www.fundsindia.com Save tax wisely Have you ever thought about why you do your tax-saving investments? To save taxes of course, you might say! That, to my mind, is incidental. Do you know that a major chunk, or perhaps the entire portion of your annual savings goes in to saving taxes (under Section 80C)? And for many, there is no other significant saving avenue other than tax-saving investments. That makes it vital that you are ‘saving’ in good avenues that build wealth. Although you put away money for your short-term need of saving tax, remember: the money, in most cases, is locked in to long-term investments. That is even more reason why you have to plan to save taxes in options that deliver smart returns over the long term. This is where tax-saving funds (ELSS – equiy linked savings scheme) score over traditional options such as EPF, PPF, NSC, or tax-saving fixed deposits. Whether it is returns, or lock-in, or tax efficiency, tax-saving funds are better than traditional options. Goal-based tax saving You need not save taxes blindly. Save taxes with a goal. Your tax-saving fund will be your equity allocation, and your traditional options would provide you debt exposure. That means you have a mix of asset classes. Set aside a sum every month or every year towards long-term goals such as children’s education, or your retirement. Expect reasonable returns (based on past long-term returns), and do the math using online calculators to set your goal. Save your money accordingly. Once your tax-saving money has a purpose to it, it becomes your wealth-creating portfolio. If you are in your 20s and 30s, you should be willing to take higher exposure to market-linked products such as tax-saving mutual funds. Hence, outside of your EPF or insurance premium, the rest of your limit in Section 80C can be exhausted using tax-saving funds. If you are in your 40s or 50s, then you should consider reducing tax-saving mutual funds to 30-50% of your overall tax-saving investment. This is simply a thumb rule. If you have a high risk appetite, and are willing to give your investment a longer period to build wealth, you can invest a larger chunk. Only, remember not to react during temporary market falls. Do read our detailed essay on tax-saving funds in this edition of Think FundsIndia. Vidya Bala Head – Mutual Fund Research FundsIndia.com November 2015 ■ Volume 05 ■ 11 KYC changes (again!) Greetings from FundsIndia! This is becoming an annual routine. Come October or November, the regulator comes in with a slew of additional Know Your Customer (KYC) requirements or restrictions that causes investors to go through an update process all over again. This time, thanks to FATCA (an American-led international consumer financial initiative) regulations, investors are required to provide more details to their KYC records by the end of 2015. However, this time, the process has a strange ‘twilight zone’ feel to it. On the one hand the regulator (SEBI) is making announcements about how they are going to make KYC paperless, fully digital, make signatures superfluous, use Aadhaar, etc. And on the other hand, you have circulars about additional data requirements and updates which need to be done by a deadline, failing which transactions will be curbed on the account! At FundsIndia, we will go to the maximum extent possible to make this process smooth for our customers. As these are mandatory requirements, we request your kind patience and co-operation. Happy (continued) investing! Srikanth Meenakshi Co-Founder & COO FundsIndia.com
Transcript
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Save tax wiselyHave you ever thought about why you do your tax-saving investments? Tosave taxes of course, you might say! That, to my mind, is incidental. Do youknow that a major chunk, or perhaps the entire portion of your annualsavings goes in to saving taxes (under Section 80C)? And for many, there isno other significant saving avenue other than tax-saving investments.
That makes it vital that you are ‘saving’ in good avenues that build wealth.Although you put away money for your short-term need of saving tax,remember: the money, in most cases, is locked in to long-term investments.That is even more reason why you have to plan to save taxes in options thatdeliver smart returns over the long term.
This is where tax-saving funds (ELSS – equiy linked savings scheme) scoreover traditional options such as EPF, PPF, NSC, or tax-saving fixed deposits.Whether it is returns, or lock-in, or tax efficiency, tax-saving funds are betterthan traditional options.
Goal-based tax saving
You need not save taxes blindly. Save taxes with a goal. Your tax-saving fundwill be your equity allocation, and your traditional options would provideyou debt exposure. That means you have a mix of asset classes. Set aside asum every month or every year towards long-term goals such as children’seducation, or your retirement. Expect reasonable returns (based on pastlong-term returns), and do the math using online calculators to set your goal.Save your money accordingly. Once your tax-saving money has a purpose toit, it becomes your wealth-creating portfolio.
If you are in your 20s and 30s, you should be willing to take higher exposureto market-linked products such as tax-saving mutual funds. Hence, outsideof your EPF or insurance premium, the rest of your limit in Section 80Ccan be exhausted using tax-saving funds.
If you are in your 40s or 50s, then you should consider reducing tax-savingmutual funds to 30-50% of your overall tax-saving investment. This is simplya thumb rule. If you have a high risk appetite, and are willing to give yourinvestment a longer period to build wealth, you can invest a larger chunk.Only, remember not to react during temporary market falls. Do read ourdetailed essay on tax-saving funds in this edition of Think FundsIndia.
Vidya BalaHead – Mutual Fund Research
FundsIndia.com
November 2015 � Volume 05 � 11
KYC changes (again!)Greetings fromFundsIndia!
This is becoming anannual routine. Come
October or November, theregulator comes in with a slew ofadditional Know Your Customer(KYC) requirements or restrictionsthat causes investors to go throughan update process all over again.This time, thanks to FATCA (anAmerican-led internationalconsumer financial initiative)regulations, investors are requiredto provide more details to theirKYC records by the end of 2015.
However, this time, the process hasa strange ‘twilight zone’ feel to it.On the one hand the regulator(SEBI) is making announcementsabout how they are going to makeKYC paperless, fully digital, makesignatures superfluous, useAadhaar, etc. And on the otherhand, you have circulars aboutadditional data requirements andupdates which need to be done bya deadline, failing whichtransactions will be curbed on theaccount!
At FundsIndia, we will go to themaximum extent possible to makethis process smooth for ourcustomers. As these are mandatoryrequirements, we request your kindpatience and co-operation.Happy (continued) investing!
For many, the term Section 80C triggers a couple ofimmediate associations. One is life insurance. We are notarguing there – insuring your life is of extremeimportance. But once you take one term insurance policy,which has an adequate sum assured based on your incomeand lifestyle, there is absolutely no need to buy even morepolicies.
The second association is, of course, home loandeductions. Here again, you usually have one loan. So,chances are that you will still have a good amount left ofthat Section 80C limit that you should claim. What then?Your options are the traditional instruments – providentfunds, national saving certificates, tax-saving fixeddeposits, and so on.
Then there are the Equity Linked Savings Schemes(ELSS), or tax-saving funds, that invest in the stockmarket, and finally the NPS which blends debt, equity, andULIPs. The idea behind offering tax-saving investmentoptions is to encourage long-term investing.
Of the options available to you, ELSS is the smartestinvestment option for the long term. Here is why.
Superior returns
Over the long term, an ELSS will deliver returns higherthan traditional options. This is because an ELSS investsalmost its entire portfolio in equities. Over the long term,equity is the best asset class for generatinginflation-beating returns.
The traditional tax-saving options (provident fund,deposits, NSC) are pure-debt instruments. Debt, as mostof you know, does not always beat inflation, and delivers
lower returns than equity. It is true that ELSS involveshigher risk that is inseparable from stock market investing.Still, the variety of ELSS schemes available sees to it thatyou can find a fund that suits your risk profile.
For example, if you do not want too much volatility, youcan go for funds that stick to stable blue chips, or movequickly into cash when markets are uncertain. If youwould like the payoff that high risk delivers, you can optfor funds that pick up smaller-sized companies instead ofblue chips.
ULIPs do have investments in debt and equity. Butbecause of the cost that goes into providing insurancecover and other sundry charges, the amount that actuallygoes into investment is lower than in an ELSS, where theentire amount is invested.
In an ELSS, you have more money working for you fromthe outset. As far as PPF or EPF go, the returns do notremain unchanged throughout. Interest rates are fixedeach year based on government security yields. You willcertainly have some degree of fluctuation in returns inyour interest earned.
The NPS, of course, given its high debt component (onlya maximum of 50 per cent can be parked in equity), cansee returns lower than ELSS schemes. Let’s put it innumbers. Take a look at the graph below.
It shows you where a yearly investment of Rs 50,000 inthe PPF over the past 15 years would place you now,against a similar investment in Franklin India Taxshield, amoderate risk ELSS. We have considered 15 years as thatis the minimum period for a PPF investment. The risk youtake in an ELSS certainly has been rewarded well, hasn’tit?
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Bhavana Acharya
You have a choice of several investments under the Section 80C’s capacious umbrella in orderto cut tax payouts. The limit of Rs. 1,50,000 is no middling sum either – for many, it can forma chunk of your annual investments. As they are investments that build wealth over the longterm, it pays to choose wisely.
Competition is only unfair if it is not on the same playing field. New entrants have no privileges theincumbents do not enjoy. We hope that the new entrants find innovative ways of giving customersbetter services at lower prices, thus shaking up and changing the banking sector for the better.Dr. Raghuram Rajan, Governor, Reserve Bank of India
No taxes at all
Now that’s a bit of a puzzling point. Aren’t we alreadydiscussing tax-saving investments? What is often ignoredis that, on instruments such as the NSC and tax-savingdeposits, the interest earned is taxed. It is only theprincipal that enjoys tax deductions.
So, a tax-saving FD with an interest rate of 8.5 per centactually works out to 7.8, 7.0, and 6.2 per cent in the threetax slabs, factoring in the tax on interest. The NPS has notaxes during its life, but when you withdraw or redeemyour investment at the time you retire, that amount istaxed. This directly detracts from their promise.
The EPF and PPF do not suffer taxes at any point,making them quite the tax-efficient product. True. But anELSS, because it is an equity-oriented mutual fund, is alsoexempt from long-term capital gains tax. Its dividends arenot taxed either. Also, as explained above, ELSS returnsare superior to provident fund returns.
Better liquidity
An ELSS investment will be locked in for three years.Incidentally, that also means you will not pay any tax at allon ELSS funds, as only a holding period of less than oneyear in equity mutual funds results in short-term capitalgains tax.
The ever-popular PPF has a minimum lock-in of 15 years,and allows only conditional withdrawal before that. Sucha withdrawal is not a quick and easy process. The EPF isusually locked in for the term of your employment.Tax-saving fixed deposits or the NSC are locked in forfive years or more.
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If investing is entertaining, if you're having fun, you're probably not making any money. Goodinvesting is boring.
George Soros
The NPS is locked in until you reach 60 years of age, andagain, only allows conditional withdrawal. ULIPs are againfive years and more in tenure, and carry surrender chargesif redeemed before the policy period.
Ideally, you should not be touching long-term investmentsin the short term. But if you do need to liquidate yourinvestments for any reason, you would find it hard withthese options. On this count, the ELSS scores due to itsshorter lock-in, and better liquidity. They are also highlyliquid, and you can receive the redemption proceedswithin three days.
But there are several ELSS funds to choose from. Here isa filtered list of schemes that we have selected based onseveral metrics, including risk and consistency. You canget a brief profile of these Select Funds and their strategyhere.
Bhavana AcharyaMutual Fund Research Desk
FundsIndia.com
Index 1 Year 5 Years 10 Years
CNX Nifty -1.27 6.03 13.27
S&P BSE Sensex -2.52 5.87 13.23
CNX Midcap 13.57 7.17 14.52
CNX Smallcap 5.92 3.74 11.49
CNX 100 0.84 6.38 13.62
CNX 500 Index 2.75 6.3 12.8
CNX Bank Nifty 3.55 7.07 16.15
CNX Energy -15.12 -4.18 7.49
CNX FMCG 4.21 16.73 18.79
CNX Infrastructure -11.71 -4.66 5.53
CNX IT 3.26 11.66 13.91
Returns (in per cent as of October 30, 2015) for less than oneyear is on an absolute basis, and for more than one year on acompounded annual basis.
A large chunk of life is random, and we as humans arewired to find patterns where none exist. But how doesthat affect investing in mutual funds? There is a largevolume of literature in the West that proves that activelymanaged funds in their markets often do no better thanindex funds, and thus, aren’t worth the cost.
But in India, that hasn’t been true in the past 20 yearswhen mutual funds have become available as instrumentsof investing. Why does this divergence happen? How canwe understand this? Are we to think that the past 20 yearsare similar to the sequence of million 0s, and soon, we’llregress back to mean?
Or, are there mathematical reasons for the divergence? Tounderstand that, let us understand the index we have. Theindex that most people are aware of in India is the Sensex.We also know that the Sensex comprises of the 30 mostwidely traded stocks, with sector-wise allocation amongthose 30 stocks.
The question we have to ask ourselves is: why the number30? Why not 29? Or 31? If you ever sat in a class ofcollege level statistics, you may immediately recall: for aprocess to be modelled as Gaussian, so that we canmeasure its mean, standard deviation and confidenceintervals well, we need at least 30 observations. That’s theCentral Limit Theorem, very loosely stated.
While the Bombay Stock Exchange (BSE) does notexplicitly state anywhere that this is the reason they picked30 and not 29, it’s a reasonable guess, given that mostother stock indices also have 30 or more constituentstocks (usually much more).
There are a few textbooks that put the lower limit of thenumber of observations at 20 instead of 30 for modelling
a Gaussian. That quite likely explains why even very smallcountries have indices that rarely go below 20 constituentstocks. As the number of observations tends to infinity,the process tends closer to a normal distribution. So, aslong as the constituent companies satisfy some criterion,the more companies/stocks an index has, the better it is.
But stock market indices are also brands. That’s possiblywhy the S&P 500 has 500 stocks. It’s nice and round. S&P499 does not roll as easily off our tongues. That differencebetween 30 and 500 likely explains why index funds inIndia do not do as well. Or, stated otherwise, why activelymanaged funds tend to do better in India.
Sensex 30
Axis Bank Bajaj AutoB H E L Bharti AirtelCipla Coal IndiaDr Reddy’s Labs G A I LH D F C HDFC BankHero Motors HindalcoHindustan Unilever ICICI BankInfosys I T CLarsen & Toubro Lupin LabsMaruti Suzuki M & MN T P C O N G CReliance Industries VedantaState Bank of India Sun PharmaT C S Tata MotorsTata Steel Wipro
We likely don’t have enough observations (read companiesin an index) to assume the Sensex is a Gaussian. Thismakes its mean not accurate, and thus, the Sensex is
The Mathematician George Spencer-Brown, in his book, ‘Probability and Scientific Inference’,tells us something remarkable. In a random series of 101000007 zeroes and ones, there are likelyto be 10 or more sequences of a million consecutive 0s. If we were to do a pattern analysis, andtook a considerably large consecutive set of a million entries that happened to be one of these10 sequences, we’d conclude that it’s just a series of 0s.
Nilakantan
I think India is only relatively better off, but in an absolute sense I don’t think the index is goinganywhere. The problem is, in some sense, you can call them old economy — the 20-30 stockswhich are so heavily leveraged where nothing has happened for them.Samir Arora, Fund Manager, Helios Capital
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Indian customers are recognising more luxurious/ premium materials and the companies have tounderstand this. We have long-term plans in India and we do recognise that. Therefore, ourproducts are also getting premium.Bo Shin Seo, Managing Director, Hyundai Motors India
probably not even a good proxy forthe market. The NIFTY, the otherpopular index in India, has 50stocks. But that’s still only 50, andfund managers beat that routinely aswell, pointing to the same problem.
The question then becomes, what ifthere’s an index fund that mirrorsthe BSE 500? Does the literaturethat holds for funds in the Westapply for those funds?
Are we better off investing in them?Unfortunately, there are not enoughindex funds that track the BSE 500for us to conclude anything.
There’s a good reason for that: Indiais not as large an economy as say, theUnited States of America (USA);therefore, the BSE 500 is volatile,and many of the constituentcompanies may not pass the tests ofinvestment worthiness of large fundhouses.
Liquidity may be a problem as well,especially in times of stress. So,unless India’s economy growsmanifold, and indices of greatermagnitudes are viable, you are betteroff thinking that GeorgeSpencer-Brown’s postulation doesn’tapply to your particular case.
I plan to investigate this further inthe next series of posts to find out ifindices with a larger numbers ofstocks, and those in largereconomies, beat actively managedfunds across countries.
Nilakantan RajaramanData Scientist
FundsIndia.com
Q: HDFC Top 200, Franklin IndiaBluechip, Franklin India Prima Plus,and such other “good funds” havebeen in and out of recommendationsbecause of the fund managers’strategy.
But they have been long-termperformers. How do we interpret thisdata?
If I continue the SIP in spite of thedowngrade, will I be cost averaging(and benefiting long term), or will Ibe taking a risk by putting in moneyduring bad performance.
Should one bet on the managers’(contrarian?) strategy, or work purelyon analytical data?
A: Other than Franklin India PrimaPlus, where data supports the fund,the other two funds you havementioned have less favourable datato support them over time frames ofup to five years at a time.
For instance, HDFC Top 200′svolatility hurts its returns in themedium term, but it makes up overlonger periods of time, typically witha 1-2 year performance pulling up its7-8 year performance.
In the case of Franklin IndiaBluechip, the low volatility does nothelp performance in the short termbut, merely by way of lesser shocks,the fund tends to perform decentlyover longer periods.
In HDFC Top 200, averaging(through SIP) works much better as aresult of its volatile nature.
In Franklin India Bluechip, volatility
stands reduced, and therefore it is notaveraging, but lesser shocks that makethe portfolio look good over the longterm.
So, the question is whether youshould go by data, or place the bet onthe fund manager.
We would think it is not one or theother. In all this, the fund’s currentportfolio, and whether a call iscontrarian or simply wrong issomething that we have to decipherbefore determining whether theportfolio holds potential.
A contrarian call in a sector for threeyears is no contrarian call; it is awrong call.
For this purpose, a fund manager’srecord of conviction calls, and how itworked in the past will matter.
We believe an investor’s requirementand investment behaviour is whatneeds to be given more weight.
For instance, if an investor is buildinga portfolio for 15-20 years and doesnot worry too much about volatility,then the erratic short-termperformance of HDFC Top 200should not be a cause for worry.
On the other hand, a nervousinvestor may specifically need a fundlike Franklin India Bluechip.
This is where a personal advisor’shelp to assess his/her requirementand risk tolerance capacity will beparamount to an investor.
Vidya BalaHead – Mutual Fund Research
FundsIndia.com
Q & A
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Kotak BankA look at the chart indicates that the stock has completeda correction and has resumed the next leg of the rally. Theimmediate support is at Rs. 635 and Rs. 595. The majorresistance is at Rs. 670 and Rs. 715. The positive view onthe stock would be invalidated if the stock declines belowthe support level of Rs. 595. We expect the stock to reachthe target of Rs. 745. The latest 50-day simple movingaverage is at Rs. 653. The stop loss is placed at Rs. 590.
This column is targeted at investors who are registered customers ofFundsIndia for trading and investing in equity as well as prospectiveinvestors who wish to open an equity account with FundsIndia.
The Nifty clocked positive returns in October. Theshort-term and medium-term trend remains positive atthis juncture, and there is every possibility of the Niftycontinuing its rally towards its immediate target level of8,500. The latest 21-day simple moving average is at 8,120.The crucial support for Nifty is at 8,090, and the majorresistance is at 8,320 and 8500. The trend will remainpositive as long as the index trades above 8,095 levels. Aclose below 8,095 will lead to further weakness to test at7,850.
Perumal RajaTechnical Analyst (Equity Research Desk)
FundsIndia.com
Sun PharmaSun Pharma was in a broad consolidation band of Rs. 840to Rs. 960. The medium-term upward trend will emergeabove Rs. 930. The stock is trading near the upperband.The ongoing trend can scale up to Rs. 1,055. Themajor support is at Rs. 840 and Rs. 800, while its majorresistance is at Rs. 1,005. The stock can be accumulatedon declines. The latest 100-day simple moving average isplaced at Rs. 872. The stop loss is placed at Rs. 790.
Technical View Nifty
Disclaimer: Mutual fund investments are subject to market risks. Please read the scheme information and other related documents beforeinvesting. Past performance is not indicative of future returns. Please consider your specific investment requirements before choosing a fund,or designing a portfolio that suits your needs. Wealth India Financial Services Pvt. Ltd. (ARN Code 69583) makes no warranties orrepresentations, express or implied, on products offered through the platform. It accepts no liability for any damages or losses, howevercaused, in connection with the use of, or reliance on its products or related services. The terms and conditions of the website are applicable.Think FundsIndia, a monthly publication of Wealth India Financial Services Private Ltd., is for information purposes only. Think FundsIndiais not, and should not, be construed as a prospectus, scheme information document, offer document or recommendation. Information inthis document has been obtained from sources that are credible and reliable in the opinion of the Editor.Publisher:Wealth India Financial Services Private Ltd. Editor: Srikanth Meenakshi
Fashion is something that we chose to focus on for two reasons. One is we have some experiencewith offline fashion, where we are the largest player in the country. Also, it’s one of the largestgrowth segments within the e-commerce space.Kumar Mangalam Birla, Aditya Birla Group Chairman
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How market cycles are completed
It’s essential to keep in mind that the equity market moves in cycles between extreme optimism, rich valuations, andpoor prospective returns at market peaks, to extreme pessimism, favourable valuations, and high prospective returnsat market lows.
In our view, the primary factors that identify the likely market return/risk profile as it evolves over the market cycleare: 1) valuations, 2) market intervals (which convey information about risk-seeking and risk-aversion), and 3) broaderfeatures of market action (such as overbought/oversold status, which can help identify emerging risks oropportunities).
Wide market cycles have been a central feature of the stock market across history. Even a run-of-the-mill bear marketdecline typically wipes out more than half the gain of the preceding bull market. We expect to observe the full rangeof market conditions and opportunities as this cycle unfolds. Avoid being lulled into the belief that the recent bullmarket, or the sideways top formation of recent quarters are representative of what lies ahead. More likely, thecompletion of the current market cycle will have no resemblance to either.
The dogmatists running global central banks have encouraged investors to believe that volatility and downside risk havebeen, and can sustainably be, removed from the financial markets. No — by encouraging the illusion that normalcyclical fluctuations have been eliminated from the dynamics of the markets and the economy, the result has been farmore risk taking. The consequence will be far more violent market behaviour over the completion of the cycle thaninvestors would have faced otherwise.
1 Name the fund house most directly impacted by thedebt woes of Amtek Auto?
2 Who is the author of the ‘Little Book of CommonSense: The Only Way to Guarantee Your Fair Shareof Stock Market Returns’?
3 Name the first credit rating company to start in India?
4 When were mutual fund regulations introduced firstin India?
5 Name the person in the image. Hewas on the Governors of theReserve Bank of India and is a highlyregarded economist. He was ChiefEconomic Advisor to theManmohan Singh Government.
Answers for October 2015 Investment Quiz: 1 ForwardMarkets Commission & Securities & Exchange Board ofIndia 2 Unitech 3 A basis point is 0.01 per cent. 4 AmtekAuto 5 Benjamin Graham
The winner of the October 2015 Investment Quiz isSantosh K S.
These are equity-oriented funds with a lock-in period ofthree years, investment in which qualifies for deduction ofup to Rs. 1.5 lakh under Section 80C of the Income TaxAct in the year of investment.
Moderate Risk High Risk
BNP Paribas LT Equity Axis Long-Term Equity
Franklin India Tax Shield ICICI Pru Long Term
IDFC Tax Advantage Reliance Tax Saver
Please click here for a complete listing of our preferredfunds.
What is FundsIndia Select Funds:
This is a listing of mutual funds that we think are mostinvestment worthy for a regular investor. We review thislist on a quarterly basis.
Do note, however, that past performance is not a guaranteeof future results. Please consider your specific investmentrequirements before designing a portfolio that suits yourneeds.
