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KEEPING CASH AND WATCHING IT GROW OUTSIDE SAVINGS ACCOUNT – AN UPDATE

 

  1. ARE YOU KEEPING TOO MUCH IDLE CASH IN YOUR SAVINGS ACCOUNTS?
  2. DO YOU WANT TO KNOW OF A WAY IN WHICH YOUR IDLE CASH CAN GENERATE ADDITIONAL INTEREST MORE THAN WHAT YOUR SAVINGS ACCOUNT GIVES WITHOUT ANY PRINCIPAL RISK?
  3. DO YOU ALSO WANT EMERGENCY ACCESS TO THE ABOVE FUND THROUGH ATM CARD WHICH CAN BE USED IN HDFC BANK ATM’S?
  4. DO YOU ALSO WANT A FACILITY IN WHICH YOU CAN TRANSFER FUNDS TO AND FROM THE FUND ONLINE THROUGH YOUR BANK ACCOUNT?

For knowing how all the above is possible please read on?

FOLLOWING UP ON ARTICLE POSTED ON 7TH OCTOBER 2011 whose link is (https://aryaadvisoryservices.wordpress.com/2011/10/07/flag-this-message-keeping-cash-and-watching-it-grow-outside-savings-account/)

Liquid funds invest in money market instruments. Money market is a market for short term borrowing and lending. This market deals with debt instruments such as certificate of deposits, commercial paper and treasury bills.
Secondly liquid funds do not have entry or exit loads so its as good as savings account.  Liquid funds give more returns than savings account normally as per the scenario of interest rates in the market.  For e.g. last one year returns of liquid funds is around 8.5%.  Whereas last 2 years per annum return is around 6.5%.
Can be easily liquidated and dividend re-investment/payout option saves tax to a person in the highest tax bracket.

Coming back to point 2 above instead of keeping lakhs of rupees in banks at a meagre rate of 4% per annum, keep them in liquid funds and let it generate returns above your savings interest rate.  Keep some amount for emergency only in your savings account and transfer other to liquid funds.

As in point 4 you can also have online facility so that after creating folio through us we will help you get the online access so that through selected banks you can transfer money online. i.e. additional purchase or even redemption you will be able to do online yourself without worrying about the time taken for redemption/purchase.

Also now Reliance has launched an ATM card for selected liquid schemes, whereby you can withdraw upto 50% of your funds in a single day (max. limit as per ATM limit per day) from any  ATM so in case of small emergencies you can withdraw from your liquid fund in any ATM.

Loss to you in the last 2 years by keeping 2,00,000rs. idle in savings account on an average is atleast 6000rs. just because you did not open  a liquid fund.  Why crib for small change when you are not interested in keeping your money wisely?  Think.

Conversations with a MF non-believer

November 2, 2011 4 comments

‘MFs are for the rich’
‘No, they for the dumb’
‘And they hardly give any decent returns’
‘Infact I can make more money from investing directly in stocks’

Presumptions about MFs always seem to outnumber the facts.   It took a 13-hour train ride to finally let go of my distrust of MF investing and emerge a believer.

There is a warm smell of chhole bathura as the young lady seated next to me meticulously opens the plastic wrapped boxes for her children. The old woman on berth 48 looks on indulgently while I’m trying hard to control my hunger pangs. We are on the 1019 UP Konark Express to Bhubaneshwar and I know I will have to deal with more delectable smelling food, restless children and an unending stream of chaiwallahs over the next 13 hours.

To take my mind off the food, I decide to start a conversation with a bright looking young man seated across me. He’s reading the Economic Times’ stock pages; Perfect. Just the kind of person I can share notes with on the recent market upswing.

Me: So you invest in stocks, eh? It definitely is a good time for people like you and me, what with the stock market on a roll.

BrightLad (BL): I don’t invest in stocks, Sir. I have all my savings in mutual funds with a good mix across equity, debt and liquid funds. I was just going through some of the NAVs

Me: Mutual funds? That’s surprising. You are a smart young man. Why would you invest in insipid mutual funds when there are much better returns to be made by investing directly in stocks? I’ve never known a man to make the kind of money in MFs that one can make in stocks directly.

BL: (laughing) Or lose that kind of money either… Investing in stocks is far riskier, Sir. It entails a lot of research, constant monitoring and most times a lot of money too in order to ensure that I have enough diversity in my investment portfolio. There is just too much risk investing the little surplus I have each month in 1-2 stocks. If they do badly, my savings are at stake.

Me: But the returns are so much more. I invested 40,000 in Vien Systems and now it’s worth Rs 1.1 lakh in just 6 months. You would never be able to make that kind of money in a MF.

BL: Maybe. But the risk attached with it is also far higher than that of a MF. When I say risk, I mean that these smaller company stocks which rise that fast can also fall as rapidly and then you might get far less returns or even have your capital wiped out.  People only talk about the money they make in stocks but not the money they lose. For every stock that gives you 300% returns, you would have 3 others in your portfolio which might be losing money.

With a mutual fund, you know that your funds are being managed by fund managers who are trained and whose job is to research companies and track markets on a full–time basis. It’s almost impossible for a lay person with a day job to replicate that kind of thoroughness or information about companies, industries or markets. Which basically means that the decision we common people on the street make about shares will be less informed than them and hence higher risk.  And if you would still prefer to invest in small cap stocks, MFs offer a  variety of schemes which invest largely in these stocks so that you can derive the benefit of value-investing.

Me: Ok so forget Vien. Even if I invest in a blue-chip stock I think I’ll make more money than say a MF which invests in blue chip companies; the reason being that MFs charge annual expense fees for the funds they manage.

BL: But you pay brokerage on your stock market transactions too, each time you buy and sell shares.  Moreover that brokerage is paid merely for executing the transaction whereas annual expense fees charged by MFs include the research that goes into picking stocks, managing the scheme’s risk-return across market conditions and executing all transactions required to maintain the portfolio in line with the scheme’s investment objectives. And to make sure that MFs do not charge any random fee, SEBI has prescribed stringent limits for MFs.

Our conversation is now drawing interested glances from a middle-aged man on the side berth and the old woman. Finally the man cannot resist:

Middle Aged man (MAM): Ok, so a mutual fund gives me the benefit of a well-diversified portfolio and hence better returns for the level of risk taken. It also allows me to achieve market related returns for small sums of money, since MFs accept investments as low as Rs 1,000 and still give you the benefit of investing in the stock markets.

Old Woman (OW): All that’s fine, but I’d rather invest my money in bonds than MFs. At my age, there is no place for any risk element in my investments.

BL: I agree. You would probably be better served by debt or liquid funds, since they give you the double benefit of investing in fixed income instruments as well as the flexibility of withdrawing your funds whenever you need it.

OW: But I thought  MFs invested only in stocks.

BL: That is a common misconception. There are several MF schemes which invest essentially in bonds, debentures and fixed deposits of banks and corporates. These are called debt  or income funds and are tailored to people who prefer low risk investments. The advantage an individual investor like you and me have here is that we are not tied down by a bond’s maturity period and can withdraw our money whenever we have the need for it. So we get the benefits of a steady income instrument without losing out on the ability to take our money when we need it.

Me: So basically what you’re telling us is people can choose lower-risk schemes like income funds or higher risk equity schemes depending on one’s risk appetite and return aspiration. And that since people have different needs at various points in their lives, MFs have devised schemes which suit those specific investment requirements.

MAM: (laughing) Probably also explains why there seem to be hundreds of schemes all over the place. People’s needs are not going to reduce any time soon, so MFs will continue to launch schemes I guess.

BL: Yes, but SEBI has also realised that this plethora of schemes can get confusing for the ordinary man and hence has issued strict instructions that MFs cant launch new funds unless they are fundamentally different from their existing schemes.The train rolls into Bhusaval and I take the opportunity to step out and buy myself some chai at the station. A while later, the whistle sounds. I run alongside the train a bit before jumping on. As I amble into my compartment, I see a new face in our midst. There’s an old man trying hard to squeeze his bag alongside all ours.

As the train gains momentum, I see the old gentleman pull out his mobile phone  and tell the person at the other end, most likely his son or daughter,  that he’s boarded the train and will call them once he reaches Bhubaneshwar. I’m trying hard not to eavesdrop but like the rest of us, the old man believes that long-distance conversations have to be conducted loudly. Suddenly he starts talking about SWP s and how he’s forgotten to deposit the cheques he’s received. The bright young lad looks at me and smiles; Another mutual fund investor, his face seems to be saying. I roll my eyes heavenwards and smile back.

The old man finishes his conversation and apologises for being loud. The bright lad smiles warmly at him: ‘You seem to have chosen your compartment well, Sir.  We have been having this interesting conversation on mutual funds and investing over the past few hours. I’m happy to see that we have another seasoned investor onboard now.’

OG: You embarrass me young man. I can hardly be called seasoned. I started investing after much prodding from my daughter. Initially I would berate her often when I had problems with either the process of investing or when the fund didn’t do as well as I expected it to. But now after nearly 2 years I’m glad I took her advice.

Me: But isn’t investing in MFs all too complicated? I mean everywhere I look I can see MF ads but none of them tell me what I really need to know. Where do I start from?

OG: (Smiling) You sound just like I did two years earlier, when investing in MFs was an alien concept for me. I had no clue either. I saw all these long articles about the virtues of MFs but absolutely nothing on the basics needed to get me started; Till a friend of mine guided me to his advisor. And that’s what I would recommend to you too.

Categories: Mutual Fund Articles

KEEPING CASH AND WATCHING IT GROW OUTSIDE SAVINGS ACCOUNT

October 7, 2011 1 comment
As Indians we have this habit of keeping cash in our savings accounts for use in case of any emergency.  Emergency can be a real emergency like paying for medical bills, or emergency can be something which could have been planned like a real estate or stock purchase.  But we as Indians have habit of keeping lakhs of rupees idle in our savings account which earn only 4% per annum interest because we feel safe that we have money in our bank.
Big corporates use the cash funds of mutual funds companies to park their deposits to get value out of their money.  Due to the opening up of the mutual fund industry with time the same cash funds are available for retail investors like us too but due to lack of knowledge we tend to discard them.
What is a liquid fund(cash fund)?

Liquid funds invest in money market instruments. Money market is a market for short term borrowing and lending. This market deals with debt instruments such as certificate of deposits, commercial paper and treasury bills.
Secondly liquid funds do not have entry or exit loads so its as good as savings account.  Liquid funds give more returns than savings account normally as per the scenario of interest rates in the market.  For e.g. last one year returns of liquid funds is around 8%.  Whereas last 2 years per annum return is around 6.5%.
Can be easily liquidated and dividend re-investment/payout option saves tax to a person in the highest tax bracket.

All major AMC’s eg. ICICI, HDFC, UTI and RELIANCE have liquid funds.

So let your idle money which you have put in savings account grow through liquid funds.

Categories: Mutual Fund Articles

WHAT KILLS MUTUAL FUND RETURNS when we compare with property returns

Reliance Growth Fund was launched in September 1995.  Anybody investing 10,00,000rs. in that fund would get 4.5 crores at present.  Hows that for starters.  But still when people compare real estate and equity mutual funds they find real estate as the best return generator.  Why the difference.  The killer here is perception and liquidity.1.     A real estate broker does not talk in per annum % terms whereas the financial advisor always talks in per annum % terms.  If we break down the above returns in per annum terms it may not seem so attractive.  A real estate broker will say to purchase the house/plot etc. for doubling but what about the per annum returns.  IF THERE ARE PEOPLE WHO MAY HAVE DOUBLED MONEY from 2008 till now in housing, there are the SAME AMOUNT OF PEOPLE WHO HAVE DOUBLED MONEY in equity mutual funds in the same period.

2.     Liquidity:  Whenever there is a need for liquidity in a persons life, the FIRST CASUALTY is mutual funds because they are liquid.  Why don’t people sell their extra property when liquidity is required.  Its the possessiveness factor.  Why don’t you be possessive of your equity mutual funds and give them TIME.  LIQUIDITY option does not let equity mutual funds grow in your portfolio.  Why not break fixed deposits for liquidity.  Again the Indian factor.

3.     Loan to buy property.  At the end of the interest period THINK IN YOUR HEART how many of you calculate the actual value of your property by adding interest paid in it.

All in all, change the old mindset and DIVERSIFY your portfolio as per your GOALS

Categories: Mutual Fund Articles

Taxation of mutual funds

 

“Dividend and Capital gain taxation in the hands of investors in Mutual Fund Schemes from 1 April 2011 (The Finance Bill, 2011 has received assent from the President on 8 April 2011)”
Individuals
Corporates
Corporates
NRI
From 01.04.2011 to
31.05.2011
From 01.06.2011
Dividend
Equity schemes
Tax free
Tax free
Tax free
Tax free
Debt schemes
Tax free
Tax free
Tax free
Tax free
Dividend distribution tax
Equity schemes
Nil
Nil
Nil
Nil
Debt Scheme(other than Money market and
Liquid schemes)
12.5%+ 5% surcharge+ 3% cess
20%+ 5% surcharge+ 3% cess
30%+ 5% surcharge+ 3% cess
12.5%+ 5% surcharge+ 3% cess
13.51875%
21.63%
32.445%
13.51875%
Money market and Liquid schemes
25% + 5% surcharge + 3% cess
25% + 5% surcharge + 3% cess
30% + 5% surcharge + 3% cess
25% + 5% surcharge + 3% cess
27.0375%
27.0375%
32.445%
27.0375%
Long term Capital gains (Units held for more than 12 months)
Equity schemes 1
Nil
Nil
Nil
Nil
Debt schemes
10% without indexetion or 20%  with indexetion whichever is lower + 3% cess
10% without indexetion or 20%  with indexetion whichever is lower+5% surcharge + 3% cess
10% without indexetion or 20%  with indexetion whichever is lower+5% surcharge + 3% cess
10% without indexetion or 20%  with indexetion whichever is lower + 3% cess
Without indexetion
10.300%
10.815%
10.815%
10.300% 3
With indexetion
20.6%
21.63%
21.63%
20.600% 3
Short term Capital gains (Units held for 12 months or less)
Equity schemes
15% flat + 3% cess
15% + 5% surcharge + 3% cess
15% + 5% surcharge + 3% cess
15% + 3% cess
15.45%
16.2225%
16.2225%
15.450% 3
Debt schemes
30% + 3% cess
30% +5% surcharge + 3% cess
30% +5% surcharge + 3% cess
30% + 3% cess
30.9%
32.445%2
32.445%2
30.900% 3
1 STT @ 0.25% will be deducted on equity funds at the time of redemption and switch to the other schemes
2 For foreign corporates, the rate applicable would be 40% + 2% surcharge + 3% cess i.e. 42.024%
3 The short term/long term capital gain tax will be deducted at the time of redemption of units in case of non-resident investors only
The rates that will be applied by the AMC at the time of redemption would be as follows

Tax Deducted at Source (Applicable only to NRI Investors)

Short term
Long term
Equity
15.45%
NIL
Debt
30.9%
20.6%

In terms of section 206AA of the Act, w.e.f. 1st April, 2010 it will be mandatory for every person including a non-resident who is entitled to receive any sum or income or amount, on which tax is deductible, to furnish his/her Permanent Account Number (‘PAN’), failing which tax will be deducted at higher of the following rates:

– the rate specified in the relevant provision of the Act;
– at the rate or rates in force i.e., the rate mentioned in the Finance Act; or
– at the rate of 20%.

Furnishing of PAN becomes critical in cases where the gains earned by the investors are taxed at a rate lower than the rate applicable under section 206AA of the Act.

Equity scheme means an “equity oriented fund” which is defined in the Income-tax Act, 1961 (‘the Act’), as a fund where the investible funds are invested by way of equity shares in domestic companies to the extent of more than 65% of the total proceeds of such fund.

The expression “money market mutual fund” has been defined under Explanation (d) to Section 115T of the Act, which means a scheme of a mutual fund which has been set up with the objective of investing exclusively in money market instruments as defined in sub-clause (p) of clause (2) of the Securities and Exchange Board of India (Mutual Funds) Regulations,1996.

The expression” liquid fund” has been defined under Explanation (e) to Section 115T which means a scheme or plan of a mutual fund which is classified by the Securities and Exchange Board of India as a liquid fund in accordance with the guidelines issued by it in this behalf under the Securities and Exchange Board of India Act, 1992 or regulations made thereunder.

Disclaimer
“The information contained herein has been obtained from sources published by third parties. While such publications are believed to be reliable, however, neither the AMC, the Trustees, the Fund nor any of their affiliates or representatives assume any responsibility for the accuracy of such information. The tax rates provided hereunder are only for the purpose of information and the actual tax incidence may vary from assessee to assessee. Investors are requested to kindly consult their tax advisors for ascertaining tax liability.”
Categories: Mutual Fund Articles

MUTUAL FUNDS VS. TRADITIONAL LIFE INSURANCE(NON-UNIT LINKED)

A comparision of mutual funds vs. other investments especially traditional life insurance policies.  Traditional life insurance policies are an old favourite of Indian investors probably because of the compulsory saving concept but if smartly and systematically in the same way investments are done in mutual funds they give more returns than any traditional life insurance policy.  Here i am not comparing ULIP policies because every ULIP policy is different based on insurance covered, charges and returns delivered.  This comparision is only for traditional insurance policies  and mutual funds.  Please click on link for the comparision.  I was not able to upload properly so am sharing link.  If you are not able to download please e-mail me on to_anand@yahoo.com for the same.

WHAT IS SIP and who should go for SIP

So generally speaking I would like to discuss with you the benefits of SIP.(Systematic Investment Plan)
  • What is an SIP?
An SIP is just like a recurring deposit such that there is a fixed amount which you commit to pay to a mutual fund every month for a pre-determined period of time either through post-dated cheques or through Auto-debit from your bank account.
  • What returns do I get from SIP?
The returns from an SIP are not fixed as in Post office recurring deposits but in the long term say 5 years or 10 years SIP’s provide very handsome returns.  For the five year period more than 15% p.a. returns can be assumed.  I have attached with this letter an illustration for your purpose of investment of Rs. 5000 per month in an SIP with its returns.
  • Who should go for an SIP?
Investors wanting to invest in recurring deposit for 5 years.
Investors who can commit a fixed amount per month for atleast 1 year.
Investors who want to have some compulsory savings scheme. This scheme forces you to earn more and save more for your future years.
Investors who are afraid to put their money in the market can divide the amount they wish to invest by say 12 months and invest through SIP to minimize risk and get benefit of averaging the market.
Categories: Mutual Fund Articles
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