors will find it difficult to adjust to the new regime. Mutual fund distributors (who are now euphemistically called Independent Financial Advisors-IFAs) are currently paid a commission by the Asset Management Company ( AMC ) whose funds are being sold. This commission is generally around 2-2.25 per cent for equity funds. This is deducted from the invested amount and the investor gets allotted that many fewer units of the fund. The distributor gets the commission from the AMC. Distributors are not permitted to refund any of the commission back to the investors. However, it is an open secr...

The expense ratio is the total amount of annual expenses incurred by the fund. It includes: The management fee and Operating expenses like the registrar and transfer agent fee, audit fee, custodian fee, marketing and distribution fee. These expenses are divided by the assets under management. Simply put, the expense ratio is the per unit cost incurred in managing the fund. The net asset value ( NAV ) which you see daily is calculated after deducting these expenses. However, the expense ratio of a fund is disclosed only once every six months. The expense ratios of equity and debt funds differ. Since the expenses of equity funds are more than those of debt-oriented funds, the expense ratio on equity funds is greater. As per the regulations of the Securities and Exchange Board of India ( SEBI ), a mutual fund can charge a maximum expense of: · 2.5 per cent for equity funds, · 2.25 per cent for debt funds, · 1.5 per cent for index funds and · 0.75 per cent ...

Take SIP route for better long-term returns A systematic investment plan ( SIP ) is an investment option that involves investments on a systematic basis over a period of time. Under a SIP option, an investor commits making a regular investment in a particular mutual fund or deposit. Investing in mutual funds through this route is much easier, more efficient, and is one of the best ways to see your investments grow over time. In a SIP, the investor invests a specific amount of money for a continuous period, at regular intervals. By doing this, you can compulsorily save a fixed amount each month. Further, you can avail the advantage of rupee cost averaging. This is because you automatically participate in the market swings. The amount of investment remaining the same, you buy more units in a declining market and less in a rising market. By consistently investing the same amount at regular intervals, your average cost per unit will be lower than the average market price, irrespect...

Here’s an insight into the world of arbitrage funds — what you must know before taking exposure in such funds. HOW IT WORKS For starters, an arbitrage fund tries to take advantage of price discrepancies for the same asset in different markets. For example, if the stock price of ABC Ltd is quoting at Rs 100 and its future price is Rs 110 in the derivatives market, then the arbitrage fund can buy the stock in the spot market and sell it in the futures market and gain Rs 10. Put simply, arbitrage funds are fixed income products that are free from equity risk. They are affected by the stock market trend (bullish or bearish) to the extent that the demand for stocks and liquidity in the markets is impacted, which in turn affects the arbitrage opportunities. Another factor that affects the arbitrage funds is interest rates. Fund managers believe that when interest rates are high, people instead of buying stocks upfront prefer to deal in the futures market as it requires only a fractio...

Mutual funds are a convenient way to invest in the markets. Numerous fund houses offer a wide platter of schemes. The choice before the investor is so wide, that he is often baffled. Some investors who have tasted attractive returns in the past believe that all funds can work the magic for them. When they get mediocre results, they realise that their time and money are wasted. Today, the stock markets are badly beaten. People with low risk appetite are locking away their savings in debt instruments. Some investors consider mutual funds a safer route to remain invested in the markets. How does an investor evaluate the performance of mutual funds? How do you ensure that your money is not locked in a low or no return scheme? Don’t rely on past performance A fund that was yielding consistent returns over the past few years can disappoint the investors next year. Past performance is no guarantee for good future performance. Compare its performance over varying timeframes against the b...

systematic withdrawal plans (STPs) are for optimal and efficient investing EARLIER in this series, we discussed the investment and redemption strategies of systematic investment plans ( SIPs ) and systematic withdrawal plans ( SWPs ). SIPs let you invest a specified sum of money at specified intervals—generally weekly, fortnightly, monthly or quarterly—irrespective of market conditions. SWPs let you withdraw money systematically from funds, as opposed to lump sum withdrawals. This week, we look at a plan that combines the best of systematic withdrawal and investing—the systematic transfer plan ( STP ). An STP withdraws a pre-specified sum of your money from one scheme, and invests it another within the same fund house, at regular intervals. It thus lets you re-allocate your from a liquid fund (a money market debt fund with low risk, but much higher returns than a bank savings account) to one or more equity schemes of the same fund house. As there is no exit load on a liquid fun...

Arbitrage Funds aim to capitalize on the opportunities arising from a pricing mismatch between the spot and the future markets . They constitute an asset class whose returns are not linked to the stock market. Their strategy to profit from the difference between the prices of a stock in different markets makes them immune to upswings and downswings of the stock market. They are undoubtedly less risky as compared to equity funds. These funds are suitable for risk-averse investors as they are the least volatile in comparison to all other types of funds. Moreover, these funds are more tax efficient than debt funds as they are treated in line with equity funds. The performance of arbitrage funds depends on the availability of arbitrage opportunities and volatile markets carry a higher potential of mis-pricing between the spot and derivatives markets. Hence, during such volatile times they form a good option to invest in.

Here are some parameters that give you an indication of a fund’s performance The performance of a mutual fund scheme is reflected in its net asset value ( NAV ) which is disclosed on daily basis in case of open-ended schemes and on a weekly basis in case of close-ended schemes. The NAVs of mutual funds are required to be published. All mutual funds are also required to put their NAVs on the web site of the Association of Mutual Funds in India ( AMFI ). Investors can access NAVs of all mutual funds at one place. The NAV is the most common denominator which summarizes the entire performance of the fund. The mutual funds are also required to publish their performance in the form of half yearly results which also includes their returns/yields over a period of time i.e. past six months, one year, three years, five years and since inception of schemes. Investors can also look into other details like expenses as a percentage of total assets as this has an affect on the yield. In addition, mut...

MAJOR emerging market fund groups recorded outflows during the fourth week of August with EMEA (Europe, Middle-East, Africa) equity funds hit the hardest in percentage terms, according to Emerging Markets Portfolio Funds Research. Investors pulled money out of the diversified Global Emerging Markets ( GEM ) Equity Funds for a fifth-straight week and extended Latin America Equity Funds’ losing run to 12 weeks and $4.1 billion. Since the second week of June, EPFR Global-tracked Emerging Market Funds have surrendered a net $23.1 billion, the note said. Appetite for exposure to emerging markets has been eroded by a sharp correction in commodity prices during the current quarter, a string of downward revisions to economic growth forecasts and painfully high inflation rates in several key markets including Russia, India, South Africa and Argentina. Investors still have appetite for direct exposure to China, although the $175 million they committed to China equity funds was more than offset b...