Best time to buy is NOW---I

“Far more money is lost while waiting for a reaction, rather than in the reaction itself.”

Retail investors are comfortable investing when there is peace prosperity all round and then complain about low returns. However, it has been time and again proved that investments made during the bad times are the best investments.

Warren buffet is not what he is today because he invested in tranquil times. He deploys his cash when markets are bleeding.

Indian equity market has been in existence only for a short time now as compared to that of the USA.

We believe that if we are able to prove that good investments are those that are made in bad times in context of United States, then it might as well hold true for the Indian equity markets.

2014 has been unnerving. Every day there’s a worrisome headline coming out of Russia, Iraq, and Libya, Gaza Strip or any other of the world’s hottest geopolitical hotspots.

So naturally the worried investors will ask: - Kya kare? FD kar le?

Warren Buffet would probably recommend taking a step back, reflecting on history and then looking to the future.

A peep into the past: -

• During the great depression, the Dow Jones hit its low of 41 on 8^th. July, 1932. Economic conditions though kept deteriorating until Roosevelt took office in March 1933. By that time market had already gained 30%.
• During the early days of World War II, when things were not good for United States, market hit bottom in April 1942—well before fortunes of Allied forces turned favourable.
• Again the best time to buy stocks in early 1980s was when inflation was high and the economy was down.

In other words bad news is investors’ friend. It lets you buy a slice of the economy’s future at a marked down price.

Over the long term, the stock market news will be good. In the 20th.century, United States endured two world wars, faced the great depression, expensive military conflicts, dozen or so recessions, and financial panics, oil shocks, a flu epidemic. Yet the Dow rose from 66 to 11497(between years 1932 to 2000)

None of the above catastrophic events made a slightest dent in Ben Graham’s investment principles. Political and economic forecasts, business channels, can prove an expensive distraction for investors.

Could Buffet have clocked an annual compounded growth of 19.7% in its book value since 1962 (compared to 9.8% of S&P 500 with dividends) had he deferred or altered deployment of investments in capital market?  Warren Buffet has gone on record saying that “we have usually made our best purchases when apprehensions about some macro event were at its peak. Fear is the friend of the fundamentalist.”

Essentially Buffet is saying 2 things:-

1.       Market will weather crises no matter how bad they are.

2.       Stop worrying about the direction of the markets. Irrespective of the direction, prices will likely be higher for patient investor.

Debt Funds & Bank deposits---What now?

The Finance Bill (2) 2014-15 was passed by the Lok Sabha on July 25, 2014.  There has been an amendment that impacts debt mutual fund investors. Non-equity oriented mutual funds, which were redeemed in the period April 1 to July 10, 2014 will be eligible for tax concessions available before the budget was announced.

Interpretation

1. All redemptions, STP, SWP and switches made from FMPs, debt funds, MIPs, gold funds and ETFs and international funds, before July 10, 2014 will enjoy the benefits that existed earlier. The holding period to classify gains as long term will be 12 months, and taxation at 10% before indexation will be available for these transactions

2. Any of the transactions as above, made after July 10, 2014 will be subject to the new rules. The holding period for treatment as long-term capital gains will be 36 months. These will be taxed at 20% after indexation. Any gains for holding periods less than that will be treated as short term capital gains, and taxed at the marginal rate applicable to the investor.

Implications

1. Capital gains accrue on sale of an asset. Therefore the new rules will apply at the time of redemption of units. There is no concession on purchases made before July 10, 2014. FMPs with maturity less than 3 years and non-equity oriented funds irrespective of when they were bought, will be subject to the new rules if they are sold within 3 years, after July 10, 2014.

2. Mutual fund investors can approve changes to the fundamental attributes of a scheme. Mutual funds are now sending investors such consent letters, to extend the maturity of shorter term FMPs to a period of 36 months plus 1 day.  Investors, who do not sign and return such consent letters, will receive the redemption of units on the original maturity date.

3. Investors can consent to a change in scheme features such as applicability of exit load, extension of maturity date, or change in the type of fund from closed end to open ended.

4. Investors whose marginal rate of tax is nil are not impacted by this change. Retired investors, whose income falls below the exempt limit for taxation, have a marginal rate of taxation of ‘nil’.  Therefore such investors are free to redeem, switch or continue with their SWP or STP as before.

5. Investors who have set up SWP or STP from their debt mutual funds will be impacted, but not as much as feared. Each withdrawal will be subject to tax, based on the first-in-first-out principle. Until the time difference between the investment and withdrawal is more than 36 months, they will be subject to short-term capital gains tax.  But SWP or STP or redemption from a growth option will include capital and income (recall that NAV represents both). Therefore the impact will be far lesser than the tax impact on interest from bank deposit

This difference is because the entire bank interest earned is treated as interest income, but a large part of redemption of the mutual fund is treated as withdrawal of capital invested. Only the gain is subject to tax in a mutual fund, whereas the entire interest income from a bank deposit is subject to tax.  Unless the investor redeems the entire amount invested, as may be the case in an FMP, the tax treatment as capital gains (short or long) will work in favour of investments in mutual funds. 

Date	Investment Value	NAV	SWP/STP	Balance Units	Capital Gains	Tax @ 30%
01/04/2014	3000000.00	10.000	0	300000	0	0
01/05/2014	3024999.00	10.083	300000	270247.92	2479.240	743.77
01/06/2014	2747706.42	10.167	300000	240741.56	4936.413	1480.92
01/07/2014	2468103.15	10.252	300000	211479.366	7376.424	2212.927
01/08/2014	2186169.96	10.338	300000	182458.836	9794.705	2938.412
01/09/2014	1901887.41	10.424	300000	153678.136	12193.00	3657.90
01/10/2014	1615235.94	10.511	300000	125135.284	14571.48	4371.44
01/11/2014	1326195.80	10.598	300000	96828.314	16930.30	5079.09
01/12/2014	1034747.09	10.686	300000	68755.276	19269.26	5780.89
01/01/2015	740869.74	10.775	300000	40914.238	21589.62	6476.885
01/02/2015	444543.51	10.865	300000	13303.281	23890.44	7167.13
01/03/2015	145747.99	10.956	145747.99		12715.17	3814.55
TOTAL WITHDRAWAL			3145747.99
CAPITAL GAINS ON WITHDRAWAL			43724.40			43724.40

This is a bit more detailed and assumes a 0.0833% return per month (10%/12 months) and the increase in NAV reflects that. The SWP is constant, until it falls below the value of Rs.3 lakh and is fully redeemed. The result will not alter unless the SWP is extended beyond 36 months. The investment value is balance units times NAV; balance units is after reducing units amounting to (STP amount/NAV); and capital gains are redemption value less cost of redeemed units.  

When one invests Rs. 30 lakh in a debt fund (first line) and begins an STP, the withdrawal does not get fully taxed, as is the case with a bank deposit. That is because each withdrawal has one portion as capital and one portion as income. Only a part of it is capital gain, and will be taxed.  Recall that I also wrote that taxation will be on first in first out basis. This means, as the investor draws money over time, the cost remains Rs. 10 per unit, but as the NAV grows the gain grows.  The sum total of capital gains tax, when the entire amount is withdrawn (last row) is the same as if the total of invested amount plus gain was withdrawn in one lump sum.  The small amounts of capital gains tax will grow, and add up, such that the gains from SWP/STP equal the gain from a lump sum income as in a bank deposit. There is no real tax advantage in a debt fund, if the withdrawal is before 36 months.

  

To those that still refuse to give up, there are two options:

1. If the first SWP is after a lapse of a period of 36 months, the indexation benefit will kick in.

2. If the investor does not redeem the entire amount, and if the SWPs spill over into a period   greater than 36 months, there will be a benefit of lower taxes for those SWPs

The summary therefore is, for all redemptions from a debt fund (SWP, STP, switch, maturity) which happen before a period of 36 months, the amount of tax an investor will pay is the marginal rate applicable to the investor. 

It is time to give up the tax arbitrage and focus on the real merit. The access to debt markets, the lower risk of a portfolio, the lower cost compared to a high spread of other intermediaries, the benefit of total return from marking to market, the flexibility of easy investment and withdrawal, and the professional management of credit and interest rate risks are all significant merits to invest in a debt fund. 

(Courtesy: - www.ciel.co.in)

YOU can make or break your Retirement

Retirement is one such inevitability which is seldom systematically planned. More often than not, it is left either to

1. luck—we’ll manage somehow; or to
2. hope —children will take care.

  

Retirement planning is nothing but working out the numbers to figure out how much I need to accumulate over n years in order to live X amount of years at Y rupees per year. Too many probable to work out.

It is human nature to postpone decisions involving uncertainty on to a future date—retirement being one of it.   Postponing the planning only reduces the kitty. For example a monthly sip of Rs. 5000/-for 25 years @ 10% CAGR will result in a corpus of roughly Rs. 66 lacs. A delay of just 5 years will yield a corpus of only Rs. 38 lacs—a reduction of whopping 40%.

Have you ever wondered what is it that can make or break your retirement?

The answer strangely enough is YOU--

•          Your thinking; and
•          Your actions

  

YOUR THINKING

Your thoughts lead to actions. Factors like too much information flow, peer pressure, atmosphere that we live in etc. shape our thought processes.

• Market levels rather than fundamentals guide your investments decisions. 

It is said and proved time & again that best investments are those that are made in bad times. Unfortunately, it doesn't so happen due to various factors like too much negative news flow in pink papers & business channels etc. Investments invariably happen during the bullish phase as is brought out by level of inflows. For example the mutual fund industry mopped up roughly Rs. 22,000 crores during the bullish fervor of 2001 while the collections during the bearish phase of 2003 were only Rs. 118 crores.

• Affinity to fixed income products 

Have you ever realized that by investing in fixed income products, you are getting poorer with every passing day? Inflation and taxation eat away a big chunk of your interest. According to a study Rs. 1 lac invested in a bank fixed deposit in 1979-1980 will be worth only Rs.1,07,452/-in 2013-2014(adjusting for inflation). Annualized return of bank FD during this period was 8.41%, while annualized inflation during the same period was 7.57%. So effectively an investor made only 0.84% annualized return---subject to tax. On the other hand Rs. 1,00,000 invested in Sensex would have been worth a whopping Rs.2,23,86,000—annualized return of 16.70%--TAX FREE. It has been wisely commented that “remaining fixed will not get you anywhere”.

  

YOUR ACTIONS

• Putting loved ones at risk 

Recently we witnessed an operations executive at a leading Mutual Fund buy a Rs. 2 lac endowment policy for his daughter. This person and many like him still believe in buying a children plan from an insurance company for securing their child’s future—little realizing that it is they who are their child’s future. Despite increased awareness about financial literacy, term plans are still considered as wasteful expenditure.

• Avoiding ELSS as tax saving instruments:- 

Section 80C provides for and deduction of Rs. 1 lac per year from the taxable income. We have observed that this limit of Rs. 1 lac is exhausted preferably through PPF (for non-salaried assesses). The lure of 8% tax free interest is too powerful to ignore. Compare this with the return that ELSS funds have given:-

	Inception date	Amount invested	Value of Rs. 1 lac (as on 25/07/2014)	Value of PPF deposit
Axis Long Term Equity fund	Dec-2009	1,00,000	2,39,527.00	1,52,730
Birla Tax Relief’96	March 1996	1,00,000	78,39,830(*)	4,59,333
Franklin India Tax shield	April 1999	1,00,000	33,35,657	3,56,265
HDFC Tax Saver	March 1996	1,00,000	35,80,590	4,59,333
Reliance Tax Saver	Sept 2005	1,00,000	3,84,882	2,14,320
SBI magnum tax gain	March 1993	1,00,000	9,63,046	5,92,219

                   (*) as on 30/06/2014

• Short term outlook for investments 

We as investors are obsessed with immediate returns to qualify as good investment. Domestic investors have been cashing out their holdings at every rise while FIIs have been steadily increasing their stake in the Indian capital market. For instance, FIIs owned roughly 13% of the stocks as on 31/03/2003. The said figure stood at 21% as on 31/03/2013. Does this mean that foreigners are more confident about our market than us Indians?

Alternatively, consider this:-Rs. 1 lac invested in Reliance Growth Fund at its inception in October 1995 is now worth Rs. 65 lacs—an annualized growth of 25%. All you had to do was buy right and sit tight—through all the wars, famines and other upheavals in the Indian economy. How many investors have you heard of making such a killing on the stock market?

In conclusion we would only say that returns from equity are certain. It’s only the timing that is uncertain. All you've got to give is time and shut out the noise. After all, to make equities your 2nd. earning member of your family, time is essence.