Grandfather clause in equity investments to protect you from some tax liabilities on LTCG

The famous budget speech by Arun Jaitley left the investors dissapointed with the re-introduction of Long-term capital gains tax. LTCG which was abolished sometime in 2004, by introducing STT was re-introduced for the equity investors with a 10% tax on capital gains over and above rupees 1 lakh for the financial year for the investments made above one year.

The shocker was too much for the investors, leading to a short-term fall in the market. The finance minister tried to tame the anger by keeping a grand-father clause applicable till 31st Jan 2018. Now the point is what is this grand-fathering clause and how is it going to make any difference to the investors?

As the LTCG was introduced, it simply meant April 1, 2018 onwards one has to pay tax on income on equity sales over 1 lakh. However, this is not exactly the case. Grand-father clause give you some respite. According to.this clause, investor need not pay tax on the notional profit accumulated till 31st of January. The returns generated over and above on the closing price of the equity as on 31st January will attract LTCG of the return is over 1 lakh. However, the return will be grand-fathered upto 31st July, 2018, post which investors will have to pay 10% tax on LTCG.

Let me give you an example with a real equity test case example. Lets take ESCORTS as a test case. Assume I purchased ESCORTS share on August 9, 2016 at a price of Rs. 260 per share. It reached a peak of Rs. 811 per share on Jan 31, 2018. So, according to grand-father clause, If I sale the shares at or below 811, I dont have to pay any tax on the same (before 31st July, 2018). Assume I sale it on 3rd April, 2018 at the price of 884 per share, my tax liability will be based on 884 – 811, 73 Rs. i.e. my tax liability would be 10% of Rs. 73 (Upto 1 Lakh tax free inclome still applies here)
Step by step guide to buy ULIPs

The Grandfather clause is applicable to domestic investors for equity and mutual funds investments on LTCG.

grand-father-clause-in-equity-LTCG, Long term capital gain

On what basis we should decide to invest in which mutual funds?

On what basis we should decide to invest in mutual funds?
I found this question on quora, and for a moment I found this question inadequate to respond. Then I realised that this is a common question i come accross from many of my friends and relatives. And decided to write a post which may not be exactly comprehensive, yet it will lead to a better idea about mutual fund investments.
So my reply —
This is a very broad based question. Still to answer you, mutual funds is an amazing investment tool. It is very flexible way of investment for investors where one can choose equity, debt, gold etc as an underlying asset depending upon the financial goal. 
Broadly in India, there are equity mutual funds, debt funds, gold funds and hybrid funds. There are sub categories under these to suit investors’ needs.

Happy Loans

If one have an ultra short term goal of 0–12 months – chose luquid funds/ ultra short term debt funds
Goal – 12- 24months – you may look at short term debt funds, dynamic bond funds, credit opportunitues fund, even long term debt funds
Goal 24 – 36 months – you may look at debt hybrid funds, 0–30% equity 70- 100% debt. These funds give stability of debt rerurns, yet give an opprtunity to invest in equity which has higher return potential. However, it has a tax treatment like debt investment.
Goal – 36 – 60 months – one may consider  investing in (SIP) equity oriented hybrid funds with 60–70% equity and 20–30% debt. They give a significant exposure to equity with a nice cushion against volatitility with debt exposure. These funds give tax free return after 1 year.
If you have goal 5 – 8 years away, choose a large cap fund and invest through SIP.
Any goal beyond 8 years, do some research in mid-cap small cap funds.
If you are more specific and comfirtable sharing details interms of your goal, your age etc, would be able to help you with more specific information.
If you want to know more specific, do mail me at debashree.ad@Gmail.com or tweet me @debashree_ad

Happy Loans for small business

Don’t evade tax, save tax! there is nothing like a relaxed mind and happy soul!

There are many way of looking at a single topic. The currency exchange is definitely tedious with the limit on transactions and long cues. But we salaried and tax payers need not worry much, it i just the currency crunch and loose change crisis, which will eventually solve and change our currency management habbits.

As law abiding taxpayers of India, we can take some learnings from the situation and do some introspection. You may say, I am paying taxes on salary, goods as well as services, then what kind of introspection we need to do?

We create the blackmoney pool with our hard earned taxed money

1. To avoid paying high amounts of taxes on gold jewellery purchase, often encourage cash transaction paving a way to make the whole white money into black by the jeweller

2. To stay away from high fee and taxes we partner with real estate developers to transact in part cash

So, basically our fear of paying taxes create the option for creation of black money.


Apart from avoiding these transactions in future, we should take Tax saving instruments

seriously to get higher, less taxed or complete tax free returns. Apart from the 80c instrument, there are many investment instruments which are tax efficient.

  • Debt Funds – More efficient for the hiher tax bracket segment
  • Equity – Return on equity shares as well as mutual funds investments n long term (more than 1 year) period is cmpletely tax exempted, whatever the amount is.
  • Dividend on equity, equity mutual funds are tax free in the hands of the investors
  • D-mat Gold – Handling cost, making charges are nil, making it much efficient investment compared to the physical gold. So, it is advisable to go for gold ETFs, or the sovereign gold funds
#save tax #black money #invest in Equity mutual funds

Be a smart investor, stay clutter free, there is nothing like a relaxed mind and happy soul!

10 reasons Why we are obsessed about ELSS mutual funds

#ELSS is a clear winner amongst the Tax saving instruments in India 
Under section #80c of the Income tax act, there are many instruments one can opt for to save tax and create a wealth kitty. In the last post on Tax saving instruments under section 80C, I have listed down all the options of investments, insurance and expenditures. Here, I would like to elaborate on the specific product “Equity Linked savings scheme” Mutual Funds, and a basic comparison with the other options in terms of liquidity, lock-in, potential return etc.
Let me begin with the table of popular investment tools under 80C and their features.
Instrument
Maximum investment amount
Lock-in
Potential return
Actual tax benefits
#PPF
Rs. 1,50,000
15 years.
8-9% per annum, compound interest
Triple exemption benefit
Sukanya Samrudhi Yojana
Rs. 1,50,000
Only for daughters, the lock in depends on the daughters age
8-9%, compound interest
Triple exemption benefit
NSC
Rs. 1,50,000
5 years
8-9% per annum, compound interest
Returns are taxed as per laws
#Tax saver Deposits
Rs. 1,50,000
5 years
7-9% per annum, compound interest
Returns are taxed as per laws
#ULIP
Rs. 1,50,000
10 years onwards.
As per equity market movement. After deducting various charges
Triple exemption benefit
#ELSS mutual funds
Rs. 1,50,000
3 years
As per equity market movement.
Triple exemption benefit
#RGESS
Rs. 50,000
3 years
As per equity market movement.
50% tax relief on returns
1. The mutual fund has minimum #lock-in period of 3 years amongst the tax saving instruments.
2. Though it has a lock-in period, the open ended #ELSS funds, don’t have a maturity date.
3. The funds come with multiple options of growth, dividend option (dividend reinvestment is currently discouraged by the regulator in recent times, hence getting discontinued for the new investment options, because of its complex nature of 3 year llock-in for every purchase)
4. The ELSS schemes enjoy triple tax exemption benefits on redemption
5. Unlike PPF, ULIP, ELSS mutual funds don’t carry an obligation of investment amounts, hence it could be an one time investment or repeat depending on investor’s wish.
6. Unlike insurance plan, investor can buy different plans basis his research and recommendations
7. Minimum investment is as low as Rs. 500/-
8. The dividend earnings are tax-free in the hands of the receivers
9. It can be held as long as the investor wants; hence, the potential of high returns of 12-15% can be easily achieved in long-term, 5-7 years period.
10. The cost of investment is very low compared to the endowment insurance products, which doesn’t reflect  too much as the returns on the investment over a long term compensate well beyond the cost implications and inflation.
A hypothetical return graph of tax saving instruments over 3, 5, 7.10 year period
initial investment
3 YEARS
5 YEARS
7 YEARS
10 YEARS
PPF
1,00,000
130864
156568
187320
245135
NSC
1,00,000
127023
148984
174742
221964
ELSS
1,00,000
156394
210718
283911
444021
Assuming a 15% return on ELSS for the period
Top 5 #ELSS Mutual funds for reference purpose –
Scheme name
1 year
2years  
3 years
5 years
ICICI Pru RIGHT Fund (G)
10.9
7.2
24.4
21.2
Axis Long Term Equity Fund (G)
8.8
9.2
26.5
21.0
Reliance Tax Saver (ELSS) (G)
13.9
6.2
29.9
20.4
DSP-BRTax Saver Fund (G)
20.1
12.7
25.5
19.7
Birla Sun Life Tax Plan (G)
12.6
12.3
24.5
18.1
Suggestion for the young investors would be to buy ELSS fund, and treat it like  a PPF account, invest regularly, preferably through SIP, for 15 years and stay invested through the term. You will end up saving a big amount for yourself. 🙂 Happy investing. Happy Saving!

Include Dynamic Asset Allocation Funds in your portfolio to create wealth and cushion against equity market volatility

Ideal for moderately conservative investors who wish to have some equity exposure, can build a retirement kitty with mutual fund using #SIP to invest and Systematic withdrawal plan to get a monthly income) reap maximum benefit of this fund category.
In my previous posts I have written about #debt and #equity mutual funds and the advantages of investing in #mutual funds. In this post I would like to share some insight about the equity oriented hybrid funds which offers best of both worlds. These equity oriented balanced funds/ hybrid funds/ dynamic allocation funds should be part of core investment portfolio of an individual investor of any age

What investors can expect from these funds?
1. Tax free returns after 12 months, and exit load free after 12-18 months depending on the fund house
2. Much higher return than Bank FD with lower downside risk compared to pure equity funds, mostly matching index returns over long term
3. Doesn’t matter you are 22 or 42, Ideal as long term wealth creation with moderate risk, can build a retirement kitty with SIP and use SWP (Systematic withdrawal plan) to reap maximum benefit of this fund
4. Even the worst fund in the category has given 10% return in five years. The top 5 have averaged return over 15%
5. This category is expected to deliver less volatility with consistency compared to the equity market
What investors should not do?
1. Not compare it with a largecap/ midcap/ thematic funds, they may swing higher both sides and have a different investment approach and objective
2. Do not consider hybrid funds to be risk-free, all investment instruments come with own share of risks, however, due to its diversification between asset class, it generally experiences less downside compared to benchmark. Not to get lured by past performance and very high returns, it is possible that fund management is taking higher risk than the fund mandate and may expose you to risks you do not wish in this category
What are #dynamic allocation/#balanced funds?
Here, I am focusing on equity oriented balanced funds. These funds have about 65% exposure in equity and rest in debt and cash. Thumb rule good investment practice, buy at low and sell at high is automatically adhered to because of its scheme mandate, mitigating risk for the investor. And during low phases it adjust its portfolio with higher equity buy and lower exposure in debt. The USP of the product category is capturing the downside risk. The chart defines how it actually benefits the investors.
Debt oriented balanced/hybrid funds also part of the hybrid funds category which is ideal for conservative and retired investors. These funds are treated as debt instrument for taxation purpose.
Who should buy equity oriented dynamic allocation funds (#balanced funds)?
The category is for everyone. This carries lower risk compared to pure equity plays, still enjoys tax free returns as any #equity fund. The investment philosophy is simple but extremely effective “buy low and sell high”, as the equity market sees a upswing, fund managers book profits to rebalance the portfolio and vice versa when market falls. This is much easier said than done but the investment mandate is such, that automatically fund managers follow the rules and avoid temptation of exposing the fund into higher risk area.
ICICI Prudential balanced advantage fund, the fund with the largest AUM in the category has beaten the category average and nifty 50 returns in the past 5 years and given return of 16% annualised return.
Portfolio allocation of ICICI Prudential Balanced Advantage Fund shows higher commitment towards protecting the investor’s money along with generating surplus return. The equity portfolio is dominated by largecap companies and debt category has maximum exposure in govt securities of about 12% of the portfolio, most debt investments are in high credit score category of AA and above.
The graph of 5 years return of a hypothetical investment of Rs. 10,000 in balanced funds of the top 5 mutual fund companies viz-a-viz Nifty

Graph source – Moneycontrol.com


Disclaimer – Mutual Fund investments are subject to market risks, read all scheme related documents carefully


How to select the best equity mutual funds for your portfoli

10 parameters to select the best #equity #scheme.
It’s a hair tearing task to shortlist mutual funds, taking expert advice, friends’ suggestions, father’s ideology and so on to figure out the best #equity #mutual funds in India. But, the more you discuss, the more complicated it gets. I have found my way of selecting the mutual funds with a little bit of help from the mutual funds fact sheets and the publicly available information.
I have divided the topic in simple 10 segments, once we put our shortlisted equity mutual funds of
our choice, we just simply need to check if its matching the parameters checklist and we are done.  While investing in equity funds, we must remember that the investment horizon should be long enough realise the benefit of equity investment, ideally above seven years. The ideal way of investing is through Systematic investment plan (SIP) to get cost average and benefit of compounding.
Before I begin with the headings, I must explain what a good equity mutual Fund is. It is the fund which consistently beat the index and stays ahead of the curve. Equity mutual funds should be considered for long term (minimum 5 years), within equity mutual fund there are several categories as below, based on the core objective of the fund. According to Indian system any mutual fund maintains equity holding above 60% is treated as equity mutual Funds. Every class and subcategory of mutual funds has a defined objective, hence the returns.
In this article we intend to only concentrate on the parameters for selecting a right equity fund.

1. The Fund house and the AUM– I personally prefer funds from top 5-7 Asset Management Company. So, once I am sure of the category, I would choose a good pedigree. The volume and pedigree cannot predict a fund’s performance, but it definitely shows the investors trust and an established history and record of fund management.
Asset under management is not true indication of future performance, largest AUM doesn’t ensure maximum return. However, a good equity mutual fund will have assets over multi hundred crore. Funds with lower assets may feel stress of volatile market movements or high redemption pressure. Also, bigger funds will likely have lesser expense burden.   
2. Fund manager – A fund manager is the person responsible for complete management of the mutual fund. With his team of analysts and trading desk he ensures smooth functioning, investments, churning of portfolio based on opportunities and threats in the stock markets keeping up with the investment objective of the fund. His experience gives an indication of his working style, and a seasoned manager is assumed to see few stock market cycles.
Ratios
3. Standard deviation ratio – A mutual fund scheme is expected to give returned aligned to its bench mark index and its investment philosophy. The standard deviation ratio indicates the possible deviation between the historical mean return of the scheme. If a fund has historical mean return of 10% and standard deviation of 2%, it indicates the fund’s future return could be 10±2%
4. Sharpe Ratio –Sharpe ratio is an indicator of fund’s performance compared to the risk taken by it. It captures the excess return the fund has earned. Higher sharpe ratio indicates better fund performance.
5. Expense ratio – This particular ratio gives you an idea how much money is getting into the operational expense for managing the fund. This is indicated in percentage term in any fund fact sheet. Though #regulators have capped the ratio, a lower ratio indicates it is not eating much into the return on your investment. A average expense ratio could be at 1.5%
6. Alpha: The simplest definition of an alpha would be the excess return of a fund compared to its benchmark index. If a fund has an alpha of 10%, it means it has outperformed its benchmark by 10% during a specified period.
7. Beta: Quite like equity stock the Beta refers to fund’s volatility compared to that of a benchmark. For example if beta of a fund is 2, for every 10% upside or downside, the fund’s NAV would be 20% in the respective direction.
8. Portfolio turnover ratio – This particular ratio specifically highlights the churning in the portfolio. Higher churning indicates higher cost. Until and unless the fund is giving exorbitant returns compared to its peers and benchmark, it could become a point of contention.   
9. Fund rating – No harm in looking at it once, but it may or may not help with a true reflection and you can skip this parameter if your fund analysis doesn’t match with their rating. Ratings are assigned annually and every year the 5star rating changes and their criteria of analysing could differ from your long term objective.  
10. Read the SID
Go to the mutual fund website and check for fund fact sheet (For example, find Franklin India Blue Chip Scheme Information document)
2. Check for analysis by few independent websites like – valueresearchonline, mutualfundsinddia etc.

Do your own homework with the 10 points mentioned above or any other reference points. 
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