5 tax implications of mutual fund investments

5 tax implications of mutual fund investments that you should be aware of while filing ITR

If you are a mutual funds investor, one of the important things to understand is the tax implications on your investments. Investment in mutual funds comes with various tax provisions. While you can claim up to Rs 1.5 lakh deduction for investment in ELSS scheme during the financial year, here are five of them which needs to be kept in mind:

• Be conscious of declaring any dividend income if received from mutual fund dividend schemes. 

• Any long-term capital gains booked in equity MF will be exempt from income tax only till March 31, 2018. 

• Benefit of indexation on their original debt fund investment means that the original investment is adjusted for the price of inflation and taxed accordingly. 

• The short-term capital gains arising out of the sale of debt mutual fund before three years are taxed according to your tax slab. 

• Remember to declare any short or long-term gains out of your liquid fund investments – especially due to rapid growth in instant redemption liquid fund products, there may be a significant number of retail investors who need to be cognizant of this point. 

Happy Investing

Source:Moneycontrol.com

Concerned about your SIP returns?

Concerned about your SIP returns? Here’s what you need to know

Don't worry if your SIP in equity mutual funds over the past 8-12 months is showing negative returns. This could be the best thing that ever happened to your portfolio


With the Sensex and Nifty touching new highs over the last few days, your equity portfolio may not reflect the same. There is a high probability that your Systematic Investment Plans (SIPs) in equity mutual funds over the past 8-12 months may show negative returns. Worried? Don't be, as this could be the best thing that has happened to your portfolio if you are investing for the long-term.

The last few quarters have seen a deep correction in the mid- and small-cap segment, and overall stock market indices have been achieving new highs. This has resulted in investments (including SIP’s) showing low or negative returns, especially if the SIP’s were initiated in the last 3-4 quarters. 

The correction in 2018 is mainly led by mid- and small-caps -- the Nifty Mid and Small Cap indices have fallen more than 11% and 19% from their peaks, respectively. Broader indices (such as the Nifty 50, have on the other hand, been in more of a "consolidation" mode, generating flat to positive returns on a point-to-point basis.

As investors, we all hate to see our portfolios give negative returns. While investing is easy these days, creating wealth is extremely tough as we go through such market cycles. There is a saying that “the stock market always rewards patient investors” and it’s at times like this our patience is tested.

The silver lining here is that such market cycles help you create wealth for yourself. The investments you are making (in equity mutual funds) and the way of investing (SIP’s/STP’s) are best suited for you to take advantage of market volatility, especially taking into consideration the time frame of your financial goals (the further away your goal in number of years the higher allocation you would have towards aggressive small and mid-cap funds).

We firmly believe that this is not the first or the last time you will be seeing high market volatility and as financial advisors, we are equally confident that being patient and continuing your investments will ensure you meet your financial goals. 

Remember, only when the markets fall is when the opportunity is created for higher returns in the future. With SIP’s you are ideally placed to take advantage of this situation as every time the market falls your monthly investments buy more units in your mutual fund. This will ensure larger returns when the market returns to growth mode.

Consider this real life example of an investor who started a SIP of Rs 10,000 per month in Franklin India Prima Fund in January 2010 (fund value today: 21.76 lakhs versus a total invested principal of Rs 9.6 lakhs). The following is only one of several examples of how depressed equity markets during an accumulation phase have paid off richly by creating wealth over six to eight-year time frames.

Market movements are not in our control, however, by making sure your investments are in the right mutual funds as per your risk profile, and through SIP modes, not only reduce risk but ensure that you meet your important financial goals by averaging out (by buying more units when the markets fall).

Although it doesn’t sound good, the best thing to happen to your investments in the initial (accrual) stage is low market returns because that will make a significant difference to your portfolio in later stages when you are close to achieving your goals.

This is where focusing on long-term investment goals provide strength and patience to not get carried away by short-term market movements. Greed and fear are your biggest enemies when it comes to meeting long-term goals. This is not the time to let fear ruin your investment decisions.

The key to success would be to get a good financial advisor who understands your finances and makes investments based on your investment goals.

Happy Investing

Source:Moneycontrol.com

5 mistakes to avoid while rebalancing your portfolio

5 mistakes to avoid while rebalancing your portfolio


Either your equity component or debt component may go beyond the defined level. That will call for rebalancing.


Rebalancing your portfolio is necessitated by a variety of factors. Your goals may have been achieved and may call for rebalancing. You may need to maintain more by way of liquidity ahead of milestones and hence rebalancing may be required. There may be a major shift in the macros calling for a rebalancing in your portfolio. A change in your own financial situation may also call for rebalancing your portfolio. But more often than not, rebalancing is entirely rule based. You start off with certain allocations for various asset classes. Either your equity component or debt component may go beyond the defined level. That will call for rebalancing.

When you rebalance your portfolio there are a lot of implications in terms of costs, taxes, impact on goals etc. Here are 5 key mistakes you must avoid when you rebalance your portfolio.


1. When you rebalance, focus on the current winners and potential losers

When we rebalance the portfolio, the focus tends to be more on the losers or the potential winners. That is a mistake. Your focus in rebalancing should be actually on current winners and potential losers. Why is that so? Your current winners are the assets that may actually require rebalancing. Also when you look at the future, the focus must be on potential losers. That is where the risk comes from. Rebalancing is an outcome of risk. Your risk stems from current winners and from potential losers. When you rebalance your portfolio that is what you need to focus on.

2. Don’t drive your rebalancing by personal likes and dislikes

Rebalancing is a scientific exercise and must be dealt with as such. When you rebalance your portfolio, a rule based approach always works best. A discretionary approach to rebalancing not only becomes too open ended but it also leaves too much to the discretion of an individual. For example, you may have a view that rates are going down and hence may want to shift your debt portfolio more in favour of long dated funds. Alternatively, you may have a view that equities are overpriced and hence may want to move more into low beta equities. Both these are views are subject to certain assumptions. Rebalancing is too delicate and important to be left to assumptions. It is best to make rebalancing rule-driven.

3. It is always better to seek expert support for rebalancing

Self driven planning and robo driven planning is good but it is always better to seek expert advice when it comes to rebalancing. It is after all about your long term goals. What is the value-add that the advisor can provide. He can provide you a holistic picture and fine tune your decision. You can share further data with the advisor and he can add a personal touch to the entire rebalancing process. Experts can also caution you on what to do and what not to do when you rebalance your portfolio.

4. There is a tax angle to rebalancing and you must factor that in

Every rebalancing has transaction implications and entails transaction costs. But above all it has tax implications. For example if you are exiting equity funds within a year it is STCG and if you are exiting beyond 1 year then it is LTCG. Effective the latest Union Budget, even equity funds have to pay LTCG tax at 10 percent on profits in excess of Rs.1 lakh each year. You need to factor in these costs when you rebalance your portfolio. The tax costs can be higher in case you are moving out of debt funds. If you are selling out before 3 years then it is STCG and is taxed at your peak rate of tax. Even if you have held debt funds for more than 3 years, you still have to pay tax at 20 percent after considering the benefit of indexation. These costs can add up to quite a bit and change the economics of your portfolio rebalancing decision.

5. Don’t rebalance without your eventual financial goal in mind

This is one of the most likely mistakes when you rebalance. Your rebalancing should be driven by your eventual financial goals and also by your milestones. For example when your milestones are are approaching it is better to stay in liquid funds. Don’t rebalance these funds as liquidity is paramount when milestones are approaching. Also when you are looking to grow your money over the long term, remember that any shift out of equities can seriously impair your long term wealth creation.

Rebalancing is a necessary decision pertaining to our portfolios. You just need to ensure that it is in sync with your long term goals and the costs do not outweigh the benefits. That is the key!






Happy Investing
Source:Moneycontrol.com

How to make money work for you while you are asleep

How to make money work for you while you are asleep


Many investors follow a buy and rotate strategy with a view of a short-term. This is the most outrageous mistake which investors can commit.


Many people are of the opinion that you need to wake up before the break of day to taste financial success. This does not mean that late risers will be left behind the race. In fact, it’s not about the time you wake up and the hours you work. It’s about the approach which you embraced to manage your finances.

One of the biggest factors that differentiate the wealthy from the rest is that they make money work for them. This is such a common advice given by many advisors. However, what does it mean? And how, you can achieve it?

Before that let me share a simple yet a thought stimulating story from ‘The Parable Of The Pipeline’ by Burke Hedges

This story circles around two protagonists Pablo and Bruno. The two friends were on a quest for financial independence in their lives.

One day, they were given a task of carrying the water from the mountain to a village. While Bruno was content with the money he earned from the task, Pablo felt quite exhausted at the end of the day. After a few weeks, an idea struck upon him. He thought of building a pipeline which can carry water on its own. While, Bruno spurned the idea, that did not deter Pablo. Soon, he started building the pipeline in his spare times. In the meantime, Bruno bought a bigger house and cow for himself.

However with time, his capacity to carry water reduced day by day. After two years, Pablo was able to complete the pipeline and now instead of using buckets to deliver water, his pipeline did the work for him. He earned a lot of money without any efforts.

So what does this story teaches us? Well, no doubt that creating pipeline was a time-consuming process, it helped Pablo to make money work for him without any efforts.

The next question is how can you replicate this model while investing in the stock market?

For you to reach financial independence, it is important to make money work you even while you take a nap. Here are four simple hacks to manage your money so that it can multiply on its own.

1. Adopt a systematic way: Getting systems in place can help you to follow a systematic method of investing. To get started in the stock market, one can invest via the automatic SIP route. In this way, a fixed amount will be automatically debited from your account every month towards your investments. This will reduce the hassle and worry of markets ups and downs. Contributing a small portion of your earnings towards strong businesses will help you to stay disciplined and consistent.

2. Power of compounding: Many investors follow a buy and rotate strategy with a view of a short-term. This is the most outrageous mistake which investors can commit. Rather, by investing in stock with strong underlying business for a long run, one can capitalize on the ‘Power of Compounding’. Power of compounding multiplies your money with time and can help you amass significant wealth. Stocks such as CEAT, Motilal Oswal, Eicher Motors mushroomed 8-12 times in the last 5 years. There are many such stocks that fetched mind-boggling returns to investors, albeit only if you allow ‘time in the market’ to come into play.

3. Develop various streams of passive income: Apart from investing in equities, you can develop other streams of passive income that can add to your regular source of revenue. Passive income will help you to pursue things which you love instead of worrying about the bills.

4. Clear all your debts: Even though this may not directly help you to earn money, it will reduce your expenses and help you have more money in your pocket at the end of each month.



To get started, it is recommended to take some time to introspect and understand your goals and what you’re good at. Even though all the above-mentioned ideas may demand an upfront payment at the start, it will definitely help you to multiply your money in the long run.

Happy Investing

Source:Moneycontrol.com

Investment Thesis For JHS Svendgaard

Investment Thesis For JHS Svendgaard

1. Successful Turnaround : JHS has emerged stronger from the woes of near bankruptcy and has experienced all perils related to debt laden expansions. The management has resolved to a debt free status, with future expansion planned through internal accruals and equity.

2. New Capex : As outlined by management, they are facing a double problem – on one side they are still underutilized on total capacity and on the other hand this capacity is not fungible hence they cannot take up multiple SKUs from clients. The retrofitting on new equipment on existing plants and new capacity coming on stream should solve both problem

Moreover, management is exploring inorganic capacity expansion in West and South India. With strong client relationships, JHS can ramp up fast, post-acquisition of new facilities through inorganic route

3. Client Relationships Is A key Entry Barrier : Given that Oral care market is pretty saturated with key incumbents, strong relationships with clients is a key entry barrier. Having walked the whole path with P&G in the past, JHS boasts of the requisite process standards and manufacturing quality certifications which would lead to meeting stringent product quality in a timely delivery schedule. For a new player, getting into the trusted list of suppliers for the key FMCG brands would be costly and time consuming. Hence ramping up with clients is much easier for JHS, compared to a new supplier.

4. GST and Shift from SSI/Unorganized Segment : GST would lead to an immediate pain for a few quarters due to inventory de-stocking however the reduced tax of 18% from earlier ~25% for toothpastes augurs well for the growth of this segment. Already we are seeing a 9% price cut from Colgate and others are bound to follow soon.

The excise duty and other exemptions available to SSI would now be not available any more. Hence private label manufacturers would prefer shifting to large organized players like JHS.

5. Growth in own brand (Aquawhite) : Management has closely guarded the profitability of the own brand sales, citing lack of adequate accounting measures in its system to report segment profitability. We expect very high margins for this segment. If management can indeed ramp up the own brand sales to 50% of overall revenues, it would add significantly to the top line and profitability.

6. Other FMCG Products : Over the next 2 years, management expects traction related to opportunity in liquid filling contract manufacturing. Given that clients like Dabur are already on board, this can be a huge opportunity in the future.

7. Exports : Given that JHS has successfully exported in the past to private label clients in the US and other markets, it can lead to additional opportunities in sales.

The investment thesis is based on the optimism outlined above, that management will be able to deliver on the promise and opportunity and achieve high sales growth both in contract manufacturing and own brand.


However, the key issue had been large and frequent equity dilution. If JHS goes on diluting equity again in immediate future, instead of buybacks, the wealth creation scope would be limited.


There are two growth streams for JHS – contract manufacturing led growth and own brand sales. FY18 would have disruption for GST in short term and capacities coming on board, full effect in new sales would be seen from 2019

The own brand margins would remain higher than contract sales, but would be capped as JHS plans to spend on advertisements in the future. Hence a higher than 21% EBITDA is not estimated.

Valuation wise, it is tricky to value a business which has just turned around. JHS is in between Converters (85% sales) and FMCG (15% sales). Going forward, management expects the FMCG sales to become 40% + of the overall sales, along with strong revenue growth.

It would be interesting to monitor the progress and see if JHS indeed emerges as a strong FMCG player in years to come.


Key Risks

· Revenue dependency on key customers: Company has few large clients who are accountable for bulk of the revenues. In case of any adversities with client businesses JHS would end up with fixed costs and incur huge losses

· Backward integration for clients: If the current buyers decide to go for own manufacturing capacities this can be detrimental for current and future prospects of the company.

· Compliance and Standard checks: Clients conduct regular audits to check standards and compliance. If JHS fails to meet these audits it can lose significant business from clients.

· Dependence on few products: Company is largely limited to few products for the revenue streams. Any adverse development would lead to large sales gaps, difficult to fulfill by other products.

· Dependence on few suppliers: Company is dependent on few suppliers for raw material procurements. Any large disruption in the supply chain will lead to cancelled orders.

· Underutilization of capacity: Delay in timely ramp up of projected order volumes can lead to high fixed costs for the company impacting the profitability.

· Threat of low cost imports: If the large buyers decide on importing from other low cost destinations company would be in a difficult position.

· Exchange Rate Fluctuations: Exchange rate fluctuations might render the company’s exports noncompetitive and impact the revenues.

· Key man Risk: Company has been largely driven by Mr. Nikhil Nanda. There is no dedicated 2nd line of command capable of leading the business in its growth phase.

· Conflict of Interest: If JHS progresses in its own brand journey, it might come into conflict with its large clients in the same line of business, resulting in lost sales.

Happy Investing

Source:Alphainvesco.com

5 things to understand while investing your hard earned money in mutual funds

5 things to understand while investing your hard earned money in mutual funds



Mutual funds are an easy route to invest and the inflows into the industry has been rising continuously. However, it important to understand that simply investing money without knowing the implications can actually have an adverse effect on your invested amount. Therefore, whenever you invest in mutual funds, you should always try and understand a few basic things about investing through this route.



Here are 5 things you should know while investing in mutual funds.


Understand one’s risk-taking capacity
You must have heard that high returns come with high risk. While that’s true, what’s important is to not take this hypothesis literally. The risk is a very subjective variable. What’s high risk to you can be low or no risk to others?. Before getting into any investment, your first step has got to be to assess your appetite for risk. One common risk test is to assess your ability to accept a negative return. If you can absorb negative return, the interpretation is that you’re willing to invest in high-risk assets. However, at times risk analysis is a bit more complex than just that. Looking at your holistic financial health is the most important step.


“Assess your liquidity, your liability, milestones, goals, sources of income, your age, job stability, years to retirement, biological health and insurance cover. These are some variables to determine your risk taking capacity. Assessing your risk taking capacity appropriately will help you extract maximum value out of your investment. After all, any investment deserves time to deliver its true value,” he added.


Know how to choose asset classes


The inflation rate in India is high and investing more than 50% in debt could generate negative real returns. Moving away from conventional financial planning,


I would recommend monthly systematic investments for the rest of your investing life. Start with 100% equity mutual funds allocation from age 21 to 50, move to a 75:25 investment ratio between equity and debt mutual funds respectively between the ages of 50 and 65 and then finally move to a 50:50 equity and debt mutual funds asset allocation for the rest of your investing life.


Understand the availability of investment option


Most mutual fund schemes have two to three investment options built in. These options are typically Growth, Dividend Pay-out and Dividend Re-investment. These are useful to investors and investors should take time to understand the merits/demerits of each option before picking one option. The growth option is generally the preferred option as it’s the best representation of ‘Wealth Creation’. “Your money is truly working in the market. For wealth creation, it is always going to be the growth option. The dividend options are useful in certain cases. For instance, if you’re someone who likes liquidity, this can be a very useful option. As dividends are paid from distributable surplus, dividends are a smart way to capture the capital appreciation in a given period of time. It’s important to note that dividends are not guaranteed,” he said.


Understand the tax implications


When you invest in an equity mutual fund there is no impact on tax immediately unless there is a deduction to be claimed. Secondly, there is no need to disclose any investment which goes into a mutual fund where you are not planning to take a deduction for this purpose. A deduction simply means a reduction in amount while calculating the taxable income of the individual to the extent of the investment that is actually made. This can only be done when you are making an investment in ELSS schemes specifically. The tax savings schemes under equity mutual fund category come with a lock-in period of 3 years. For example; if your taxable income is Rs 10 lakh and you have invested Rs 1 lakh in ELSS fund then in such case, the tax will be calculated on the balance of Rs 9 lakh.


Do not book profit frequently


Looking at a certain profit gain initially without giving time to your investments is not a good idea of generating income. The investments will have zero impact on returns if you book your gains from time to time. Compound your gains and don’t book them. Realising gains in a short period will only attract capital gains tax and transaction costs which benefit the exchequer and the mutual fund, but neither benefits the investor.






Happy Investing
Source:Moneycontrol.com

Cost of delay

Cost of delay

Are you planning to delay your SIPs to avoid market volatility? Find out what it may cost you


Of late, many potential investors have turned cautious. With equity markets remaining volatile in the short-term, some new investors, who may have earlier firmed up plans to invest, are now reconsidering their decision. By delaying their investments, they think they can avoid short-term loss, even though they remain convinced about the long-term prospects. When asked, they often argue that a 6 to 12 months delay in their systematic investment plan (SIP) will not make any big difference, especially since they want to invest for a time horizon of 20 to 30. Will delays actually not make any difference? We tell you.


Six-month delays

Mutual fund SIPs are designed to invest both at highs and lows, and allow you to benefit from rupee-cost averaging. A delay means you will miss out on return. Six months may seem like a small period because it is just six monthly SIPs. But the impact is far bigger.


Let us assume you delay your monthly SIP of Rs 5,000 for six months in an investment horizon of 20 years. If your expected rate of return is a modest 12% per annum, a six-month delay can actually cost you Rs 3.18 lakh. If the return rate is 15%, a mere six-month delay will set you back by a whopping Rs 5.17 lakh. If your SIP monthly amount is Rs 10,000 and you expect 15% return annually, a half a year delay could cost you upwards of Rs 11 lakh. These delays cost a lot of money because they miss compounding opportunities


A year later

Since the next 12 months are likely to be volatile due to elections and what not, many investors are thinking of delaying investments for a longer period. They want to invest in the calm waters. Not only does such a strategy go against the basic purpose of doing SIPs, it also limits your money power.


For a moment, think that you wanted to invest Rs 12500 per month for a year in tax-saving funds. This would have allowed you to use the Section 80C limit. But you wait for 12 months. The cost of delay can be staggering even if your investment horizon is as long as 25 years. Delaying your Rs 12500 monthly SIP for 12 months (i.e. Rs 1.5 lakh) will lead to a loss of Rs 28 lakh even if you invested for next 25 years and got 12% returns annually. A 15-month delay will cost you Rs 34 lakh, and an 18-month delay will set you back by a staggering Rs 40 lakh.


So, it is a good idea to delay your SIP? Think again.




Happy Investing
Source:Valueresearchonline.com

How to choose an equity fund

How to choose an equity fund

Six factors you must consider while choosing an equity fund

The mutual fund universe is huge; there are more than 2,500 equity funds available. With this kind of choice, picking a mutual fund is a task in itself. This quick primer will help you understand how to pick an equity fund.

Following are the factors to be considered while choosing an equity fund:



Investment horizon: Your investment horizon determines whether you should go for an equity fund or a debt fund. For long-term goals - those that are more than five years away - equity is the best asset class. While equities are volatile in the short term, over the long term, the volatility is ironed out. For short-term goals, debt funds are the best option.



Risk appetite: While debt funds are generally safe, the riskiness of equity funds varies. Among equity funds, balanced funds are least risky and mid-cap and small-cap ones are the riskiest.



Balanced funds combine both debt and equity and hence are less volatile. Large-cap funds invest in large companies and tend to give moderate returns at a low risk. Multi-cap funds invest in companies of all sizes and are the best equity funds to own to have exposure to companies of all sizes. For investors who can take higher risk, mid- and small-cap funds are the option. Finally, funds investing in just one sector or one theme should be avoided as they can show wild swings and provide no diversification.


Balanced < Large Cap < Diversified Equity < Mid & Small Cap < Sectoral & Thematic





Fund performance: Investing in performing funds is absolutely essential to achieve your goals. You can start by checking the star rating of a fund on


Two other things that you should check are
(i) consistency in performance and
(ii) the fund manager's track record.



Expense ratio: In simple words, it is the fee that an AMC charges the investor for managing a fund. It may also include a commission paid to your broker or distributor. Often it happens that two similar funds from different AMCs have different expense ratio. Your aim should be to go for a fund with a lower expense ratio. That way you will end up investing more money.



Age: If your goal is several years away, you must invest in equity funds. Even if an investor is retired, he can invest in a balanced fund if he is going to need the money, says, ten years later. Still, starting early has its own advantages. Investing when you are young enables you to benefit from the true compounding power of equity.



Tax-planning: Saving income tax is a priority for most of us. Thus, a tax-planning fund, which are also known as ELSS, should be a part of every portfolio. These are nothing but regular equity funds that also give you tax benefit under Section 80C. If you just stick to investing in tax-saving funds in a disciplined manner, you can do very well over time.



A good place to start choosing an equity fund would be the Fund Selector tool, which pretty much aggregates all the necessary information about multiple funds in a single place. Then, of course, there are other useful tools that will help you zero in on the appropriate fund(s).

 

Happy investing

Source:Valueresearchonline.com

Lessons from a veteran stock investor

Lessons from a veteran stock investor

• Stock-market fortunes are not made by following the dictums of market gurus on TV. Don't keep on changing channels to get multi-bagger ideas.

• Data interpretation is very important. An excellent buy before market hours could become an excellent sell after market hours. So, analyse data carefully.

• Those who do not have the required skills should not invest directly in stocks. Go for mutual funds, where experts manage the risks.

• Make financial investments only when you have savings. Don't borrow and invest.

• Investment is akin to a farmer planting seeds. Not all become seedlings. Even out of those that grow, only a few bear fruits.

• Avoid trading. Invest for the long term.

Happy Investing

How to actually buy a house

How to actually buy a house


Buying a house is among the biggest financial decisions you are likely to make. Ignore the hype and stick to these three principles to save yourself from financial hardships.


Of all the big investments you are likely to make, none is so fraught with uncertainty and doubt as that of buying a house. For once, this is not the fault of the saver. The blame lies squarely with the way the real estate industry has evolved over the last decade or two. The very idea that a house is a financial investment is a product of the hype that has evolved over this period. Before that, except for a handful of people who had vast amounts of cash to utilise, houses were not financial investments. Of the small number of Indians who were prosperous enough to actually buy a house, most just bought one in which they lived out their years and on which their children later litigated.


However, starting around the year 2000, the combination of dropping interest rates, tax breaks, and rapidly increasing disposable incomes reached a tipping point. This led to the rise of the EMI investor, the small, leveraged second (and third, and maybe fourth) homebuyer which was something that India hadn't seen before. People took loans to buy houses and sold them two or three years down the line because prices had risen enough to prepay the loan and still make an enormous profit. However, the real estate industry rapidly rigged this phenomena and turned it into a bubble which eventually burst. While that's a long story and this is not the place for it, today there are any number of people who are stuck with unbuilt houses with unpayable EMIs.


None of this is a secret. The only problem is that real estate cheerleaders-which include builders, dealers, and the media, which is beholden to real estate advertising revenues-are fully dedicated to convincing you that none of this is happening or if it is, then a huge revival is just around the corner. However, you still must try to buy one house. Despite all of the above, real estate is the only purchase for which it's fine to take a loan. The saving on rent, the tax break, and the psychological comfort are worth it.


However, you have to ignore the hype and stick to these principles:





One, buy just one house which will actually save you rent. Do not even think of buying any more just for investment.


Two, and this is the most important rule-don't stretch yourself. No matter how much you'd love a fancy house and how beautiful the ads and the brochures are, the EMI should not be more than one third of your family income. That's the UPPER limit. If you can get by at a lower level, then please do so. Basically, don't buy a house of your dreams. I know that the whole thrust of real estate marketing is this 'house of your dreams' concept, but that's a really bad way to make a sensible choice.


Three, I hardly need to point out that there's a huge difference between a house and a promise of a house. Completion of projects is at a premium today. This is unfortunate, but is a side-effect of the way real estate developers have gotten away with fraudulent behavior. So, buy something that you can live in, rather than a mere plan and a promise.


Look at it in another way. Real estate investments must be evaluated in the normal terms of any investment - liquidity, safety, transparency, returns and similar parameters. Most people get confused about this because there is a fundamental difference between your first house where you live in and property bought purely for investment. The first house is a need and when you take into account the fact you can stop paying rent and get a tax break on the EMIs, you'll get a big financial advantage. In any case, a first house may or may not turn out to be an investment; it doesn't matter.


The myth of real estate being a great investment is mostly due to mathematical illiteracy about compound growth. Any real estate fan will tell you how some land or house became 50 or 100 times its value in 40- 50 years. Sounds fabulous, but you know, the BSE Sensex has become 300 times its value in 38 years. That's Rs 10 lakh becoming Rs 30 crore. Even 100 times in 50 years, which is a real estate example someone from Mumbai gave me, is a 9.6 per cent per annum gain. That's a good return, but not an outstanding one in India. It's certainly a lot less than stocks.


After that, there is basically no case for real estate as an investment. The ticket size is huge, liquidity is poor. The entire investment has to be sold at one go. You may or may not be able to sell when you want to-in a slump, entire markets disappear for long periods. Pricing may be hard to discover. Information is anecdotal and hard to verify.
The choice is clear house is not an investment.




Happy investing
Source:Valueresearchonline.com

Your first mutual fund is very important

Your first mutual fund is very important

It will play a major role in making or breaking your belief in stock investing. Read how to select it

Useful, simple to understand and easy to execute. Those should be the qualities that your first fund investments should have.

For beginners, these requirements are generally best satisfied by tax-saving funds or balanced funds. Here's why. When you start investing in mutual funds, it makes sense to invest in a fund that invests mostly in equity. The reason for this is that you are likely to have no equity investments at all. Investors at an early stage of their investing life generally have bank deposits, PPF and other fixed-income investments. Since equity is the best form of long-term investment, and mutual funds the easiest and safest way to invest in equity, it follows that the type of fund you choose must be an equity fund. There are two types of funds that are uniquely suitable as beginners' funds. These are Tax-Saving Funds and Balanced Funds.





Tax Savings Funds:


Tax saving funds are also called ELSS funds as their formal name in the tax law is Equity-Linked Savings Scheme. They are basically all-equity funds, investments in which are eligible for tax exemptions under Section 80C of the Income Tax Act. Under Section 80C, you can invest up to R1.5 lakh in a set of investments, one of which is ELSS funds. Since they are equity funds, one should invest in them for long-term. This long-term imperative is compulsorily enforced because under the tax laws, investments made into these funds are locked in for at least three years. Because of this lock-in, investors tend to have a good experience of getting reasonable returns from these funds. Moreover, the tax-break acts as a natural boost to returns.





Balanced Funds:


Balanced funds, also called hybrid funds combine equity and debt investments in a certain ratio. In order to maintain this ratio, the fund manager will typically disinvest from holdings that have gained more and invest in holdings that have gained less. This, of course, is asset rebalancing.



Effectively, the gains that are made in equity are protected by debt. The great advantage of balanced funds is that they are inherently safer than pure equity funds. They gain well when the markets gain but when the markets fall, they fall less sharply, thus protecting the gains that were made in the good times.

 

Happy investing

Source:Valueresearchonline.com

How are value funds different from multicap funds?

How are value funds different from multicap funds?

How value funds are different from multicap funds

How are value funds different from multicap funds? Where should I invest for five to seven years?

Sometimes, they could be similar but they are not same. Value funds are mutual fund schemes which are trying to spot companies which are out of favour and available at a discount. The fund manager thinks that these stocks are worth much more than the price they are available at.



Broadly speaking, all stocks can be either value based or growth based. Value stocks are what I just explained. Growth stocks are where investors are willing to pay a premium because the company is growing much faster. Because a company is growing faster, it will earn more money and because of that people are willing to pay a higher price to achieve that higher growth. So, multicap funds can be a combination of value as well as growth and it will necessarily be invested in all sizes of companies. So, multicap is a perfect representation of all sizes of companies in your portfolio - large, mid and small. Value funds are not designed to be multicap at all times.



For five to seven years, use a combination of both value and multicap funds. Value funds require greater patience. We don't have pure value funds. Sometimes there are, but very few. Most funds try to do well consistently over time and have followed a very lenient definition of value. I would say have a combination of both but multicap should be your main stream.

 

Happy Investing

Source:Valueresearchonline.com

Multi-baggers are as fickle as the markets

Multi-baggers are as fickle as the markets

Compounders will always turn out to be multi-baggers, but the reverse is not a workable assumption. Here's why

After an investment phase comparable to a dream run, the markets are gradually settling down. The occasional bouts of fear and the regular capitulation seen in overvalued companies only keeps the excitement quotient alive. Even though most serious investors clearly realise that the party of 2017-18 is drawing to a close, few people have left the party. Nobody wants to be left out of any residual excitement.

Investment performance over a shorter period looks ordinary. Red ink has started to mark mid-cap portfolios. An uneasy calm prevails over mid-caps, which have seen the most stellar investment performance in our market's history. The question on everybody's mind is when the trend will regain its mojo and create a resurgence in fallen stocks. To answer that, we should understand the genesis of the recent investment performance by mid-cap stocks that had stayed static for years and suddenly saw markets aggressively rerating them. The market perception altered dramatically over just a few quarters leading to a drastic gain in the stock prices of these companies. The one-way rise led to their being adjudged compounders. But the context in which they showed outlier performance in business and in the stock markets was hardly going to remain static for long. The line between multi-baggers and compounders got blurred.



What do we mean by this? Compounders tend to grow their business performance and valuations over extended periods of time. Their rise is never sudden. They gain credibility after years of consistent business growth and develop an investor following that is stable, reliable, and unshakeable. Even when investors develop short spells of doubt around these, they quickly stabilise to re-establish their reliability. Stocks that are long-term compounders turn out to be multi-baggers in the long run. But stocks that turn out to be short-term multi-baggers need not necessarily become long-term compounders.



The context under which multi-bagging happened needs to sustain if the stocks must keep compounding. Outlier stocks from one bull run rarely sustain their performance after markets cool down. The circumstances in which they became multi-baggers often change quickly and they rarely reach their glory days for long periods.



Every bull market throws up multi-baggers from several emerging stocks. Most such multi-baggers make their greatest returns within a short time. The stock price appreciation is mostly backloaded and the rise is usually abrupt. Bull markets see several stocks subscribe to this pattern. Typically, around every market peak, several stocks grow manifold quickly. Often, these gains take place within a period of just a year. The past year saw several stocks perform brilliantly making them multi-baggers, and investors who owned them gained iconic status.



Naturally, this created a euphoric surge in the investor community comparable to a gold rush. Everybody craved to own the next multi-bagger. And thus, began the virtuous search for the next multi-bagger. Stocks that an influential section of the market felt were potential multi-baggers got lapped up quickly. Institutions hurried to deploy capital and this sense of urgency added fuel to the multi-bagger hunt. Savvy institutional brokers and early investors created and managed scarcity of stocks in these companies. Sellers froze seeing money chase these stocks. That was the perfect setting for a virtuous rise.



Multi-baggers were easy to create. All that was needed was a few quarters of superior earnings. These earnings were supported by changing commodity prices, falling interest costs, rising demand in specific product niches, and widening margins. The float in these stocks dried out quickly and prices went up one way. For a brief while, these multi-baggers were mistaken to be compounders. It seemed the profits would keep growing. Then suddenly, the very pattern that created the earnings expansion, reversed. Commodity prices shot up, interest rates started to rise, exchange rates rose, and demand softened. The markets began to develop self-doubt. The conviction simply could not be supported by fundamentals. This led to a swift unwinding in valuations of multi-baggers. Clearly, investors who failed to see this coming were caught on the wrong foot. This magnified the panic in these multi-bagger stocks. The inevitable recoil in stock prices was accelerated by governance concerns and rumours.



The lesson from this market boom is simple. Multi-baggers are often products of business circumstances, competitive context, and scarcity of shares. All three can change swiftly. Investment momentum always thrives and grows in such circumstances. But compounding is a sustained activity where circumstance and context remain stable for extended periods of time. The market position of these companies remains strong, lending business performance across economic cycles. Compounders will always turn out to be multi-baggers, but the reverse is not a workable assumption.




Happy Investing
Source:Valueresearchonline.com

What is Hindu Undivided Family and how is it taxed?

What is Hindu Undivided Family and how is it taxed?

Interestingly, even Jain, Buddhist and Sikh families can have HUFs. Here's everything you need to know about HUFs

An HUF is a family which consists of all persons lineally descended from a common ancestor, and also the wives and daughters of the male descendants. It consists of the karta, who is typically the eldest person or head of the family, while other family members are coparceners. The karta manages the day-to-day affairs of the HUF. Children are coparceners of their father's HUF. Once a daughter gets married, she becomes a member of her husband's HUF, while continuing to be a coparcener of her father's HUF. Even Jain, Buddhist and Sikh families can have HUFs.

Under section 2(31) of the Income-tax Act, 1961, an HUF is considered a "person" and, therefore, is treated as a separate entity for the purpose of tax assessment. Often families that own ancestral properties and businesses obtain a separate Permanent Account Number (PAN) in the name of the HUF. This is done so that the incomes earned from the assets and businesses owned by the HUF are assessed separately, which also brings down the family's tax liability. An HUF is taxed on the same slab rates that are applicable to an individual income tax assesse.

Happy Investing

Source:Valueresearchonline.com

How to pick the right health insurance plan for your parents

How to pick the right health insurance plan for your parents

Increase in age pushes up the premium and gives restricted coverage to diseases. Here's what you should keep in mind before buying insurance for your parents

Considering the rising medical costs, an illness in your family can easily create a dent in your pocket. Don't want to deplete your savings in case of a medical emergency? Get a health insurance cover for yourself and your parents. According to Kapil Mehta, co-founder, SecureNow, health care inflation is around 15%. We tells you the things you should keep in mind before buying a plan.

Buy today

The sooner you buy a health insurance, the better it is for your finances. "Plan your parents' health insurance when they are still considered young parents. Increase in age pushes up the premium and gives restricted coverage to diseases," said Mahavir Chopra, director, health, life and strategic initiatives, Coverfox.com, online insurance broking company. Chopra said the number of individuals buying health plan for their parents on his portal has gone up to 10,000 this year from 7,000 plans last year.


Multiple plans

There are multiple health insurance products available in the market. "There are more than 35 policies and 20 insurers in the market," said Mehta. How do you choose? "It is important to have a plan with maximum coverage and minimum exclusions," said Ashish Mehrotra, chief executive officer and managing director, Max Bupa Health Insurance Co. Ltd. You also need to consider the illness and surgeries your parents may have to undergo. It is better to go with a plan that offers higher sum assured, said Mehrotra. As a thumb rule, you can consider a cover of Rs 10 lakh- Rs 20 lakh each depending on the city your parents live in.


Pre-existing diseases

Start with checking the exclusions on pre-existing diseases. If your parents are suffering from an illness at the time of buying the plan, the policy may either exclude it permanently or cover it with a waiting period. The waiting period should range between two years and four years. "It is important to check the details as an aged parent may need hospitalisation during the waiting period, but the insurance company may not accept the claim," said Mehrotra. For instance, Bajaj Allianz Health Guard has a waiting period of three years for pre-existing diseases. Also, any disease contracted during the first 30 days of commencement of the health insurance policy is excluded from coverage.


Certain diseases such as hernia, piles, cataract and sinusitis will be covered after a waiting period of two years. You may come across plans where the coverage varies with diseases. "If a single health insurance plan caps the coverage for every single disease it covers, stay away from such plans," said Mehta.


Co-pay amount

Co-pay amount, in insurance jargon, is the percentage of the claimable hospital bill that you will have to pay. Avoid plans with higher co-pay amount. For instance, in Max Bupa Heartbeat policy, there is an option of 10% to 20% co-pay for individuals below 65 years of age. However, it is mandatory for anyone above the age of 65 years. This co-pay reduces by 5% at each renewal making it zero at the 4th renewal.


Claim settlement ratio

As the name suggests, claim settlement ratio is a ratio of the number of claims paid to customers by the insurance company to the total number of claims. "You should purchase health insurance from insurers that have a 90% claim settlement ratio. This information is available in the public disclosures on insurer's websites," said Mehta.

Single or floater

A family floater plan provides health cover to the entire family with a single limit that can be utilised by any member. For example, if you purchase a family floater for Rs 5 lakh, any member can utilise that amount. But if one member utilises the policy and claims a large amount in a year, surpassing or meeting the cap, other members will not be able to avail it. It is not advisable to take such plans for your parents because of the high age and risk element involved. "For senior citizens, it is better to have a separate policy, so you remain insulated from each other in terms of risk."

Happy Investing

Source:Valueresearchonline.com

New EPF withdrawal rules explained in 5 points

New EPF withdrawal rules explained in 5 points

EPFO subscribers will get the option to withdraw 75% of accumulated provident fund or PF corpus after just one month of unemployment

In a significant decision, the retirement fund body EPFO or Employees Provident Fund Organization on Tuesday gave more flexibility to subscribers for withdrawing their provident fund (PF) kitty. EPFO subscribers will be given the option to partially withdraw from PF kitty after one month of unemployment or leaving the job. The PF account holder can also keep its account active with the EPFO. The latest move will benefit about 5.5 crore subscribers.

 

Here are five things to know about the new PF withdrawal rules:


1) Currently, an EPFO subscriber can withdraw the accumulated funds in PF kitty after two months of unemployment and settle the account in one go.


2) Under the new PF withdrawal rules, EPFO subscribers will be given the option to withdraw 75% of accumulated corpus after one month of unemployment and at the same time keep the account active.


3) Also under the new rules, EPFO subscribers will have the option to withdraw the remaining 25% of their funds and go for final settlement of account after completion of two months of unemployment.


4) "We have decided to amend the scheme to allow members to take advance from its account on one month of unemployment. He can withdraw 75 per cent of its funds as advance from its account after one month of unemployment and keep its account with the EPFO," said Labour Minister Santosh Kumar Gangwar, who is also the Chairman of EPFO's Central Board of Trustees. Central Board of Trustees is the apex decision-making body of the EPFO.


5) The new rules would give an option to subscribers to keep their account with the EPFO, which they can use after regaining employment again. "We are trying to give subscribers a window to take out a sizable portion of the corpus, yet not close the account. When he gets a new job, he can transfer the old account money to the new account with the new employer," said central PF commissioner V.P. Joy.


Currently, an EPFO subscriber needs to contribute to his PF account consecutively for at least 10 years to become eligible for pension. However, if a person closes his or her PF account two months after losing a job, it may affect the person's pension eligibility.
In another development, the central board of EPFO has also sought the approval of the finance ministry before deciding on diversifying its equity portfolio beyond the Nifty 50 and Sensex 30 stocks. The EPFO had started investing in ETFs in 2015 with a mandate of investing 5% of its investible deposits in the equity-linked schemes. The proportion was increased to 10% in 2016-17 and 15% subsequently in 2017-18.

 

Happy Investing

Source:Valueresearchonline.com

How ELSS scores over other tax saving avenues

How ELSS scores over other tax saving avenues

Individuals often take sub-optimal investment decisions with their tax-saving investments. But things aren't as difficult as they look.

Under Indian tax laws, savers have a complete range of tax saving instruments like Public Provident Fund (PPF), Tax-saving fixed deposits, National Savings Certificate (NSC), Equity-linked Saving Scheme (ELSS) and others. Yet, individuals often take sub-optimal investment decisions with their tax-saving investments. Why does this happen?

One common reason is that there is a confusion of goals between saving tax and making investments. The typical investor makes this decision either in late March under the duress of having the deadline slip by, or under intense pressure by a salesman who drives home the fact that time is running out. At the end of the day, we make sub-optimal investment decisions and when we realise the fact later, we console ourselves by saying that at least we got tax benefits for the investments. This approach proves expensive in the long run.



This duality of concern-tax as well as investments-prevents clear-headed thinking about just exactly what one is getting out of an investment and whether the quantum of disadvantages are actually worth the quantum of tax benefits that are being obtained. Investors should work on eliminating both these sources of poor decision-making-time pressure as well as not thinking through about these investments. Eliminating time pressure is simple-just plan these investments as early in the year as possible and once you start in time, there's no need to stop after a year.



For most people, the investment that should make most sense is in an ELSS. Salary-earners generally have some of the permitted amount going into fixed income through PF deductions and to balance that, equity is advisable. ELSSs are unique in being the only viable tax-saving investment within Rs 1.5 lakh limit that brings the benefits of equity returns. Sure, there are two other options that give equity-linked returns-ULIPs and the National Pension System (NPS). However, ULIPs have a longer long lock-in period of 5 years coupled with high costs and poor transparency. The NPS is a retirement solution rather than a savings one. It has only partial exposure to equity and a very long lock-in period that effectively extends till retirement age. There's no way a three year lock-in product like the ELSS can be compared to the NPS.



For many beginner investors, it makes an excellent gateway product in which they get the first taste of equity investing and of mutual funds. You end up investing in these funds because the tax-savings attracts you and it has the shortest lock-in. This experience encourages investors to invest in equity mutual funds over and above their tax-saving needs. Once you have a taste of long-term equity returns, then you end up trying other types of equity investments as well.



Equity investment carry higher risk over the short-term. However, for investment periods of three to five years or longer, the risk on equity investments is considerably lower. When you take inflation into account, bank FDs and similar deposits turn out to be sub-optimal because of inflation. Like all equity investments, the best way of investing in an ELSS is through monthly SIPs throughout the year. That's also the way to avoid any last minute rush. At the beginning of every year, estimate the amount you have left over from the Rs 1.5 lakh limit after statutory deductions, divide it by 12 and start an SIP.




Happy Investing
Source:Valueresearchonline.com

Why short-term thinking dominates

Why short-term thinking dominates

Most of us are not good at making decisions that involve comparing the seductive present with the distant future. Here's where the problem lies

If you ask a child to choose between eating one ice cream immediately or two ice creams a day later, she'll invariably choose to have just one right away. But if you give the child a choice between one ice cream the next day or two ice creams the day after that, almost all children will choose to wait the extra day and get two ice creams instead of one. I think all parents know this. I too figured this out almost as soon as my daughter was old enough to ask for things. Of course, children are pretty clever and often manage to outmanoeuvre parents. But whether it works or not, parents know that the trick is to try and avoid situations where a choice has to made between immediate gratification and some future pleasure.

 

Unlike parents, economists took a long time to figure this out and when they finally did, it was thought to be a great discovery. But then, applied to economic behaviour, it probably is. What is true about the way our children make ice cream decisions is also true about the way we make decisions about savings, investments, expenditures and probably about many non-financial matters like health and work too. Most of us, children or adults, are not good at making decisions that involve comparing the seductive present (and the immediate short-term) with the distant future.

Of course, this is not equally true of everyone. Some people, specially at a young age, have a severe form of this problem of not being able to think past the immediate gratification. These are the people who supply much of the profits of credit card issuers. At the other extreme are the kind of people who spend their lives accused of being 'kanjoos'- the ones who are unable to live the present without obsessively planning for the future. For a long time, the difference between the two kinds was considered to be a sort of moral gap with the former being the thrifty and careless no-goods and the latter being sensible and prudent.


But perhaps this is not the right way of looking at things. Over the last three decades or so, there has been a lot of research that suggests that some of these behaviour patterns are fundamental to the way the human brain has evolved. For most of the period during which human beings were evolving, the immediate present really was very important - much more so than the distant future. The problem is that this instinctive preference produces financial behaviour that is detrimental to our economic well being.


Conventionally, the solution to this would be education and self-awareness. If more people learn about patterns of risky economic actions then they wouldn't take those actions, right? Well, actually, it doesn't look like it. Only a small proportion of people will have the self-awareness to modify their economic behaviour and pay more attention to the long-term than the immediate short-term. The only way people can change their behaviour is by getting committed into a good choice.


For example, as an investment analyst, I've always said that it was important for investments to be liquid so that one could withdraw from them when the need arises. However, it is a fact that for a large mass of people, the main investments tend to be the ones like provident fund where they are forced to make and stick to for a long period of time. Perhaps there's a lesson there.




Happy Investing
Source:Valueresearchonline.com

Tax planning and SIPs

Tax planning and SIPs

By investing your tax-saving money in mutual funds through SIPs, you not only save the tax outgo but also build wealth

Many of us approach tax planning as a recurring headache that has to be got rid of somehow. As the end of the financial year approaches and the accountant asks for investment proofs, we tend to scramble for any tax-saving investments. Many of us even fall prey to unscrupulous salespeople, who peddle us some investment product not quite suited to our needs. Once we have unwittingly put our money into some investment, we feel the job is done. Later, we forget about the money.

Not planning for your income tax properly is a serious investment mistake. As the process described above is repeated over the years, your chances for wealth creation are diminished. Here is how. Let's say you invest the entire tax-exempt amount of Rs1.5 lakh in a mutual fund every year for 40 years at 12 per cent rate of return. After 40 years, you will have Rs12.89 crore. You get this enormous sum without making any additional investments but just by carefully investing your tax-saving money. So by not taking your tax-saving investments seriously, you actually lose the opportunity to build wealth in a simple manner.

But what exactly stops us from making prudent tax-planning decisions? The devil lies in deferring the tax-planning activity to the last moment. The right way to plan for your taxes is to start investing at the beginning of a financial year, not when it is drawing to a close. By systematically investing in tax-saving plans, also called equity-linked savings schemes (ELSS), you can bring discipline to your approach.

Just pick one or two good tax-savers and start SIPs in them at the start of the financial year. You can even opt for the auto-deduction facility. With it, the specified amount gets debited from your bank account periodically and is invested in a fund. This does away with manual intervention and hence precludes missing out on your monthly investment.

Another benefit of SIPs is that they help you invest over the market cycle and hence you don't catch a market peak. What does this mean? Let's say you are suddenly reminded that there is something such as tax planning and you have to invest in the next two days to avail tax benefits. You quickly find an investment, say, a mutual fund. You invest Rs1.5 lakh in it in one go and feel happy that the job is over. But you don't realise that the stock market was at its peak when you made that investment. As the stock market corrects, your investment goes into red. It takes many months or perhaps years to recoup your losses.

With SIPs, you could have avoided this. Since SIPs help you invest over the market cycle, you invest at both market highs and lows. This averages your cost. You automatically buy fewer units when the market is high and more when it's low. A market downturn doesn't hit you as much hard as it would have if you had invested a lump sum.

Properly investing your tax-saving money through SIPs kills two birds with one stone: you save the tax outgo and you build wealth. What else could be a better deal?




Happy Investing
Source:Valueresearchonline.com

The illusion of children-specific products

The illusion of children-specific products


Financial products that are designed specifically for your children's future are not what they are cracked up to be


If you love your children, buy our product. As product pitches go, it's simple, direct and manipulative. Unfortunately, it's also far too widely used. While I have nothing to say on the merits or otherwise of health drinks or educational aids or even cars (!) that use this tack, financial products are another matter. Products that use the children ploy to sell have a long history in India. Insurance, as well as mutual fund products that have the words ‘child’ or children in their name, have been around for so long that many people assume that there is a specific class of products that provide some unique advantage to their children’s future that other products do not.


So much so, that at Value Research, we get a substantial flow of emails from worried parents who are looking for the best possible ‘child plan.’ With years of background exposure to the phrase, they just assume that somewhat like a tax plan, a child plan is an integral part of personal finance. Well, guess what, ‘child plan’ is actually not a financial term all but a marketing one.


There’s nothing distinctive about them. For example, one of the largest ‘child’ mutual funds was for years just a vanilla balanced fund of mediocre performance. The pitch was that you should invest in it and use the money for your kids’ college fees. However, the returns that such funds produce are not made up of money that is especially designed for paying college fees—it’s just normal money. However, if the loving parents had chosen better performing funds, they would have more of it and that would probably be some actual help.


Insurance products too play a similar trick. There’s nothing distinctive about the products themselves. You can pitch a product by saying that if you die then kids’ college fees can be paid out of the benefits, but so could those from any insurance policy.

 Happy Investing
Source:Valueresearchonline.com

Banks with their own AMCs minted money

Banks with their own AMCs minted money

Mutual fund houses shelled out Rs 8533 crore as commission in FY18. Here's a detailed report

Banks are powerful financial institutions. When it comes to selling mutual funds, they are big influencers too. With the inherent advantages of customers coming to them, and ability to leverage the trust enjoyed on account of old banking relationships, banks sell MFs much more easily than any pure-play distributor, online platform, broker or independent financial advisor. This is why HDFC Bank, State Bank of India, Axis Bank, ICICI Bank, Kotak Mahindra Bank, Citibank and Standard Chartered Bank continue to remain among the top mutual fund distributors in terms commissions earned. In total, banks (as MF distributors) earned Rs 3480 crore as commissions in FY18 compared to Rs 1944 crore in FY17. In most cases, the bank turns out to be the biggest distributor of its own AMC as well. Read on to know more details.

Big banks, big bucks

FY18 had been a phenomenal year for most mutual fund distributors. Last year, the stock market rallied which helped attract robust inflows to the mutual fund industry. The Mutual Fund Sahi Hai campaign, which also took off during this period, added to the interest shown in mutual funds. This helped distributors make handsome commissions. In total, the top 979 MF distributors earned Rs 8533 crore as commissions. In FY17, 732 distributors earned Rs 5000 crore. AMFI discloses top MF distributors' commissions of a given fiscal year, after collating the data across fund houses.

Commissions earned by the top 10 distributors

Distributor	FY18 (Rs Cr)	FY17	Gain (%)
NJ Indiainvest	786.77	442.68	78
HDFC Bank	641.39	396.51	62
SBI	557.9	178.79	212
Axis Bank	537.71	248.53	116
ICICI Bank	470.28	279.68	68
ICICI Securities	316.53	172.58	83
Kotak Mahindra Bank	274.29	198.67	38
Citibank	248.96	185.02	35
Prudent Corporate Advisory Services	217.82	99.21	120
Standard Chartered Bank	185.42	119.53	55

Banks already have the largest number of entities among the top 10 MF distributors at an industry level. If the commissions earned by all MF distributors in FY18 rose by 70%, banks' commissions rose by 80%.
Also, the share of banks' commissions in the overall distributor pie grew. Banks, as MF distributors, earned Rs 3480 crore as commissions in FY18, compared to Rs 1944 crore in FY17. The Rs 3480 crore pocketed by banks in FY18 represents 41% share of all commissions, compared to 39% in FY17.


To each his own



In many cases, the bank turns out to be the biggest distributor of its own AMC as well. While there is nothing wrong with a bank being the biggest muscle in its own AMC's distributor network, this does raise an uncomfortable question: Are banks truly unbiased while distributing their own AMC's products? We may never know the truth, but data shows that most banks 'happen' to be the biggest distributor of their own AMC.


On one end, there's Union AMC, who paid Rs 17.44 crore (which is over 98% of the total commission paid) as commission to Union Bank of India. On the other end, there's Kotak AMC, which paid Rs 63.95 crore, or 15% of total commission pie (Rs 424.4 crore), to its biggest distributor Kotak Mahindra Bank.
Similarly, SBI AMC paid Rs 552.9 crore as commission to its biggest distributor SBI. In effect, the PSU bank earned 60% of all commissions i.e. Rs 928.9 crore paid by SBI AMC. Interestingly, SBI as an MF distributor earned 99% of all its MF distributor commission income from its own AMC.

Commission earned by bank as percentage of total AMC commission (FY18)

AMC	Bank	Commission (%)
Principal Pnb	Punjab National Bank	21
Union	Union Bank of India	98
IDBI	IDBI Bank	67
Canara Robeco	Canara Bank	45
ICICI Prudential	ICICI Bank	26
HDFC	HDFC Bank	23
SBI	State Bank of India	60
Kotak Mahindra	Kotak Mahindra Bank	15
Axis	Axis Bank	69

Others gain too



In 2017-18, the top MF distributor club was, like in the previous years, dominated by Surat-based NJ Indiainvest which garnered Rs 786.77 crore as commission. It saw a 78% jump, compared to Rs 442.68 crore earned in FY17.


It is quite interesting to see that a pure-play MF distributor is actually raking in more commission than some of the biggest banks. With every passing year, NJ Indiainvest is widening its lead over others. In FY17, NJ Indiainvest was less than Rs 50 crore ahead of next competitor HDFC Bank. In FY18, this gap grew to over Rs 140 crore.


Also, NJ Indiainvest as MF distributor seems to be making more money than the very AMCs it serves. For instance, NJ Indiainvest's Rs 786-odd crore MF commission income in FY18 is more than what many AMCs earned as total income in FY17. This list includes SBI Funds Management , which earned Rs 778 crore as revenue in FY17, and UTI AMC which earned Rs 757 crore as operational revenue in FY17. We compared with FY17 because FY18 numbers of these AMCs are not available yet.
At an individual or IFA level, all (except one) of the top 10 distributors earned more than Rs 5 crore in FY18. Here are the top 10.

Commission paid to individuals

Name	FY18 (Rs Cr)	FY17
Dhruv Lalit Mehta	8.73	7.01
Gaurav Ganpule	8.42	6.03
Ganesh Shridhar Shanbhag	7.42	3.69
Padam Singh Raj Purohit	6.82	5.37
Roopa Venkatkrishnan	6.62	4.57
Shivam Mehrotra	5.96	1.77
Hari Ghanashyam Kamat	5.93	3.21
Mukesh R Parikh	5.61	4.4
Navneet Kumar	5.08	2.54
Sadashiv Arvind Phene	4.95	3.27

In 2011, Sebi had directed individual asset management companies (AMCs) to disclose the total commission and expenses paid each year to their large distributors.


Mutual fund commission is a sum of two factors: upfront fee and trail fee. Interestingly, the majority of money earned from open-end funds is trail fee. The trail fee in equity, tax-saving and equity-hybrid schemes (except arbitrage schemes) is about 1% to 1.25% per annum. In debt schemes (excluding liquid funds), the trail fee is 0.15-0.75%. In closed-end funds, upfront commission is quite high, since there is no risk of investor money going away midway due to closed-end structure.

 

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Source:Valueresearchonline.com