Foreign retail investors must have PAN for investing in Mutual funds

Individual foreign investors seeking entry into Indianstock markets will now have to acquirePermanent Account Number, or PAN, the passport to allfinancial transactions. The mandatory PAN was announced recently by the finance ministry while outlining the framework for foreign retail investment in mutual funds, a promise made in the February budget.

"The Central Board of Direct Taxes, the apex direct taxes body, will soon issue an instruction in this regard," a finance ministry official said. However, to ensure that the requirement does not make investing cumbersome, PAN will be issued on the basis of know your customer (KYC) scrutiny of the investor.

KYC conditions prescribed by the market regulator, Sebi, are quite stringent making them PAN plus, said the official.

However, experts say tax authorities should clarify that acquiring a PAN will not trigger an obligation to file income tax return here. "Primary concern these investors have is that PAN could trigger an obligation to file return," said Amitabh Singh, partner, Ernst & Young. PAN is a 10-digit alpha-numeric tax payer identification number that is allotted to an individual and is increasingly required to be quoted with financial transactions.

The government has allowed individual foreign investors to invest in domestic MFs, thus creating a new class of investors called Qualified Foreign Investors.

Sebi is expected to notify the norms governing these investors soon. These investors would be able to put money into domestic MFs through Unit Confirmation Receipts (DPs) or Depository Participant route. QFIs could be individuals and bodies, including pension funds, and cumulatively they can invest up to $10 billion (about 45,000 crore). Dividend income earned by these investors would be tax-free. At present, only FIIs, sub-accounts registered with SEBI and NRIs are allowed to invest in MF schemes in the country

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/foreign-retail-investors-must-have-pan-for-investing-in-mutual-funds/articleshow/9390894.cms

We Expect Yields to Move Up Gradually On Expectation of Further Rate Increase & Supply Fears

The policy is largely focused on inflation, both emerging and advanced economies due to higher commodity prices and domestic demand pressures.

On the global front, concerns over sovereign debt in the Euro region, medium term debt sustainability issues in US, supply chain disruptions in Japan and higher commodity prices led to some easing of the economic growth rates. The European Central Bank raised rates for the second time in order to fight back inflationary pressures. Emerging economies including China persisted with tightening monetary policy.

Domestic growth rates saw some moderation in the industrial production data. However, inflation numbers remained elevated, with non-food manufacturing inflation at 7.2% as compared to a long term average of 4%. Credit growth remained at 19.5%, higher than the RBI's revised projection at 18%.

The RBI thinks that the economic growth moderation will be limited by buoyancy in the consumption sector, due to increase in real wages. Inflation estimate has been increased to 7% from 6% due to:

Recent increase in fuel prices

Significant increase in minimum support price for agricultural commodities

Higher non-food manufacturing inflation

Uncertainty of increase in administrative prices of coal and fuel

Inflation and growth outlook still remains contingent on oil price, food price inflation emanating from the monsoon, foreign fund flows to fund current account deficit and fiscal deficit. Large fiscal deficit is a key source of demand pressure. The subsidy burden amounting to 1% of GDP is also a factor contributing towards inflation.

Going Forward

The RBI has continued with anti-inflationary policy. As the growth numbers are still sustaining and inflation is still high, the RBI has chosen to aggressively tackle inflation. The monetary policy stance in future will be determined by evolving inflation trajectory, which in turn will be determined by trends in domestic growth and global commodity prices. A change in stance will be motivated by signs of a sustainable downturn in inflation.

The corporate yield curve may flatten due to more rate pressures. We expect yields to move up gradually on expectation of further rate increase and supply fears.

Bond funds and Monthly Income Plans have been lately focusing on building duration selectively. We continue to seek duration at elevated levels post the policy. Short-end funds have maintained higher cash levels ahead of the policy. Thus, they should benefit from higher yields. We continue to believe that we are closer to peak of interest rates in the current cycle.

Source: http://www.adityabirlamoney.com/news/493523/10/22,24/Mutual-Funds-Reports/We-Expect-Yields-to-Move-Up-Gradually-On-Expectation-of-Further-Rate-Increase-Supply-Fears

Arbitrage funds take debt route for safe returns.

Arbitrage schemes of domestic mutual funds, hit by sizeable outflows in the past 18 months due to falling returns, have devised a way to work around their investment mandate to boost performance. Fund managers are investing more in money-market instruments to lift returns but are ensuring that the scheme is still eligible to be taxed like equity schemes, a key factor that drew investors to this product in the past.

These schemes, which benefit from the price anomalies between futures and underlying shares, are required to invest at least 65% of their corpus in stocks to gain the tax advantage that equity schemes enjoy over fixed-income products. But, with arbitrage opportunities on the wane in a lacklustre market, investing 65% of the corpus has compressed returns. The situation has resulted in fund managers coming out with an idea to lift returns while ensuring tax status of an equity scheme.

Taxation rules state that a scheme will be taxed similar to an equity product if 65% of its corpus is in stocks on the last day of a month and the first day of the ensuing month.

For instance, an arbitrage scheme needs to invest at least 65% of its fund on July 31 and August 1 to gain the tax advantage of equity products. Equity investments beyond a year are exempt from paying capital gains tax. Capital gains tax on redemption before one year is 15%.

For debt mutual funds, the long-term gain is taxed at 10% without indexation and 20% with indexation.

Some fund managers are investing more than 35% of their corpus in money market instruments for most of the other days of a month and trimming it below this level on the two days.

"Since money market instruments are fetching higher returns, a large portion of the fund corpus is being diverted to these securities for most of the month before the month-end. This arrangement is not illegal," said a chief executive officer with a foreign mutual fund, requesting anonymity.

"This arrangement has helped some arbitrage schemes to slightly lift annual one-year rolling returns of late," a top official with another mid-sized mutual fund.

Money market instruments, which are short-term, are returning over 8.5% annually, while the arbitrage fund category has returned almost 6% in 2010 and roughly 4.5% in 2009.

Source: http://articles.economictimes.indiatimes.com/2011-07-26/news/29816623_1_arbitrage-fund-category-arbitrage-schemes-tax-advantage

Immediate Impact of the Policy Has Been an 11 Bps Rise in Yields in the 10 Year G-Sec From 8.29% To 8.40%

Commenting on Reserve Bank of India's First Quarter Review of Monetary Policy, Mr. Ramesh Rachuri, Senior Fund Manager - Fixed Income, Bharti AXA Investment Managers said - The Reserve Bank of India raised the Repo Rate by 50bps to 8.00%, and the Reverse Repo Rate by 50bps to 7.00%. It kept the CRR rate unchanged. It also revised upward the baseline inflation projection for March 2012 to 7.00%. Further, RBI has also stated - “the monetary policy stance will depend on the evolving inflation trajectory, which in turn, will be determined by trends in domestic growth and global commodity prices. A change in stance will be motivated by signs of a sustainable downturn in inflation.”

Stubbornly high and persistent inflation, strong demand pressures, absence of policy initiatives on the supply side and infrastructure, high fiscal deficit due to subsidies and lower tax collections (lowered customs duties on petroleum products due to price rejig) are some of the factors cited for this monetary policy action.

The immediate impact of the policy has been an 11 bps rise in yields in the 10 year G-Sec from 8.29% to 8.40%; rise in 4-5 month CD rates by 20 - 25 bps; and rise in 2 month CD rates by 15-20 bps. In keeping with the anti-inflationary stance, the RBI is expected to keep liquidity in deficit mode below 1% of NDTL (Net Demand and Time Liabilities) of banks, or roughly around Rs.1 Lakh Crores. The current weekly average is a deficit of Rs.63,000 crores.

Monetary authorities also try to target a 'neutral' policy rate at which there is no slack in the economy in terms of potential output. RBI has also implied that after the present hike, the monetary situation is close to normal or neutral and further action would depend on evolving circumstances. Reflecting this, the current implied forward rates of the market shows that the market does not expect another rate hike till the end of the calendar year. So, unless inflation goes out of hand, or there is a 'shock' to the system, RBI would prefer to wait and watch in the mid-quarter review on the 16th of September. What would then be a market mover in the bond and money markets would be liquidity. As we step into the busy season of credit lending with the next policy, corporate borrowing would start and we would see a slight tightening of liquidity, especially at the end of September, coinciding with advance tax payments, in money market securities.

However, what will be in focus would be external developments in Europe and the U.S. How events unfold in the peripheral economies in Europe with a partial debt default and rolling over of borrowing by Greece will be closely watched. The increase in the debt limit in the U.S., which is currently being acrimoniously debated, will also shape liquidity, and interest rates, as also lowering of aggregate demand and impact on employment. The moot point is that all the external indicators suggest possible lowering of aggregate demand, and hence impact on commodity prices like crude oil, food (soft) commodities, etc., which the RBI is watching like a hawk.

In light of the above, and given the possibility of a pause in rate hikes till atleast September (and possibly till the end of the current calendar year), being coupled with a falling off of CD issuances from banks due to contraction between credit and deposits, we would judiciously extend duration, wherever feasible, especially in our Bharti AXA Short Term Income Fund, and Bharti AXA Regular Return Fund.

Source: http://www.adityabirlamoney.com/news/493398/10/22,24/Mutual-Funds-Reports/Immediate-Impact-of-the-Policy-Has-Been-an-11-Bps-Rise-in-Yields-in-the-10-Year-G-Sec-From-8-29-To-8-40-

RBI surprises with 50 bps rate hike

Welcoming the Reserve Bank's decision to hike key rates by a hefty 50 basis points, Finance Minister Pranab Mukherjee today said it will help bring down inflation to a comfortable level of 6-7% by year-end.

"The Reserve Bank of India has sought to give a strong signal to further moderate inflation and check inflationary expectations," Mukherjee said.

Inflation has remained stubbornly close to double-digit levels during the first quarter of the current fiscal. Mukherjee said the RBI rate hike was necessary to bring down inflation to an acceptable level at the earliest.

Overall wholesale price-based inflation stood at 9.44% in June. To tame the inflation monster, the RBI today hiked key policy rates by 50 basis points. "With this policy adjustment, we will be able to get back to a more comfortable inflation situation that takes us to the year-end inflation level of 6 to 7%," Mukherjee added.

The RBI has hiked its policy rates 11 times since March, 2010, to curb inflation. However, the problem persists. Mukherjee said although food inflation has moderated in recent months, pressure in manufactured items has hardened.

While coming out with its first quarterly policy review for the 2011-12 financial year, the RBI admitted that there has been a moderation in growth, but maintained its previous estimate of 8% GDP growth for the current fiscal.

Mukherjee said, "The overall GDP growth for 2011-12 so far is in line with the momentum attained in 2010-11." There have been concerns that the country's economic growth could see some moderation on the back of a deceleration in factory output growth in April-May.

Industrial output growth in April-May this year averaged 5.7%, compared to 10.8% in the same period last year.

Source: http://www.moneycontrol.com/news/economy/rbi-rate-hike-to-ease-inflationary-pressure-says-fm_569175.html

Franklin Templeton MF declares dividend for FT India Dynamic PE Ratio Fund of Funds

Franklin Templeton Mutual Fund has approved the declaration of dividend on the face value of Rs 10 per unit of FT India Dynamic PE Ratio Fund of Funds. The record date for dividend has been fixed as July 29, 2011.

The quantum of dividend will be Rs 0.440 per unit for individuals and HUF and Rs 0.377 per unit for others. The scheme record NAV of Rs 33.8048 per unit as on July 22, 2011.

The investment objective of the scheme is to provide long-term capital appreciation with relatively lower volatility thorough a dynamically balanced portfolio of equity and income funds.

Source: http://money.livemint.com/News/MF/MUTUAL-FUNDS/NEWS/144970.aspx