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International funds – Invest or Not to?



The recent changes in the tax structure, along with the expected economic recovery and stock market boom, have made the international funds lose their appeal.

 

Under the Indian income tax rules, international equity funds are categorised as non-equity funds. Consequently, they also took a hit when finance minister removed the option of 10% tax on capital gains before indexation. Now, they will be uniformly taxed at 20% with indexation benefits. Moreover, the holding period for such funds has gone up from one year to three years for the gains to be qualified as long term in nature. While this change may not impact the long-term investors (with a 3-5 year holding period), it will affect the active investors who alter their international fund allocation based on a medium-term review.

Given the changed landscape, should the Indian investors continue to bet on international funds?

In addition to the changes in tax structure, the expected recovery in the Indian economy, reflected in the booming stock market, also makes international funds less attractive.

I prefer Indian equity over international equity now. The underperformance of international funds compared to domestic funds is another reason why they might not be the best investment option. Though some international funds had generated decent returns a year ago, it was primarily due to the sudden depreciation in the Indian rupee. With a recovering economy and stable domestic capital markets, the probability of currency depreciation is remote.
Diversification

Still, you should not avoid the international funds entirely and can opt for them for specific reasons. Geographical diversification is one of them. It makes sense to keep a small portion, say, 5­10% of your equity allocation, outside the country. Those investing in international funds with a view to diversify their portfolios should consider developed markets, not other emerging markets, say experts. "Developed markets have a lower correlation with the Indian equity market compared to other emerging markets

 ICICI Prudential US Bluechip fund, Franklin US Opportunities fund and Motilal Oswal Nasdaq 100 ETF are some of the International schemes worth considering. The US market did well last year, but it may not be the case this year. So, don't try to extrapolate future returns.

For select investors Unless you have a decent sized portfolio of domestic equities, it is advisable not to diversify, and small retail investors can skip international funds altogether. As of now, resident individuals can remit up to $0.125 million per financial year for investments outside the country. Since investments in international funds do not fall under this RBI restriction, they offer a good opportunity to high net worth individuals (HNIs) who want to park a bigger sum abroad. It is important to make sure that your risk profile suits such an investment. International funds are suitable only for investors with aggressive or moderately aggressive risk profiles. International funds are an HNI product because in addition to the market risk, you are adding the currency and country risk also.

The options

We need international funds that are more diversified rather than country-specific funds. Currently, most international funds focus on a particular theme or country.

Among these, the funds focused on global commodities and China hold greater promise than their peers. For commodities, the worst is over. Having come close to production cost, the commodity prices have started bouncing back. Most base metal prices have gained 10-20% in the past three months. Global commodity prices are expected to move up further because global growth in 2015 will be better than 2014. A withdrawal of liquidity by the US Federal Reserve poses a threat to this commodity rally, but the easing by the EU and Japan should balance this. Since the Indian stock market will be negatively impacted if there is a flare-up in the international commodity prices, these funds will also act as a good hedge against inflation.

 

The Chinese market has not been doing too well in the past few years. There are also worries about a possible `crash landing' due to a very high corporate debt. However, this means that investors get a good entry point.

"We are positive on China as the valuations remain attractive, significantly below their historical average.

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

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Best Performing Mutual Funds

1. Largecap Funds Invest Online
1. DSP BlackRock Top 100 Fund
2. ICICI Prudential Focused Blue Chip Fund
3. Franklin India Bluechip
4. ICICI Prudential Top 100 Fund

B. Large and Midcap Funds Invest Online

1. ICICI Prudential Dynamic Plan
2. HDFC Top 200 Fund
3. UTI Dividend Yield Fund
4. Birla Sun Life Front Line Equity Fund
5. Franklin India Prima

C. Mid and SmallCap Funds Invest Online

1. Reliance Equity Opportunities Fund
2. DSP BlackRock Small & Midcap Fund
3. Sundaram Select Midcap
4. IDFC Premier Equity Fund
5. Birla Sun Life Dividend Yield Plus
6. SBI Emerging Businesses Fund
7. HDFC Mid-Cap Opportunities Fund
8. ICICI Prudential Discovery Fund

D. Small and MicroCap Funds Invest Online

1. DSP BlackRock MicroCap Fund
2. Franklin India Smaller Companies

E. Sector Funds Invest Online

1. Reliance Banking Fund
2. Reliance Banking Fund
3. ICICI Prudential Banking and Financial Services Fund

F. Tax Saver Mutual Funds Invest Online

1. ICICI Prudential Tax Plan

2. HDFC Taxsaver

3. DSP BlackRock Tax Saver Fund
4. Reliance Tax Saver (ELSS) Fund

G. Gold Mutual Funds Invest Online

1. Relaince Gold Savings Fund
2. ICICI Prudential Regular Gold Savings Fund
3. HDFC Gold Fund
4. Birla Sun Life Gold

H. International funds Invest Online

1. Birla Sun Life International Equity Plan A

2. DSP BlackRock US Flexible Equity

3. FT India Feeder Franklin US Opportunities

4. ICICI Prudential US Bluechip Equity

5. Motilal Oswal MOSt Shares NASDAQ-100 ETF

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3-year FMPs still more tax efficient than FDs





The budget has removed the tax advantage enjoyed by short-term FMPs but the 3-year plans continue to be more tax efficient than fixed deposits

 

After the budget changed the rules for non-equity mutual funds, several fund houses junked their plans to launch one and two-year FMPs. Some even returned to investors the money collected during recently closed NFOs of one year schemes. These have now been replaced by 3-year FMPs on the market shelves. At least seven 3-year FMPs are currently on offer and more are in the pipeline.

Experts say that given the high bond yields, one can expect a pre-tax yield of over 9% from these FMPs. Given that you can claim indexation benefit on these schemes after three years, the tax will be significantly lower compared to what is payable on the interest earned on fixed deposits. The budget killed 1-2 year FMPs but 3-year FMPs still have a significant tax advantage over fixed deposits

The interest on fixed deposits is fully taxable. It is added to the income of the investor and taxed as normal income. For those with a taxable income of over rs 10 lakh a year, the tax is 30%. In stark comparison, the effective tax on the gains from a 3-year FMP is less than 4% if you assume a modest inflation of 8% (see table).

Poor on liquidity

Though FMPs can give higher post-tax returns, they don't score very well on the liquidity front. They are closed-ended schemes and the fund house is not under any obligation to redeem the units before the maturity date. However, mutual funds do offer a small exit window to investors who want to redeem before maturity. FMPs are listed on the stocks exchanges and one can sell his investments to anyone willing to buy it. But this exit route is only a theoretical possibility. In reality, there are hardly any FMPs traded on the exchanges. According to Value Research, during 2013, only eight of the 700 FMPs available in the market were traded on the BSE on 20 days. This year has been better but the volumes rarely cross a few hundred FMP transactions in a day. The scanty trading is not the only problem. The price offered by buyers is usually lower than the NAV of the scheme. If you need the money urgently, you will have to take a loss and sell at a discount. So, be ready to hold for the full term when you invest in an FMP because there is no way you can exit before maturity.

On the other hand, an increasing number of banks is not levying any penalties on premature withdrawal of fixed deposits. The State Bank of India, for instance, does not charge any penalty on premature withdrawals from short-term deposits of Rs 15 lakh and above after seven days. In cases of tenure of more than one year, there is a small penalty. The deposit earns 0.5% below the rate applicable for the period the money remained with the bank or 0.5% below the contracted rate, whichever is lower.

Experts say this makes bank FDs a better proposition for those in the lower tax brackets. The tax on FMPs will only be marginally lower and not make a significant difference for someone whose earns less than Rs 5 lakh a year. Even though the tax will be higher on FDs, they will offer greater liquidity to the investor.

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

Leave a missed Call on 94 8300 8300

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Download Mutual Any Fund Application Forms

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Best Performing Mutual Funds

1. Largecap Funds Invest Online
1. DSP BlackRock Top 100 Fund
2. ICICI Prudential Focused Blue Chip Fund
3. Franklin India Bluechip
4. ICICI Prudential Top 100 Fund

B. Large and Midcap Funds Invest Online

1. ICICI Prudential Dynamic Plan
2. HDFC Top 200 Fund
3. UTI Dividend Yield Fund
4. Birla Sun Life Front Line Equity Fund
5. Franklin India Prima

C. Mid and SmallCap Funds Invest Online

1. Reliance Equity Opportunities Fund
2. DSP BlackRock Small & Midcap Fund
3. Sundaram Select Midcap
4. IDFC Premier Equity Fund
5. Birla Sun Life Dividend Yield Plus
6. SBI Emerging Businesses Fund
7. HDFC Mid-Cap Opportunities Fund
8. ICICI Prudential Discovery Fund

D. Small and MicroCap Funds Invest Online

1. DSP BlackRock MicroCap Fund
2. Franklin India Smaller Companies

E. Sector Funds Invest Online

1. Reliance Banking Fund
2. Reliance Banking Fund
3. ICICI Prudential Banking and Financial Services Fund

F. Tax Saver Mutual Funds Invest Online

1. ICICI Prudential Tax Plan

2. HDFC Taxsaver

3. DSP BlackRock Tax Saver Fund
4. Reliance Tax Saver (ELSS) Fund

G. Gold Mutual Funds Invest Online

1. Relaince Gold Savings Fund
2. ICICI Prudential Regular Gold Savings Fund
3. HDFC Gold Fund
4. Birla Sun Life Gold

H. International funds Invest Online

1. Birla Sun Life International Equity Plan A

2. DSP BlackRock US Flexible Equity

3. FT India Feeder Franklin US Opportunities

4. ICICI Prudential US Bluechip Equity

5. Motilal Oswal MOSt Shares NASDAQ-100 ETF

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Retirement Fund should Give Positive Real Return





Plan well to earn post-tax gains that beat inflation, clear debt before calling it quits

Any discussion relating to retirement in India almost surely brings in the twin aspects of high rate of inflation and the increasing life expectancy.

High rate of inflation in the country is the result of several factors, including the fast growing economy that India is, and also demand and supply issues which are unique to us. The increasing life expectancy, on the other hand, is mainly because of the advancement of medical science and people being more conscious about various health issues. However, when these two issues --higher inflation and increasing life expectancy -are combined, things could turn tough for people who are on the verge of retirement and also for those who have just retired.

According to financial advisors, if the retirement corpus is not used well, which includes putting in place a plan for its growth and also utilization, there is every possibility that over the long life of the retired person, high rate of inflation would either force the individual to deplete the retirement corpus slowly over the years, or he/she may have to compromise on the quality of life. A combination of the both is also possible, they say .

Let us see why this is a possibility. Suppose you have just retired and your family's monthly expenses on the necessities are Rs 10,000. The rate of inflation is 10% per annum while the rate of return that your retirement corpus generates is 9%. At this rate you are falling behind the rate of inflation by a percentage point. The situation could worsen if your investments are in such instruments returns from which attract income tax. Post tax, post inflation rate of inflation could be lower by more than one percentage point.

If your retirement corpus is large enough to meet the your monthly expenses after accounting for the rate of inflation, tax outgo and still leaves you with something extra to invest every year, that is the ideal situation. However, for most just retired or soon-to-retire people, that is not the case. Only a select few are found to be in such a sweet spot. Others need to plan a bit to be in a sweet spot and enjoy the post-retirement life.

There are some easy to follow steps that the soon-to-retire or just retired individuals could follow for a smooth life during their sunset years.

Foremost is that you should plan your investments. Your retirement corpus should be invested in such a way that there is regular flow of income and the principal amount grows for at least the next five years. Financial planners say in case you are not competent enough to plan how and where you should deploy your retirement corpus, it is better to seek professional help.

The retiring person should compute the cash flow. Get used to maintain expenses and income from your investments in a cash flow statement. This statement will track the savings on hand at end of every month which can be used in investments.

After, analyzing the statement you can control unnecessary expenses in a month. Keeping this record will make it easier to analyze your financial situation at end of first year and you can make adequate changes in lifestyle and expenses to plan the future.

The next step is to get rid of debt before retirement or as soon as possible. You should plan to get close out all loans before retiring. Understand at this age you require sources of regular income and not to take up regular outflow to pay outstanding loans.

The next step is to analyze your insurance needs since nowadays the rising inflation impact medical costs. "A medical insurance is a must for you and your spouse. Maintain a record of each medical policy with its coverage, premium due dates and renewals. Also be alert to no-claim bonuses, if any.

And last but not the least: Keep alive your old networks. It could happen corpus created is not adequate to take care of your lifestyle and expenses for the long term. So, it's better to join back the last employer as a consultant or work part time. Take up a work which could interest you like training or a hobby which leads to a source of income after retirement.

For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call

Leave a missed Call on 94 8300 8300

Leave your comment with mail ID and we will answer them

OR

You can write back to us at

PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest Mutual Funds Online

Invest Any Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Any Fund Application Forms

---------------------------------------------

Best Performing Mutual Funds

1. Largecap Funds Invest Online
1. DSP BlackRock Top 100 Fund
2. ICICI Prudential Focused Blue Chip Fund
3. Franklin India Bluechip
4. ICICI Prudential Top 100 Fund

B. Large and Midcap Funds Invest Online

1. ICICI Prudential Dynamic Plan
2. HDFC Top 200 Fund
3. UTI Dividend Yield Fund
4. Birla Sun Life Front Line Equity Fund
5. Franklin India Prima

C. Mid and SmallCap Funds Invest Online

1. Reliance Equity Opportunities Fund
2. DSP BlackRock Small & Midcap Fund
3. Sundaram Select Midcap
4. IDFC Premier Equity Fund
5. Birla Sun Life Dividend Yield Plus
6. SBI Emerging Businesses Fund
7. HDFC Mid-Cap Opportunities Fund
8. ICICI Prudential Discovery Fund

D. Small and MicroCap Funds Invest Online

1. DSP BlackRock MicroCap Fund
2. Franklin India Smaller Companies

E. Sector Funds Invest Online

1. Reliance Banking Fund
2. Reliance Banking Fund
3. ICICI Prudential Banking and Financial Services Fund

F. Tax Saver Mutual Funds Invest Online

1. ICICI Prudential Tax Plan

2. HDFC Taxsaver

3. DSP BlackRock Tax Saver Fund
4. Reliance Tax Saver (ELSS) Fund

G. Gold Mutual Funds Invest Online

1. Relaince Gold Savings Fund
2. ICICI Prudential Regular Gold Savings Fund
3. HDFC Gold Fund
4. Birla Sun Life Gold

H. International funds Invest Online

1. Birla Sun Life International Equity Plan A

2. DSP BlackRock US Flexible Equity

3. FT India Feeder Franklin US Opportunities

4. ICICI Prudential US Bluechip Equity

5. Motilal Oswal MOSt Shares NASDAQ-100 ETF