mf pointer march issue 87 - ventura securities ltd · indian budget session saw a tad response from...

MF POINTERFor Private Circulation only

Impact of Dividend Distribution Tax

(DDT) on Debt mutual funds – A death

knell to retail investors

Issue - 87 March, 2013

Global Indices

Benchmark Closing 16-Feb-13

to 12-Mar-13

Bovespa 58208.6 1.0

CAC 40 3840.0 4.7

DAX 7966.1 4.4

Dow Jones 14450.1 3.0

FTST 100 6510.6 3.0

Hang Seng 22890.6 -2.1

Nikkei 225 12314.8 8.0

Shanghai Composite 2286.6 -5.6

(continued on page 2)

March, 2013 Smart investing starts here 1

Equity Market

Global Equities:th• For the month ended 12 March 2013, global equity indices

ended on a positive note after the US markets reported better economic data and surge in industrial productivity.

In US, the benchmark index Dow Jones Industrial Average (Dow) reached all time high level of 14329.49 points, above the earlier high recorded in 2007, gaining by more than 9.9% in this calendar year to date. This was due to US government spending cut by $85 billion starting March 1, 2013 which suggested US markets were hopeful of strong corporate performance on the back of a recovering economy. Also US economic data was largely positive showing improvement in home sales, consumer confidence, service indices and retail sales.

Euro-area industrial production dropped 0.4% in January 2013, after increasing by 0.9% in December 2012. Both Germany and France, the two industrial powerhouses in the region, registered a drop in production The European leaders would later meet to try to reduce austerity measures and giving debt-ridden countries more time to bring down deficits. January's fall in the euro-region's industrial production will keep pressure on the ECB to cut interest rates to below the current 0.75 % rate later this year, which would lower the cost of borrowing for companies and households.

On the commodity front, crude oil prices decreased to thUS$109 a barrel for the month ended 12 March, 2013.

Decline in U.S stockpiles and weak demand of oil globally led to decline in crude oil prices. Gold also declined by $18 per ounce and closed at $1591.29 during the month on the upbeat economic data from the U.S. indicating economic recovery and investors shifting into stocks from gold.

Domestic Markets:thDomestic indices for the month ended 12 March 2013 closed

on a positive note with Sensex and Nifty up by 0.50% and 0.45% respectively.

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Major indices rose after rise in industrial growth however concerns remained on inflation which saw February 2013 Consumer Price Index (CPI) coming above 10% for the third consecutive month which may weigh on RBI's decision to cut interest rates in its March policy meet.

Indian Budget session saw a tad response from Indian investors even as the Budget showed support for growth by the Indian government which unveiled a surge in spending - despite expectations of an austere budget to shore up its finances - and imposed new taxes on the rich and large companies to address concerns on fiscal and current account deficit.

India's Industrial Production (IIP) rose in January 2013 to 1.2% after falling by 0.6% in December 2012 after a pick-up in domestic demand and infrastructure output. Output in the country's eight key infrastructure industries, widely known as the core sector, accounting for almost 40% of factory production, grew an annual 3.9% in January 2013; it's fastest in three months.

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Rupee remained flat against the dollar to close at ̀ 54.19 a dollar from `54.22 against dollar in the last month on account of selling from FII's after the budget. FII's continued to be net buyers in equities to the extent of `7165cr while Mutual funds were net sellers to the extent

thof ̀ 548cr for the period 16th Feb – 12 Mar, 2013.

Bond Market

Indian bond prices edged down at the end of the month after yields rose at the end of the month as CPI came at higher levels (10.91%), raising concerns on rate cut expectations by the central bank in March 2013.

Yields on the 8.15% GOI 2022, 10-year benchmark paper throse by 7 basis points to close at 7.90% as on 12 March

2013 in comparison to 7.83% a month earlier.

March, 2013Smart investing starts here2

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Top 5/Bottom 5

Equity Schemes

Top Performers Under Performers

Absolute Absolute Scheme Name Returns(%)* Scheme Name Returns(%)*

SBI Infotech Fund 5.76 Birla SL CEF-Global Prec Metal -9.81

ICICI Pru Technology Fund 5.61 DSPBR World Mining Fund -6.52

Franklin Infotech Fund 5.61 DSPBR World Gold Fund -5.10

Birla SL New Millennium Fund 4.65 Mirae Asset China Advantage -4.09

DSPBR Technology.com Fund 4.58 Mirae Asset Global Comm. Stock -4.04

Debt Schemes

Top Performers Under Performers

Annualised AnnualisedScheme Name Returns(%)* Scheme Name Returns(%)*

Sundaram Gilt Fund 14.78 JM G-Sec Fund -4.93

Escorts Income Bond 14.38 IDBI Gilt Fund -4.18

DWS Gilt Fund 12.29 Kotak Gilt-Invest -2.67

PineBridge India Total Ret Bond 11.78 Kotak Gilt-Invest-PF&Trust -2.64

ICICI Pru Banking & PSU Debt 10.29 ING Income Gth Multi FoF-30%-A -2.05th*Returns as on 12 -Mar-2013

thCategory Returns: For the month ended 12 March 2013, most of the sector funds ended in the negative. Gold and Banking sector funds fell the most by 3.40% and 3.37% respectively. Also as rupee strengthened against the dollar, schemes with global exposure (FOF- overseas & Equity Global) declined by 0.28% and 1.23% Gold funds also declined by 3.4% on the back of decline in gold prices.

respectively.

th*Returns as on 12 -Mar-2013

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Many a wish-list remained unanswered during the union budget presented on 28 February, 2013, but for banks it was a day to remember as they had been lobbying very hard for past number of years to remove the tax arbitrage between debt mutual funds and fixed deposits. The main bone of contention of banks has been that dividend which is paid by mutual funds is tax free as compared to interest on fixed deposits which is taxable in the hand of the investors. This gap was narrowed down with the introduction of DDT. In the budget of 2011-12 the Finance Minister introduced a provision wherein for corporate entities the DDT was increased to 32.445% and there was no tax arbitrage benefit available. As regards individuals/HUF, the debt funds were bifurcated into Money Market Funds (MMFs) & Other Debt Funds. For individuals/HUF the MMFs were taxed @ 27.038% and other debt funds @ 13.519%. The new provision now removes the distinction between MMFs and other debt funds in totality. It is also pertinent to note here that a debt fund would also include a fund which has an equity exposure upto 35%, thus bringing all Monthly Income Plans (MIPs) in its ambit. According to the amendment proposed in the budget (always in fine print), DDT has now been extended to engulf individuals as well as HUFs for all debt funds and it has been enhanced from 12.5% to 25%. The rate will now be 28.325% on account of a 10% surcharge and 3% education cess. The effective rate will be 22.073% (calculated as 28.325/128.325) as the DDT is levied on the net amount.

Now let us examine this provision in 3 scenarios and how it will affect retail investors. We have calculated the taxation for an individual in 3 scenarios:

1. An individual earning Rs. 5 lacs



As can be seen from the detailed illustration below, the effective tax rate for an individual in scenario 1 is 6.18% under scenario 2 it is 13.39% and under scenario 3 it is 22.15%.

Impact of Dividend Distribution Tax (DDT) on Debt mutual funds – A death knell to retail investors

*Effective DDT is calculated as 28.325/128.325 = 22.073% **Effective DDT is calculated as 13.519/113.519= 11.909%

Thus lower the taxable income of an individual higher is the DDT for that individual. This itself defeats the entire purpose of investing in mutual funds and individuals will be better off paying their taxes and investing in fixed deposits. This move will primarily hit senior citizens & retired individuals the most as they normally like to receive income at regular intervals. The dividend option will be beneficial for investors who have a taxable income which would exceed Rs. 1 crore on the entire amount, as it would attract an additional surcharge of 10% and they would be better off with a tax free income to fall below that slab.

Given below is the impact in percentage terms

Net Taxable Tax Payable Effective Old DDT New DDT Increase Income (`)

(A) (B) (C) = (B/A) (D) (E) (F) = (E-C)

(`) Tax Rate compared to effective rate

500,000 30,900 6.18%

1,000,000 133,900 13.39%

2,000,000 442,900 22.15%

15.893%

8.683%

NIL

13.519%

11.909%**

28.325%

22.073%*

Impact of Dividend Distribution Tax (DDT) on Debt mutual funds – A death knell to retail investors

MF POINTER


In the process of trying to reduce the arbitrage, the FM has now created an anomaly with mutual fund income bearing more tax than fixed deposits. It is very unfortunate, that the mutual fund industry is bearing this brunt. The product is such a powerful instrument over a traditional fixed deposit as it gives liquidity to an investor whenever he wants it and also have the advantage of selling it when there are interest rate changes, making a profit when interest rates go down and vice versa. A fixed deposit on the other hand is non-transferable and illiquid asset and even when interest rates go down, one has to pay a penalty for early withdrawal as deposits are not a marketable security.

So does it mean that you should now ignore debt funds?

NO, debt funds still do have an advantage in terms of liquidity as well as superiority of returns. However, now an individual will have to look at the investment based on the matrix given below:

Notes:

1. You would be better off investing in fixed deposits, as the effective tax rate would be lower than that of Dividend Distribution Tax.

2. You would be indifferent in this scenario, as there is no spread between the tax rate which would be applicable in case you invest in Debt Funds or Fixed Deposits.

3. Debt funds would be a efficient choice as you would end up paying lesser tax as against the tax applicable for the highest tax bracket i.e. 30.9%. In fact the tax rate for an individual earning more than Rs. 1 crore will be 33.99%.

4. You should opt for Growth option since the objective is to hold the investment for more than 1 year. Profit on sale will be treated as long term capital gains tax (income is taxed on sale after 1 year @ 10% of profit or 20% of profit (post indexation) whichever is less).

5. You should opt for Growth option as the taxation would be at the same rate as a fixed deposit. An added advantage is that short-term capital gain on the investment in debt funds will be allowed to be set-off against any short-term capital loss of any other investment.

6. You should opt for Growth option, if you have a short-term capital loss on any other investment, the same would be allowed to be set-off against gain on the investment in debt funds; if not you should opt for Dividend Reinvest as an option, as this would be tax efficient and you would end up paying lesser tax, as against the tax applicable for the highest tax bracket.

Investment Matrix

Taxable REQUIRE Regular Income DO NOT REQUIRE Regular Income Income

Long Term Short Term Long Term Short Term

(more than 1 year) 0–6 M 6–12 M (more than 1 year) 0–6 M 6–12 M1Less than Fixed Deposits

` 11 lacs2 4 5Between ` Debt Funds or Fixed Deposits Debt Funds Debt Funds

11 – 25 lacs3More than Debt Funds Debt Funds –

6` 25 lacs Dividend Reinvest

MF POINTER


Know Your Report – Taxation Report

The below window would open

Step 1

Step 2

Taxation report enables computing of tax implication on account of gains/ loss made at the

time of filing tax returns. The intention is to provide a guide to the investor and this report

should be used as guidance and not a final report. Many a times when transactions are

switched from one scheme to another, the taxation implication is skipped as they do not

involve any monetary transaction.

Once the client logs under the Mutual Fund section the below headers are visible. Under

the Profit/ Loss menu a client can click on the Taxation Report.

1. By default the current Financial Year would be shown in the report.

a. Client can select the period (from date to date)

2. Click on SHOW REPORT icon.

MF POINTER


The report shows the details of various schemes invested by the client with the dates on

which the schemes were purchased and sold. The transaction is bifurcated between short-

term and long-term as per the Income Tax rules.

Taxation Report

The above report represents the tax implication upon redemption or switch of units. This

report contains details of the nature of gain or loss made in the scheme.

Column header and descriptions of the above report are mentioned below:-

1. Transaction Type: This column indicates whether the transaction was a purchase,

systematic investment or a switch from a previous investment.

2. Transaction Date: The date on which the investment was made.

3. Purchase Price: It is the price of per unit on the transaction date.

4. Units: This field would indicate the number of units allotted at the time of investment.

5. Purchase amount: Indicates the investment made by the client.

6. Sell date: Represent the date when the investment was sold.

7. Sell Type: It refers to whether the exit was due to redemption or switching to another

fund.

8. Sell Rate: The price at which the units were sold/ switched.

9. Sell Amount: Refers to the total proceeds received upon exiting the holding

10. Days: This column indicates the number of days invested in a particular scheme.

11. G/L ST [Debt/Equity]: Represents short term gain or loss on Debt or Equity Schemes.

12. G/L LT [Debt/Equity]: Represents long term gain or loss on Debt or Equity Schemes.

13. STT: Represents the Securities Transaction Tax (STT) charge levied upon sale of

Mutual Fund units.

MF POINTER


Corporate Office Address : Website :

A1, Kailash Industrial Complex, Park Site, Off LBS Marg, Vikhroli West, Mumbai - 400 079. Tel: +91-22-6754 7000 • E mail : [email protected] • www.ventura1.com

This document is solely for private circulation only. Mutual funds like securities investments are subject to market risks and other risks. Investors are advised to read the offer document before investing.

Performing Mutual Fund Plans

Scheme Name Corpus NAV (`) Annualised %

( Crs)# Gr Div 1 mth 3 mths 6 mths 1 yr

Income Funds

Birla SL Dynamic Bond Fund-Ret 14,706 19.74 10.60

HDFC High Interest-STP 2,828 22.99 10.58

Ultra Short Term Plan

HDFC Cash Mgmt-TA Plan 11,022 25.00 10.08

Reliance Money Manager Fund 8,414 1595.83 1012.24

Tata Floater 3,970 1748.02 1109.03

`

7.90 9.65 9.75 10.44

6.17 8.13 8.85 9.83

7.26 7.41 7.56 8.62

8.47 8.53 8.60 9.56

8.18 8.44 8.54 9.47

*Returns for less than 1 year is absolute (in case of MIP, it is annualized) and more than 1 year are compounded annualized as thon 12 Mar 2013.

#Corpus as on December 2012 as AMFI has mandated for quarterly AUM declaration.

Scheme Name* Corpus NAV (`) 6 mths 1 yr 3 yrs 5 yrs

(` Crs)# Gr Div (%) (%) (%) (%)

Hybrid - Monthly Income Plans(MIPs)

Birla SL MIP II-Savings 5 294 20.91 11.75

DSPBR MIP Fund 467 22.79 11.41

Balanced Fund

HDFC Prudence Fund 6,427 231.32 24.67

Equity - Large Cap

DSPBR Top 100 Equity Fund 3,684 108.57 21.35

Franklin India Bluechip Fund 5,230 235.63 34.78

HDFC Top 200 Fund 12,395 221.42 39.49

ICICI Pru Dynamic Plan 3,953 116.08 16.93

ICICI Pru Focused BlueChip Eq Fund 4,366 18.43 16.61

Equity - Multi cap

Birla SL Dividend Yield Plus 1,402 90.29 12.50

HDFC Equity Fund 11,498 284.78 43.73

IDFC Premier Equity Fund 3,603 38.28 25.22

Reliance Equity Opportunities Fund 4,990 42.72 23.28

UTI Dividend Yield Fund 3,660 33.61 13.51

Equity - Midcap

DSPBR Small & Mid Cap Fund 1,340 18.14 12.75

HDFC Mid-Cap Opportunities Fund 2,756 17.83 14.98

ICICI Pru Discovery Fund 2,503 55.74 21.26

SBI Emerging Businesses Fund 1,163 56.22 18.13

Sundaram Select Midcap 2,145 160.58 18.17

Tax Saving Scheme(ELSS)

HDFC TaxSaver 3,583 236.38 53.72

ICICI Pru Tax Plan 1,521 153.13 17.49

Sensex 19,564.92

Nifty 5,914.10

9.30 9.65 8.29 10.38

8.66 8.46 7.79 8.88

7.86 7.02 8.72 11.83

8.29 6.80 6.59 8.23

9.81 9.94 7.54 9.15

10.44 8.65 7.16 10.25

7.12 9.75 7.45 9.36

9.25 11.90 9.82

6.30 5.23 8.58 13.16

10.54 7.87 7.04 10.48

11.37 16.49 11.85 12.40

9.20 17.76 12.87 12.75

6.27 5.37 6.59 10.20

4.16 7.07 6.26 9.09

5.77 9.46 11.53 12.23

8.49 16.15 9.85 14.89

11.08 28.03 17.86 9.74

3.95 10.53 6.25 8.42

8.08 5.48 5.44 8.49

8.20 12.86 7.14 9.60

8.69 11.24 4.45 3.94

8.90 10.35 4.80 3.95

mf pointer march issue 87 - ventura securities ltd · indian budget session saw a tad response from...

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