Gilt fund units back in favour among rich investors

Long-term gilt funds, which invest in government bonds with long-term maturity, including the 10-year benchmark bond, have been out of favour among many investors in the past year or so.

But analysts see merit in increasing exposure to these schemes since yields on 10-year government bonds are unlikely to rise much from these levels, with softening inflation expected to limit policy rate hikes by the RBI.

“At current yields on the 10-year benchmark bond, medium-to-long-term gilt funds are very good bargains,” said Devendra Nevgi, principal partner, Delta Global Partners.

“They can generate double-digit returns in the next 2-3 years,” he added. The yield on 7.80% benchmark bond maturing in 2020 was at 7.99% on Monday. It has been hovering around the psychological 8% mark in recent weeks, after rising from a low of 5.25%.

Bond yields and prices move in opposite direction; when yields rise, prices fall and vice-versa. Traders in long-term government bonds, including banks and mutual funds, rely on price jumps in this security to clock higher returns in their portfolios.

Some investors, mainly the affluent, have already started buying gilt fund units in a phased manner, similar to the systematic investment plan. These are investors, who are not sure about the extent of rise in bond yields, but don’t expect it to rise sharply from these levels.

Many debt market participants don’t expect the yield to rise beyond 8.15-8.25%. “By creating average at higher yields and with other fundamental factors, like lowering commodity prices, lowering inflation, higher revenue and other receipts by the government, affecting the market positively, the said strategy should pay good returns to the investor,” said Sunil Jhaveri, chairman, MSJ Capital, a New Delhi-based mutual fund advisor.

A fall in inflation is expected to reduce the pace at which the RBI hikes rates. Although a liquidity crunch is expected in September due to advance tax outflows and a possible interest rate hike by RBI, market participants said the crunch is expected to ease soon. Normally, the borrowings tend to be less in the second half of the year. So, the supply of g-secs tends to be less while there is an increase in demand.

“With tight liquidity conditions prevailing in the money market, banks have increased their deposit rates leading to higher deposit creation in the system which will create additional demand for g-secs,” said Ritesh Jain, head-fixed income, Canara Robeco Mutual Fund.

Source: http://economictimes.indiatimes.com/markets/stocks/market-news/Gilt-Fund-Units-back-in-favour-among-rich-investors/articleshow/6465074.cms

Bill deals body blow to mutual fund dividends

Retail investors in stocks may have a lot to cheer about but risk-averse people who prefer to park their money in dividend-yielding equity mutual funds may be forced to scout about for alternative options before the direct tax bill comes into effect by April 1, 2012.

Salaried people, who funnel their money directly into stocks, will be gung ho over the fact that they will not have to pay a capital gains tax on equity investments that they hold for more than a year — a tax break they enjoy at present and which the original bill had intended to scrap.

But even more attractive is the provision that says the short-term capital gains tax —levied on stocks flipped before 12 months — will be linked to an individual’s income tax slab.

In the case of investments held for less than one year, short-term capital gains tax will be levied in three slabs of 5, 10 and 15 per cent, respectively. This is 50 per cent of the marginal rate of income tax — 10 per cent for those with an income between Rs 1.6 lakh and Rs 5 lakh, 20 per cent in the income bracket between Rs 5 and 8 lakh, and 30 per cent for those with incomes above Rs 8 lakh.

At present, the short-term capital gains tax is a flat 15 per cent irrespective of the tax slab that the investor belongs to.

Individuals in the low-income bracket will have to pay a capital gains tax of 5 per cent. Only those in the top income bracket will have to pay 15 per cent as they do at present. Tax experts say that if the surcharge is included the short-term capital gains tax actually goes up to well over 16 per cent.

Vishal Malhotra, tax partner at Ernst & Young, told The Telegraph that the changes proposed in the short-term capital gains tax should encourage small salaried earners to invest in stocks as they will be subject to a lower rate of tax than in the current regime.

Market circles also reacted positively to the new capital gains tax proposals.

“These will induce greater investments in the stock markets, particularly from the retail end. The markets were apprehensive over the proposals pertaining to capital gains tax. It is heartening to see that zero long-term capital gains tax has been maintained,” said a research head from a brokerage.

Mutual fund woes

The big blow to mutual fund investors is the fact that income distributed by mutual funds to unit holders of equity-oriented fund or that distributed by life insurer to policy holders of an approved equity-oriented life insurance scheme will be taxed at 5 per cent.

According to Gautam Mehra, executive director at PwC, this will impact returns from the stock markets.

Dhirendra Kumar, CEO of Value Research, said the 5 per cent dividend distribution tax would prompt mutual fund investors to move away from dividend-paying schemes and opt for growth plans.

Source: http://www.telegraphindia.com/1100831/jsp/business/story_12877062.jsp