Decoding - Direct Tax Code (DTC) of India

Today DTC has been placed in parliament. Last week it was approved by cabinet. The surprises:

Positive:
1. No long term capital gain tax if STT is paid (positive from its last draft as there is no long term capital gain tax now also).
2. STT remains for equity transactions.
3. Short term capital gains will taxed at 50% rate of one's tax bracket. So instead of 15% direct taxation, short term capital gain tax will be levied at 5%, 10% or 15%.
4. Mutual Funds and ULIPs have to pay dividend distribution tax of 5%.

Negative:

1. DTC is effective from 1st April, 2012 instead of 1st April, 2011. God knows why it has been tabled so early. Hope it does not go through ever changing drafts from here on (but no complaint if negatives are neutralized in n number of drafts)
2. DTC is way bulkier than it was originally thought of. One of the basic reasons of bringing DTC is to make tax in India simpler.
3. No tax exemption if you invest in ELSS (equity linked tax savings) mutual funds or ULIP.

Other facts:

1. Man and woman will have same tax slabs - that is no tax till taxable income of Rs 2L, 10% tax between Rs. 2L to 5L and 20% between Rs. 5L to 10L, and 30% above 10L (L = Lakh = 100,000, Rs. = INR = Indian National Rupee). For senior citizens first no tax needs to be paid till income of Rs. 2.5L in a year.
2. Corporate tax is now 30% instead of 33.22%. Foreign companies now pay 40% tax, it'll be same as their Indian counterparts and will be at 30%.
3. DTC also proposed to increase the minimum alternate tax (MAT) rate of companies to 20% of book profit from the current 18%. However, under the current Income Tax Act, adding up the surcharge and cess would take the current MAT to 19.93 per cent.
4. Home loan interest exemption (Rs. 1.5L) stays, list of 80C (Rs 1L) exemptions is now very limited and there can be further Rs 50K exemption for some insurance and other products.

DTC not so good for long term capital gain tax on Equity

If Direct Tax Code gets implemented on 1st April, 2011 - long term capital gain on equity instruments will no longer be tax free. Also short term capital gain is no more treated within 365 days from date of investment, it's 1 year from 31st March of that financial year. So if you invest on 2nd April, 2011 - you pay short term capital gain tax till 31st March, 2013 (almost 2 years). Though revised DTC gives some relief on indexation benefit (though not spelled out exactly how much) on long term capital gain, but it is still taxable.

So question is - should we book profit in our equity investments or continue past March, 2011? There are many scenarios - but one thing is for sure - if you need money in next 1 year or so and in a good profit on your long term equity investment - it's better to book profit during Jan-Mar'11. But if you don't need that money - let's think more..

But I'll still love DTC if they maintain those income tax slabs - 30% tax only if your taxable income is more than Rs. 25 Lakh that year. But not sure if they will keep that as they started making DTC more complex and in doing so government will start losing revenue. And when Government wants money - their soft target is salried class. But let's pray..

11% almost guaranteed return - July FMPs

Fixed Maturity Plans (FMP) are similar to Fixed Deposits of Banks with an indicative return usually higher than FDs. As inflation is going through the roof, FMPs are fast catching up in their returns (call it interest/gain in FD term). These FMPs are usually floated by Mutual Fund companies and usually close ended and remains open for investment for a couple of days to couple of weeks. These are usually much more tax efficient than FDs for higher tax bracket individuals. It's slightly riskier than FDs, but usually fund manager could return the indicative returns. For dividend option the tax outfo will be at around 14.6% DDT and for growth option it'll be either 11.2% or 22.4% with indexation benefits (Long Term Capital Gain). So for people with higher tax bracket where FD interest gets taxed at 34%, this is a better bet. Click on following table to see the latest FMP yields. 11% almost guaranteed return - great isn't it?

Pre-paid or Post-paid - which one is better? - off topic, but again - a penny saved is a penny earned and then a penny invested

Now on a slightly different topic - pre-paid vs post-paid mobile service. What do you think is beneficial for anybody who makes any amount of call? My research suggested - pre-paid is any time better for both frequent and less frequent callesrs and both STD and local callers. Compare this:

1. Minimum post paid rental for Airtel is Rs 249 which is for having the service calling others at a discounted rate of Rs.50 and STD @ Rs.1.50. On top of that there is a 12% (some decimals missed) tax on the total bill.

2. Pre-paid - Recharge for Rs 1111 and get Rs. 1250 worth of talk time (for lifetime custmers this is valid for lifetime). Then recharge Rs. 94 to get Rs. 1 STD (present in post-paid also) and Rs..60 M-M calls. So effectively you are getting full talk time and Airtel pays you rent of Rs. 45..:)

This is just an illustration and then both have their good and bad points - like post paid can enjoy GPRS 100 MB plan, pre-paid customers have to go for unlimited one etc.. Your comments are welcome.

FYI I am still a post-paid customer..:)

REIT, Real Estate Funds, Equity and general hello after long time

Sorry friends - could not post for a long time. In the last few months lot have been done on following things for the benefit of investors:

1. Entry load made to nil for any investor who are directly investing into any equity fund. Remember - you have to either invest directly by submitting form to the fund house or by incremental investments through their websites only. Even if you do online investment through other sites like ICICI Direct etc, you'll still be charged entry load.

2. REIT framework is frozen and should be out for investors in next 2 months.

In the mean time I could get a chance to invest in a REIT like structure from Milestone. It's called IL&FS Milestone Realty fund. So far they are doing well in paying the yields (rental returns). I got two quarters worth of returns so far. They started with 11% pre-tax return and latest one I got was @12%. After 4 years when they will sell the properties, we'll get the capital appreciation also. Not a bad one!!

Another nice fund they are coming up with, which is called milestone domestic fund series 2. They are expecting IRR of 30% in that one. It's 4 years (with an option to increase by upto 2 years) fund with a minimum investment amount of 20 Lakhs. If anybody has such amount - this may be a good one to invest. This is also certified by RBI. For more information you can check out http://milestonecapital.in/. Unlike other development oriented real estate fund this one is only for 4 years (others range from 6 years and up) and minimum investment amount is lower (others go as high as 1 crore - though I have seen it coming down significantly to 25L level nowadays).

Another good investment avenue is equity market in general with 3-5 years horizon. After Sensex came down and settling at 17K level, it may be a good time to enter. CITI has target of 18500 in 9 months, others say 20K in 1-2 years - which are not bad - of course not as spectacular as last 3 years - but hey, things which go up that fast had to come down. But now things are more rational - so go ahead for equity for slightly longer term view (3-5 years).

More to come...

Do you know - two ways to avoid fees for equity Mutual Funds

Two awesome ways to pay less or no entry load for MFs:

1. Put your money in a 0 load liquid fund of any fund house. Then do a STP (Systematic Transfer Plan) of minimum 4 times (can also be weekly for 4 weeks) to any equity fund of your choice of the same fund house. That way you don't pay entry load to those equity funds.

2. Pay 0 to 1% entry load to get into any index fund of a fund house and then do a "Switch To" any equity fund of your choice among the funds from same fund house. For that there is no entry load.

This is out of my reearch. Any comments are welcome.

Equity MF entry load to be waived - proposal by SEBI

Here is a that much sought after relief for Mutual Fund Investors in India. SEBI is proposing to remove the entry load by Mutual Funds if application has been directly placed to the MF houses or collection centers or through internet without routing through any distributor. We loose 2.25% everytime we invest in a equity MF and churn out a good portion of our money by that entry load which this MF houses pay to the distributors or agents. Let's all support this greatest idea. Send email to ruchic@sebi.gov.in supporting the idea. Hope SEBI makes it a law soon.

Following is the proposal from SEBI:

SECURITIES AND EXCHANGE BOARD OF INDIA
INVESTMENT MANAGEMENT DEPARTMENT

Proposal on waiver of load for direct applications in Mutual Fund schemes

Currently all investors irrespective of the mode of entry are required to pay the entry load.

SEBI has stipulated that the loads collected by the Asset Management Companies (AMCs) for each scheme have to be maintained in a separate account and can be utilized towards meeting the selling and distribution expenses.

As per industry practice the load is normally utilized towards meeting the agent/distributor’s commission. So, the entry load collected from the investor normally goes towards paying the brokerage/commission of the distributor through whom the application was routed to the AMC.

Keeping in view the interest of the investors SEBI is now considering giving a waiver in entry load for direct applications received by the AMCs i.e. applications received through internet, submitted to AMC or collection centre/ Investor Service Centre that are not routed through any distributor/agent/broker.

Interested people may send in their comments on this issue to ruchic@sebi.gov.in or by writing a letter addressed to SEBI, Investment Management Department, SEBI Bhavan, Plot No. C-4A, G Block, Bandra Kurla Complex, Bandra (E), Mumbai – 400051 on or before September 12, 2007.

Best of both the worlds - Fixed income with upside of Equity

The much-awaited Structured Product is here finally which promises besides Capital Guarantee, a worst-case scenario of 21 per cent absolute return and a best-case scenario of upto 81 per cent in 37 months duration.

Scheme is being offered by Benchmark Asset Management Company which is renowned for Exchange-traded funds. The underlying assets in this structured product (usually defined as a debt obligation of a triple-A-rated debenture issued by a financially sound company - in this case, it is DSP Merrill Lynch Capital Ltd.)

Details attached in the file but key points are below:

Structured Products are products which have a higher tax-efficiency than fixed deposits or debt instruments because they offer assured downside protection and pre-defined returns (usually linked to market returns.)
This product is Structured Product Series XI from Benchmark AMC and has been fine-tuned by our bank after elaborate feedback from discerning clients across a wide cross-section
In a bank deposit, you get taxed at 33% but in a structured product which has debt instruments listed within 3 months, your tax outgo is only 10% plus surcharges - there's a steep advantage in favor of structured products.
In the present product, for the first time, apart from Capital guarantee, there's an absolute return promised at the end of 39 months (3 months more because of time-frame to wind down positions in nifty-linked instruments).
Higher of floor payout of 25 per cent on the face value of the debenture at maturity, if Nifty does not close at or above 190% of its intial valuation date (17th September 2007) on any of the monthly observation dates from 13th month till 36th month (24 observations) or
participation in the Nifty within the range of movement of Nifty from 0% to 189.99% (in which case the return can go as high as 89.99% * participation, which is 0.90 or 90 per cent = 81 per cent.
If Nifty closes at or above 190 per cent on any of the monthly observation dates, the payout is capped at a fixed payout of 30 per cent absolute return on maturity.
The payout has another condition which accordingly subjects it a scenario where the base-case return works out to be 21 per cent. (please see illustration to understand the scenario)
Expenses Ratio is only 4% one-time - no charges subequent will be levied.
Reporting is done every six months for Investment Performance.
Minimum Investment is Rs.10 lacs plus fees. Say, for Rs.10 lacs, the amount of investment is Rs.10.40 lacs.
Offer closes on 10th September, 2007
Ideal for:
Individuals, Trusts, Institutions who seek capital protection plus fixed return plus potential of upside return.
The product is itself structured in such a manner that it is tax-efficient and gets an annualised return of over 7% in worst-case, over 10% in medium-case scenario and higher return in other scenarios of outperformance of Nifty.
Investors who invest significantly into fixed deposits, RBI Bonds, Post-Office Schemes - who are risk-averse.
Investors, who having substantial exposure to Equities, are looking to lock their ESOP share-sale proceeds or Rebalancing proceeds or Equity assets into Higher-Return seeking Avenues without capital loss risk.
Investors who do not expect Nifty to go beyond 190 per cent in the next three years (with Domestic Elections, etc.) should lock portion of the Assets in this instrument. (This is reasonable assumption, because Nifty today is at 4412 points. Expecting it to cross 8382 points in next 3 years is a tall order given that stock prices of the top 20 companies have already priced in.) This is a significant pointer to consider this Asset-Class with upside potential with zero downside and a reasonable fixed-income return.

See attached for more details

September 2007 New Fund Offerings

ABN Amro China India Fund - An open-ended equity fund which invests 65%in Indian stocks and 35% in Chinese stocks. Previous successful NFOs: ABN Amro Future Leaders, ABN Amro Opportunities. Scheme closing October 1, 2007. Taxation Rate: same as Equity Funds (not debt).

ICICI Prudential Indo Asia Equity Fund - An open-ended equity fund which invests 65% in Indian Stocks and 35% in Asian Stocks. Previous successful NFOs: Prudential Discovery, Prudential Emerging Star, Prudential Infrastructure, Prudential Services, Prudential Fusion 1 and 2, Prudential Wealth Optimiser. Scheme closing September 21, 2007. Taxation Rate: same as Equity Funds.

Fidelity India Growth Fund - An open-ended equity fund which invests concentrated positions in Indian stocks growing faster than GDP. Previous successful NFOs: Fidelity Equity, Fidelity Special Situations, Fidelity International Opportunities, Fidelity Tax Plan. Scheme closing September 26, 2007.

Pay zero tax on unlimited gains in India - a very interesting article on rediff

India has truly become a tax haven. If you are willing to take market-related risks, you can arrange your affairs in such a fashion that you don't have to pay even one single rupee as tax, irrespective of the extent of your gains.

And, it's all perfectly above board and legal! Here's how.

With a view to giving a boost to the Indian equity market, successive recent finance ministers have doled out many tax concessions to the income and gains from:
Shares traded on a recognised stock exchange in India, and Equity-based mutual fund schemes (equity funds).Now, all you have to do is to park all your investible funds in either of these two avenues -- and relax.The dividends are tax-free, and so are all long-term capital gains. The only question that needs an answer is -- which of the two avenues should you choose?

Read rest of it here...
http://www.rediff.com/money/2007/jun/22tax1.htm

Free Tax Filing in India ITR Forms (ITR1 and ITR2)

http://www.simpletaxonline.com - A free service from CTE Ltd for Tax Paying Community in India

Everonn IPO - Grey market premium more than 100%

Everonn systems IPO is a very good one and rated 5 stars by CNBC TV18. But till now it has been over-subscribed by 19 times. But in Non-institutional category it is not oversubscribed that much (unlike retail category). So who wants to get a better luck in the allotment, and wanted to subscribe near 1 Lakh, it's better to subscribe for little more than a lakh and in Non-instituitional category. I subscribed for 1400 @ Rs. 140 bid.

See Everonn profile at http://www.moneycontrol.com/stocks/pickoftheweek/equityreportfinal.php?eqid=ESI04

Good Luck and happy investing!!

My today's investment:

1. Tata Chemical - 41 shares at Rs 241.50
2. JK Cement - 67 shares at Rs. 149
3. Reliance Equity Advantage Fund FPO - Rs. 1 Lakh at a face value of Rs 10 (NAV)

Investment product galore - July, 2007

What's coming up this July, 2007:

1.Reliance Equity Advantage Fund - closing July 10th

2. HDFC Sensex Plus Fund - opening shortly (similar to Reliance Equity Advantage Fund)
3. Nifty-Linked Debentures (Index Linked Debentures) Series-3 From ICICI Prudential PMS.
4. IndiaReit (Real Estate Venture Fund) Series II - from Nicholas Piramal Pharma Group - closing July 15th for minimum Rs.25 lacs (First Series has returned over 45% in the first year)
5. DSPML Global Mining Companies Fund - closing July 25th (Details yet to be formally launched)
6. Fixed Maturity Plans (Yields falling however to 7.8% to 8.3% - with higher yields at 370 Days plus)
7. Birla Capital Protection Plan
8. Franklin Templeton Fixed Term Plan above one year.
9. UTI Lifestyle Fund (managed by Anoop Bhaskar - ex-Fund Manager Sundaram BNPP Select Midcap Fund.closing July 25th.
10. Sundaram BNP Paribas Global Opportunities Fund - Directly managed by BNP Paribas Asset Management - Opening shortly.
11. ICICI Prudential India Real Estate Portfolio with a Portfolio Management Scheme (Stand-alone) this time from ICICI Prudential AMC PMS) - not from ICICI Ventures - with Investment Committee covering the best of brains from Foreign and Indian Realty players.
12. Peninsular Realty Venture Fund.

ICICI Bank IPO - Allotment status can be found here

http://www.chittorgarh.com/stockmarket/ICICI-fpo-allotment-status.asp

DSPML World Gold Fund - investing in Gold mining companies through an International Fund

Just wanted to share an exciting new product which will shortly be available from DSP Merrill Lynch which is a formidable alternative to ETFs. The details will be sent out as we hear more but these are the salient features:

Name of the Scheme: DSPML WORLD GOLD FUND investing in Gold mining companies through an International Fund.

Open-ended Fund which closes 27th July 2007 with Growth and Dividend options.
So far not available to Indian Investors - Accessing one of the Largest Funds in its category (Merrill Lynch International Investment Funds - World Gold Fund having corpus of USD 5405 Million.

How has been the performance of MLIIF-World Gold Fund?

Out-performed Gold (Bullion Investment) by 268% and S&P CNX Nifty by 127% (in absolute terms) between 1994 - 2007.
Just to give an example, an investment of Rs.1 lac on 30-Dec 94 would have given the following Absolute Returns and CAGR in the following:

S&P CNX Nifty - Abs.Return 263.35%, CAGR 10.94%
Gold Bullion - Abs.Return 122.86%, CAGR 6.66%
FTSE Gold Mines (Cap) Index - 47.19%, CAGR 3.16%
MLIIF - World Gold Fund - 390.71%, CAGR 13.66%

More than 12 years of performance track record - AUM of Rs.22017 crores (USD 5405 Million)
AAA rated- S&P Fund Research, AAA rated- Forsyth Partners

What are the other salient points?

A "Best Ideas" rather than benchmark driven portfolio
Invests in Gold (no less than 80% at any time) mining companies which are listed, besides Diamond mining companies, Silver mining companies, and Platinum mining companies - situated in South Africa, North America, China, Latin America, Europe, Australasia and Former Soviet Union.
Correlation with MSCI World Index is -0.11 (negative) and Correlation with S&P 500 is 0.07 (negligible) making it a good case for Asset-Class diversification beyond Indian Equities, Commodities, Debt, Physical Gold and ETFs, Real Estate and International Equities.

Why invest in Shares of Gold Mining Companies?

Because of negative or negligible correlation with stock market as outlined above.
Gold prices are going up due to increasing demand-supply gap
Shares of Gold Mining Companies are leveraged to the gold price, possibility of superior performance and dividends.
Gold Mining Companies have a multiplier effect on their profits vis-a-vis Gold price (To illustrate, today's gold prices are around USD 650 per troy oz. but the cost of production for mining companies has almost been stagnant for the last several years at USD 550 per troy oz.).
Increase in Gold price by 23% leads to increase in profits of Gold Mining companies by 150% according to base case and other scenarios.
M&A Activity in the Gold Mining Sector is rising which leads to premium ratings on growth stocks - Drivers behind consolidation remain and private equity is starting to take interest.

How is it different from Gold Bullion and Gold ETFs?

In Gold Bullion, you buy physical gold, participate in gold fundamentals with passive management with lot of liquidity but no diversification
In Gold ETFs, you buy physical gold kept with custodian (Certificate of Holding etc), participate in Gold fundamentals with passive management with daily liquidity but no diversification.
In DSPML World Gold Fund - you invest in Gold Mining Companies through MLIIF-World Gold Fund, participate in gold fundamentals, with ACTIVE management, with daily liquidity but achieve geographical diversification, exposure to other precious metals and also have value unlocking of stock ratings and re-ratings.
All in all, a good diversification and one of the most differentiated products on alternative investing strategies.

ICICI Bank IPO - Subscription status and biggest investors

Following are the biggest investors in ICICI Bank Follow-on Public Offer:

Citigroup (USD 2 Billion)
Merrill Lynch (USD 2 Billion)
Tamesek Holdings (Rs.8300 crs.)
LIC (USD 2 Billion)
State Bank of India (USD 1.35 Billion)
Warburg Pincus (USD 993 Million)
GIC (Singapore Government)
Capital International
T.Rowe Price
Mukesh Ambani (Rs.1000 crs.)
Aziz Premji (Rs.1000 crs.)
Rahul Bajaj (Rs.1000 crs.)
Deutsche Bank (USD 1 Billion)
Goldman Sachs (USD 1 Billion)
ABN Amro (USD 750 Million)
BNP Paribas (USD 440 Million)

Maximum Bids were received between Rs.885 - 930 per share.

Subscription Details

Investors Qualified institutional buyers 21.62 Times
Non institutional investors 6.15 Times
Retail individual investors 1.03 Times
Employee Reservation 0.22 Times
Total 11.50 Times

RETURNS OF - NFO - LAST ONE YEAR

Here (click here) is a comprehensive information about the returns of the new fund offereings from several Mutual Fund houses during last one year. Because of the difference in the end dates, you may not be able to compare apple to apple, but this gives you an idea about the performances of thes NFOs.

Top 10 Stock Holdings of Top 10 Equity Mutual Funds in India

Please click below to see the top 10 holdings of the top 10 Mutual Funds in India. Notice that few of the blue chip companies appear repeatedly on most of the funds' top holdings.

Also listed are category wise top Mutual Funds.

Top 10 Stock Holdings of Top 10 Equity Mutual Funds in India

FRANKLIN INDIA HIGH GROWTH COMPANIES - New Fund Offer - Details and analysis

Fund closing on June 29th 2007.. (details attached here)

Franklin Templeton has launched a new fund - Franklin India High Growth Companies Fund (FIHGCF) an open ended diversified equity fund closing on The Fund's clear USPs are as follows:

1. Combines the Aggressiveness of Franklin's Style of Investing with the conservatism of Templeton Approach.
2. Open-Ended Diversified Multi-Cap Fund. Fund Positioning a tad less aggressive than Franklin India Opportunities Fund.
3. The present Fund is managed by K Siva Subramaniam (One of the most respected Fund Managers in Asia who has seen more than 12 years of market cycles
4. Track-Record of Templeton has always been in the top quartile but never flashy or flamboyant (Like Reliance) or Inconsistent (Like some Mutual Fund Houses).

NFO Details Investment Objective :

This fund seeks to achieve Capital appreciation through investments in Indian Companies/Sectors with high growth rates or potential.

Key Features :

Growth style of investing could provide relatively higher returns in a fast growing economy like India The combination of top-down and bottom-up analysis helps in identifying the fastest growing companies in terms of earnings and sales, amongst the various sectors benefiting from India's economic growth
Investors with an appropriate risk profile can benefit from Templetons experience of identifying growth companies for over 12 years across market cycles.
A high growth strategy is complementary to a core equity portfolio.
Asset Allocation pattern : Type of Instuments Normal Allocation# (Min%-Max%) Equity and Equity Linked Instruments 70% - 100% Debt securities* and Money Market Instruments 0% - 30% # Including investments in Foreign Securities as may be permitted by SEBI/RBI up to 35% of the net assets of the scheme, exposure in derivatives up to a maximum of 50%
* Including securitised debt up to 30% NFO Dates : May 31, 2007 - June 29, 2007 Load Structure (during the NFO) o Entry load - 2.25% (Less than Rs. 5 Crs) & Nil (Rs. 5 Crs & above) o Exit load - 0.5% for redemption within 6 months and 1% for redemptions within 1 year. Minimum investment - Rs. 5000 and in multiples of Rs. 1 SIP - Minimum amount Rs 1000 for 12 months Also find below some factors which help us selling this fund effectively

Suitability: This fund is suitable for Agressive and Long Term investors.

Plus Points:
The objective of investing in high growth companies is expected to benefit the fund as these companies would be the beneficiaries of the strong economic growth to be witnessed by the Indian economy in the coming years .
Increased interest for equities among Indian investors and concentration on companies with high growth prospects should be a positive for the fund, provided the fund manager picks the right companies.

Key Distinguishing Factors:

The fund has the leeway to invest in high growth companies across marketcaps i.e. largecap, midcap and smallcap
Benefit of employing blend of top down and bottom up approach
Sound fund management track record

Risk Factors :

High interest rates and inflation could have an adverse impact on the profitability and revenues of companies in the midcap and smallcap segment
Any correction or consolidation in the euqity markets would result in the midcaps and smallcaps underperforming the largecaps and adversely affect the fund's performance