Reliance Equity Advantage Fund to be Renamed as Reliance Top 200 Fund

Reliance Mutual Fund has decided to rename Reliance Equity Advantage Fund as Reliance Top 200 Fund with effect from 26 August 2011. Accordingly, the investment objective, benchmark index and asset allocation pattern of the scheme will be altered. 

Investment Objective: The primary investment objective of the scheme is to seek to generate long term capital appreciation by investing in equity and equity related instruments of companies whose market capitalization is within the range of highest and lowest market capitalization of BSE 200 Index. The secondary objective is to generate consistent returns by investing in debt and money market securities. 

Benchmark Index: BSE 200 

Asset Allocation Pattern: The scheme will have a revised asset allocation pattern to invest 65% to 100% of assets in equity and equity related instruments with medium to high risk profile. On the other side it would allocate upto 30% of assets in debt instruments and money market instruments (including investments in securitized debt) with low to medium risk profile. 

Unit holders of the scheme are being provided with an option to exit the scheme at the prevailing NAV without any exit load. The option to exit without payment of exit load will be valid from 27 July 2011 upto 25 August 2011.

Mutual Funds panel for removing expense ratio cap

The committee on mutual funds appointed by SEBI to look into the issues faced by the industry is likely to submit its recommendations to the Board of SEBI when it meets on July 28. 

One of the issues that the committee has addressed pertains to the expense ratio of asset management companies, sources said. The committee, it is gathered, is recommending that the sub-head caps within the expense ratio be done away with. This will provide some room to mutual funds to give better commissions to their agents. 

Expense ratio is how much an investor pays a fund in percentage terms every year for management of his money. This could involve management fees, commissions to agents, fees to registrars and marketing and promotion expenses.

Currently the expense ratio has been capped at 2.5 per cent for equity funds; and there are various sub-categories of expenses which also have their own caps. It is known that the committee is planning to do away with these caps and leave the break up of expense distribution to the discretion of the mutual funds. 

It may be recalled that SEBI had, during the Chairmanship of Mr C B Bhave banned entry loads on mutual funds. A large part of this entry load used to be paid as distributors' commission. After the ban the mutual industry went through a black patch when many distributors stopped selling mutual funds. 

When Mr U K Sinha took over as Chairman at SEBI, he appointed a seven-member committee, chaired by whole time member Mr Prashant Saran to look into the problems of the mutual fund industry. 

Mr Sinha after taking over at SEBI has been often quoted as saying that while mutual fund distributors should be incentivised, the entry load ban will not be lifted. 

In fact one of the first circulars issued by SEBI after he took over related to mutual funds. SEBI in March said that load balances of mutual funds shall be segregated into two accounts – one to reflect the balance as on July 31, 2009 and the other to reflect accretions since August 2009. The first load balance can be used for marketing and selling expenses including distributor/agents' commissions, subject to not more than one third of the balance being used in any financial year. The second account could be used without any restrictions. 

Yet another recommendation of the mutual fund committee is for a one time flat fee of Rs 100 to Rs 125 to be paid by newcomer to a mutual fund.

Growth or dividend option? Let cash flow needs, tax outgo help you decide

While investing in mutual fund schemes, investors can choose from the dividend or growth option. When it comes to fixed income funds, both the options have certain advantages. But there are some factors to be considered before you make your choice.

CASH FLOW NEEDS

The primary criterion for choosing an option is cash flow requirements .

If there is no interim cash flow requirement, the growth option is better; in this option, the returns are reflected in the movement of the NAV. There are also no hassles in investing the interim cash flows. If there is requirement for interim cash flows from the investment , then the dividend option is better. The frequency of the dividends would be as per the requirements of the investor and the availability of the dividend frequency options (monthly, quarterly, etc) in the fund.

The asset management company (AMC) endeavours to maintain the stated dividend frequency, subject to availability of distributable surplus.

TAX TREATMENT

The other relevant parameter is the tax efficiency of the returns being taken home through the dividend and growth options. Dividends are tax-free in the hands of the investor, but there is a dividend distribution tax (DDT) that is deducted by the AMC on behalf of the investor and passed on to the government.

The rate of the DDT in case of liquid funds is 25% (plus surcharge/cess). For non-liquid fixed income funds, there are two rates of DDT: for individual /HUF investors, it is 12.5% (plus surcharge/cess) and for corporate investors, the rate is 20% (plus surcharge/cess). From June 1, the DDT rate for corporate investors has gone up to 30% for all categories of fixed income funds. In the growth option, the gains are taxable in the hands of the investor, ie, there is no distribution tax. As per the current tax laws, the growth option taxation depends on the holding period: returns from mutual fund units held for a period of less than a year are called short-term capital gains (STCG), and from holdings of more than a year are long-term capital gains (LTCG).

STCG is taxable at the slab rates for individuals; most investors nowadays are in the highest tax bracket of 30% (plus cess). In case of LTCG, the investor has the choice of paying the incometax either at 10% (plus cess) without taking the benefit of cost inflation index or at 20% (plus cess) after taking the benefit of cost indexation. As we see from the tax structure , as per the current tax laws, the choice of dividend/growth option should be based on the intended holding period.

For a horizon of less than a year, the dividend option is better as the individual DDT rate of 12.5% (plus surcharge/cess) is lower than the STCG rate of 30% (plus cess). The only exception to this would be an individual who is in the 10% tax slab, for whom the STCG tax rate would be lower, but that would be a rare case. For a horizon of more than a year, the growth option is preferable , as the 10% (without indexation ) rate is lower than the current DDT rates. The investor should opt for the 20% rate only if the net tax incidence (with indexation benefit) is lower than the 10% rate.

EFFECTS OF DTC

So far so good, in that the choice between dividend and growth options is based on cash flow requirements and tax efficiency.

The grey area comes with the proposed Direct Tax Code (DTC), scheduled to be implemented from April 1, 2012. It is a grey area because at this point of time, it is a proposal which is yet to be made into law and may undergo changes by the time it is implemented. As per the proposals, the returns from the dividend option will be clubbed with the income of the investor (ie, there would be no distribution tax) and would be taxable at the slab rates.

In the growth option, there would be no distinction between short-term and long-term holdings as such, but the benefit of indexation would be applicable for a holding period of one year from the end of the financial year in which the asset is acquired . The taxation on the growth option would be as per the slab rates, which means 30% for most investors. Since both dividend and growth options would be taxable at the hands of the investor, there would not be much of a difference in terms of taxation except where the intended holding period would be enough to be eligible for indexation benefit. In that case, the growth option would be more tax efficient.

source: Economic Times

FAQ on Exemption from filing of Income-tax Return for Salaried having total income not exceeding Rs. 5,00,000

FAQ ON EXEMPTION FROM FILING OF INCOME-TAX RETURN

What is the purpose of this notification and who are proposed to be exempted from the requirement of filing of the return?

1. The primary objective of this notification is to exempt those salaried taxpayers from the requirement of filing income-tax returns, who have (i) total income not exceeding Rs. 5,00,000, and (ii) the total income consists only of income chargeable to income-tax under the head ‘Salaries’ and interest income from savings bank account if such interest income does not exceed Rs. 10,000.

Further, such salaried taxpayer would be eligible for exemption from filing a return of income only if tax liability has been discharged by the employer by way of Tax Deducted at Source (TDS) and the deposit of the same to the credit of the Central Government. For this purpose, taxpayer has to intimate his interest income to the employer during the course of the year.

For Example – 

  (i)  If an individual has salary income of Rs. 4,90,000 and interest income from savings bank account not exceeding Rs.10,000 (which has been reported to the employer and tax has been deducted thereon), then the taxpayer would be exempt from the requirement of filing income-tax returns since the total income from both the above sources does not exceed five lakh rupees.

 (ii)  A taxpayer having salary income of Rs. 4,98,000 and interest income from savings bank account of Rs. 2,000 (which has been reported to the employer and tax has been deducted thereon), would also be eligible under this Scheme.

(iii)  A taxpayer having salary income up to Rs. 5,00,000 and nil interest income would also be eligible under this Scheme.

(iv)  A taxpayer having salary income of Rs.5,50,000, interest income from savings bank account of Rs. 8,000(which has been reported to the employer and tax has been deducted thereon), and who has claimed deduction of Rs. 70,000 under section 80C (on account of certain payments/investments/savings) would also be eligible under the Scheme.

 (v)  A taxpayer having salary income of Rs. 6,10,000, interest income from savings bank account of Rs. 10,000 (which has been reported to the employer and tax has been deducted thereon), and who has claimed deduction of Rs. 1,00,000 under section 80C (on account of certain payments/investments/savings), a deduction of Rs. 20,000 under 80CCF (Infrastructure Bonds) and a further deduction of Rs. 15,000 under section 80D (Health Insurance Premium) would also be eligible under the Scheme.

Whether a salaried taxpayer having total income of less than Rs. 5,00,000 and claiming a refund of Rs. 3,000 would be eligible under this Scheme

2. No. The taxpayer has to file a return of income for making a claim of refund.

Is having a valid PAN a precondition for being covered by the notification?

3. Yes. The notification clearly specifies that the individual has to report his PAN to the employer. Hence having a valid PAN is a precondition for falling within the ambit of the notification.

Can an individual who is getting income under the head “salaries” from more than one employer take benefit of the notification?

4. No. A salaried taxpayer who has earned income from more than one employer during the financial year is not covered under this Scheme.

Whether this notification would also cover taxpayers having ‘loss from house property’, which are often reported by the employees to the employer.

5. No. Under the existing procedure, DDO/employer can give credit to the employee for a claim for loss under the head “income from house property” under section 24 made by the employee. As a result, a salaried employee’s total income may reduce to less than Rs. 5,00,000 as loss from the head “income from house property” would have been set-off against salary income. Such a taxpayer is not exempted from filing his return of income as the notification exempts only cases where the total income is under the head “salary” and from savings bank account (income from other sources) not in excess of Rs. 10,000. If the taxpayer has any loss under the head “income from house property”, he will not be eligible for exemption from filing a return of income.

Does savings bank account include other banking accounts like fixed deposits or recurring deposits accounts?

6. No. The benefit of the notification is available to taxpayers whose interest income comprises of interest earned on savings bank account ONLY.

Circular No. 8/2010, dated 13-12-2010 which is applicable for Assessment Year 2011-12 stipulates that the Drawing and Disbursing Officer (DDO)/Employer while deducting TDS from salary of an employee cannot allow deduction u/s 80G except donations made to the Prime Minister’s Relief Fund, the Chief Minister’s Relief Fund or the Lt. Governor’s Relief Fund. Whether the notification would cover only these cases?

7. Yes. An individual cannot avail the exemption under this notification if the claim of deduction for donations under section 80G is for donations other than those mentioned in Circular No. 8/2010. A taxpayer has to file a return of income for making a claim in respect of claim of deduction under section 80G for such donations (not specified in Circular No. 8/2010).

Will a salaried individual having agricultural income, which is exempt from tax, be covered within the ambit of the notification?

8. A salaried individual with agricultural income exceeding five thousand rupees shall be out of the ambit of the notification. A return will have to be filed in such a case, even if other conditions of the notification are satisfied as the agricultural income (of more than Rs. 5,000) has to be included, for rate purposes, in the total income.

Did you know? Overseas Investments by resident Individuals

When constructing a portfolio, most investors think of diversification across assets to spread the risk. Another way to do this is to diversify across geography and the Reserve Bank of India’s (RBI) Liberalised Remittance Scheme allows Indian investors to invest abroad. 

How much can you invest?

If you are an Indian resident, you can remit or make purchases overseas up to $200,000 (Rs. 89.20 lakh) every financial year. You are not required to repatriate any earnings generated out of investments even if it takes your total investment limit above $200,000. In other words, only the principal you invest is subject to this limit.

The limit is in addition to any amount that you may have carried overseas while travelling, or for studies and medical treatment, but it includes any amount sent overseas as a gift or donation. 

There is no limit on the frequency of transactions.

Where can you invest

You can buy and hold immovable property, shares or fixed-income instruments outside India without RBI’s prior approval. You can also invest in mutual fund units and exchange-traded funds. 

Where you can’t

What is not permitted is buying and selling of foreign currency convertible bonds issued by Indian companies and foreign exchange trading. The regulation does not allow margin trades; you can buy securities only if there is enough money in your trading account. So you can’t trade in futures and options or short sell a security.

Other limitations

Under this scheme, you can’t invest in Bhutan, Nepal, Mauritius or Pakistan. You also can’t make remittances directly or indirectly to countries identified, from time to time, by the Financial Action Task Force as “non co-operative countries and territories”.

Investing process

Individuals can open and maintain foreign currency accounts with banks outside India for carrying out transactions; you can even link them to your overseas trading account. Your broker can help open the trading account. You start with completing your know-your-client formalities and fill up an account opening form for an overseas trading account. Your broker will then contact the overseas broker partner along with your documentation. The foreign partner will then send account details where the money needs to be sent. 

Money is usually sent through a wire transfer, which takes about three-four days. So ensure you have sufficient money in your account if you are investing in markets abroad.

Affluent investors flock to structured mutual fund debt schemes promising higher returns

Structured mutual fund debt schemes that promise to fetch higher returns than plain-vanilla fixed income products are finding many takers among affluent investors and companies nowadays.

These schemes simultaneously invest in banks' one-year certificate of deposits (CD) and high-yield corporate bonds with 15- to 18-month maturity to gain the edge over basic debt products. Fund managers of these schemes, as part of this strategy, lock in a significant portion - about 70%- of the investment portfolio in one-year CDs and the remaining in corporate bonds, including non-convertible debentures.

In this strategy, the CD investments help the fund manager lock-in a higher yield similar to a fixed maturity plan, while the corporate bonds drive the additional returns. At current rates, the investment in one-year CDs could yield as high as 10%. The year when the CD matures, the portion invested in corporate bonds, with 15-18-month maturity, would still carry a residual maturity of 3-5 months.

This is where the fund managers look to cash in. Yields on corporate bonds tend to fall (and prices rise) as the securities near maturity; bond prices and yields move in opposite direction. As bond prices rise, fund managers redeem them, enabling them to gain from the upsides.

"Investors should ideally have one year investment horizon for these schemes. This strategy over one year generally cannot go negative even in the worst case scenario," said Sunil Jhaveri, chairman of MSJ Capital , a firm specialising in fund research and advisory.

"Investors have been tired of taking interest rate and duration calls on debt schemes. Products like FMPs or bank fixed deposits are good, but investors lose out on liquidity and prospects of capital gains."

Templeton India Short Term Plan, Pramerica Treasury Advantage Fund and BNP Paribas Bond Fund have adopted this strategy. Investors hope to pocket 10.5-11.25% returns on such structured portfolios.

"Structured short-term open-ended debt funds are for investors who want to gain from higher short-term rates marked at different (type of) debt papers and tenures," says Mahendra Jajoo , CIO, fixed income, Pramerica Mutual Fund .

"Such type of funds are open-ended in nature. They allow investors the flexibility to restructure investments in the wake of direct tax code roll-out next year," Jajoo said.

The government is likely to take away indexation tax benefits from investors under the new DTC rules. Under the current tax regime, if investors buy a 370-day FMP in March, 2011, s/he is eligible to claim benefits of inflation for two years before calculating the capital gains tax liability.

The fund is structured on the premise that short-term rates will decline in a year's time. In the event of an inverted yield curve (that is when long-term debt instruments have a lower yield than short term debt instruments of the same credit quality), returns on these funds could fall marginally.

Fund managers claim that they have a back-up plan if the existing strategy for this scheme goes wrong. "We'll be able to realign even if our call on interest rates go a bit out of place. In case the rates go up in the interim, we'll replace the existing constant portfolio with higher-yielding securities. This, in a way, will enhance portfolios returns after one year," Jajoo said.

Interest on Post Office savings account taxable from current fiscal

The government has decided to levy tax on the interest obtained on Post Office savings schemes from the current financial year.  The Central Board of Direct Taxes ( CBDT )) has brought out a notification in this regard recently, which stipulates that any interest earned beyond Rs 3,500 (in case of individual accounts) and Rs 7,000 (in case of joint accounts) will be taxable from the running fiscal.

The CBDT– which is the administrative authority of the Income Tax Department– has issued the notification to all the tax collection ranges across the country for implementation. 

Taxpayers will have to reflect this investment on their income tax returns.

“Taxpayers who now invest in the post office saving accounts schemes will now have to show the interest earned on this scheme while filing their income tax returns. Interest upto Rs 3,500, in case of single accounts and and Rs 7,000 in case of joint accounts, is exempted,” a senior I-T official said.

The Assessing Officer (AO) will compute the tax on the interest earned, beyond the exemption limit, accordingly, he said.

The current interest rates for Post Office savings deposits is 3.5 per cent per annum.

The minimum investment limit in this scheme is Rs 50 while the maximum limit is Rs one lakh for an individual account and Rs 2 lakh in case of a joint account.

Mutual funds may benefit from long-term money

The finance ministry’s guidelines allowing foreign individual investors to invest in Indian mutual fund schemes should be music to the ears of the industry. Fund-starved since the entry load ban, the industry would look to tap international investors aggressively.

The finance ministry has capped the cumulative investment limit to $10 billion or Rs 45,000 crore. This will be reviewed after six months. The Securities and Exchange Board of India (Sebi) will notify the final guidelines by August 1.

As on May 31, the mutual fund industry’s total assets under management stood at Rs 731,448 crore. The entry of foreign investors is likely to make the market more vibrant. 

The advantages are obvious. According to market experts, internationally, foreign retail investors hold mutual funds in their country for an average of five years. In comparison, Indian retail investors hold it for only 18-24 months. In addition, they invest larger sums. This implies more money as well as stable money. This, in turn, could increase the depth of the market.

The reverse is also true. Today, foreign institutional investors dominate the Indian equities market. Their inflows and outflows impact the benchmark indices substantially. In fact, they more or less decide the market sentiment. Since January, they have sold net equity (according to data with the exchanges) worth Rs 12,049 crore. This has dragged the markets down by more than 10 per cent.

One fear experts have is that any change in the sentiment can lead to large outflows as well, leading to redemption pressures on the scheme. This could hurt domestic investors as the net asset value of the scheme will suffer.

The new class of investors, called qualified foreign investors (QFI), will be able to invest through the depository participant route as well as the unit confirmation receipt system, which will involve custodians. QFIs can be individuals and bodies, including pension funds. Though industry players are rather upbeat about the announcement, they say they are awaiting final guidelines from Sebi regarding the same. Fund houses, too, will have to gear up to attract foreign retail investors.

While Sebi guidelines are awaited, it would be interesting to see if the market regulator separates schemes for foreign investors. For instance, even as a fund house has the same scheme today, collections from retail and institutions are kept separately. That is, ICICI Prudential Indo Asia Equity has a separate institutional and retail scheme. The question is, would foreign retail investors be allowed to invest in the Indian retail scheme or a third variant would be made available to them? Experts say this move is more beneficial for investors from smaller countries. In bigger countries, investors have the option to invest in the country through India-dedicated funds.