Mutual Fund NEWS Group: March 2012

Saturday, March 31, 2012

NSE to launch corporate debt ETF

The National Stock Exchange plans to introduce a 'Corporate Debt Exchange Traded Fund (ETF)' in this calendar year.

ETFs are essentially index funds that are listed and traded on exchanges. In this sense, an ETF is a basket of stocks or assets such as gold or even money market instruments. Its trading value is based on the net asset value of the underlying assets that it represents.

According to a source, "We believe that exchange traded funds on corporate debt can help in bringing more liquidity and depth in the corporate bond market. Investors will be able to invest in a basket of corporate bonds, getting thereby the benefit of a portfolio for investment."

One medium

The new product is in line with the Government's emphasis on expanding and deepening the corporate debt market. It will help investors put money in a basket of corporate bonds with just one medium. The price discovery will be better. Simultaneously, the new product will give better enter and exit facility, the source added.

ETFs have gained wider acceptance as financial instruments whose unique advantages over mutual funds have caught the eye of many an investor. These instruments are beneficial for investors who find it difficult to master the tricks of the trade of analysing and picking stocks for their portfolio.

Various mutual funds provide ETF products that attempt to replicate the indices on NSE to provide returns that closely correspond to the total returns of the securities represented in the index.

At present, NSE provides ETF in four different categories — equity, debt, gold and world indices. There is no exchange fee on debt and world indices ETFs, while charges vary on gold and equity ETFs.

Gold ETF attracts an exchange fee of Rs 1 for a lakh while equity ETF is charged between Rs 3-3.25 a lakh. There are indications that the corporate debt ETF may get fee waiver too.

Source: http://www.thehindubusinessline.com/markets/stock-markets/article3258855.ece

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'I made my money by selling too soon.'

Website: http://indianmutualfund.co.cc/

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IFAs find the new capital protection products innovative

Investors are also keen to invest in such capital protection funds where some portion in invested in the equity market 'options premium'.

In the current challenging market scenario, AMCs have had to think out of the box to make their schemes popular. DSP Blackrock Mutual Fund and Reliance Mutual Fund have both launched Dual Advantage Fund (FMP) where 80 percent of the investment is locked in debt securities and 20 percent is invested in equity and equity related options premium.

The unique feature of this product is that it gives the investor the potential to profit from the 'options market' while keeping the investment stable. Being a FMP, the product is a close-ended scheme with a lock-in period of 3 years. "The important thing about such NFOs is the time of launch. I feel it is a good time when such capital protection products have been launched and there is a rising demand among the investors to buy such product," said Mukesh Dedhia, Mumbai based IFA.

Amar Pandit, CEO, My Financial Advisor strikes a word of caution."In such products, the credit quality of the debt investment is important. It is a pretty innovative product where the capital is protected and the investor can also take advantage of the equity market. An investor should only invest in such products when they already have a proper asset allocated portfolio," said Amar.

Vinod Thakkar, IFA from Kolkata finds many takers for such products. "These capital protection funds provide dual advantage but the only draw-back is that the investment is that it is locked for three years. In the East, most of the investors want to lock their money in debt so such products have a good demand and a number of my clients have invested in these products," said Vinod.

DSP Blackrock has garnered Rs 168 crore investments through two versions of Dual Advantage Fund launched in February and March this year. "In these funds, investor money is converted from 80 percent debt investment to 100 and the extra returns earned through the equity market is like an icing on the cake. We have got a good response in our earlier products and we are thinking of launching more such products in the next quarter," said Ajit Menon, Executive Vice President and Head Sales and Marketing, DSP Blackrock.

Himanshu Vyapak, Deputy CEO, Reliance AMC agrees. "This is a new route that the investors are taking without eroding their capital as 80 percent is invested in debt. Even in such a volatile market, we have got positive response from investors as the product does not have too much risk attached to it.We have been able to gather Rs 185 crore from the earlier version of the Dual Advantage Fund where 20 percent of money is invested in equity related options premium and in the current NFO which is closing today, we feel we will be able to raise Rs 300 crore," said Himanshu.

A few other fund houses are also in the queue for launching such kind of products.

Source: http://www.cafemutual.com/News/InnerNews.aspx?srno=1193&MainType=New&NewsType=Industry&id=21

Friday, March 30, 2012

Market's risk-reward ratio balanced right now: Daiwa MF

In an interview to CNBC-TV18, David Pezarkar, head - equity, Daiwa Mutual Fund says that the global markets are consolidating now. He stressed that there is no reason to be ultra-bullish on Indian markets. He feels that capital goods might not outperform because of many uncertainties in the sector, but there could be individual standouts that need to be looked at.

Below is the edited version of the transcript. Also watch the accompanying video.

Q: Liquidity and global market support has been working in our favour. Do you see that peter off in next couple of months?

A: Global markets are some sort of consolidating now. As of now, there is no reason to be ultra bullish on our markets. Most of the optimism has faded away. The markets will stay in a sort of range.

Investors would be advised to try and look at panic kind of reactions to add on to their equity positions in large cap, well managed companies with strong balance sheets. I think that will again be the focus after the January and February rally of high beta stocks.

Q: How would you approach capital goods now?

A: Performance of all the sectors in March has been a complete reversal when compared to their outperform show in January and February. There has been a move towards risk aversion.

Sectors such as FMCG and pharma which were outperformers in 2010-2011 have again started outperforming. Capital goods might not outperform. We would have to look at individual stock ideas. The unbridled optimism which was created in earlier months might not sustain. There are too many uncertainties for the sector as a whole, but there could be individual standouts and those will have to be looked at.

Q: We have reached the lower end of the trading range. Do you think the risk reward is in favour of investments?

A: The risk reward is sort of balanced as of now. There is some amount of nervousness around but we are not seeing the kind of pessimism that we saw in November-December last year.

If we see that kind of pessimism or we see similar kind of selloff, then it will give a extremely good investment opportunity. At this point it is better to look at the large well managed companies and trade in a range of 7-10%.

Whenever a stock is down around 5-6% from its high, one can look at it. Unfortunately that's how the markets will behave for next two or three months or unless we see strong policy action or oil cooling off substantially.

Source: http://www.moneycontrol.com/news/mf-interview/markets-to-stayrange-daiwa-mf_686689.html

Wednesday, March 28, 2012

ELSS better than PPF, NSC: Crisil

Investment in an Equity-Linked Savings Scheme (ELSS) of a mutual fund can yield higher returns compared to other instruments like PPF and NSC, a report by Crisil has said

"Our analysis shows that ELSS gave 26 percent and 22 percent annualised returns over three and 10 years respectively vis-a-vis 8-9 percent offered by traditional tax saving investment products such as public provident fund (PPF) and national savings certificates (NSC)," Crisil said.

Crisil noted that interest on Employees Provident Fund (EPF) for 2011-12 was slashed to 8.25 percent from 9.5 percent in the previous year and thus ELSS can act as a strong alternative to investors.

Though the traditional debt products are considered to be relatively safer bet as they are not affected by volatility, they are unable to generate higher inflation-adjusted returns over the long run.

The PPF accounts fetched 8.12 percent over the last 10 years and in the similar period, the NSC gave an interest of 9.10 percent. The average inflation over the past 10 years stood at 6.05 percent.

"ELSS is not only an attractive option to save tax, but also helps create wealth over the long run. ELSS as a category has outperformed the Nifty 500 across three and 10 years. With average inflation around 7 percent over the past three years, top Crisil-ranked ELSS gave an inflation adjusted return of 14 percent, which is significantly higher than returns offered by other tax saving products," Crisil senior director Mukesh Agarwal said.

The rating agency, however, cautioned that the ELSS investment requires some amount of market risk and had to cherry pick those schemes which have performed consistently well.

"Since investments in ELSS are subject to market risks, investors must take into consideration their age and risk-taking abilities. The investment horizon should be more than five years for higher inflation-adjusted returns.

Further, investors must choose funds that have performed well both in good and bad times," Crisil head for Funds and fixed income research Jiju Vidyadharan said.

It said ELSS is not eligible for tax benefits under the DTC, but since the implementation of the new tax regime has been postponed, investors can park their funds in these equity schemes for now.

Source: http://www.indianexpress.com/news/elss-better-than-ppf-nsc-crisil/929093/0

Tuesday, March 27, 2012

L&T Finance acquires Fidelity's India mutual fund business

L&T Finance (LTF), a subsidiary of L&T Finance Holdings (LTFH), has acquired FIL Fund Management (Fidelity AMC) and FIL Trustee company, engaged in mutual fund business in India. However, the deal is yet to get regulatory approvals, the non-banking finance company said in a notice sent to stock exchanges.

"This acquisition provides L&T Mutual Fund the necessary scale, products and access to retail customers to grow profitably," Y. M. Deosthalee, CMD of L&T Finance Holdings was quoted saying.

"With this acquisition we are one step closer to achieving our vision of being among the top players in the Indian mutual fund industry. We remain committed to that goal and look forward to building one of India's most admired asset management businesses."

Incorporated in 2004 Fidelity AMC manages an average asset under management (AUM) of Rs 8,881 crore for the quarter ended December 2011. Majority of its asset (around 68%) are equity oriented. It has a market share of 1.3%.

"Its equity assets are the 10th largest in India with a market share of 3.1%. Further, in the past 3 years, the fund performance has resulted in 4 of its 5 equity funds being ranked amongst top 10 in their respective category," said the notice.

L&T Financial Services established its presence in the mutual fund industry through the acquisition of the mutual fund business of DBS Chola in January 2010. Since then, L&T Mutual Fund has grown its total average AUM by a CAGR in excess of 33% to Rs 4,616 crore (average AUM for the quarter ended December 2011).

Source: http://www.moneycontrol.com/news/business/lt-finance-acquires-fidelity%E2%80%99s-india-mutual-fund-business_685788.html

Monday, March 26, 2012

Hurdles to long-term investment

The mutual fund industry has failed in branding and marketing its products.

With returns of 15-30 per cent per annum during the last ten years, equity mutual funds have delivered the goods for investors who stayed wedded to them. Despite this, the industry has failed to convince investors that mutual funds are a good option for their long-term goals.

Ask an ordinary investor regarding this, and he will probably tell you that his 'long-term' money is locked into an insurer's endowment plan or public provident fund. If he owns equity mutual funds at all, he plans to cash out in a couple of years' time. Data from the Association of Mutual funds of India shows that 48 per cent of all investors in equity mutual funds held their units for less than 2 years.

INFLATION IGNORED?

This investor behaviour defies logic. Why does an investor stay on patiently for ten years with a product that earns him 5-6 per cent a year, and yet shun one which delivers 15-20 per cent?

After all, the basic intention of putting away money for the long term is to make sure your savings grow at a rate that beats inflation. During a ten-year period, stock market investments are more likely to deliver an inflation-beating return than debt products. In the short term, equity investments are more likely than any investment to sustain losses.

This quirky investor behaviour suggests three things.

We like predictability.

One, Indian investors prefer predictability compared to returns. They are so spooked by the ups and downs of the stock market that they would rather choose a guaranteed return product that barely preserves their capital, compared to a market-linked one.

If this is the problem, funds can address this by offering guaranteed return products. Insurers in India have always offered guaranteed return products (with such a small 'guarantee' that it can be easily accomplished), but funds haven't, as the practice is frowned upon by the Securities and Exchange Board of India.

Guaranteed returns however, aren't expressly forbidden by Securities and Exchange Board of India. All the regulations say is that, if a fund makes a guarantee, it should have the resources to make good the shortfall, if the portfolio doesn't deliver the promised sum.

Lock-in is good.

Two, investors actually like the discipline that a lock-in period imposes. Insurance plans or the PPF require you to deposit money every year, and don't allow you to withdraw it too easily. Mutual funds, in contrast, have embraced the open-end structure. Investors unhappy with the fund's performance can pull out their money on any day of their choice. When markets do a yo-yo act, there is thus a strong temptation to pull out.

Finally, investors may willingly accept a locked-in equity investment, if they are given the feeling that the money is being set aside towards a noble goal. The old Unit Trust of India (UTI) had enormous success with its long-term schemes such as Rajalakshmi, Grihalakshmi, and so on. These specifically allowed savings towards a goal such as a daughter's marriage or education. Insurance companies successfully market children's plans to investors, though they call for long-term investing in equity instruments.

No branding please, we're the Funds.

This suggests that where the mutual fund industry has failed is in branding and marketing its products. By branding its offerings as 'mid-cap funds', 'infrastructure funds', 'strategic sector funds', and so on, the industry has failed to strike a chord with its customers.

Information on where the fund plans to invest may be quite useful to an informed investor who dabbles daily in the stock market.

But to an ordinary person looking simply to save money to fund his daughter's college degree ten years hence, the stock market association may be quite disconcerting.

Overall, defining fund products in terms of the investor's requirements (say, a retirement fund, or a schooling fund) may be all that is needed to make sure that investors stay with equity funds for the long term.

Source: http://www.thehindubusinessline.com/features/investment-world/mutual-funds/article3220409.ece

Saturday, March 24, 2012

Stay invested in equities to beat inflation

India and other Asian economies are known for high savings rates of its people (about 36%). However, due to lack of innovation and poor marketing by financial firms, these savings are not translated into investments, says Jaideep Bhattacharya, chief marketing officer of UTI Mutual Fund. He spoke to Neeraj Thakur on the sidelines of the World Marketing Summit (WMS) in Dhaka last week.

In your presentation at the WMS, you mentioned financial inclusion. Please elaborate.
I focused on what we have done in India. We have to see how we can get people at the bottom of the pyramid to also live a life of dignity in their sunset years. We have to make sure that poor people are able to finance their children's higher education. This is possible only by following a disciplined approach. I have introduced the concept of 'ICE'(innovation, collaboration and experience).

Innovation means that there are a lot of problems and you need to be innovative for your products to stand out. In a population of 1.2 billion, one has to come out with many products that are innovative.

The next couple of decades are going to be about collaboration. Unlike now, when a big corporation starts from bottom-up, big corporations will have to see how they can work with like-minded organisations that are already focused on the investors and the customers, and add value to the customers in a nice way. And we have also shown how the government, regulators and NGOs can come together and add value to the products and the industry.

Experience is required for the last mile connectivity with the customer. The person who talks to the end customer is of prime importance because through him or her, you can communicate the message and we feel that we need to find the way through which we strengthen the last-mile connectivity.

Where financial literacy is very low, how can you educate people about the financial products?
Yes, in South-East Asia, it takes a long time for people to understand financial products. What I have suggested is that we should use colours. For example: we can use traditional colours like red and green to warn the customers about the risk factors associated with, say, derivatives, insurance or debt products. So, if someone is signing on a red stripe or bar, then he is going to think twice before signing. In case of green, the person might sign immediately.

Wouldn't colour-coding make it difficult for companies to sell risky products coded in red?
First of all, we have to educate, because every product has a risk attached to it, whether it is a banking product or an insurance product or a mutual fund. What is important from an investor's perspective is that he should know what is the risk factor in the product.

When you and I sign on a home loan paper, there are about 40 papers that we are supposed to read. Do any of us read those 40 papers? I have never read them. So, someone has to look into the interests of the customers. Companies should look at the customers from a life-time value perspective. For a company, an investor should be for a lifetime, not just for one transaction.

Do you see opportunity for Indian companies in the rest of Asia?
From the people's perspective and the topography, we understand each other better. A lot of time, we are using the same language. Our cultures are the same; our values are the same. In all the countries of this region, the savings rates are very high. People understand that the social security net is not very strong. Unless you save for tomorrow, you would be in difficulty. If you look at the trade in this region, it is less than 5% of the total global trade. If you look at Europe, it is one-fifth to two-third of the trade. So, we need to find a way through which we can collaborate to learn from each other in different fields. For example, Indians understand micro-pensions because India has been doing it for quite some time. But in microfinance, Bangladesh is so far ahead that Indian can learn from it.

How can the problem of unethical marketing of financial products be tackled?
Sometimes, telling a person not to buy a financial product is also good marketing. If you think this is not the right product for your customer, you should tell him so upfront, even if he wants that product. Corporations should look to add to their business. And values and profits are not something that cannot co-exist. You need to provide value to your customers and investors and in return they will reward you by giving larger percentage of business to you.

What is your advice for retail investors?
After the 2008 crash, there's a lot of maturity among investors; they have learnt that investment is about achieving long-term goals and not about trading goals. There is no good time for investing, every time is a good time for investing. Valuations are attractive now. Investors should enter the market and stay invested.I believe in the next three to five years, they will make substantial wealth in their portfolios that they would be investing in now.

No matter how much we try, we cannot time the market. But, the way India is poised, over the next few years, it'll grow at over 6%. And anyone will give his right hand for this growth rate. I am sure even the markets will do well. If we look at the last 25 years, the stock markets in India have given returns between 14% and 16%. This means, as an asset class, equity markets will beat most of the other asset classes. India is a high inflation economy. Any asset class with a fixed rate of return can't meet the deficit created by inflation. So, we need to stay invested in the equity markets to beat inflation.

What is your outlook on debt funds?
With respect to bond funds and short-term interval funds, we expect that with falling interest rates, these two types of funds will perform. If you look at the liquid category of funds, we feel, it depends upon the liquidity in the market. You know that last week, there have been `1.80 lakh crore of borrowings from the market. So, I feel that unless the corporates have liquidity in the market to borrow, we might not see substantial growth.

What impact will the recent stock market uptrend have on systematic investment plans (SIPs)?
Well, the purpose of investing in SIPs is to diversify the risk. Otherwise, someone could invest directly in the equity market. And people invest in SIPs with specific financial goals. So such goals are long term and they do not change. We will definitely see a spike in SIP sales. But ideally, people should buy SIPs with long-term goals, irrespective of the fluctuation in the market in the short term.

Source: http://www.dnaindia.com/money/interview_stay-invested-in-equities-to-beat-inflation_1666586

Friday, March 23, 2012

Reliance Mutual, HDFC, State Street Corp & seven other funds in final lap for Fidelity's India mutual fund business.

About ten funds, including Reliance Mutual, HDFC, and State Street Corp, have been shortlisted to buy Fidelity's India mutual fund business, people close to the transaction said. The winner is expected to be selected some time in April from a second shortlist of five, they added.

JP Morgan, which is advising Fidelity on the transaction, is said to have compiled a shortlist of ten from the 22 funds, who submitted expressions of interest. Of these ten, Fidelity India will recommend the five "best names" to its parent to take the transaction forward, a person close to the development said.

The shortlisted asset management companies include Reliance Mutual Fund, HDFC Mutual, ICICI Prudential, Birla Sunlife Mutual Fund, Invesco, Mitsubishi UFJ, Mizhuo Asset, Pramerica and State Street Corp.

Almost all these institutions have bid for Rs 350-Rs 500 crore, another highly-placed official at Fidelity told this paper. The price values the mutual fund at 4-5.8% of its total assets under management of Rs 8,700 crore, lower than Fidelity's expectation of 6.5%.

A Fidelity spokesperson declined comment on speculations or rumours. Spokespersons of all the domestic mutual funds declined comment to an email questionnaire from ET.

Though Fidelity has drawn a shortlist, it is not clear whether the deal will also include the equity fund management team, which the fund house was not very keen to sell when the bids opened in February.

In its "request for proposal" document, Fidelity had stated that it is not keen on making the equity fund management team headed by Alexander Treves, the Mumbai-based CIO, as part of the sale.

The fund house intended to retain the team to manage its offshore investment advisory business, which again is not a part of the "assets-to-be-sold" list.

"We've not been told anything of their investment team till now; we're not really keen to acquire them also. We've our own team to manage funds," said the senior official of a domestic fund house, shortlisted by Fidelity.

Fidelity insiders said the board's meeting in Boston will seal the fate of the deal. If the board is not happy with the bids or conditions placed by the bidders, it may decide to defer the stake sale for a later date, sources said.

Domestic fund houses that have bid for Fidelity's assets have another problem with respect to absorbing their workforce. In its "request for proposal" document, Fidelity expected the acquirer to give jobs to all members of business management team consisting of marketing and sales personnel.

Fund houses such as ICICI, HDFC, Reliance and Birla have full-sized business management teams. These fund houses are still not sure how many Fidelity staffers will they be able to take on their rolls.

Source: http://articles.economictimes.indiatimes.com/2012-03-22/news/31225274_1_fund-business-fidelity-s-india-fidelity-india

Tuesday, March 20, 2012

MFs eye Rajiv Gandhi Equity Savings Scheme

Indian fund managers want the proposed Rajiv Gandhi Equity Savings Scheme (RGESS) to be routed through mutual funds (MFs). Though there is no clarity yet on how the scheme would operate to attract retail investors into the equity markets, industry executives and experts say there is no other vehicle best suited for the proposed initiative except MFs, provided the product is structured well.

But, would mutual fund investments qualify for the scheme, ask market experts. "Often, new investors would prefer to come through the MF route as they may have little knowledge about investing directly in equity markets," says Rajiv Bajaj, managing director of Bajaj Capital.

In his Budget speech the finance minister made his intentions clear that he wanted to encourage the flow of savings into financial instruments and improve depth of the domestic equity markets. He proposed to introduce RGESS, which would allow new retail investors investing up to Rs 50,000 directly in equities, an income tax deduction of 50 per cent. The scheme would have a lock-in period of three years. Investors with annual income of below Rs 10 lakh would be eligible to reap the benefits of the scheme.

But there are problem areas too, in the proposal. "Who is a new retail investor, and why investments have to be directly in equities?" asks Dhruva Chatterji, senior research analyst at Morningstar India.

Dhirendra Kumar, chief executive officer (CEO) of Value Research, says, "The proposal of RGESS has huge potential to attract funds from retail investors. But it could prove disastrous if new investors put in money directly into equities because of their inexperience. I hope that details emerge, mutual funds are made part of it."

According to experts, the country's stock markets could get up to Rs 50,000 crore of retail inflows per annum of long-term funds, which would exceed the funds brought in by foreign investors. The money would not only boost India's capital markets, but also bring stability as these funds will be stickier.

Sanjay Sachdev, CEO of Tata Mutual Fund, agrees, "If MFs are made vehicles for RGESS, it will be easier and faster as the industry has an established system. This could be a variant of the existing equity-linked saving schemes (ELSS)." There are many takers for this suggestion. In post-Budget conversations with Business Standard, industry chief executives said government has chosen a good time for this product.

If further guidelines favour the MF industry as a vehicle, fund houses would roll out appropriate products, (such as Tata Mutual Fund RGESS or ICICI MF RGESS), they added. With the Direct Taxes Code (DTC) set to come into play soon, ELSS will lose its edge as tax saving havens. "Operationally, it is possible to have the existing ELSS under RGESS," says Nimesh Shah, CEO of ICICI Prudential Mutual Fund. Moreover, if MFs are made vehicles for the new scheme, investors would have a variety of options to chose from out of the existing ELSS, depending on the schemes' track record.

Equity mutual funds have the largest investor base in terms of folios. As per statistics from the Securities and Exchange Board of India (Sebi), in January overall equity folios stood at 38.4 million.

Of this, ELSS constitured over eight million.

According to industry officials, since there is a substantial investor-base in ELSS, the proposed scheme should be moulded in a way that existing retail investors in tax-saving equity products can continue under a new name of RGESS.

Source: http://www.business-standard.com/india/news/mfs-eye-rajiv-gandhi-equity-savings-scheme/468301/

MF agents laugh more on the way to the bank

Having been battered by life-changing regulatory moves for over a couple of years now, mutual fund distributors finally have something to smile about. The finance minister has given a significant relief by exempting their services from the ambit of service tax of 12 per cent.

According to a notification on Saturday, the "services rendered by a mutual fund agent or distributor to mutual fund or asset management company for distribution or marketing of mutual fund" form part of 34 items exempt from service tax. "The government, being satisfied it is necessary in public interest so to do, exempts the following taxable services from the whole of the service tax leviable thereon under section 66 B of the Finance Act," said the notification.

Distributors are relieved. K Ramesh Bhat, chief executive, IFA Galaxy, a Chennai-based group of independent financial advisors (IFA), said, "It is big relief. Asset management companies used to directly deduct this 10.3 per cent from the commissions payable. And, since it was not in the nature of tax deducted at source (TDS), we could not even set it off against expenses. Distributors had to bear it all themselves. They could not pass it on, too."

The move will put more cash in the hands of all classes of distributors, including IFAs, corporate distributors and banks, say experts. For example, an IFA earning Rs 8,970 will earn Rs 10,000 post the changes, Bhat said, adding, "It will 100 per cent help the industry, which is facing difficult times."

Private banks such as HDFC Bank and ICICI Bank, which earn a significant income through the distribution of financial products, are set to gain, say analysts.

The industry has been facing heavy attrition after the Securities and Exchange Board of India (Sebi) abolished upfront commissions in 2009. Many small distributors either quit or moved to selling other products such as insurance policies and bonds which offered higher remuneration. Even last year's move by Sebi to introduce a fee of Rs 100 for investments of Rs 10,000 or more has not been able to revive interest amid lacklustre equity markets.

Coming in this backdrop, the Centre's move will free up cash for expansion at a time when inflows have been erratic, says Rajiv Bajaj, managing director, Bajaj Capital, a national distributor. "The timing could not have been better. Business has not been great for the past three-four years. The service tax was a big drain on our resources. The government move would help us invest in the expansion of distribution," he added.

Apart from increasing the cash flow in new businesses, MF agents will also take home 11 per cent more on past efforts. Trail commissions, the fee paid by fund houses based on assets contributed by the distributor at the end of the year, will also go up. Amidst a lack of new business, trail commission was a major source of revenue for distributors who hung on.

"Whatever little we were earning on trail used to be shrunk by the service tax," said Bhat. "We had made a lot of representations soon after the tax was introduced five years ago. But, this week's relief was unexpected." The finance minister said in his Budget speech there would be an exemption list in addition to the negative list of services for the purpose of collection of service tax.

Other exempt financial sector services include services of a sub-broker, an authorised person to a stock broker or commodities broker, banking correspondents and business facilitators for insurance companies in rural areas. The government has also exempted services provided by the general insurance industry to some rural economy-focused schemes such as crop insurance, cattle insurance, etc.

Source: http://business-standard.com/india/news/mf-agents-laugh-morethe-way-tobank/468372/

Pramerica, HDFC Asset Bid for Fidelity India Unit, Mint Says

Pramerica Asset Managers Pvt., a unit of U.S.-based Prudential Financial Inc., and HDFC Asset Management Co. are leading the bid for the Indian assets of Fidelity mutual fund, the Mint newspaper reported, citing two people with direct knowledge of the deal.

HDFC and Pramerica have been shortlisted out of about 20 bidders with their bids ranging between 4 billion rupees ($80 million) and 5 billion rupees, the paper reported. The bids value Fidelity at 4 percent to 5 percent of its average assets, the newspaper said.

Source: http://www.bloomberg.com/news/2012-03-19/pramerica-hdfc-asset-bid-for-fidelity-india-unit-mint-says.html

Monday, March 19, 2012

Kenneth Andrade: Budget Expects The Consumer To Grow The Economy

The mutual fund expert says that the finance minister has left very little room for error by presenting a practical Budget

Kenneth Andrade, Chief Investment Officer at IDFC Mutual Fund, is not a Budget freak. He believes that Indian companies have moved out of the domestic market and are more affected by the global economic scenario than policies announced in the Budget. Some excerpts from an interview with Forbes India.

How do you look at the Budget? Do you see any long-term impact on the market?
It was actually a non eventful day. Over the last three years, we have been looking for a fiscal balance. In fact, budgets have not been able to do anything path-breaking for a long time. There have been no big implications on any industry through budgets. This year, there were talks about increasing the prices of diesel cars. That did not happen. I think it's better to increase the price of diesel than the prices of the cars. I think somewhere down the line we will have a fuel price hike. As growth is coming down, the fiscal deficit is climbing. But as far as the capital markets are concerned, you can say that the Budget is almost becoming a non event.

While there are tax benefits to the middle-class, the excise on various goods has gone up. Do you think that this will increase demand?
I don't think it works that way. It doesn't necessarily net each other for sure. The FM wants the consumer to pull the economy and put it into proper shape. But I don't see any point in connecting these two things.

Do you think markets will continue to remain flat for the coming year as the Budget really did not have any incentives for the corporate sector?
You have to understand that markets have been flat for the last couple of years. They have been in the range of 15000-20000 for a long time. Whether markets break out of here or not, there are some companies that are increasing their profitability every year. If we keep markets in isolation and look at corporate structures you will see that things are moving. A few years ago we talked about the outsourcing model in the technology sector. But in the last five years India has started to export balance sheets. If you leave out the banking sector, you will notice that India has been a net exporter of balance sheets.

Tata is the largest employer in Britain and IT companies have moved away from off-shoring or on-shoring model and have bought companies abroad and [are] creating jobs abroad. That's the model that is significantly more value added than any other model. Earlier there was an arbitrage model. But now you are doing business in their countries and at their costs. Many companies have gross block that is higher outside India. These companies are not really dependent on the Budget any more. We all need to understand that we are operating in a market without boundaries. The Budget has largely to do with the economy. Corporate business models are expansive across the globe and are not just in India.

How do you look at the Indian economy now?
The high growth of India's GDP was based on asset creation. Now if we move back to the 6 percent of GDP, it is the representation of the investment economy slowing down. The slowdown is actually the slowdown of capital formation on the ground. There are two ways you can expand the economy. One is through investment and the other through consumers. The third is through outsourcing, but that model has fallen apart. The investment economy creates the job opportunity—taking people into rural markets and then putting them into organised markets and then you have to give incentives so that people spend more. Basically, we are in a cycle where an investment economy leads to employment which leads to demand which leads to capacity creation. We are in that trend. We are in a significant downtrend which won't last for too long.

How would you sum up the Budget?
It was a practical Budget because the fiscal deficit target that they set out to achieve is very much in line. They have given very less room for error. The finance minister had said that he wanted to put more money into the hands of the consumer in the current Budget which he has done by tax breaks to the middle class. The second important thing that has happened is on the infrastructure side. There has been a big shift in terms of policy. This has been done by giving incentives to the cost structure of the investment economy by lowering the cost of various raw materials in the entire system. The import duty on coal and LNG has been brought down to zero. Infrastructure companies can raise ECBs abroad at lower costs. This is all in the right direction. The Budget tried to make operational assets efficient and help generate cash flows to grow the entire economy and expects the consumer to take the lead to grow the entire economy.

Source: http://forbesindia.com/article/india-budget-2012/kenneth-andrade-budget-expects-the-consumer-to-grow-the-economy/32534/1

Fund Managers outlook on key sectors: Quantum Mutual Fund

Quantum Mutual fund has come out with its latest report which foresees markets key instruments like Equity, Gold, Debt performance amidst volatile market.

EQUITY OUTLOOK

Views by Atul Kumar - Fund Manager (Equites) : The month of February was an encouraging one for equities. FIIs continued to show strong buying interest during the month and were net buyers to the tune of USD 5.13 Billion. Indian equities continue to look encouraging in the long run. Irrespective of the global economic problems, India appears well poised to achieve a GDP growth of 7% over the next few years. Investors can consider allocating to equities at this point of time for good returns in the long term.

GOLD OUTLOOK

Views by Chirag Mehta Fund Manager (Gold): During February 2012, Gold continued its upward trend for most of the month. However, the Federal Chairman's speech that avoided signs of further easing triggered a sharp selloff on the last day. To put some numbers to this; gold prices saw an increase of 2.9% based on the London AM Fix price, however, when considering the spot closing prices, it indicated a decline of - 2.3% for the month. Such was the magnitude of the selloff seen on the last day of February 2012.

DEBT OUTLOOK

Views by Chari- Fund Manager (Debt): February 2012 saw 10-year government bond yields trading at lower levels, finally ending at 8.2%. This was good news to Indian Bonds, which continued their positive return trend for the fourth consecutive month. Indian bonds started their bull run back in November 2011, with yields falling and prices rising. During the same time, 10-year yields reversed their upward trend above the 9% mark, as the Reserve Bank of India (RBI) began its Open Market operations to add liquidity by buying government bonds across tenor.

Source: http://www.moneycontrol.com/news/mf-reports/fund-managers-outlookkey-sectors-quantum-mutual-fund-_681701.html

Budget 2012: All you wanted to know about DTC and other taxes

ET's helps readers navigate through the maze of tax jargon:

Direct Taxes: It's the tax individuals & companies pay directly to the govt.

Corporation Tax: It's the tax companies pay (30% at present) on their profits.

Taxes On Income Other Than Corp Tax: It's income-tax paid by individuals or 'non-corporate assessees'. This ranges from 10% to 30%, depending on income.

Securities Transaction Tax ( STT): Applicable if you're dealing in shares or mutual fund units. It was introduced in the 2004-05 budget, replacing the tax on profits earned from the sale of shares held for more than a year (known as long-term capital gains tax).

Minimum Alternate Tax (MAT): Indian companies pay 30% tax on profits as per the I-T Act. But tax holidays could lower the outgo. If a company's tax liability is less than 10% of its profits, it has to pay a MAT of 15% of book profits. This provision is expected to change once the direct taxes code (explained below) proposals are accepted. Under DTC, MAT will be levied on gross assets.

INDIRECT TAXES: It's essentially a tax on expenditure. Considered regressive, this tax does not distinguish between the rich and the poor and hence most governments prefer to raise their revenues through direct taxes.

Customs: Anything you bring from abroad comes at a price. By levying a tax on imports, the government achieves twin objectives: it raises revenues and protects local industries.

Union Excise Duty : Imposed on goods manufactured in the country.

Service Tax: You pay the govt when you eat out or visit your hairdresser -- it is a tax on services rendered. Levied on 119 activities.

Value-Added Tax: State governments levy this on goods at the point of sale, based on the difference between the value of the output and the value of inputs used to produce it. The aim here is to tax a firm only for the value it adds to the inputs, and not the entire input cost. Thus, VAT helps avoid a cascading of taxes.

TAX REFORMS GOODS AND SERVICES TAX: The proposed GST is expected to streamline the indirect tax regime. It contains all indirect taxes levied on goods, including central and state-level taxes. Billed as an improvement on the VAT system, a uniform GST is expected to create a seamless national market. It could also mean lower taxes.

DIRECT TAXES CODE: The I-T Act came into effect nearly half a century ago. To account for the new business and activities that have come since then, the government formulated the DTC. It proposes to simplify tax laws and include a new way to calculate taxes on income.

Source: http://economictimes.indiatimes.com/personal-finance/tax-savers/tax-news/et-in-the-classroom-all-about-taxes/articleshow/12241464.cms

Schroders Investment in talks to buy 30% stake in Axis MF

Schroders Investment Management, a UK-based firm managing $ 291 billion worldwide, is in talks for buying 30% stake in Axis Mutual Fund, sponsored by Axis Bank. This will possibly also end company's four-year wait to enter India's mutual fund market.

Axis is said to be negotiating to sell 30% stake at a valuation corresponding to 5% of the mutual fund's assets under management of around 8,600 crore as on December 31. At 5% of its assets, Axis Mutual Fund is valued at almost 430 crore implying that Schroders would play around 130 crore if the deal is consummated

"Axis Bank regularly evaluates partnership opportunities for Axis AMC that will add value to its business either in investment management or distribution, both local and global. When we are able to identify the right partner, we will assess the appropriate partnership arrangement," said a spokesperson for the bank, India's fourth most valuable bank after, SBI, HDFC Bank and ICICI.

A Schroders spokesperson said: "We have a policy of not commenting on market speculation or rumour. We have no further comment."

Source: http://articles.economictimes.indiatimes.com/2012-03-14/news/31168892_1_mutual-funds-axis-amc-axis-bank

Short-term rates of CDs rise to 11.6%

Rates on certificates of deposit (CDs) increased 25-30 basis points on Tuesday, as banks rushed to refinance maturing debt, meet year-end targets and prepare for withdrawal pressure from companies, ahead of the deadline for advance tax payments. A lack of participation from mutual funds also helped raise the rates, said bankers.

CDs are short-term debt instruments issued by banks to raise funds for up to one year. Mutual funds and banks are major investors in these instruments.

Market participants said on Tuesday, banks raised about Rs 6,000 crore through deals that included three Rs 1,000-crore ones. Axis Bank, UCO Bank, IDBI Bank and Indian Overseas Bank were among the banks that issued CDs on Tuesday. CDs maturing in three months were issued at 11.5-11.6 per cent, while those maturing in six months were issued at 11.1-11.2 per cent. One-year maturities had a rate of 10.8-11 per cent on Tuesday.

Bankers said Rs 1.5 lakh crore worth of CDs issued earlier were lined up for maturity this month. T S Srinivasan, general manager (treasury), Indian Overseas Bank, said, "Rollovers are happening at a higher rate, as investors are not keen on participating at this point."

While mutual funds are facing redemption pressures, banks with surplus funds are deploying these to boost credit growth, instead of lending in the money market. Mutual funds are also not aggressive on investing in CDs, owing to recent guidelines by the Securities and Exchange Board of India that mandates these to mark-to-market all debt investments with maturity periods of more than 60 days.

Liquidity in the banking system continues to be more than double the central bank's comfort level of one per cent of net demand and time liabilities. On Tuesday, banks borrowed Rs 1.23 lakh crore from the Reserve Bank of India (RBI) at 8.5 per cent.

Last fortnight, banks' repo borrowings increased, closing at Rs 2 lakh crore. This prompted RBI to announce a cut of 75 basis points in the cash reserve ratio (CRR) on March 9. The central bank is to release the mid-quarter review of monetary policy on Thursday.

Traders said CRR cut would help offset outflows on account of advance tax payments, not infuse additional liquidity. According to RBI, the 75-basis point cut in the CRR would release Rs 48,000 crore into the system. On the other hand, advance tax outflows are expected to be around Rs 50,000 crore.

A senior Union Bank of India official said he expected liquidity to improve next fortnight, as the pressure from advance tax payments fades. However, the demand for funds to meet year-end targets would keep the short-term rates high.

Source: http://www.business-standard.com/india/news/short-term-ratescds-rise-to-116/467652/

Tuesday, March 13, 2012

Redemptions in equity MFs hit 16-month high

Retail investors accessing equities through mutual funds (MFs) continued to book profits amid steep volatility witnessed in February. The redemption amount hit a 16-month high, while net outflows, were the highest since October 2010.

According to the statistics released by industry body Association of Mutual Funds in India (Amfi), overall redemption from pure equity schemes stood close to Rs 6,300 crore in February. With consistent subdued fresh sales of equity funds, the net outflow increased to Rs 2,700 crore against Rs 456 crore in the previous month.

"This is in line with expectations," says Akshay Gupta, chief executive officer of Peerless Mutual Fund. "Especially when equities are not stoking confidence among investors, who are preferring availability of alternative investment avenues including fixed deposit and tax-free bonds."

After a steep rally in January, sharp volatility hit the markets in February. During that month, benchmark stock indices ran up eight per cent, only to see a correction of over four per cent in a matter of a few sessions. "Investors are using these intermittent rallies to exit," explains Gupta.

The chief investment officer (CIO) of a foreign fund house agrees, noting that extremely high volatility is taking toll on investors' sentiments. "Indian retail investors prefer to stay away when markets correct. When the rally comes, they wait for corrections," he notes.

"This makes me wonder: when would retail investors come in?"

Industry officials to whom Business Standard spoke say there was no reason for the market to rally so steeply in January. "Had this rally happened during a course of three to four months, lost investor confidence could have stood restored," explains the CIO. "But, sharp movements tend to keep investors away which is hitting MF equity schemes."

With such a sharp outflow in February, the overall inflows in the equity segment has barely managed to remain in the positive territory so far in the current financial year at less than Rs 500 crore. During the same period (April-February) last year, the industry had witnessed a net outflow of a whopping over Rs 13,000 crore — the highest for the fund industry.

However, concerns continue to remain among fund managers about the current month. They say, there is no enthusiasm among investors. According to them, investors have started questioning industry's objective of long-term investment as they have not made gains over the last three to four years.

"Their point is valid," adds an equity head of a mid-sized fund house. "That is the reason why the industry's most sold concept of SIP (systematic investment plan) too has been hit hard over the last six to eight months. Cancellations and terminations are happening on a consistent basis."

Source: http://www.business-standard.com/india/news/redemptions-in-equity-mfs-hit-16-month-high/467497/

Monday, March 12, 2012

Indian equity market is going to see new highs: Pramerica Mutual Fund

In an interview with ET Now, Vijai Mantri, MD & CEO, Pramerica Mutual Fund, talks about the IIP Numbers and markets. Excerpts:

ET Now: What would you make of a number 6.8%?

Vijai Mantri: The market would salute a little bit but not much because these are historical data, markets always look at what is going to happen in future. And I agree with Mr. Barua that when we look at these numbers we have own homework we do look at companies, we see things from the ground level and what kind of feeler we are getting from the companies. So, we do not rely on these data completely. However, these data do give us some signal, the direction of Indian economy. In the short term market may like this data because they have come much ahead of anybody's expectation. The guy who was giving the bullish number was close to 3%, it is a 6%-8% and what is key is that we are clearly seeing something is happening on the capital good side. It has not gone into positive territory but it looks like coming out of negative territory and that would be the key if you look at the investment cycle revival in this country.

ET Now: Would you believe that only perhaps when we can see interest rate softening and that all of these geopolitical and macro concerns fading that the situation for the overall Indian economy will be perhaps less challenging for FY12 and FY13?

Vijai Mantri: The challenge will continue to remain there, the biggest challenge as we see it that how does one revive the investment demand in Indian economy because if the investment demand is revived then you see some action happening on the manufacturing side and that is very good for the export. What we are seeing on the global factor one is definitely the Euro crisis over the time being is put on hold right now. US, we are seeing interesting data point, US would be showing some sign of recovery than what many people has expected. For India, it is one of the biggest export partner. Export, we see some in spite of recent challenges we see some sobering effect in export going back to their old days.

If you look at Indian economy we believe that April, May, or June onward you see interest rate is going down because if you have a bank CD or corporate paper available at 11.5% or 12% why do you put a plant of 5000 crore or 10,000 crore because you can get same kind of return on putting your money in the bank deposit in the corporate CD and CP. So, very clearly when the interest rate goes down there is a more incentive to put that money to the risk uses to put money for the businesses. The government can take care of couple of things first and foremost I believe they take care of coal linkages, that is a biggest concern people are putting manufacturing plant and that does not require actually parliamentary approval that can be done by the government itself. So if you ask me, I would look at interest rate, I would look at coal linkages if these two things are being take care of we would see investment revival. We see Indian economy reviving and we see market in much better shape than what they are today because a lot of global money available which would like to come to India.

ET Now: With respect to any of the sectors given that we have seen some initiatives being taken in the mining sector, do you believe that this time around it did come as a big disappointment and we might see some stability come into the numbers, any surprise figure that you are expecting to see in individual sectors going forward?

Vijai Mantri: I have not seen the data it is very difficult for me to comment that what this data mean because I just saw the numbers with you guys in front of TV screen. So we need to go back and see what this data indicate and more importantly what trend we are seeing and is this trend continue to be going there going forward which we believe on many sector it is going to be.

ET Now: A quick word on what your Sensex target for 2012 is?

Vijai Mantri: I just close to a three-four weeks back I came to your TV channel and I did mention that we clearly see 2012 may be 2013, 12 months from now the Indian equity market is going to see new highs for very simple reason that there is lot of liquidity available in the market. The ownership of the retail investor is very low and if you look at the valuation they are available at historical low compared to last 5 to 10 years level. So we believe that next 12 to 15 months market may see new highs.

Source: http://economictimes.indiatimes.com/opinion/interviews/indian-equity-market-is-going-to-see-new-highs-pramerica-mutual-fund/articleshow/12231101.cms

Tuesday, March 6, 2012

Lessons From Fidelity’s Slip-Ups

Fidelity Mutual Fund, a global fund managing assets worth $310 billion, has decided to exit its India operations. This comes as a shock to many industry analysts as its MD and country head Ashu Suyash had single-handedly defied the mutual fund industry by not choosing the traditional channels of distribution and yet managed to build a good reputation for the fund in a span of just seven years.

Apart from being the only woman at the top in the mutual fund industry, Suyash also happens to be one of the most ambitious business leaders. She was not really well-known when Fidelity, the second biggest fund house in the world (next only to Vanguard), hired her as the country head for its India operations in 2005.

In May 2010, she stated that she wanted to put Fidelity India among the top five mutual funds in the country. The fund was then ranked number 20 with assets worth Rs 7,400 crore. Within 18 months, the fund saw its assets move up 18 percent while all the top funds saw a fall. Overall, the industry fell by 25 percent.

But now, Fidelity plans to exit its India operations as it has accumulated losses of Rs 300 crore and the overall return on investment for the fund has not been sustainable. Mutual fund analysts feel that the real reason is not clear as the Rs 300 crore-loss for a seven-year fund, with the backing of an international giant like Fidelity, is actually not very high. Fidelity's exit will, however, leaves a big blot on the industry as other international funds who want to enter the Indian market will rethink their decision.

Over the last three years, the Indian mutual fund industry has virtually stagnated and has grown only by around 5 percent annually. Much of this growth has happened in the fixed income assets which normally comprise low-margin products. So, even if there has been growth in assets, the same is not happening with the bottomline of the asset management companies (AMCs). Fidelity and other foreign funds would have ideally been able to ride all the issues had they not compromised on costs, distribution and operational freedom. Fidelity India declined to comment on this story.

Cost Management

When Suyash was appointed to head Fidelity India, she decided to concentrate on equity assets that are considered to be profitable. Almost 70 percent of Fidelity's assets are in equity, but recently the fund has also been looking at fixed income. Fidelity saw its business development expenses double over the last year as it was spending heavily on low-margin products.

The fund was also spending a lot on employees. Salaries of foreign funds operating in India need to be aligned with their international counterparts where employees are paid twice the amount compared with domestic funds.

Of its total expenses, Fidelity was spending half on employee salary and benefits. This is way above the 20-25 percent that Indian funds spend.

"Foreign players have higher costs. They pay higher salaries, and in most cases, they do not have a local in-house distribution agency which can promote their schemes. Domestic mutual funds are very cost conscious about the same," says Nipun Mehta, a private banker who specialises in mutual funds.

Most domestic players also have strong affiliation to national distributors or they have their own distribution companies. This is not the case with foreign players. They try to sell their products through international banks—their global tie-ups—that are operational in India. Globally, banks are the biggest distribution channels for mutual funds. Foreign funds feel that whatever has worked in international markets will also work in India.

In India, foreign banks account for almost one-third of the overall distribution market. However, due to competition from private Indian banks like ICICI and HDFC, the foreign banks are losing their market share. Indian mutual funds use banks, independent financial advisors (IFAs) and national distributors, like Bajaj Capital, as their main channels for distribution.

According to a McKinsey study released last October, it is the IFAs and national distributors who have witnessed the majority of growth over the last two years. But many foreign funds like Fidelity have stayed away from these channels and, thus, were not able to scale up.

Foreign funds that are new entrants into the market are now beginning to realise that tying up with local partners who understand distribution in a country like India is the key to their survival.

In India, metros and tier 1 cities account for 80 percent of the assets of the mutual fund industry. While foreign funds are not exploring new territory, domestic funds realise that tier 2 and tier 3 cities hold the potential for the bulk of their growth. Furthermore, in smaller towns, Indians are more comfortable with domestic brands.

Another reason why Indian funds are doing better than foreign funds is that they do not take much time to react to market situations, especially when it comes to new product launches.

It takes about six weeks for an Indian fund to launch a new product. For a foreign fund, this can extend beyond a year because of various processes and approvals from the global headquarters.

Freedom of Operations

The last, but not the least part, is the performance of fund houses. Foreign fund managers have to adhere to international philosophies when it comes to fund management. Often, these do not allow fund managers to pick and choose stocks to beat the markets. They have to stick to the rules dictated by the global headquarters. This is not the case with domestic fund houses. Most domestic fund houses allow fund managers to be flexible and invest heavily in mid- and small-cap segments.

"Investment processes of wholly or dominantly MNC-owned AMCs are quite inflexible. Domestic fund houses, in comparison, appear to be flexible in their choice of mid-cap and small-cap stocks within the framework of the guidelines laid down for the schemes. This often helps in better performance of select schemes," says Mehta.

Source: http://forbesindia.com/article/boardroom/lessons-from-fidelitys-slipups/32388/1

Investment with judicious tax planning

Asset allocation is a simple yet powerful strategy to balance risk and return of a portfolio by diversifying investments across asset classes.

Asset allocation is unique to each individual and one needs to take a holistic view of his/her situation to arrive at an optimal allocation. This includes considerations like return expectation, risk appetite, time horizon, taxes applicable, liquidity requirements etc.

Establishing your asset allocation is both a science and art. While sophisticated software/psychometric tests can assist in understanding your profile, the ideal optimal allocation includes subjective factors like risk tolerance and willingness to take risk.

In order to ensure long-term portfolio success, investors need to have a disciplined strategic asset allocation in place wherein the weightages are clearly defined. However, tactical changes to the strategic allocation can be implemented based on market opportunities.

Tax Efficiency & Financial Instruments

The tax structure in India is clearly in favour of long-term investments. Indian capital markets offer investors plenty of investment choices across asset classes. Within equity, investors can choose from stocks, equity mutual funds, portfolio management schemes and private equity. Long-term capital gains and dividend from equities are tax free in the hands of investors.

Similarly, under fixed income, investors can opt for fixed maturity plans, other bond funds, government and corporate sector bonds as well as fixed deposits. Indexation is allowed for debt mutual funds held for more than one year thereby enhancing post tax returns. Within debt, taxation in mutual funds is lower compared to interest income.

While interest income from fixed deposits and bonds is fully taxable, regulation do allow for long-term capital gains and losses from debt to be set off against each other. For example, investors having eligible carry forward long-term losses can offset long-term capital gains from debt investments under the growth option.

Fixed Income

Take the case of the recent issuance of tax-free bonds by NHAI and Power Finance Corporation. On a ten-year bond, these offer a tax-free return of 8.2%. To earn a similar post-tax return, an investor in the highest tax bracket needs to invest in a bank fixed deposit giving pre-tax return of more than 12%. Presently, bank fixed deposit rates are hovering around 10%. Such tax-free bonds are not regularly available; hence, investors should grab these opportunities as and when they arise.

An alternative to fixed deposits can be investment in bond funds or fixed maturity plans. In case the investment tenure exceeds 12 months, the appreciation is treated as capital gain which is more tax efficient when compared to interest income.

Equity

Investment costs/taxation tends to be higher in portfolio management schemes when compared to equity mutual funds. In a mutual fund, investors hold units of a fund and have no tax impact for changes in the fund's underlying holdings. However, in a portfolio management scheme, the stocks are purchased/sold in the investor's name thereby making them liable for short-term gains tax if sold at a profit within a year.

Under the present tax regulations, gains from transactions in futures & options (derivatives) are categorised under the head of speculative income. It is advisable for investors to keep F&O and regular capital market investments in separate books. Higher transaction costs and tax are a drag on long-term portfolio returns. Investors therefore need to be careful in selecting the right avenues with a long-term horizon in mind.

Finally, introduction of the Direct Tax Code may lead to certain changes. One should take them into account before making investment decisions.

Source: http://economictimes.indiatimes.com/personal-finance/savings-centre/analysis/investment-with-judicious-tax-planning/articleshow/12154939.cms

ICICI Bank, Citi, BoB, LIC sign MoU to set up India's first Infrastructure Debt Fund

Union Finance Minister Pranab Mukherjee today said that setting up of Infrastructure Debt Funds (IDF) through public-private partnership (PPP) would meet the long-term need of infrastructure funding in the country.

Speaking after a memorandum of understanding (MoU) was signed here in his presence for setting up India's first IDF, Mukherjee said he was confident that the stablishment of such funds in the PPP mode would be a guiding principle for future activities in this area.

According to him, funds to the tune of $ 1 trillion would be required for infrastructure sector funding in India in the next five years, out of which 50 per cent would come from the private sector through the PPP mode.

The MoU for the new IDF, structured as a non-banking finance company (IDF-NBFC), was signed by Chanda Kochar, Managing Director, ICICI Bank, Pramit Jhaveri, CEO, Citibank, M.D. Mallaya, CMD, Bank of Baroda and Sushobhan Sarkar, MD, Life Insurance Corporation (LIC).

Others present on the occasion included Planning Commission Deputy Chairman Montek Singh Ahluwalia, Planning Commission Member Gajendra Haldia, Finance Secretary R.S. Gujral, Economic Affairs Secretary R. Gopalan, Expenditure Secretary Sumit Bose, Disinvestment Secretary Haleem M. Khan, Secretary, Disinvestment and Bimal Julka, Additional Secretary cum Director General, (Currency), Ministry of Finance.

The Finance Minister in his Budget Speech for 2011-12 had announced setting-up of IDFs in order to accelerate and enhance the flow of long-term debt in infrastructure projects for funding the government's ambitious programme of infrastructure development. To attract off-shore funds into IDFs, he had also announced that withholding tax on interest payments on the borrowings by the IDFs would be reduced from 20% to 5%. Income of the IDFs has also been exempt from income tax.

The framework for establishment of IDFs was announced by the Ministry of Finance in June, 2011 wherein IDFs were allowed to be set up either structured as an NBFC or as a mutual fund. Reserve Bank of India (RBI) issued the regulations for IDFs to be set up as a NBFC in November, 2011 and Securities Exchange Board of India (SEBI) issued the regulations governing an IDF structured as a mutual fund in August, 2011.

ICICI Bank (together with a wholly-owned subsidiary), Bank of Baroda, Citi and LIC will hold 31%, 30%, 29% and 10% shareholding, respectively, in the IDF-NBFC. The IDF would seek to raise debt capital from domestic as well as foreign resources and would invest in infrastructure projects under the PPP model that have completed one year of operations. The IDF will expand and diversify the domestic and international sources of debt funding to meet the large financing needs of the infrastructure sector, thereby giving an impetus to the creation of the infrastructure necessary to drive India's growth, an official press release added.

Source: http://netindian.in/news/2012/03/05/00019123/icici-bank-citi-bob-lic-sign-mou-set-indias-first-infrastructure-debt-fund