MFs bank on 'tax saving' season, line up ELSS

The debacle in the liquid and fixed maturity plan (FMP) may have put the brakes on the growth in assets under management of the mutual fund industry. But it has not dampened the spirits of fund houses, as far as scheme launches are concerned.
There are a host of new fund offers awaiting SEBI approval. Asset management companies seem to have made an early start to cash in on the ‘tax saving’ season. According to the SEBI website, as many as six AMCs have lined up equity-linked savings schemes (ELSS) for its approval last month. These include Religare Aegon, Quantum Mutual Fund, DBS Cholamandalam, Bharti AXA, Edelweiss and Tata Asset Management.
The number of ELSS applications filed this year is much higher than those in the past few years. While JM Financial was the only fund house to have launched an open–ended ELSS last year, DSP BlackRock, HSBC and Lotus were the only three fund houses to have launched similar schemes in 2006-07.
Most of the fund houses, which lined up equity-linked savings schemes this year, have been launched recently or are relatively new, and have a long way to go in establishing their identity in the highly-fragmented and competitive Indian mutual fund industry. The older ones — DBS Cholamandalam and Tata Asset Management — already have an open-ended tax-saving scheme each in their kitty and have now come up with close-ended funds.
This surge in the number of new fund offers (NFO) in the ELSS category should be viewed in the context of financial year 2008-09 drawing to a close. Around this time every year, tax-saving instruments see a mad rush of investors seeking to claim the deduction benefit under Section 80C of the Income-Tax Act. It seems that the mutual fund industry, where the fresh inflow of funds in equity schemes has almost dried up, is now trying to use ELSS as a carrot to woo back its (lost) investors.
ELSS schemes are pure-vanilla equity diversified schemes in structure, with the only added advantage of a tax benefit. These schemes are popular as investment in them — up to a maximum of Rs 1 lakh — is exempted from any tax payment. While this category has also faced the wrath of the market, investors can take relief from the fact that these schemes attract a lock-in period of three years. Thus, whatever the market scenario, redemptions are not possible before the expiry of the lock-in period.

Source:http://economictimes.indiatimes.com/Personal_Finance/Mutual_Funds_line_up_ELSS/articleshow/3738711.cms

Why you should prefer Gilt investments to FDs?

What is Gilt?

Gilt or G-Sec are instruments issued by the Reserve Bank of India (RBI) on behalf of the government and include central and state government securities, as well as short-term treasury bills issued as part of the central bank's open market operations.

How can we invest?

Gilt Mutual Funds: Retail investors can take exposure to Govt. bonds through Gilt funds - mutual funds that invest in G-Secs and money market instruments. Over the past one year, medium- and long-term gilt funds have been the best performing category among debt funds. Some top-rated gilt funds are giving a return of over 20 per cent.

What are the risks when investing in Gilts?

On any fixed income investment (Gilt, Corporate bond, or Fixed Deposit in a bank) there are three types of risks - Credit risk, Liquidity risk and Interest rate risk.
G-Sec has practically zero credit risk (guaranteed by Govt.) and good liquidity. However, they do have interest rate sensitivity like any other fixed instrument - there is an inverse relationship between interest rates and prices of securities. Therefore, if the interest rate goes down, the prices of bonds rise and vice versa. Interests on these bonds are normally paid semi-annually on the face value, and are one of the sources of earning from these papers.

Gilt Mutual Funds – Tax efficient than FDs

Gilt funds get the same treatment as debt funds and are thus, eligible for the benefit of indexation on capital appreciation. Dividend received, if any, is chargeable to tax at 14.16% (12.5% + 10% surcharge + 3% education cess). In bank FDs, one has to pay tax on the interest earned at the end of a financial year even if the interest would be paid at a later date, or maybe years later. For example -you have made an FD of Rs 50,000 for four years. You will have to pay tax on the liable interest for all the financial years it spans, even though the interest amount would come into your hands only at the end of the four-year tenure.
Also, if the interest on a particular fixed deposit exceeds Rs 10,000, you would be liable to tax deduction at source (TDS), which is applicable per financial year. The bank will compute your interest and will deduct an amount equivalent to the tax, if any, by making adjustments in the FD amount.