Anticipating Budget 2018-19

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Warm Greetings from PenguWIN:

            In a few hours, Finance Minister Mr. Jaitley will be presenting the Union Budget for 2018-19. No, this is not a commentary on Budget or a wish list as Budget details are kept confidential.

In this blog, I plan to highlight an important change with respect to Equity investing. The change might not be proposed by FM (like last year when it was expected but finally did not occur), significance of the change could be lower or more. Every business vertical including Banks, SME, NBFCs, Insurance and Mutual Funds prepare a wish list and send it the F.M. However, there is no certainty whether the proposals will get accepted or turn out to be worse than anticipated.

MFs proposal include, bringing down LTCG (Long Term Capital Gains) tax of the debt funds from 3 years back to 1 year, which was the treatment until 2014, approval to launch Debt based Tax saver funds like Equity Linked Savings Scheme – DLSS, lowering threshold limit from 65% to 50% for equity-based taxation and removal of Securities Transaction Tax (STT) for MFs and Exchange Traded Funds. The ask on reversing the debt fund taxation from 3 years to 1 year is a little too much in my POV, when the FM is grappling for new resources to fund schemes for sectors like Agriculture.

Equity investing (Mutual Funds and Stocks) is attractive for 2 reasons; primary one being the potential to deliver highest and inflation beating returns, among the various asset classes (proven across the globe). Second is the unique tax aspect where LTCG is zero. i.e. principal and gains held greater than 1 year is tax free (15%, if the holding period is less than a year). No other asset class enjoys this kind of tax benefit which was Implemented in 2005, to encourage people to invest in Equity. But, the logical reasoning of Equity as a long-term investment vehicle and wealth creator is paradoxical with the tax benefit of reaping the gains in a years’ time. Equity is not a product for 1-year time horizon and because it has given excellent returns in a year like 2017, it should not be misconstrued.

There are lot of rumours going around saying that the FM will bring back the LTCG Tax for Equity. Some say it would be made 3 years instead of 1 which means the second and third year redemptions will also attract 15% tax, a flat tax rate of X% when funds are redeemed or a progressive structure (tax rate increases with the income slab). However, the same commotion happened during the run up to last years budget and finally the FM maintained status quo

Some of the major countries in the world do tax capital gains from stocks:

  • US has LTCG tax for equities which is a progressive structure
  • Germany has gains taxed fully, including a 25% withholding tax,
  • Canada has 50% deduction on CGs split between Federal and Province
  • Brazil has progressive taxation on CGs between 15 to 22.5%
  • Singapore does not tax capital gains

What will be the outcome if FM introduces LTCG in some way for Equity Investments in India?

  • In case if LTCG is announced, the chances that the markets will react negatively is high. This will be a temporary phenomenon as taxing capital gains is a practice in most countries and we need to reconcile to reality.
  • What are the alternative investment options? Can Real Estate or Gold or Bank, Govt. and Company deposits provide better returns. I can confidently say that even after taxation, Equity will continue to be the best asset class for long term wealth creation. We can take the cue from the level of equity penetration, which is far higher in countries where LTCG is in place, compared to India.
  • Investors with a short time frame and using Equity markets for short term gains will slowly disappear and only investors who want to invest with a minimum or 3 years+ will remain in the market (PenguWIN recommends pure Equity investing only for time frame of 5Y+)

Viewing budget telecast live is an interesting experience and if you have interest in finance, I would definitely recommend.

Keep a track on Sensex, Nifty and other key indices and you will see them moving up and down with every announcement that is favourable or unfavourable to markets.

At the end of the day when our CEOs are asked by reporters/analysts on how they think the budget was, I can tell that they will present a positive picture, irrespective of whether it is good or bad. A few bold CEOs will give the real perspective and ones who are close to the opposition will say that its insipid and wasted opportunity

 

<Blog # PenguWIN 1057 – Anticipating Budget 2018-19! >                                             

Finance Lessons from Hindi Movies

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Happy Republic Day Greetings from PenguWIN !!!

Rather than Verbose text based articles, for a change, I have compiled this. The key content is picked from a magazine and if I had to come up with something similar, I would chose either Tamil or English 🙂

Financial Lessons from Hindi Movies

 

< PenguWIN TITBIT # 104 – Finance Lessons from Hindi Movies >

FRDI bill: Please dont Panic!

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Warm Greetings from PenguWIN:

                            Couple of weeks back, one of our clients, who is 3 years away from retirement, reached out to me with the question of safety of bank deposits. Subsequently I got calls from atleast half a dozen clients and yesterday morning, one of our key clients, senior citizen, spooked by FRDI (Financial Resolution and Deposit Insurance Bill), called and wanted to move his major share of bank deposits to Mutual Funds (Liquid Funds). To allay the fear of investors, I thought that I can put together a write-up and will try to keep it simple.

However good the social media tools like Twitter, WhatsApp are, they have their own drawbacks. Both Twitter and WhatsApp are tools to disseminate information; problem is its mostly copied content and forwards to “N” number of people, many a time without even reading the content. A major share of the rumours that the bank deposits of investors can be used for rescuing them (Banks) in an event of financial crisis, can be credited to WhatsApp and Twitter.

The objective of the bill is to set up a new organization, Resolution Corporation that will closely monitor banks/financial institutions and help them resolve, in case of crisis situation. The controversial clause in the bill is the “Bail-In” option where the savings of depositors can be leveraged to rescue the bank. The opposition parties, including Congress have vehemently opposed the bill in the current form and unless all controversial clauses are modified/removed, it will not see the light at the end of the day. Most bank depositors are ignorant of the fact that the current system in place, where a bank gets into a financial crisis, will compensate only to the extent of One Lakh through insurance provided by Deposit Insurance and Credit Guarantee Corporation (DICGC) under RBI. For all these years no one was agitating to revise the insurance amount and why now? The depositors who knew about DICGC too never complained as they firmly believed that RBI and Government will intervene and set things right.

In India, a large portion of the bank deposits are held with public sector banks, which are owned by the Government of India. Hence, usage of depositor’s funds in the banks to resolve issues will have huge ramifications. Unlike other developed countries, our proportion of savings in banks is also high. So, in case the bill is passed in the current form (which is hypothetical) Bank runs (depositors trying to withdraw funds at the same time) will be triggered resulting in colossal impact to our economy. The reason for skepticism in this case is because the rumours are spread with the rider “The current PM is very powerful and is capable of imposing anything like Demonetization”.

About 15 years back there used to be a private bank called Global Trust Bank (GTB) which got into a crisis and RBI and Government rescued it by merging it with Oriental Bank of Commerce, without affecting the interest of the depositors. RBIs scheduled commercial banks ( PSU and Private banks – not cooperative banks) have never defaulted and depositors interests have never been compromised. So, there is absolutely no reason to fear that hard earned money of depositors will be utilized to resolve bank issues. If depositors are not convinced and still sceptical, then there are multiple threats to worry about like a world war getting triggered because of nuclear weapons usage of North Korea or India losing its patience against Pakistan’s support for terrorism and decides to go for a full-fledged military solution (war). I don’t think we are obsessed and worried about wars breaking out and same should be the temperament in the case of FRDI and “Bail-in”

 

<Blog # PenguWIN 1056 – FRDI bill: Please dont Panic!>

Category: Fixed Income, General