Longer stay in India to increase NRIs' tax liability

Domestic households savings contribute significantly to India’s overall domestic savings rate. The credit goes to the Indian tax laws to a certain extent, as they provide tax incentives to individuals to invest in some specified tax-saving instruments. Section 80C of the Income Tax Act (Act) provides for a deduction of `1 lakh in certain investments (tax saving instruments)/payments made during the year.

The various investments which are eligible for deductions under Section 80C are equity-linked savings schemes (ELSS) offered by LIC and mutual funds, unit-linked insurance plans (Ulips) for self and/or spouse, children, life insurance policies for self, and/or spouse, children, employees’ contribution to recognised provident funds (PF), approved super-annuation fund, contribution to public provident fund (PPF); deposits in post office schemes such as National Savings Certificate (NSC), Senior Citizen Savings Scheme (SCSS), if it applies and the post office five-year time deposits, term deposit with a scheduled bank for a period of at least five years, investments made in bonds issued by the National Bank for Agriculture and Rural Development (Nabard) and debentures issued by specified companies.

In addition to the above investments, the following payments also qualify for deduction under Section 80C: payment of tuition fees for full-time education in any Indian university, college, school, educational institution (available for any two children), and repayment of the principal portion of a housing loan.

Besides Section 80C, one can also make an investment up to `20,000 in specified infrastructure bonds to save tax. Further, an individual gets a deduction of up to `15,000 (`20,000 where the individual is a senior citizen) for the health insurance of self and his family. There is an additional deduction of `15,000 where the health insurance is taken for the parents (`20,000 where any of the parents is a senior citizen).

However, the situation may undergo dramatic changes after the Direct Taxes Code (DTC) comes into play. DTC, 2010, proposes to restrict the deduction of `1 lakh only to some approved fund(s)— such as an approved provident fund, pension fund, super-annuation fund, PPF among others. However, an additional deduction of `50,000 has been proposed to cover payments such as life insurance premiums (premium not to exceed 5% of sum insured), health insurance premiums and the tuition fee. That means an individual won’t get any tax incentives for existing tax-saving instruments other than those covered in the DTC.

Non-resident Indians (NRIs) visiting India, will need to be more vigilant, post the DTC regime. Under DTC, if their stay in India exceeds 60 days during a year and 365 days for the past four tax years, then they may be considered as residents of India. Currently, they become residents only when their stay exceeds 182 days. Once they become a resident, they may have to pay tax on their global income, if their stay in India for the past seven tax years exceeds 729 days and if they are residents in two out of the past 10 tax years. In a nutshell, NRIs run the risk of triggering worldwide taxation soon if they spend a significant time in India.

The DTC proposals relating to individual taxation have undergone significant change since the DTC was proposed in August 2009. One will really need to wait for the final bill, which will become operational from April 1, 2012.

Source: http://economictimes.indiatimes.com/personal-finance/tax-savers/tax-news/Longer-stay-in-India-to-increase-NRIs-tax-liability/articleshow/6733168.cms

Industry witness fall in folios

The mutual fund industry, for the third consecutive month has witnessed a loss in folios. The fund houses bared a 5.85 lakh reduction in folios in September 2010, thanks to 6.53 lakh folio. reduction in growth/equity oriented schemes.

Total Assets Under Management (AUM) of Mutual Fund (MF) industry fell 7.38% or by Rs 52353 crore to Rs 6.57 lakh crore in September. Fund flow into mutual fund (MF) industry turned out negative in September as there had been net outflow of Rs 71838 crore compared with net inflow of Rs 36185 crore in August. There had been huge outflows from liquid funds, income funds and equity funds. The outflows from income and liquid funds accounted for Rs 64745 crore while outflows from equity funds stood at Rs 7011 crore.

Profit booking had been causing outflows from equity funds during September with the Sensex and Nifty rising over 11.6%. Some of the investors have redeemed their investments from the underperforming equity funds and also were booking profits & diversifying their investments into other assets classes. For the second quarter of this fiscal there have been outflows from the equity funds to a tune of over Rs 13000 crore.

Similarly, equity folios (representing the number of investor accounts) of mutual funds saw a sharp decline of over 6.53 lakh in September. Investors seem to be redeeming equity fund units on the back of rising equity markets to book profits and uncertainty over its direction, going forward. Total equity folios stood at 3.94 crore in September as compared to 4.00 crore in August. Meanwhile, total folios (including debt and others) also saw a dip of 5.85 lakh and were at 4.71 crore in September with high reduction in equity folios. However, the income/debt schemes folio increased by 1.03 lakh in September over August or by 2%. In the previous 11 months (between November 09 to September 10), the number of folios declined by 7.30 lakh, which in context to June rise of 70503.

Fund house wise, of the top five fund houses in the country, only HDFC Asset Management Company (AMC) has seen an increase of 40,999 in folio numbers in September to around 41.99 lakh folios. The other four fund houses saw a drop — Birla Sun Life Mutual Fund by 33,598 to 24.06 lakh; ICICI Prudential Mutual Fund by 37,224 to 28.75 lakh; UTI Mutual Fund by 64,464 to 99.71 lakh, and Reliance Mutual Fund by 79,442 to 72.51 lakh. SBI Mutual Fund registered the highest fall in folios by 80055, followed by Reliance Mutual Fund and UTI Mutual Fund.

Source: http://www.apollosindhoori.cmlinks.com/MutualFund/MFSnapShot.aspx?opt=9&SecId=10&SubSecId=22,24#

MFs must tighten controls to prevent front-running

Back in June this year, market regulator Securities and Exchange Board of India (Sebi) revealed that an investigation had revealed that an equities dealer at HDFC Mutual Fund had been misusing his position to illegally make money in the stock markets.

This dealer would leak advance information of the mutual funds’ stock trades to his accomplices. They would then buy and sell before HDFC Mutual Fund itself did, thereby making money for themselves while causing incidental loss to the mutual fund, or rather, to the mutual fund’s investors.

At that time, Sebi fined HDFC Mutual Fund and banned Nilesh Kapadia (the rogue dealer) from participating in the securities market. It also asked HDFC to overhaul its internal controls and procedures to ensure that this sort of thing didn’t happen again.

I had heard that the incident had triggered panicked reaction in a large number of businesses that trade in equities on behalf of investors. Mutual funds, portfolio management services and insurance companies scrambled to figure out how vulnerable they were to something like this.

From what I know, many of them came to the conclusion that they could not guarantee that a determined and clever operator would not do the same thing. However, as far as investors were concerned, the matter seemed to blow over. Certainly, HDFC Mutual Fund itself seems to have gotten away without any detectable damage to its image among investors.

However, a couple of days ago, a more alarming piece of news has come out. Sebi has stated that it is now engaged in investigating 10 more mutual funds companies for possible cases of front-running. At this stage, they are just investigating and Sebi may or may not discover any actual wrong-doing. Also, it is notable that Sebi did not come out with this information willingly. Instead, it revealed it only in response to an Right To Information (RTI) request by a newspaper.

However, no matter how the investigations go, it is clear that front-running can only be curbed by organisations if they are internally committed to doing so. One important component of this commitment is that such actions should get exemplary punishment. Not just that, the responsibility for laxity in internal controls should actually be considered the real cause for losses suffered by investors. And these things should be done and not just seen as being done.
Those who manage other people’s money have a finite amount of trust and trust once spent is hard to earn back.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/analysis/MFs-must-tighten-controls-to-prevent-front-running/articleshow/6726754.cms

Amfi to become self-regulatory

No longer content with being just an industry association and trade body for the Rs7.13 trillion mutual fund industry, the Association of Mutual Funds in India (Amfi) is taking baby-steps towards becoming a self-regulatory organization.

In an interview, newly elected Amfi chairman U.K. Sinha refused to specify a time frame for the planned transformation, but said the objective is on his agenda. “The capital market regulator, Securities and Exchange Board of India (Sebi), has been asking Amfi to do this for quite some time. We’ll consult Sebi on the matter and soon start the groundwork to move in this direction,” he said.

Sebi now regulates mutual funds, but Sinha says the industry, with 41 asset management companies and at least 100,000 distributors, is too large and intricate for the market regulator to oversee every detail.

Amfi must move beyond being just an industry body. We have to engage other players who are on the periphery. Presently Amfi doesn’t have any representation from distributors or registrar and transfer agents. Ultimately Amfi must become a self-regulatory organization (SRO). We have also started talking to Sebi (Securities and Exchange Board of India) more actively. We would also like to work towards developing a mutual fund (MF) policy.

Tell us more about this policy.

For a variety of reasons, we observe that MFs are being perceived as a short-term vehicle and it is an aggregator for liquid assets of firms. That is just one part of our overall existence; to say that that is our only objective is a wrong impression. I protest.

The policy statement will define the industry’s role, list out measures to reach out to small towns, small investors, the MF industry’s obligations and thereafter its responsibilities. We have seen policies in the banking, civil aviation, insurance and even the pension sector.

Do such policies work? Many still can’t borrow from banks, non-remunerative flight sectors go empty. However, mobile phones (an area without policy) get penetration. Aren’t we going back 25 years?

I don’t think we can call these examples as failures. Maybe they have not been able to meet their expectations. For instance, if 40% of a bank’s advances has to go to the priority sector, banks have to set aside that money. Whether it reaches the final destination can be a question we can ask.

MF pension products are excluded from the tax deduction instruments under the new Direct Taxes Code. What also hurts the MFs is the differential treatment. There will be no harm to get clarity on this from the government and the regulator.

But, despite tight regulations and strong performance, why is it so difficult to get your message across to the investor?

Low financial literacy is a problem. Competitive products can offer incentives; the MF industry can’t. Since 2003, when the markets were going up, there has never been a year when retail equity inflows in the industry has been negative. But since last one year, the retail equity inflows has been negative. In fact, we are losing around Rs3,000 crore per month on average. The number of folios is dwindling. This is also why the New Pension Scheme has not taken off despite being a good product because there is no incentive for distributors. So we have to recognize that if there are other products where it’s possible for people selling them to be incentivized in a better way, a product which doesn’t pay incentives—no matter how good it is—will be at a disadvantage.

Are we talking of a move back to a system of paying incentives?

It is too early to comment on how the policy would shape up on this issue, but I am flagging this is as one of the issues. Fortunately, we have evidence of the past 15 years. If the government or the regulator is convinced that MF is a good product for retail investors, then a suitable incentive plan can be devised.

Would an incentive-based structure address the problems of mis-selling if adviser regulations are in place?

Yes it would. The absence of distributor regulation is a big lacuna.

Would Amfi—as an SRO—be interested in taking the leading and devising distributor regulations, at least for distributors selling MFs?

We have not discussed this with Sebi or with the distribution industry; I’d be speaking out of turn, if I say we will do this. Though I think Amfi should move in that direction.

Source: http://www.livemint.com/2010/10/11000607/Amfi-to-become-selfregulatory.html?h=A1

Making MF transfers easy — Nominee for your funds

Registering a nomination facilitates easy transfer of funds to the nominee on the demise of the investor.

What is a Nomination?

An investor can nominate a person(s) called nominee(s) to whom his/her Mutual Fund Units will be transferred on his / her demise.

Mutual Fund units get transferred to the nominee registered in the folio on the demise of the Investor.

What are the benefits of registering a nomination?

Registering a nomination facilitates easy transfer of funds to the nominee(s) on the demise of the investor. In the absence of the nominee, a claimant would have to produce a host of documents like a Will, Legal Heir-ship Certificate, No-objection Certificate from other legal heirs etc. to get the units transferred. The process is simple if a nominee is registered in the folio.

How can an investor make a nomination?

Nomination can be registered at the time of purchasing the units. While filling in the application form, there is a provision to fill in the nomination details.

Alternatively, an investor may register a nomination later through a form which may be submitted with relevant particulars of the nominee.

The forms are available on the mutual fund websites.

Investors may also request the registrar and transfer agent to send a form.

Can an investor make multiple nominations?

Yes! An investor may make up to three nominations and even specify the percentage of the amounts that will go to each nominee.

If the percentage is not specified, equal shares will go to the nominees.

Can a minor be a nominee?

Yes! A minor can be a nominee. However the guardian will have to be specified in the nomination form.

Can a nomination be changed?

A nomination can be changed and even cancelled. The relevant form should be filled and submitted to the Registrar or Mutual Fund Office.

If an investor has different schemes in a folio, will all units of all schemes be transferred to the nominee?

A nomination is at folio level and all units in the folio will be transferred to the nominee(s).

If an investor makes a further investment in the same folio, the nomination is applicable to the new units also.

Who can nominate and who is eligible to be a nominee?

Nominations can be made only by individuals applying for / holding units on their own behalf, singly or jointly.

Non-individuals, including societies, trusts, body corporates, partnership firms, the karta of an HUF, and the holder of a power of attorney (POA) cannot nominate.

Nomination can be in favour of individuals, including minors, the Central Government, State Government, a local authority, any person designated by virtue of his office or a religious or charitable trust.

A non-resident Indian can be a nominee, subject to the exchange control regulations in force from time to time.

Source: http://www.thehindubusinessline.com/iw/2010/10/10/stories/2010101051320800.htm

Long-term growth potential justifies high valuations

With over two decades of experience in the asset management, Sanjay Sinha, chief executive officer, L&T Mutual Fund, says when it comes to intangible products like mutual funds, people prefer to buy it offline through someone who can guide and provide service. In an interview with FE's Saikat Neogi, he says that in the medium to long term, more people will move to online purchases of mutual funds. Excerpts:

What explains the relatively high valuations of Indian equities? Does it signal an impending correction?

India’s long-term sustainable growth is likely to further increase the growth differential across markets. Global liquidity and the shift towards emerging markets have led to strong FII investments, leading to greater valuations of Indian equities. However, valuations are reasonable given the long-term growth expectations.

What would you advise retail investors now? Which sectors are you overweight or underweight?

The market looks attractive from a medium- to long-term perspective. While the recent run-has been is sharp and market might consolidate before moving ahead, we believe, equities are expected to perform well over the longer term. With India becoming one of the strongest growth countries, we expect companies to continue to do well. There may be sectoral variations, but therein lie the opportunities. We expect FII fund flows to continue. Hence, we advise retail investors not to get swayed by volatility if the objective is to gain in the medium to long term. Infrastructure, automobiles and cement sectors look attractive considering growth and valuation. With the recent rally in financial stocks, we believe they may consolidate in near term. We are underweight on telecom.

Globally, mutual funds are retail investors' avenue to invest in equities. Why has this trend failed to catch up in India?

In India, the mutual fund industry is still in its infancy. If you see its evolution, we are witnessing the fifth phase of growth. Investors like mutual funds to be sold to them rather than buy on their own initiative. The lack of equity culture and awareness are also deterrents. Investors still feel that mutual fund means stock market. Having said that, we should not understate the growth of mutual funds' retail assets. The industry is servicing almost 4.5 crore folios and attracting 45 lakh systematic investment contributions every month.

With rising household savings, do you see greater expansion in non-metros?

Mutual fund is a true savings product and has all the characteristics of an ideal investment product. It provides liquidity, tax-efficient returns, flexibility and ease of transaction. This makes mutual funds one of the best vehicles for an individual investor to route savings. Currently, investors are savers, parking money in bank deposits. As awareness grows, people will start searching for the right avenues which can give tax-efficient returns and returns above inflation. Non-metros are yet to see the reach of mutual fund companies in true sense. I am very bullish about mutual funds expanding in in non-metros.

After the ban on entry load, how will fund houses reduce the cost of MFs and attract investors?

After the ban on entry load, there is going to be a paradigm shift in product and sales and distribution strategy by fund houses. I feel three fundamental changes are going to happen. First, more and more transactions will become paperless. Fund house will promote online/web as a channel to attract retail investors. This will reduce the cost significantly and bring scale to overall distribution. Second, optimisation of resources is going to be a key differentiator. The resources may be of any kind. It can be in terms of time, manpower, de-duplication of administrative jobs etc. This can be made possible by the use of technology. Thirdly, fund houses will have to take collective efforts to graduate distributors to the next level by new ways of training/engagement/promotion and so and so forth.

How will the online model of selling mutual funds pan out?

People are beginning to fancy buying products offline. This is true for tangible products like white goods, food items, clothes etc. When it comes to intangible products like MFs, people currently prefer to buy them offline and that too through someone who can guide and provide service.

However, the change in demographic profile is bringing an online culture. Youngsters — potential savers of tomorrow — are quite fond of Twitter, Facebook and other such media. This clearly indicates the evolving atmosphere in the buying pattern of an individual. I feel in medium to long term, more and more people will gravitate towards buying mutual funds online.

Source: http://www.indianexpress.com/news/-Long-term-growth-potential-justifies-high-valuations-/694557

HDFC fund chief sees 20% return from market

Equities may return as much as 20% annually over the next three to five years, HDFC Asset Management chief investment officer Prashant Jain said. “Returns should be in line with earnings growth,” Jain, who oversees six of the 15 best-performing funds in the past decade, said. Earnings growth of 15% to 20% “from a diversified portfolio of equities is not very difficult to achieve,” he said.

The Bombay Stock Exchange (BSE) Sensex has rallied for a record seven straight quarters. The gauge has surged 18% this year as overseas investors bought a record $21 billion of equities on the expectation that surging consumer demand will boost corporate earnings even as global growth slows.

The Sensex has gained 28% from a May 25 low, approaching its record closing high of 20,873.33 on January 8, 2008.

Foreign fund inflows have surged 59% this year, according to data from the Securities and Exchange Board of India (Sebi) compiled by Bloomberg. Gross domestic product (GDP) expanded 8.8% in the June quarter from a year earlier, the most among major economies in Asia after China.

“India is clearly emerging as a key asset globally,” said Jain, who manages $21 billion in assets. “How many economies are there in the world which are of our size, growing at 8% to 9%, where neither the companies nor the households are leveraged?” The gains have made India the most expensive among the world’s 20 largest stock markets, according to data compiled by Bloomberg. Stocks on the Sensex are valued at 19.5 times earnings, compared with 13.7 times for Brazil’s Bovespa, 7.8 times for Russia’s Micex and 15.1 times for China’s Shanghai Composite, among the so-called Bric markets. “The markets are close to being fairly valued,” Jain said on Wednesday. “In three years, the economy and many companies have grown meaningfully. I don’t think it’s overvalued.”India stocks aren’t in a “bubble” territory even with the Sensex approaching its all-time high, BNP Paribas analysts led by Manishi Raychaudhuri wrote in a report on Wednesday.

Source: http://www.financialexpress.com/news/hdfc-fund-chief-sees-20-return-from-market/694120/

Funds turn open-ended, but investors stay on

Many investors now prefer to stay invested in close-ended funds that have just turned open-ended and are mobilising fresh investments from investors. Being mostly mid-cap funds, investors hope these schemes will fare well in the event of a further rally in mid- and small-cap stocks, say fund sellers.

About 10 close-ended schemes have turned open-ended over the past few months; almost all these funds are attracting money from investors. Among a handful of funds, Religare Mid-cap Fund, SBI Infrastructure Fund , Sundaram BNP Paribas Select Small-cap Fund, DSP Blackrock Micro-cap fund and Kotak Emerging Equity are attracting fresh money from retail investors.

According to mutual fund tracker Value Research, ING Optimix Multi-Manager Equity Option Scheme is the only equity scheme that got discontinued at end-of-term. Birla Sunlife Cash Plus Sweep Daily Dividend Fund and Fortis Overnight Institutional Plus Growth Plan are the only debt funds that got discontinued at term end. All the three funds had low asset bases, said fund researchers.

“A good number of these funds are flexicap funds with a mid- or small-cap bias. People invest in these funds on hopes that mid-cap funds will do well in a booming market,” said Hiren Dhakan, associate fund manager, Bonanza Portfolios. Interestingly, close-ended funds have not seen heavy redemptions, unlike most diversified open-ended equity schemes. Asset bases of funds like SBI Infrastructure Fund, HDFC Mid-cap Opportunities Fund , Religare Mid-cap and Kotak Emerging Equity have fallen only in the range of 11-22%. Usually, investors in close-ended funds prefer to redeem (or book profits) their entire investments at end of term.

“Most close-ended funds that got converted recently are 3-year-old schemes; these funds had raised and deployed NFO money when the markets were trading at record levels (in 2007). While these funds have logged decent one-year returns, they have not been able to outperform key indices on a 3-year basis,” said the marketing head of a corporate-promoted fund house, adding, “Investors are staying put in these funds as they don’t want to redeem their investments (of three years) at a loss.”

While existing investors remain invested in the fund for bettering their return profile, new investors are taking a sectoral or market-cap specific call. Themes like infrastructure and stock segments, like mid-caps and small-caps, are ‘flavours of the season’ among mutual fund investors. “Corpuses of these funds (that got converted to open-ended schemes) are fairly stable as there has not been much redemption or large inflows, post-conversion. Schemes with appealing themes and strategies are getting fresh investors,” said Lakshmi Iyer, head, fixed income & products, Kotak Mutual Fund .

Fund houses, on their part, are promoting these funds in a big way. They are paying upfront trail commission (for 2-3 years) to encourage distributors to sell these funds.

Source: http://economictimes.indiatimes.com/markets/stocks/market-news/Funds-turn-open-ended-but-investors-stay-on/articleshow/6695142.cms