What is the difference between the growth and dividend option in MFs





As a mutual fund investor, it becomes a challenging task to understand the difference between growth option, dividend payout option, and dividend reinvestment option of mutual fund schemes and choosing the best option as per individual requirements.

We have summarized how each option is different from the others and how their individual tax implications are:

Growth Option

Growth option means that an investor won’t receive any profits in the form dividends that may be paid out by the mutual fund scheme. If any profit is generated by the scheme, this amount gets invested back into the scheme which results in an increase in its NAV. In this plan, units of investors remains the same but the NAV increases as profits keep getting added and compounded over time thus giving higher capital gains at the time of redemption. This option is best suited for investors who don’t need regular income in the form of dividends.

Tax Implications of Growth Option

Equity: Only Capital Gains Tax
Short Term (holding period of less than or equal to 1 year): 15% on the capital gains
Long Term (holding period of more than 1 year): ZERO tax on the capital gains

Debt: Only Capital Gains Tax
Short Term (holding period of less than or equal to 3 years): Rate is based as per income tax slab, on the capital gains
Long Term (holding period of more than 3 years): 20% on the capital gains with indexation benefit

Dividend Payout Option

Dividend Payout option means that the profit generated by the scheme will be distributed to investors in the form of dividends. Dividend can be paid out on monthly, quarterly, half-yearly or annual basis but there is no guarantee of frequency and amount of dividend. It is solely at the discretion of the fund manager and whether the scheme has any profits to distribute. If the scheme is making a loss, dividend need not be declared. Whenever the dividend gets declared, the amount of dividend gets deducted from the NAV of the scheme thereby bringing the NAV down.  

The scheme deducts dividend distribution tax (DDT) in debt schemes before paying out the dividend to investors. DDT is only applicable in case of debt funds and is paid by the mutual fund scheme from the distributable income at a rate of 28.33% (including surcharge and cess).

The dividend received by the investors is tax free in the hands of the investor in case of both equity and debt schemes.


Tax Implications of Dividend Payout Option

Equity:
Dividend Distribution Tax: ZERO
Short Term (holding period of less than or equal to 1 year): 15% on the capital gains
Long Term (holding period of more than 1 year): ZERO tax on the capital gains

Debt:
Dividend Distribution Tax: 28.33% of dividend declared
Short Term Capital Gains Tax (holding period of less than or equal to 3 years): Rate is based as per income tax slab, on the capital gains
Long Term Capital Gains Tax (holding period of more than 3 years): 20% on the capital gains with indexation benefit


Dividend Reinvestment Option

Dividend Reinvestment option means that the profits generated by the scheme is not distributed to the investor in the form of cash dividends but is distributed in the form of additional units in the scheme. The dividend amount is used to purchase more units in the same scheme. This increases the units of the investor in the scheme and profit can be realized in the form of capital gains at the time of redemption.
  
Tax Implications of Dividend Reinvestment Option

Equity:
Dividend Distribution Tax: ZERO
Short Term (holding period of less than or equal to 1 year): 15% on the capital gains
Long Term (holding period of more than 1 year): ZERO tax on the capital gains

Debt:
Dividend Distribution Tax: 28.33% of dividend declared
Short Term Capital Gains Tax (holding period of less than or equal to 3 years): Rate is based as per income tax slab, on the capital gains
Long Term Capital Gains Tax (holding period of more than 3 years): 20% on the capital gains with indexation benefit


Conclusion

For a Debt MF investor who wants to invest for the short term (holding period of less than 3 years) and who are in the 30% income tax slab, Dividend Options are better than the Growth Option in terms of tax implications.

For an Equity MF investor, if the holding period can be greater than 1 year, Growth Option is much better than Dividend Options.


How to link Aadhaar to Mutual Fund folios online





As per recent amendments to Prevention of Money Laundering Act (PMLA) Rules, 2017, it is mandatory to link your Aadhaar card to all Mutual Fund folios by 31-Dec-2017. 

Please link your Aadhaar Card with the following RTA's, each RTA's processes funds for specific AMC's, find the list as below:

*RTA links for Aadhaar Linking-* 

*CAMS* 

*KARVY* 
_For Individuals-_

_For Non-Individuals -_ 

*FRANKLIN TEMPLETON* 

*SUNDARAM * 


LIST OF FUND HOUSES SERVICED BY RESPECTIVE RTA’s:
  
CAMS:
Aditya Birla Sunlife Mutual Fund
HDFC Mutual Fund
ICICI Prudential Mutual Fund
DSP BlackRock Mutual Fund
IDFC Mutual Fund
HSBC Mutual Fund
IIFL Mutual Fund
Kotak Mutual Fund
L&T Mutual Fund
Mahindra Mutual Fund
PPFAS Mutual Fund
SBI Mutual Fund
Shriram Mutual Fund
TATA Mutual Fund
Union Mutual Fund
  
KARVY:
Axis Mutual Fund
Baroda Pioneer Mutual Fund
BOI AXA Mutual Fund
Canara Robeco Mutual Fund
DHFL Pramerica Mutual Fund
Edelweiss Mutual Fund
Essel Mutual Fund
IDBI Mutual Fund
India Bulls Mutual Fund
INVESCO Mutual Fund
JM Financial Mutual Fund
LIC Mutual Fund
Mirae Asset Mutual Fund
Motilal Oswal Mutual Fund
Principal Mutual Fund
Quantum Mutual Fund
Reliance Mutual Fund
Taurus Mutual Fund
UTI Mutual Fund

Sundaram:
Sundaram Mutual Fund
BNP Mutual Fund

Franklin:
Franklin Templeton Mutual Fund


Confused about investing when the stock market is at an all-time high?




An Indian investor’s KIM KARTAVYA VIMOODH moment

KIM KARTAVYA VIMOODH (kim-kuhr-tuh-vyuh-vim-oodh; Kim = what, Kartavya = duty, work, Vimood = confusion)

-A Hindi noun that refers to someone who is unsure of what to do, is perhaps at a crossroads and needs to make a tough decision about his course of action. A state of dilemma.

With the stock market at an all-time high (Nifty at 10,300 and Sensex at 33,000), any investor with even a little interest in the Indian Stock Market would be in a dilemma, “Should I buy more at current prices?” For those who entered the market lower and with handsome gains on the table, the question “should I book some profit at current levels and then re-enter when the market goes lower or should I wait for it to go higher before selling?” would be on top of the mind. And those who are new to the market would be wondering “is it foolish to enter at market highs?”

These very valid doubts if you are an investor, especially when the market is at its peak.

Hopefully, by the end of this article you will have some clarity on what to do.

To begin with, I don’t think anyone really questions the long term growth story and potential of India or of India’s Stock Market. Almost everyone accepts that the Nifty/Sensex will be much higher than what they are today in the long term.

But what about the short term?

What could be possible reasons for the market to correct? While there can be many, the most relevant today are:

Top 7 reasons for the stock market to fall in 2018

1.       Domestic company earnings continue to disappoint

Indian corporates earning’s story is similar to the one about the boy who cried wolf. The expectation that earnings will ‘start picking up very soon’ has been in existence for over 5 years now and there is still no clear sign of a pickup. Yet, each quarter’s results are met with hope and even this time around (results of Q2FY18) the same optimistic sentiment remains. However if corporate earning’s disappoint yet again (or fail to show a recovery over the next 2-3 quarters), one can expect a correction in the market. 

2.       State election results disappoint

Over the next few months, the states of Gujarat and Himachal Pradesh go to polls. If the BJP doesn’t win both states, it will signal a weakening of public confidence in the Modi government and a correction in the market is likely. However, based on early forecasts, BJP should win both states comfortably.

3.       Global geopolitical tensions, especially concerning North Korea

The ongoing stand-off between Kim Jong Un’s North Korea and Donald Trump’s United States is a major geopolitical overhang the world is facing today. No-one can really predict if North Korea is going to launch a nuclear missile or if the US will attack first, but expect plenty of noise from both leaders. A good indicator of this crisis is South Korea’s stock market, which surprisingly hit an all-time high recently. So for those closer to the action, a blow-out scenario seems to be a very low probability event but expect some volatility in the markets going forward.

4.       US stock markets sell off, either due to disappointing corporate earnings in the backdrop of steep market valuations or due to the inability of Trump to push through business friendly tax and economic reforms.

The US economy looks good today with healthy corporate earnings and economic growth. No signs of stress as yet. But going forward, one needs to keep an eye on the earnings story to spot any nascent signs of trouble since valuations are quite high. Rising interest rates is a concern but one can expect the fed to manage it well. We also need to closely watch for the final version of Trump’s reforms that actually get passed into law.

5.       Indian banking sector balance sheets under stress

Banks are the backbone of any economy. Unfortunately in India, the banking sector NPA problem is still prevalent. One hopes it will get sorted soon. The rate of fresh NPAs have declined but recognition and provisioning of older debts is still a concern. The government’s mega recapitalization plans will boost public sector banks but devil lies in the details as the size of the problem is quite large. RBI is also taking steps to clean up the mess but there is still some pain left in the system.

6.       Private sector investments and capital expenditure missing

India has always been a services and consumption led economy. Our demographics and population ensures a base level of 4%-5% GDP growth. But if India aims to enter the 8%+ GDP growth range (just like China did for many years), capital investments especially from the private sector are a must.

Current problems such as highly levered corporate balance sheets, slowing exports and slow pace of demand pickup resulting in existing capacity underutilization have throttled the pace of fresh investments.

However, this has been compensated by some extent through significant capital expenditure by government (both central and state) and quasi-government entities over the past couple of years. Their focus is strong on areas such as Roads, Metros, Water, Railways, Smart Cities, Housing etc. However in the longer term, government spending will be limited by its fiscal deficit targets and it is necessary that the private sector takes over the mantle of driving growth.

7.       Weak job market and limited employment opportunities for the youth

A structural challenge for a country with approx. 1.2 Crore young Indians joining the job market every year. The current govt. is under immense pressure to solve this demographic challenge. While some steps have been taken in this regard by the government via their flagship schemes, the Pradhan Mantri Kaushal Vikas Yojna, Pradhan Mantri Awas Yojana, Saubhagya Scheme, Smart Cities Mission, AMRUT, Bharatmala project etc., much more needs to be done. Private sector needs to play a larger role as the principal job creator but is hampered by some of challenges discussed above. One also needs to be aware of the role technology will play in increasing efficiency thereby putting even more pressure on jobs. We need a comprehensive action plan on job creation that is broad based and productive

Many other factors which drive equity market performance such as FII flows, RBI rates and liquidity outlook, government policies, Inflation trajectory, Current Account Deficit, Fiscal Deficit, monsoons, global commodity prices, global growth outlook, high market valuations etc. were considered but were found to have a limited negative role in the near future.


However, on the positive side, the last few years have witnessed a spate of reforms that have improved the macroeconomic fundamentals of the country and future growth prospects. Two important reforms that will be very beneficial over the medium to long term (Demonetization and GST), have had some negative impact on growth over the last few quarters. This slowdown should be seen as temporary and there are enough reasons to believe that the economy will bounce back strongly in next few quarters. It is quite possible that the 5.7% GDP growth number seen in Q1FY18 is a bottom. 

5 positive themes that will play out in the stock market in 2018

1.       Domestic retail liquidity and financialization of retail savings is a long term structural story and will limit the downside to the market

2.       Discretionary consumption is on the rise and is linked to the rising wealth in the hands of Indians

3.       Technology and innovation set to transform many traditional businesses. New age companies focused on improving productivity, replacing inefficient incumbents, or even creating new sectors, will play a dominant role in the future.

4.       Tax compliance is on the rise, both in direct (due to demonetization) and indirect (due to GST) taxes. Tax revenues as a % of GDP will go up and the extra revenue will help boost the economy. Government focused sectors would benefit.

5.       Current fall in GDP growth is a short term phenomena. Once net exports pick up, and with a good monsoon, GDP growth will go back to 6%+ in the short term (1-2 quarters). With increasing tax revenues, GDP growth will rise to 7%+ in the medium term (4-6 quarters). And once private sector investments pickup (10-12 quarters), GDP growth will go beyond 8%+ for a sustainable period.


Concluding View

On assessing the different risks and their potential impact, our view is that none of them are very serious threats as of now. However, all these risks need to be closely monitored and if any materialize, quick remedial action needs to be taken

A maximum fall of 10%-12% (approx. 8800-9000 on the Nifty) can be expected in the worst case. And every price closer to those levels needs to be used as a buying opportunity.

Many sectors / companies have already run up over the last 18 months such as auto and auto ancillaries, retail and FMCG, and financial services such as housing finance companies, select private sector banks etc.

However, there are many undervalued opportunities still available in the market, some of which are connected to the themes mentioned above. Whether you are a Mutual Fund investor or a Direct Equity investor, it is important to pick the right sectors/companies and if possible, at the right price.

Investing in the stock market, even at this price, still makes a lot of sense, given the upside vs. downside potential. You need to get your investment thesis and personal risk capacity right.

After that, in the words of a popular internet meme, Keep Calm and Carry On.

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Disclaimer: This article is solely meant to guide you in your decision making process and should not be construed as investment advice. Investments in the stock market are subject to market risk. Please consult your investment advisor at ORO Wealth before investing or signup on www.OROwealth.com to receive customized investment solutions with actionable advice and recommendations.

Market is at all-time highs. What should you do?

 

The Sensex recently breached 30K and Nifty breached 9K. With the two market benchmarks at all-time highs, investors are particularly worried that markets may suffer from bad case of vertigo and may come crashing down.

So is this the right time to invest or is it better to sell and book profits?  We looked at previous instance of all-time highs to find out.

So what does history tell us?

If we look at the SENSEX history from 1997 (and Nifty will mirror it pretty closely), we find that there were 5 episodes in the past when the SENSEX achieved all-time highs (i.e. a value higher than what had been previously achieved) after a considerable period of time. All-time highs which were achieved within a short time of one another were considered as the same episode.




Of these we find that three times – in July 1999, December 2004 and October 2013 – the high was a harbinger of a multi-year bull market (The first one driven by global bull-market associated with dotcom bubble, the second one was again driven by the global bull market of 2004-7 and the third one can be attributed to the Modi Wave). Investors who exited the market at those points or stayed out because the market was too high would have considered themselves very unlucky indeed. They would have missed out on returns of 19%, 216% and 38% respectively (corresponding to CAGRs of 21%, 29% and 18% respectively) till the eventual turnaround happened.

However, we also find there are two other times – in Jan 2004 and Oct 2010 – when after attaining an all-time high, the market went down immediately afterwards. However, if you consider the fact that you are always asked to invest in equities with at least a 5 year horizon, then these points were bad but not terrible times to enter. Over the next 5 years markets gave you returns of 11% and 6% respectively. 

The history has some crucial lessons

To me the biggest lesson from this study of historical episodes is that most investor’s worst case scenario that the market would hit a record high one day and then fall of the cliff the next day from which they would find very hard to recover has never actually materialised. In fact, the worst thing that would have happened to an investor who invested at a market high or did not get out is that they would have experienced below average (but still positive) returns over the next few years. Not that bad an outcome considering you are always advised to invest in equities if you have a 5 year+ horizon.

So on balance of probability, market hitting an all-time high is a good time to stay invested or even to enter. At worst you can probably expect flat to slightly returns for some time and if things turn out well we could be on the cusp of another bull market.

One good strategy would be to invest through SIPs or via an STP from a liquid fund. This way even if this all-time high is just a fluke you would have invested less at an unfavourable entry point.

But, what about market timing?

Markets massively up one day and then down has not happened in the past. This is not a coincidence. If you think about it even though markets can be irrational sometimes, most of the times they are driven by fundamentals – what is happening to growth and inflation, what is the central bank doing. And fundamentals don’t move randomly. You do not get a 8% growth number one month and 4% the next. And hence you do not get markets making all-time highs one month and then a massive loss the next.

While we have answered (or at least attempted to answer) the immediate question, the larger question lurking here is of market timing i.e. how to know when is a good time to enter and exit markets. Market timing can and does work. Like we mentioned earlier, markets are inextricably tied to fundamentals and fundamentals are not completely random. So markets should also inherit some predictability.

However before you decide to jump into full-fledged market timing it would be good to keep some things in mind.

1: You are probably doing some market timing already:
Many people invest in markets through mutual funds in which case they already have a manager trying to do market timing for them. Of course given their mandate, mutual fund managers can never actually exit the market but they can chose to invest more in cash or shift to safer equities.

Another source of market timing is the SIP mode of investing which is quite popular and which we suggested as a strategy earlier. By using SIPs, investors can buy less when the markets are at a high (and likely to be over-priced). They buy more when markets are at a low (and more likely to be cheap). Those with a lumpsum amount to invest can consider STPs from liquid fund to equity funds to get a similar effect.

2: (Portfolio) Size matters: For small portfolio sizes, relying on your fund manager/SIP may be the best form of market timing. To implement more active strategies needs a large portfolio. This is because most good/successful market timing strategies will not be binary in nature i.e. either you are in or out. Instead usually such strategies only move in small steps based on the balance of probability. However, with small portfolios you can run into problems of minimum transaction size etc. which makes implementing active strategies unprofitable.

3: Market timing should not be ad hoc but systematic: Finally even those who have large portfolios should only pursue market timing if they can be systematic about it. For instance you may pick the right time to get out of the market but then you also need a strategy for when to back in. More generally, successful market-timers are not people who get every decision right (it is nearly impossible to have perfect foresight into markets) but those who get more decisions right than wrong. So timing the market is not a one-time exercise but something which has to be done repeatedly. Given the full-time nature of this job it may be better to seek services of a professional.

The Final Word

Given history, markets hitting an all-time high do not seem to be a good time to stay away from investing/exit. Cautious investors with reasonable sized portfolios can opt for SIPs or STPs to reduce the entry point risk. Investors with larger sized portfolios can opt for more aggressive market timing to know when the markets are getting “too high” but this should be done systematically probably with the help of a professional. 

This article was first published on IIFL website on June 06, 2017.

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Should you invest in Gold

 


Gold can play a very valuable role in equity and bond portfolios, doing well when both equities and bonds are under-performing. Hence long-term investors should definitely consider investing 5-20% of their portfolios in gold even though the recent price action has not been very encouraging.

What does the gold price even mean?

This question may seem strange. Of course gold price is the amount of rupees I need to spend to buy a certain amount of gold. But while it may be natural for us in India to think of the gold price in Indian rupees, this rupee price of gold is actually a derived price with two different components:

What is happening to the gold price in dollars: This portion is affected by various international developments; the effect of India-specific factors is actually quite minimal.

What is happening to the price of Indian rupee in dollars: This is the interesting part. When people own gold, they are also implicitly holding a position in USDINR. This position will do well every time the rupee weakens and do badly when rupee strengthens – so a very clear India-specific angle.

(In practice, the relationship between these 3 may not be exact because there is friction due to government restrictions on gold imports etc which gives rise to the “Mumbai premium”. But that part is small and can be ignored for this discussion.)

USDINR component of gold makes it useful in reducing equity downside

USDINR is strongly correlated with Indian equities. The relationship is negative, i.e. (usually) when Indian equities go up (down) then the rupee is also strengthening (weakening) at the same time. Very intuitively this is because all factors that are big negatives for Indian equities (growth crises in the world and/or India and high inflation in India) are all also big negatives for INR. 

Gold in INR is useful for protecting against the downside in Indian equities because of this USD INR component. Basically gold in INR does well when equities go down not because gold (as measured in USD) is necessarily doing well but because INR is doing poorly and getting weaker.

This explanation is also borne by data. The chart below shows the performance of USDINR and Gold in INR when equities have been down by more than 20%.

USDINR and Gold have been up in recent episodes when equities were down by >20%
 

Also in the long run, the correlation between the monthly returns of gold and Nifty in the 15 year period from 2002-2016 has been -7% highlighting that these are two positive return asset classes which behave differently from each other – pure gold (pun intended) from a portfolio construction perspective!

Gold can also give returns when bonds are falling

Many people think of debt as adding stability to their portfolio. While this is mostly true, bonds themselves (esp. those with long maturity) can do extremely badly during periods of high inflation because the central bank is expected to increase rates to fight inflation.

However, high inflation periods are also when INR depreciates or in other word gold in INR is likely to do well. This explanation is again supported by data. The correlation between the monthly returns of gold and a 10-year government bond index between 2002-17 has been -12%.

Who is gold not for?

So far we have shown that gold can be a valuable third asset component in equity-bond portfolios. However there are at least 2 portfolios/requirements for which gold may not be very useful.

First, is for investors who are investing money for regular income or other short-term objectives such as emergency funds. Gold does not generate regular interest or dividends. Further short-term investors are mostly invested in short-duration debt instruments which provide low but steady returns and do not need diversification.

Second, is for investors at the opposite end of the spectrum who want to invest for the long term and are not concerned about (even significant) volatility in the meantime. In such cases, investors have low need for diversification and would rather put all their money in the highest returning asset namely equities. However, in my experience, such investors are very rare in real life.

The Final word

Both data and intuitive explanation show that gold can be extremely useful in most portfolios due to its ability to give positive returns when both equities and bonds are giving negative returns. Our analysis shows that a 5-20% allocation to gold is desirable with the exact percentage depending on an investor’s goal and risk appetite.


This article was first published on IIFL website on May 18, 2017.

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