Tag Archives: Wealth Adviser

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 >

Wishes for a Happy Diwali 2017

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Dear Friends,

                            Advance Diwali wishes from team PenguWIN !

Right from my childhood days, Deepavali day has been my favourite day of the year (birthday comes latter) as I used to be deeply obsessed with Crackers. I have even had ideas to open a fireworks shop during Diwali eve, not with money-making motive, but get a chance to visit Sivakasi and buy fireworks at cheap prices so that I get a huge quantity to burst. But till date, it remains an unfulfilled wish.

I am aware that Fireworks cause health hazards, but was unaware of its intensity – Apparently, burning snake tablets is equal (how many boxes is something that was not published and obviously it’s not just 1 tablet or a box containing a dozen tablets) to 475 cigarettes (courtesy NDTV). Fireworks have been banned in many places in NCR (in and around Delhi) and I guess it’s only a matter of time that it ceases to exist for retail consumption.

I would like to brief about a category of equity funds called Equity Savings Fund, which as a concept I am really impressed. The fund category has only a 2-year history and long-term performance is yet to be tested. All major fund houses have launched this fund, starting 3rd quarter of FY 15-16. After the 2014 budget when the Finance Minister changed the taxation of debt funds, all debt funds need to be held for 3 years for indexation benefit and subsequently taxed at 20%. Manufacturers in mutual fund industry (who create new schemes) are extremely savvy and came up with the concept of Equity Savings Fund.

For a fund to be categorized as Equity Fund, it has to have a minimum of 65% exposure to Equity (Stocks) and the balanced fund category is based on this principle, though SEBI continues to say that Balanced Fund should be 50%:50%, Equity and Debt. Meanwhile a separate category of funds called Arbitrage Funds came into existence, where the fund manager tries to identify opportunities of mispricing between cash and futures markets. Without getting too technical, Arbitrage Funds belongs to equity category but potential returns are like debt category (about 5 to 6% ROI now). There is no issue of losses in these funds as purchase and sale of securities are done at the same time.

Using the advantage of Equity for high returns, Debt for stable returns and Arbitrage for Equity tax treatment and stable returns, Equity Savings Fund was conceptualized. They take 1/3rd exposure to Equity, Debt and Arbitrage, with specific schemes taking a little higher or lower proportion of securities. They maintain a minimum of 65% exposure to Equity and Arbitrage so that the fund enjoys equity taxation. From a risk perspective, it’s a lot lower than Balanced Funds giving a comfort feel to investors.

This category of fund, caps both the upside and downside quite well through its composition and has potential to generate 10% to 12% (net of tax) over a 3-year time frame. If this fund category proves its mettle, they will become a great hit among investors who don’t have the appetite for high exposure to Equity and Tolerate Volatility. Balanced Funds have attracted huge inflows in the recent run, higher than any other equity fund category – good returns with reduced risk. Equity Savings Fund could well be the next category to bet on.  

< PenguWIN TITBIT # 103 – Equity Savings Fund>