What next???
Friday: quote Buffett
Monday: quote Keynes
Thursday: quote the Bible.
Date:14/03/2022
Since the start of this calender year we have had only negative news, omicron, rising inflation and consequent aggressive monetary tighteneing by Fedral Reserve and if that was not enough we had Russian invasion into Ukrain which just accelerated the the rise in inflation. What looked like a pass by correction has suddenly turned a major one and who knows how deep it can get??
There is a mayhem in the newly listed and platform companies in USA, mainly where predictability of earnings was uncertain. Stocks with growth in revenue as the only model with no clear visibilty on year of profitability are all down like 50/90 percent. In india fortunately we had only few on them which recently listed and they are down like 50/70 percent from their listing day rate.As they say that Liquidity Is the Mother of all Bull Markets, since now liquidity will shrink with the FED’s indication of close to 6/7 rate hikes this year…we will know who were swimming naked.
India which had the highest GDP growth estimates for FY 23 from 8.5/9.5 % , till recently before the Russia Ukrain war will now be cut down sharply with rise in crude oil. Remember one thing, that all our budget estimates were based on crude oil price expectaions of 75$ per barrels. Rise in crude oil price to 110/115$ ( high of 130$ per barrel ) has just accelerated FII selling into India who for last whole financial year have been net sellers except for the month of September. Only savers have been the MF’s and retail who are still pouring systematically and as a result we have behaved like a mature baby outperforming most of the big global indices. There was a mad rush in equity and which needed some kind of break and now it has come and how. Nifty pe which had crossed to some 23 times at fy 23 estimate of around 850 + earnings is now at 18/19 pe , however this EPS will be sharply cut now. The joker in pack for India is crude oil and clearly if we go down to 85/90 $ average for whole year we should do really good inspite of rate tightening cycle, but looking at geopolitical issues this looks like a tall ask ( however we are optimist here ).
As an investment advisior our role is not only to maximise returns but also reduce risk on the overall portfolio and keeping the clients informed of how good or worse can their portfolio look , so that he is not shocked with whats happening to his hard earned money and also help them in navigating difficult times. While investors have shown mature behaviour with continuing their sips and asking for putting more money than panicing and withdrawing, clearly this is one of those corrections which may test patience. During the fall generally indices outperform the funds, even the large caps, and so our fresh advice to all our clients has been rather than increasing the Sip on existing mid caps and flexi caps we would advice add a fresh index fund and consequently reduce the beta i.e downside volatility of your portfolio. This is not meant for risk seekers.
On good news we recently had , is the state elections where BJP was clear winner in 3 out of 5 states and formed government with outside support in the fourth one, also the 5th non BJP won state has Aap government which is also a productive party. Increasingly we are becoming a stronger political nation. Hence looks like the house is still in order and if we do not have crude playing very badly all should be well.
All past declines look like an opportunity, all future declines look like a risk. If you are in the game of investment for long term….dont act smart in timing the market….but be in the market.
KNOWLEDGE CENTER
TAX IMPLICATIONS ON MUTUAL FUNDS-
The main objective of any investment is wealth creation. Mutual funds are efficient financial products that aid this objective through capital appreciation. Like all other investments, gains from mutual funds are taxable.
The tax you incur on mutual funds is based on the type of asset the fund focuses on and the holding period of your investment. However, a special kind of mutual fund–the equity-linked savings scheme or ELSS fund – can help you save taxes.
Asset categorization
Any mutual fund that invests more than 65 per cent of its corpus in domestic company shares is categorized as an equity-oriented fund for taxation purposes. Arbitrage funds that invest to take advantage of the difference in prices in the cash and derivative market are taxed as equity oriented funds provided the investment in cash market meets the criteria of minimum 65% investment in domestic company shares.
A debt fund (i.e. a non-equity oriented fund) that invests in different fixed-income securities carries a different tax rate from equity-oriented funds. International funds investing in stocks abroad and fund-of-funds that make money through investments in various mutual funds are taxed like debt funds.
Hybrid funds are treated as equity oriented funds only if they have a minimum of 65 per- cent exposure to domestic company shares. Otherwise, they are treated as debt funds.
ELSS mutual funds, though primarily invested in the stock market, are tax saving mutual funds. What sets ELSS apart from other equity oriented funds is the minimum lock-in period of three years.
If you option for a dividend option, dividends shall be taxable in the hands of the investors and the mutual fund will deduct TDS @10% for resident investor and @20%(plus applicable surcharge and cess) for non-resident investor before payouts/re-investment. However, the Investor can claim tax credit of TDS deducted at the time of filing of their annual return
Holding periods
The duration for which you hold on to your mutual fund investment is called the holding period. Short-term investments attract a tax rate different from long-term investments.
Short-term taxation
Investment in any equity-oriented mutual fund for less than 12 months is considered short-term and attracts a short-term capital gains tax of 15 per cent.
For debt funds, a holding period of fewer than 36 months is considered a short-term investment. Short-term capital gains on debt funds are taxed according to your individual income slab.
Long-term taxation
Gains from equity mutual funds held for more than 12 months attract long-term capital gains tax at 10 per cent if the total long term capital gains amount from equity oriented mutual funds/ equity shares exceed ₹1,00,000 in a year. Returns below that threshold are tax-free.
Gains from debt funds, on the other hand, are taxed at 20 per cent after indexation benefit, if held for over 36 months. Indexation refers to gains adjusted for inflation. Without indexation, the tax on debt funds would be higher.
Tax saving mutual funds
When you invest in an ELSS fund, you are eligible for a tax deduction. You can save up to
₹1, 50,000 under Section 80C of the Income Tax Act, 1961. Although primarily an equity fund, the lock-in period of three years and the high probability of return makes it one of the best tax saving options available to investors.
Securities transaction tax
Apart from the taxes mentioned above, all equity-oriented funds also incur a securities transaction tax of 0.001 per cent at the time of redemption. Investors receive the fund after STT deduction, so you do not have to pay it separately.
SIP taxation
Tax on systematic investment plans is calculated for each individual unit. The holding period from the date of purchase to the redemption date determines whether it will be considered for short-term or long-term capital gains tax. If redemption is carried out in parts, then the first-in, first-out rule is applied, meaning that the first units purchased are considered sold first.
Things to remember
- Mutual funds are taxed based on asset categorization and duration of the investment.
- Equity oriented mutual funds have a short-term capital gains tax of 15 per cent for a holding period of up to 12 months. Beyond that, long-term capital gains tax of 10 per cent is applicable for gains (from equity oriented mutual funds and equity shares) over ₹1,00,000.
- Debt mutual funds are taxed as per your income slab for investments held for up to 36 months. After that, long-term capital gains tax of 20 per cent applies, after adjusting for inflation.
- Equity-linked savings schemes are eligible for tax deduction up to ₹1,50,000 per annum
- Dividends are taxable in the hands of investors.
TDS @10% for resident investor and @20%(plus applicable surcharge and cess) for non-resident investor shall be deducted by the mutual fund on dividend distributed.
MUTUAL FUND SIP RETURNS
CATEGORY AVERAGE RETURN
- CA JAYESH GANDHI
Disclaimer: This is an informative document and opinions expressed in it are our own and not any advice. We are certified investment advisors yet to be SEBI registered. We are AMFI registered MUTUAL FUNDS DISTRIBUTOR.
