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8/3/2019 Mutual Funds Taxation 2
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MUTUAL FUNDS and
TAX IMPLICATIONS
MUTUAL FUNDS and
TAX IMPLICATIONS
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FINANCIAL MARKETS
2
HSBC , Goldman
sachs,JP Morgan
ICICI ,HDFC
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FINANCIAL MARKETS
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MONEY MARKET INSTRUMENTS
TREASURY BILL- GOVT : mature in one year or less, they are sold at a discount of the par value to create
a positive yield to maturity. T-Bills are commonly
issued with maturity dates of 28 days, 91 days, 182
days , and 364 days .
COMMERCIAL PAPER : commercial paperis
an promissory note with a fixed maturity of 1 to 270
days. Commercial Paper is issued (sold) bylarge banks and companies to get money to meet short
term debt obligations (for example, payroll),
ASSET-BACKED SECURITY : is a security whose value and income payments arederived from and collateralized (or "backed") by a specified pool of underlying assets
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Industry profile
The mutual fund industry in India started in 1963 with the formation ofUnit Trust of India, at the initiative of the Government of India and
Reserve Bank. The history of mutual funds in India can be broadly
divided into four distinct phases.
First Phase 1964-87: Unit Trust of India (UTI).
Second Phase 1987-1993 (Entry of Public Sector Funds).
Third Phase 1993-2003 (Entry of Private Sector Funds).
Fourth Phase since February 2003
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Introduction
What is a Mutual Fund ?
Why invest in Mutual Fund?
Types of Mutual Funds
Tax Issues
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What is a Mutual Fund?
A mutual fund is a trust that pools the savings ofseveral investors and then invests these into
different kinds of securities (shares, debentures,
money market instruments, or a combination of
these) in keeping with a pre-stated investmentobjective.
The income thus generated and the capital
appreciation is distributed among mutual fundunit holders in proportion to the number of units
held by them.
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STURCTURE
SPONSORS : Sponsor is basically thepromoter of the fund.
ASSEST MANAGEMENT COMPANY : A set of
Financial professionals who manage the fund
TRUSTEES : Professionals who supervise the
activities of AMC.
CUSTODIAN :A custodian keeps safe custody
of Investments
TRANSFER AGENTS : Interfaces with
customers , issues a funds units e .g CAMS
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Working of Mutual Fund
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Net Asset Value of a fund
NAV is the total market value of all the assets,including cash, held by the fund, after deducting
its liabilities.
The per unit NAV represents the market value of
one unit of the mutual fund.
It is the price at which investors can buy or
redeem the mutual funds units.
The per unit NAV is computed by dividing the
total value of all the assets of the mutual fund,
less any liabilities, by the number of units
outstanding.14
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Benefits of investing in Mutual funds
DiversificationDiversification involves holding a wide variety of
investments in a portfolio so as to mitigate risks.
Mutual funds usually spread investments acrossvarious industries and asset classes, constrained
only by the stated investment objective.
Thus, by investing in mutual fund, you can avail
of the benefits of diversification and assetallocation, without investing the large amount of
money that would be required to create an
individual portfolio.
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Professional Management
Mutual funds employ experienced and skilled
professionals, who conduct investment research,
and analyse the performance and prospects ofvarious instruments before selecting a particular
investment.
Thus, by investing in mutual funds, you can avail
of the services of professional fund managers,which would otherwise be costly for an individual
investor.
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Liquidity
In an open-ended scheme, unit holders can
redeem their units from the fund house anytime,
by paying a small fee called an exit load, in somecases.
Even with close-ended schemes, one can sell
the units on a stock exchange at the prevailing
market price. Besides, some close-ended andinterval schemes allow direct repurchase of units
at NAV related prices from time to time.
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Flexibility
Mutual funds offer a variety of plans, such as
regular investment, regular withdrawal and
dividend reinvestment plans. Depending uponones preferences and convenience, one can
invest or withdraw funds, accordingly.
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Cost Effective
Since mutual funds have a number of investors,
the funds transaction costs, commissions and
other fees get reduced to a considerable extent.Thus, owing to the benefits of larger scale,
mutual funds are comparatively less expensive
than direct investment in the capital markets.
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Well Regulated
Mutual funds in India are regulated and
monitored by the Securities and Exchange Board
of India (SEBI), which strives to protect theinterests of investors. Mutual funds are required
to provide investors with regular information
about their investments, in addition to other
disclosures like specific investments made by thescheme and the proportion of investment in each
asset class.
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Risk associated with Mutual Funds
Mutual funds invest in different securities whichmay be equities or bonds, depending upon the
funds objectives. Accordingly, different schemes
have different risks depending on the portfolio
composition. In general, mutual funds are subjectto the following risks
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Systemic risks
Systemic risks or market risks refer to risks thataffect the entire market and have an impact on
the entire class of assets.
The value of an investment may decline over aperiod of time because of economic changes or
other events that affect the overall market.
Systemic risks include risks related to interest
rates, inflation, exchange rates and politicalevents, etc.
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Non-systemic risks
Non-systemic risks refer to risks associated with investments in
a particular sector or industry or stock.
Sector-specific schemes invest in equities of a particular
industry or sector, owing to which they are subject to higher risks
than other diversified schemes.
For example, tax benefits to a particular sector of the economy
would affect the shares of companies belonging to that sector
and thus, affect the returns of funds investing in that sector
Other factors that have a greater impact on the performance ofa mutual fund include the skill and experience of the fund
manager and the research team, the size of the corpus,
redemption pressures, etc.
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TYPES OF MUTUAL FUNDS SCHEMES IN INDIA
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Types of Mutual Fund Schemes
Mutual funds are classified on the basis oftheir
STRUCTURE
INVESTMENT OBJECTIVE
NATURE
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BY STRUCTURE
OPEN-ENDED SCHEMESAn open-end fund is one that is available for
subscription all through the year.
These do not have a fixed maturity. Investors can conveniently buy and sell units at Net
Asset Value ("NAV") related prices.
The key feature of open-end schemes is liquidity. One can invest in such funds on any working day, during business
hours. Investors can buy or sell units of open-ended schemes directly
from the fund house at NAV related prices.
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CLOSE-ENDED SCHEMES
These schemes have a pre-specified maturityperiod.
One can invest directly in the scheme at the time
of the initial issue.
Depending on the structure of the scheme there
are two exit options available to an investor after
the initial offer period closes.
Investors can transact (buy or sell) the units ofthe scheme on the stock exchanges where they
are listed.
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The market price at the stock exchanges couldvary from the net asset value (NAV) of the
scheme on account of demand and supply
situation, expectations of unitholder and other
market factors.
Alternatively some close-ended schemes provide
an additional option of selling the units directly to
the Mutual Fund through periodic repurchase atthe schemes NAV; however one cannot buy units
and can only sell units during the liquidity
window.
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SEBI Regulations ensure that at least one of thetwo exit routes is provided to the investor.
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INTERVAL SCHEMES
Interval Schemes are that scheme, whichcombines the features of open-ended and close-
ended schemes. The units may be traded on the
stock exchange or may be open for sale or
redemption during pre-determined intervals atNAV related prices.
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BY NATURE
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Equity fund:
These funds invest a maximum part of their corpusinto equities holdings. The structure of the fund may
vary different for different schemes and the fund
managers outlook on different stocks. The Equity
Funds are sub-classified depending upon theirinvestment objective, as follows:
Diversified Equity Funds
Mid-Cap Funds
Sector Specific Funds
Tax Savings Funds (ELSS)
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Equity investments are meant for a longer timehorizon, thus Equity funds rank high on the risk-
return matrix.
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Debt funds:
The objective of these Funds is to invest in debtpapers.
Government authorities, private companies,
banks and financial institutions are some of the
major issuers of debt papers.
By investing in debt instruments, these funds
ensure low risk and provide stable income to the
investors.
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Debt funds are further classified as:
Gilt Funds: Invest their corpus in securities
issued by Government, popularly known as
Government of India debt papers. These Funds
carry zero Default risk but are associated with
Interest Rate risk. These schemes are safer as
they invest in papers backed by Government.
Income Funds: Invest a major portion intovarious debt instruments such as bonds,
corporate debentures and Government securities.
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MIPs: Invests maximum of their total corpus in debtinstruments while they take minimum exposure in
equities. It gets benefit of both equity and debt
market. These scheme ranks slightly high on the
risk-return matrix when compared with other debtschemes.
Short Term Plans (STPs): Meant for investment
horizon for three to six months. These funds
primarily invest in short term papers like Certificate
of Deposits (CDs) and Commercial Papers (CPs).
Some portion of the corpus is also invested in
corporate debentures. 37
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Liquid Funds: Also known as Money MarketSchemes, These funds provides easy liquidity and
preservation of capital.
These schemes invest in short-term instruments like
Treasury Bills, inter-bank call money market, CPs
and CDs.
These funds are meant for short-term cash
management of corporate houses and are meant foran investment horizon of 1day to 3 months.
These schemes rank low on risk-return matrix and
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Balanced funds:
As the name suggest they, are a mix of both
equity and debt funds.
They invest in both equities and fixed incomesecurities, which are in line with pre-defined
investment objective of the scheme.
These schemes aim to provide investors with the
best of both the worlds. Equity part provides
growth and the debt part provides stability in
returns.
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By investment objective:
Growth Schemes : Growth Schemes are alsoknown as equity schemes. The aim of these
schemes is to provide capital appreciation over
medium to long term
Income Schemes:Income Schemes are also
known as debt schemes. The aim of these
schemes is to provide regular and steady income
to investors
Money Market Schemes: Money Market
Schemes aim to provide easy liquidity,
preservation of capital and moderate income.
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These schemes generally invest in safer, short-term instruments, such as treasury bills,
certificates of deposit, commercial paper and
inter-bank call money.
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Other schemes
Tax Saving Schemes
Index Schemes
Sector Specific Schemes
Exchange traded funds
Fixed Maturity Plans
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Tax saving schemes Such schemes are aimed at offering tax rebates to
investors under specific provisions of the Income Tax Act,
1961. For instance, investors of Equity Linked Savings
Schemes (ELSS) and Pension Schemes are applicablefor deduction u/s 88 of the Income Tax Act, 1961.
Index schemes
Such funds strive to mirror the performance of specificmarket indices, such as the BSE SENSEX, CNX Nifty, etc
which are called the base index. Investments in such
funds are made in the same stocks as the base index and
in similar proportion.
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Sector-specific schemes Such funds invest in a specific industry or sector. The
investments could be in a particular industry (Banking,
Pharmaceuticals, Infrastructure, etc) or a group of
industries, or various segments (like A Group shares).
Exchange-traded funds
Such funds are listed and traded on the stock exchange in
a similar manner as stocks. Such funds invest in a basketof stocks and aim at replicating an index (S&P CNX Nifty,
BSE Sensex) or a particular industry (banking, information
technology) or commodity (gold, crude oil, petroleum).
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Tax implications of investing in
mutual funds
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Dividends
Income received from units of a mutual fund
registered with the Securities and Exchange
Board of India is exempt in the hands of the
unit holder.
A debt-oriented mutual fund is liable to pay
income distribution tax of 12.5% and 20% on
the distribution of income to individual /Hindu Undivided Fund and other persons,
respectively.
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In the case of money market mutual fundsand liquid mutual funds (as defined under
SEBI regulations), the income distribution tax
is 25% across all categories of investors
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Capital Gains
Long-term capital gains arising on thetransfer of units of an equity oriented mutual
fund is exempt from income tax, if the
Securities Transaction Tax (STT) is paid on
this transaction i.e., the transfer of such unitsshould be made through a recognised stock
exchange in India.
Equity oriented mutual fund means a fund
where the investible corpus is invested by
way of equity shares in Indian companies to
the extent of more than 65% of the total
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SHORT TERM CAPITAL GAIN
Short-term capital gains arising on such transactionsare taxable at a base rate of 15% (increased by
surcharge as applicable, education cess of 2% and
secondary and higher education cess of 1%).
If a transaction is not covered by STT, the long-termcapital gain tax rate would be 10% without indexation
or 20% with indexation, depending on which the
assessee opts for.
Short-term capital gains on such transactions are
taxable at normal rates
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Taxation
Equity
oriented
Funds
Liquid
funds/Money
Market Funds
Debt
fund/liquid
plus Funds
Short Term
Capital Gain
Tax
15%As per Income
Tax Slab
As per Income
Tax Slab
Long Term
Capital Gain
Tax
Nil
Less of 10%without
indexation or
20% with
indexation
Less of 10%without
indexation or
20% with
indexation
Dividend
DistributionTax
Nil 25%* 12.5%20.0%*
Individuals/HUFAny other
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Budget 2011 increased the dividend distribution tax (DDT) for corporate
investors to 30%, thus companies can not take advantage of the
prevailing tax arbitrage (1st June, 2011 )
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A taxable capital loss (i.e., a transaction onwhich there is a liability to pay tax if the result
were gains instead of loss) can be set-off only
against capital gains. An exempt capital loss
(i.e., a transaction which is exempt from tax if theresult were gains instead of loss) cannot be
set-off against taxable capital gains. A taxable
long-term capital loss can be set-off only against
long-term capital gains. However, a taxable short-term capital loss can be set-off against both
short-term and long-term capital gains
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Tax issues concerning Unit holders
I. Equity Oriented Funds - Tax Treatment of
Investments
A. Tax on income in respect of unitsAs per the section 10(35) of the Act, income
received by investors under the schemes of any
Mutual Fund is exempt from income tax in the
hands of the recipient unit holders.
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B. Dividend Distribution Tax:By virtue of proviso to section 115 (R) (2) of
the Act, equity oriented schemes are exempt from
income distribution tax. As per section 115T of
the Act, equity oriented fund means such fundwhere the investible funds are invested by way of
equity shares in domestic companies (as defined
under the Act) to the extent of more than sixty five
percent of the total proceeds of such fund.
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C. TDS on income of units :As per theprovisions of section 194K and section 196A of
the Act, where any income is credited or paid on
or after 1st April 2003 by a Mutual Fund, no tax is
required to be deducted at source
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D. Tax on capital gainsi) Long Term Capital Gains
As per section 10(38) of the Act, any income arising from
the transfer of a long term capital asset being a unit of an
Equity Oriented Scheme chargeable to securities
transaction tax (STT) shall not form part of total income,
therefore, exempt from Income Tax. As per section 10(38)
of the Act, equity oriented fund means a fund where the
investible funds are invested by way of equity share in
domestic companies to the extent of more than sixty fivepercent of the total proceeds of such fund and which has
been set up under a scheme of a mutual fund specified
under section 10(23D) of the Income Tax Act, 1961.
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ii) Short term capital gainsUnits held for not more than twelve month's
preceding the date of their transfer are short term
capital assets. Capital gains arising from the
transfer of short term capital assets being unit ofan equity oriented scheme which is chargeable to
STT is liable to income tax @ 15% under section
111 A and section 115 AD of the Act. The said
tax rate is increased by surcharge, if applicable.
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iii) Securities Transaction Tax (STT)
As per Chapter VII of Finance (No. 2) Act, 2004 relating to Securities
Transaction Tax (STT), with effect from June 01, 2006, the STT is
payable by the seller at the rate of 0.25% on the sale of unit of an
equity oriented scheme to the Mutual Fund. The STT is collected by
the Mutual Fund at source.
With effect from 01st April 2008: the deduction under section 88E of
the Act has been discontinued, and
the amount of STT paid by the assessee during the year in respect of
taxable securities transactions entered into in the course of business
will be allowed as deduction under section 36 of the Act subject tothe condition that such income from taxable securities transactions is
included in the income computed under the head Profits and Gains
of business or profession.
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80C benefits through ELSS: Under the current tax laws,you can get an annual income tax benefit of up to Rs.
1Lakh if you invest in Equity Linked Savings Schemes,
ELSS. However, the minimum term for these schemes is
3 years and you cannot withdraw your money before that
time
*The education cess of 3% shall be levied on all investors.
*Short Term Capital Gain Tax indicated above is inclusive
of education cess
**Dividend Distribution Taxes indicated above are
inclusive of additional surcharge and cess.
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EXCHANGE TRADED FUNDS (ETFS)
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A security that tracks an index, acommodity or a basket of assets like
an index fund, but trades like a stock
on an exchange.
ETFs experience price changes
throughout the day as they are bought
and sold.
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Exchange Traded Funds (ETFs) represent abasket of securities that is traded on an
exchange, similar to a stock.
Hence, unlike conventional mutual funds, ETFs
are listed on a recognised stock exchange and
their units are directly traded on stock exchange
during the trading hours.
In ETFs, since the trading is largely done overstock exchange, there is minimal interaction
between investors and the fund house.
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ETFs are either actively or passively managed.Actively managed ETFs try to outperform the
benchmark index, whereas passively-managed
ETFs attempt to replicate the performance of a
designated benchmark index.
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Difference Between ETF and Conventional Mutual
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Difference Between ETF and Conventional Mutual
Funds
Mutual funds are traded through fund housewhere as in an ETF, transactions are done
through a broker as buying and selling is done on
the stock exchange.
In conventional mutual funds units can be bought
and redeemed only at the relevant NAV, which is
declared only once at the end of the day.
ETFs can be bought and sold at any time duringmarket hours like a stock.
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ETFs safeguard the interests of long-terminvestors. This is because ETFs are traded on
exchange and fund managers do have to keep
cash in hand in order to meet redemption
pressures
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What Are ETFs?: Creation Process
Investor
Brokerage
account
Cash
ETF
Shares Securities
ETF Authorized
ParticipantsCapital Markets
Creation Units Basket of Securities
ETF Fund Advisor
Cash
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FIXED MATURITY PLANS
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FMPs, as they are popularly known, are theequivalent of a fixed deposit in a bank, with a
caveat.
The maturity amount of a fixed deposit in a bank
is 'guaranteed', but only 'indicated' in the FMP ofa mutual fund.
The regulator does not allow fund companies to
guarantee returns, and hence the 'indicatedreturns' in FMPs.
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Typically, the fund house fixes a 'target amount'for a scheme, which it ties up informally with
borrowers before the scheme opens. Since the
fund house knows the interest rate that it will earn
on its investments, it can provide 'indicativereturns' to investors.
FMPs are debt schemes, where the corpus is
invested in fixed-income securities. The tenure
can be of different maturities, from one month to
three years.
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They are closed-ended in nature, which meansthat once the NFO (new fund offer) closes, the
scheme cannot accept any further investment.
These FMP NFOs are generally open for 2 to 3
days and are marketed to corporate and highnet-worth individuals. Nevertheless, the minimum
investment is usually Rs 5,000 and so a retail
investor can comfortably invest too
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FMPs usually invest in certificate of deposits ,
commercial papers , money market instruments,corporate bonds and sometimes even in bank
fixed deposits.
Depending on the tenure of the FMP, the fundmanager invests in a combination of the above-
mentioned instruments of similar maturity. Say if
the FMP is for a year, then the fund manager
invests in paper maturing in one year.The prevalent yield minus the expense ratio,
which varies from 0.25 to 1 per cent, will be the
indicative return which can be expected from the
FMP. 76
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The expense ratio is mentioned in the offerdocument. The yield can be indicated fairly
accurately because these schemes are open only
for a short while.
The fund received is for a pre-specified tenureand the exit load from this plan is high (usually 1
per cent to 3 per cent, depending on the time of
redemption). So, the fund manager has the liberty
to deploy most of the funds mobilised under the
scheme.
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The actual return can vary slightly, if at all, fromthe indicated return. Against that, a bank fixed
deposit exactly prints the amount which is due to
you on maturity on the FD receipt. However,
FMPs do earn better returns than fixed depositsof similar tenure.
FMPs are classified under the debt scheme
category and enjoy certain tax benefits, such as:
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Dividend in the hands of the investor is tax-free.But the mutual fund has to deduct a dividend
distribution tax of 12.5 per cent in the case of
individuals and Hindu Undivided Families (HUFs),
and 20 per cent in the case of corporate.
Long-term capital gains (investment of more than
a year) enjoy indexation benefit.
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Short-term capital gains are added to the incomeof the investor and taxed as per his/her slab,
whereas the interest on a bank deposit (except
where special 80C approved) is added to the
income of the investor and taxed as per his/herslab.
The results of all these are quite dramatic.
Lets take an example of a 90-day FD yielding 8per cent, compared with an FMP yielding 8 per
cent for an individual investor in the highest tax
bracket.
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BANK FD FMP-
dividendoption
FMP - growth
option
Net yield 8% 8% 8%
Tax 30.90% - 30.90%
DDT - 12.88%Net yield 5.53% 6.97% 5.53%
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Actually, the dividend distribution tax is deducted on the gross yield.
So the return from the dividend option can be 10-20 bps higher.
But for the sake of simplicity, it is calculated here on net yield.
If the tenure of the FMP is more than a year, the growth option gives
a higher yield because of the indexation benefit.
What is indexation benefit?
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What is indexation benefit?
The finance minister has been generous enoughto recognise that inflation erodes the real value of
any investment.
So every year, he comes out with an inflation
index based on the prevailing rate of inflation.
The cost of investment is indexed by multiplying
the index of the year of maturity and divided by
the inflation index prevailing on the year ofinvestment.
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Look at the workings: Note: Cost Inflation Index for FY06-07 is 519. The
assumption is that the CII for FY07-08 is 567 and
for FY08-09 is 592.
Clearly, the post-tax return is superior for an
FMP.
If you have arrived at an indexed cost, then the
long-term capital gain is taxed at 20.6 per centand if you do not opt for the indexed cost, then
the tax is 10.3 per cent.
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Cost of inflation Index
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Cost of inflation Index
FINANCIAL YEAR COST INFLATION INDEX
2003-2004 463
2004-2005 480
2005-2006 497
2006-2007 519
2007-2008 551
2008-2009 592
2009-2010 632
2010-2011 711
2011-12 785
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Indexed Purchase
Price = Purchase Price * (CPI for
current year / CPI for year of
purchase)
Bank Fixed
Deposit 30 Month FMP
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Deposit 30 Month FMP
With Indexation
Without
Indexation
Amount of Investment (Rs.) 10000 10000 10000
Post Expenses Yield (p.a)* 8.30% 8.30% 8.30%
Tenor (in months) 30 30 30
Approx Maturity Amt 12,075 12,075 12,075
Gain 2075 2075 2075
Indexed Cost NA 11,406 NIL
Indexed Gain NA 669 NA
Tax Rate 30.9% 20.6% 10.3%
Tax 641 138 214
Post Tax Gain 1434 1937 1861
Approx Post Tax
Annualised Return 5.74% 7.75% 7.44% 86
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BONDS
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TREASURY CURVE RATES
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TREASURY CURVE RATES
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The yield curve is a description of a line thatconnects the yields on various maturities, ranging
from 3-month Treasury Bill to 30-year Treasury
Bonds
It is tool to help track and predict the overallmovement of interest rates and the near future of
the economy.
A normal, or positive, curve is created when long-term bonds produce higher yields than short-term
bonds.
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Investors generally seek higher rewards tocompensate for the risks involved with investing
money for longer periods of time.
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Typically, a flat curve, when long-term and short-term yields are the same, predicts economic
slowdown.
According to the Federal Reserve Bank of San
Francisco, each of the six recessions since 1970was preceded by a yield curve inversion.
That statistic, however, conveniently leaves out
the two recessions that occurred in the 1950sand 1960s, which were not predicted by an
inverted curve.
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BACK UP SLIDES
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Interbank Call Money Market
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Interbank Call Money Market
A short-term money market, which allows forlarge financial institutions, such as banks, mutual
funds and corporations to borrow and lend money
at interbank rates.
The loans in the call money market are veryshort, usually lasting no longer than a week and
are often used to help banks meet reserve
requirements.
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How is a Mutual Fund NAV Calculated?
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To calculate a Mutual Fund's Net Asset Value or NAV, the value of the total assets of themutual fund is subtracted by its liabilities, and then this amount is divided by the total
number of shares or units in the mutual fund.
Mutual Fund NAV = Total Assets - Liabilities / Total number of shares or units
The assets of a mutual fund would consist of its investments and cash. The liabilities of a
mutual fund include operating expenses.
For example, a mutual fund has assets in stocks and other investments to the value of
Rs100, 000 and liabilities worth Rs 20, 000. Assuming the mutual fund has issued 10, 000
Units, then its NAV would be:
NAV = (100, 000 - 20, 000)/ 10, 000
NAV = 80, 000 / 10, 000
NAV = Rs 8
The NAV or price per share of this mutual fund would be Rs 8.
A Mutual Fund NAV is calculated on a daily basis, after the stocks markets close for the day.
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Mutual Fund NAV after Dividend Payout
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y
A mutual fund pays out dividend to its investorswho have opted for the dividend plan. In such
cases, the NAV of the mutual fund falls according
to the amount of dividend paid.
For example, if the NAV of a mutual fund on 10
July 2010 was Rs 10 and a per unit dividend of
Rs 2 is declared and paid out, then on 11 July
2010, the NAV of the mutual fund would fall toRs8. The cash obtained by the investor can be
reinvested to buy more shares of the mutual fund
at lower value.
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Some investors who seek pure capitalappreciation may opt for an aggressive growth
fund, without dividend payments. The returns
then would be solely based on the mutual fund
NAV appreciation.
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FUND EXPENSES
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Different funds have different expense ratios.However to keep things in check, the Securities &
Exchange Board of India (SEBI) has stipulated an
upper limit that a fund can charge.
The limit stands at 2.50 per cent for equity fundsand 2.25 per cent for debt funds.
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The total expenses of the scheme excluding issue orredemption expenses, whether initially borne by themutual fund or by the asset management company, but
including the investment management and advisory fee
shall be subject to the following limits :-
(i) On the first Rs.100 crores of the average weekly net
assets 2.5%
(ii) On the next Rs.300 crores of the average weekly net
assets 2.25%
(iii) On the next Rs.300 crores of the average weekly netassets 2.0%
(iv) On the balance on the assets 1.75%
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The asset management company may charge the mutual fund with
the following expenses namely:-
(a) initial expenses of launching schemes.
(b) recurring expenses including:-(i) marketing and selling expenses including agents'
commission, if any;
(ii) brokerage and transaction cost;
(iii) registrar services for transfer of units sold or redeemed;
(iv) fees and expenses of trustees;(v) audit fees;
(vi) custodian fees; and
[(vii) costs related to investor communication;
(viii) costs of fund transfer from location to location;
(ix) cost of providing account statements and dividend/redemption cheques and warrants;
(x) insurance premium paid by the fund;
(xi) winding up costs for terminating a fund or a scheme;
(xii) costs of statutory advertisements;][ (xiii) such other costs as may be approved by the Board.]
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EXIT LOAD
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Exit Load varies for different schemes and isgenerally charged as a percentage of NAV. The
Exit load normally varies between 0.25% to 2% of
the redemption value. Some mutual funds
however do not charge any exit load. Suchmutual funds are referred to as 'No Load Funds'.
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At present, my rate is 13.52% (12.5% dividenddistribution tax + 5% surcharge + 3% cess) on
income distributed by debt funds other than liquid
funds. For liquid funds, I am charged at the rate
of 27.04% (25% dividend distribution tax +surcharge and cess).
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Budget 2011 increased the dividend distribution tax (DDT)
for corporate investors to 30%, up from 25% a year back
in case of liquid funds and up from 12.5% in case of all
other debt funds.
This is a significant move as it removes the arbitrage
opportunity that companies had in parking their surplus
cash in MF schemes, especially liquid funds and ultra
short-term funds.
Since I come at a lower rate in case of MF dividends
(25% in case of, say, liquid funds) against tax charged oninterest earned from a savings bank account (where I
come at the rate of 30%), companies found it tax-efficient
to put their excess cash in MFs.
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So far as Dividend Distribution and IncomeDistribution Tax payable u/s.115O and u/s.115R
by companies and Mutual Funds is concerned
the rate of surcharge on tax is reduced from 7.5%
to 5% w.e.f. 1-4-2011.
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Section 115R:
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Particulars Existing rateNew rate
w.e.f. 1-6-2011
(i)
Income distributed to an
individual or HUF by a money
market Mutual Fund or Liquid
Fund
25% 25%
(ii)
Income distributed to any other
person by a money market
Mutual Fund or Liquid Fund
25% 30%
(iii)Income distributed to anindividual or HUF by a Debt
Fund
12.5% 12.5%
(iv)Income distributed to any other
person by a Debt Fund20% 30%
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. The only restriction is that a long-term capital losswill be available for a set-off against a long-term
capital gain only, while a short-term capital loss
can be set off either against a long-term capital
gain or a short-term capital gain.
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What Does Tax Arbitrage Mean?
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The practice of profiting from differences betweenthe way transactions are treated for tax purposes.
The complexity of tax codes often allows for
many incentives which drive individuals to
restructure their transactions in the mostadvantageous way in order to pay the least
amount of tax.
Some forms of tax arbitrage are legal whileothers are illegal.
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Securities Transaction Tax (STT)
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Securities Transaction Tax is a neat and efficient way
of computing tax on profit incurred from the sale ofsecurities, as it virtually nullifies the scope of tax
avoidance.
Securities Transaction Tax is applicable at differentrates on the value of the taxable securities
transaction.
Taxable securities transaction, payable by both the
buyer and the seller, refers to any transaction of
securities entered into in a recognized Stock
Exchange in India
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Definition of Securities
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As per section 2(h) of the Securities Contracts
(Regulation) Act, 1956 (SCRA), Securities
includes to:
Shares, scrips, stocks, bonds, debentures,
debenture stock or other marketable securities ofa like nature in or of any incorporated company or
other body corporate;
Derivative instruments (likeforwards/futures/options on indices, stocks,
commodities etc.)
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Units or any other instrument issued by any
collective investment scheme to the investors in
such schemes;
Security receipt as defined in section 2(zg) of the
Securitisation and Reconstruction of FinancialAssets and Enforcement of Security Interest Act,
2002;
Government securities;
Such other instruments as declared by the
Central Government; and Rights or interest in
securities.
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