Month: March 2021

Digital payments to skyrocket 3X to over Rs 7,000 lakh cr by FY25; mobile payments to see highest growth

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The maximum growth is likely to be witnessed in the mobile payments segment at 58 per cent from Rs 25 lakh crore to Rs 245 lakh crore.

The nascent yet fast-evolving digital payments industry in India, propelled by policy framework and technology penetration, is expected to grow at a compound annual growth rate of 27 per cent during the FY20-25 period. The growth in retail electronic payment systems including National Electronic Fund Transfer (NEFT), mobile banking, and development of payment acceptance infrastructure is likely to boost digital payment transactions from Rs 2,153 lakh crore in FY20 to Rs 7,092 lakh crore in FY25, according to the India Trend Book Report 2021 by the Indian Private Equity and Venture Capital Association (IVCA) and Ernst & Young.

The digital payments market, which has been led by companies such as Paytm, PhonePe, Pine Labs, Razorpay, BharatPe, and others on the B2C and B2B sides, has surged expeditiously with businesses offering cash backs, rewards, and offers to woo customers. Moreover, the recent pandemic has stimulated the demand for digital wallets as contactless payment is reckoned as the new normal protocol. Policy frameworks, on the other hand, such as Pre-Paid Instruments (PPI), Universal Payment Interface (UPI) by the NPCI apart from Aadhar, and the launch of BHIM-app have driven the financial inclusion and improved the payment acceptance infrastructure in the country.

In terms of segment-wise growth, the payment gateway aggregator market is expected to grow at around 19 per cent CAGR from Rs 9.5 lakh crore in FY20 to Rs 22.6 lakh crore in FY25 while the merchant payments segment is likely to see 52 per cent growth from Rs 4.7 lakh crore to Rs 33 lakh crore during the said period. The maximum growth is likely to be witnessed in the mobile payments segment at 58 per cent from Rs 25 lakh crore to Rs 245 lakh crore.

Also read: CEA Krishnamurthy Subramanian: Mindset of always asking what govt can do for startups should change

Meanwhile, the overall fintech market, which also catered to online lending, wealth management, insurance technology, etc., is likely to grow from Rs 1.9 lakh crore in 2019 at a CAGR of 22.7 per cent during the period 2020-25. While some fintech subsectors such as MSME digital lending have been facing temporary downturn, others including digital payments and insurtech have benefitted from Covid-induced digital adoption among consumers. According to the IVCA report, India has emerged as Asia’s biggest destination for fintech deals, leaving behind China in the quarter ended June 2020. Amid COVID-19, India saw a 60 per cent YoY increase in fintech investments to $1.5 billion in 1H20.

“Covid-19 pandemic has accelerated the shift toward a more digital world. It has changed the ways businesses were done and technology is at the forefront of these changes. Opportunities for internet and tech companies have increased multifold in the last one year. Wide penetration of internet and lower internet cost has complemented the digital and technology trend for consumers and have changed the ways of shopping, education, agriculture, retail, logistics, finance, health, etc. businesses,” said Ankur Bansal, Co-founder and Director, BlackSoil.

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Tax Saving Through Family Members: Here Are All The Possible Ways

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Taxes

oi-Roshni Agarwal

|

Its tax planning season again and apart from tax deductions that you can claim under Section 80C, your family can also help you save tax through lesser known tax laws. Here we discuss the same:

Tax Saving Through Family Members: Here Are All The Possible Ways

Tax Saving Through Family Members: Here Are All The Possible Ways

Tax saving via spouse:

1. Business: If the taxpayer is a business person or professional and his or her spouse who is also professionally qualified and helps in the business or profession then it shall be fair to share the total receipt between the firm and the spouse. In such a situation, the advantage of income tax slab can be availed on the income from business or profession of the spouse also. Say for instance if both spouses are doctors and offer medical services then in such a case invoices issued to patients can be divided in a way such that the slab benefit for both can be availed under Income tax.

2. Leave travel: The benefit of LTA can be claimed in respect of two journeys during the block of 4 years. And in a situation, when both spouses are working, then together they can claim LTA for 4 journeys carried out during four years time.

3. Loans: If you gift money to your wife and the same is invested, the interest on the investment shall be added to your income and taxed, provided the investment is made in a tax-free instrument such as PPF. Instead to reduce your taxable income, you can give loan to your spouse who has low or meager income source at a reasonable interest rate or can extend interest free loan.

4. Capital gains: The long term capital gains of Rs. 1,00,000 on sale of listed equity as well as units of equity mutual funds are exempted from tax implication in accordance with Section 112A and so the investment can be done in the name of both the spouses to claim exemption every fiscal year.

Tax savings through children:

Here also there are various methods in which your children that includes adult children too can help you save tax:

1. Tuition fees: Here the deduction can be claimed by a parent against the tuition fees paid for two children to a university, college, school or any other educational institution as part of Section 80C.

2. Investments: If you make investments in your child’s name such as in PPF, mutual funds, traditional insurance policies or ULIPs, you will be entitled to claim tax deduction up to a maximum of Rs. 1.5 lakh per year under Section 80C. Also, you can invest in equity mutual funds as gains of less than Rs. 1 lakh a year will not result in any tax liability.

Further in case if you have opened a savings account in the name of your child then Rs. 1500 interest income per child for two children will be tax exempt benefit as part of Section 10(32).

3. Loan: Against the education loan secured for your child, you get tax deduction under Section 80E on the interest repayment for up to 8 years beginning from the year in which interest repayment starts. Another way out to reduce your taxable income is to give an interest free loan to your children.

Savings tax via parents:

Through parent you can save a substantial amount of tax through any of the below routes:

1. Rent: The benefit of rent paid to one’s parents can be claimed in the form of house rent allowance (HRA). “In order to demonstrate the bonafide of rental arrangement with his parents, one will have to retain the rental agreement, bank statement for payment, intimation to society about his tenancy, etc”, Gopal Bohra, partner, NA Shah Associates is quoted as saying in a leading business dailies.

2. Investments: If your parents are in a lower tax bracket then you can transfer money into their bank account and invest in their name. This shall be a tax free financial gift and money can be put into schemes such as SCSS or senior citizen savings scheme, the post office MIS or any other investment fetching higher return. Senior citizens on fixed deposit interest income get a tax exemption of up to Rs. 50000 per year.

Through Parents-in-law:

Also, in a case if your parents in law fall in a lower tax bracket in comparison to yours, you can gift money to them and they can invest it. The earnings on that investment shall be considered as theirs and will be taxed at a lower rate in comparison to the rate applicable to you. Further the gifted money is tax exempt for the parents in law.

GoodReturns.in



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Fixed Deposits: Compare The Best FD Rates Across 6 Months To 5 Years

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Key takeaways of fixed deposits

  • The maturity tenure of FDs varies by bank and spans between seven days to ten years.
  • The interest rate is compounded periodically i.e. monthly, quarterly or annually
  • When compared to regular customers, senior citizens generally receive a 0.5 per cent higher interest rate.
  • Withdrawals in part or in full are allowed, but they may be subject to penalties.
  • Under Section 80C of the Income Tax Act of 1961, individuals can claim tax deductions by investing in 5-year tax-saving FD schemes.
  • Investors can reinvest the money in an FD account until it matures for the potential term.
  • A loan against a fixed deposit investment is also available for fixed deposit investors. In this situation, the maximum loan amount varies from one bank FD to the next. In this situation, the loan amount is limited to a percentage of the fixed deposit corpus.
  • Returns are guaranteed because they are not linked to market ups and downs.
  • Premature withdrawals are permitted with some penalties, ensuring that you will always have a fund to cover the unwanted crisis.
  • Despite the fact that fixed comes with a lock-in period, you can liquidate the fund at any time. The lock-in period is not as long as it is for most investment instruments like PPF.
  • With effect from 4 February 2020, you will be liable for a maximum compensation of Rs 5 lakh from the Deposit Insurance and Credit Guarantee Corporation (DICGC). FDs are a safe investment choice because of this framework.

Taxation on fixed deposits

Taxation on fixed deposits

According to the terms of the Income Tax Act, TDS, or Tax Deducted at Source, is deducted from interest earned from fixed deposits per year. As a result, interest income is included in income tax returns under the heading “Income from Other Sources.” Individuals who choose a 5-year tax-saving FD, on the other side, can claim a tax deduction on the principal amount of up to Rs. 1.5 lakh in a fiscal year. TDS will not be deducted from a Fixed Deposit’s earnings until they exceed Rs. 40,000 for non-senior citizens and Rs 50,000 for senior citizens. Non-senior citizens can submit Form 15G, and senior citizens can submit Form 15H to the bank in order to avoid TDS.

Who should invest in fixed deposits?

Who should invest in fixed deposits?

Fixed deposit investments are a great option for those who don’t want to take any risks with their capital. FD accounts are a good option if you want to keep your money safe over time and interested in growing your fortune or getting consistent returns. Many retirees who receive a lump sum as a result of their retirement invest it in FD so that they can welcome monthly interest payout into their personal finance space. When investors invest in market-linked securities like ELSS, Mutual Funds, NPS, and so on in order to achieve higher returns, they may be subjected to risks As a result, in order to achieve stable financial growth, investors must stick to secure investment vehicles like a fixed deposit of banks or post office. An investor’s risk tolerance pattern influences his or her investment strategies Higher returns often come with a higher risk, which may mean risking a large sum of money at some time in the future if the market turns against you. An optimal investment strategy is a blend of risky and risk-free investments tailored to an individual’s risk tolerance ability. Although most investments are customized to their specific needs, desires, and objectives, there are a few investment vehicles that are required in every portfolio and a fixed deposit is one of them.

List of banks with the best FD rates for amount below Rs 1 Cr across different tenures

List of banks with the best FD rates for amount below Rs 1 Cr across different tenures

Bank 6 months – 1 year 1 year to 2 years 2 years to 3 years 3 years to 5 years > 5 years
State Bank Of India 4.40% 5% 5.10% 5.30% 5.40%
Canara Bank 4.45% 5.20% 5.40% 5.50% 5.50%
Bandhan Bank 5.25% 5.75% 5.75% 5.50% 5.50%
Yes Bank 5.5 – 5.75% 6.25% 6.50% 6.75% 6.75%
Union Bank of India 4.30% – 4.50% 5.25% – 5.30% 5.30% – 5.55% 5.50% – 5.55% 5.55% – 5.60%
Federal Bank 3.75% -4.40% 5.10% – 5.35% 5.35% 5.35% 5.50%
Dhanlaxmi Bank 4.50% 5.25% – 5.30 % 5.25% – 5.40% 5.40% – 5.50% 5.50%
South Indian Bank 4.75% 5.40% 5.40% 5.50% 5.50% – 5.65%
TamilnadMercantile Bank 5.25% 5.75% 5.65% 5.50% 5.50%
Karnataka Bank 5.20% 5.30% 5.30% – 5.55% 5.55% 5.55% – 5.70%
Karur Vyasa Bank 4.75% – 5.00% 5.50% 5.50% 5.65% 5.65% – 6.00%
IDFC Bank 4.50% – 5.25% 5.75% – 6.0% 5.75% 5.75% 5.75%
DCB Bank 5.95% 6.05% – 6.70% 6.50% 6.75% 6.75%
Axis Bank 4.4% – 5.15% 5.10% – 5.25% 5.40% 5.40% 5.50%
HDFC Bank 4.40% 4.90% 5.15% 5.30% 5.50%
IndusInd Bank 4.5% – 5.75% 6.50% 6.50% 6.50% 6.25% – 6.50%
RBL Bank 5.25% – 5.75% 6.50% 6.50% 6.25% – 6.60% 6.25%
Source: Bank websites



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Product review: Axis Securities’ YIELD platform

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To make investing in bonds and debentures easier, Axis Securities launched a new online platform ‘YIELD’ early this month. Customers of Axis Securities can use YIELD to buy and sell bonds in the secondary market.

What it is

YIELD enables customers of Axis Securities to invest in a range of corporate bonds (rated A and above) trading in the secondary market. The bonds purchased on the platform can also be sold here.

Today, when you buy / sell bonds through your trading account with a broker, the transaction goes through based on the volumes available on the stock exchanges. Axis Securities has empanelled large wealth management firms (that deal in bonds) on its platform. It is the inventory of bonds available for sale with these firms that is aggregated and displayed on the YIELD platform.

For each bond, YIELD shows you the face value, current price (‘minimum investment’), coupon rate, yield to maturity (‘yield’), maturity date, frequency of interest payment, among other details. You can also see whether the bond is tax-free or taxable and perpetual or not. The platform also shows you the stream of cash flows from a bond over its entire tenure. The periodic interest payments each year and the final maturity amount to be received in the end, are shown diagrammatically for each bond. YIELD also allows you to compare different bonds with each other as also with fixed deposits from a few select banks including SBI.

Suitability

While YIELD offers the prospect of better liquidity (larger volumes) that HNI bond investors may require, it may not offer any significant advantage to small retail investors who can, therefore, continue to trade with their existing brokers. YIELD gives Axis Securities’ customers access to bonds available with large wealth management firms (which is besides what is available on the exchanges) thereby providing them greater liquidity.

The platform also offers the advantage of one-time KYC (know your customer) to investors. According to Vamsi Krishna, Head- Products & Marketing, Axis Securities, once your KYC with Axis Securities is complete, all your purchases through YIELD are simply conducted based on that. You don’t require a separate KYC for bond transactions with every bond house. Existing customers of Axis Securities can use the platform at no additional cost. Note that, though, as on date, you can use YIELD to sell only those bonds that have been bought on the platform.

Furthermore, today, with the cheapest bond on the platform priced at around ₹2 lakh and many others at ₹10 lakh, per bond, the platform is not suited to the needs of small investors. Axis Securities plans to introduce bonds of smaller denominations in future. Retail investors can invest in tax-free and taxable bonds of significantly small denominations via their trading accounts with other brokerages as also with Axis Securities (outside of the YIELD platform).

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How your motor insurance comes handy in case of breakdown

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Two neighbours’ daily routine of watering plants leads to an interesting conversation.

Sindu: Hey, you missed the event on plant protection. It was so informative. There are so many simple hacks to grow plants.

Bindu: Oh! I so wanted to come but my car broke down and my entire morning went away in getting someone to bring a mechanic.

Sindu: What? You could have asked your insurer for RSA? Or didn’t you opt for the rider?

Bindu: I don’t even know what RSA is, to start with. So, how do I say whether I have opted for such rider?

Sindu: RSA stands for roadside assistance. It can be of great help, in the event of a breakdown of your car, like it happened yesterday, or in case of an accident. All you need to do is to call your insurer company and inform them about the problem and your location. They either offer help over the phone or send a representative (mechanic) to your location

Bindu: What if the problem isn’t resolved?

Sindu: Then, your insurer/mechanic will arrange for the car to be towed away to a nearby garage for repair. Also, as part of the RSA cover, some insurance companies arrange for your accommodation till the issue with your vehicle is resolved. Alternatively, you can avail of a taxi service to office/house. This facility is, however, provided to only one destination.

Bindu: This is great news! What are all the services that RSA covers?

Sindu: The list of services varies across insurers. But broadly the RSA should provide coverage for mechanical/electrical breakdown, towing the car, fuel delivery (you will have to bear the fuel charges though), flat tyre, minor repair services, spare keys for your car, accommodation, travel/taxi arrangement and cost of legal advisor.

Bindu: Good. If I had known about this, it could have saved me lot of trouble.

Sindu: Hold there. RSA is mostly offered as an add-on cover with your motor insurance. That means, you will have to pay additional premium to avail this rider. So unless you opted for this cover specifically, your policy will not cover you.

Bindu: Killjoy. Oh well, I wouldn’t mind it, if it comes to my rescue during an emergency.

Sindu: True. But think through a few points carefully, before you buy the rider. One, older your car, the higher will be the chances of mechanical problems. So, many insurers will not be willing to offer this cover for such cars. Two, if you use your vehicle to travel long distances frequently, it is advisable to opt for this cover. But some dealers offer RSA for new vehicles too. So, you can go for RSA with an insurer after the expiry of dealers’ services contract.

Bindu: Okay… is there any limit to the number of times I can avail this service?

Sindu: Yes, but Insurers cap the number of times, limit but the cap varies with each insurer. For instance, ICICI Lombard offers RSA for maximum of four claims.

Bindu: So, now that you have told me the positives, what are the exclusions?

Sindu: The general exclusions that apply on your motor cover, apply to this too. But specifically with respect to this rider, you shouldn’t use the vehicle for any illegal activities like motorsports. Your driving should be as per rules and regulations and the insurer should be informed about the breakdown or RSA requirement immediately. If you get repair work done without the insurer’s approval, you claim could get rejected.

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Tax query: What’s the tax liability for buying resale property using proceeds of equity investment?

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I am planning to buy a resale property using the proceeds from sale of my shares held in ICICI direct. What will be my tax liability, considering the fact the shares held in the account are one year old to seven-year old? Also, advise me on the precautions needed while buying a resale house.

Nilesh

Assuming that the shares held in ICICI direct are listed on Indian stock exchanges and are held for a period of more than 12 months, the gain/loss arising on sale of these shares shall be treated as long-term capital gain /long-term capital loss (LTCG/LTCL). As per Section 112A of the Act, LTCG in excess of ₹1,00,000 earned from sale of listed equity shares on which securities transaction tax has been paid shall be subject to income tax at the rate of 10 per cent (excluding surcharge and education cess).

Where the shares are purchased before January 31, 2018, the cost of acquisition shall be the higher of the following:

· actual cost of acquisition; or

· lower of (i) fair market value (FMV) of such share on January 31, 2018 (highest quoted price) or (ii) full value of consideration as a result of transfer.

You can explore deduction under Section 54F of the Act in case the net sale consideration arising from the sale of shares is invested in purchase of a residential house property within one year before the transfer date or within two years after the transfer date subject to specified conditions.

In regards to the purchase of immovable property, as per Section 194-IA of the Act, you will be required to deduct taxes at source (TDS) at the time of making payment of the sale consideration to the seller @ 1 per cent (assuming seller is a resident of India), where the sale consideration of the said property is equal to or exceeds ₹50 lakh. In such case, you will also be required to file a TDS return in Form 26QB and issue a Form 16B to the seller of the property.

A senior citizen engaged in businessis expected to make payment of advance tax based on his earnings. I would like to know the following: (i) if a senior citizen makes investment on equity, does he need to pay advance tax based on the quarterly earnings? (ii) if a senior citizen does trading on equity (buying and selling shares) will the same (payment of advance tax) be applicable? Please clarify while keeping in mind long- and short-term gains.

RM Ramanathan

As per Section 208 of the Income Tax Act, 1961 advance tax is applicable if the tax liability (net of taxes deducted or collected at source) on taxable income is ₹10,000 or more. As per Section 207 of the Act, liability to pay advance tax doesn’t apply to a resident senior citizen (who is aged 60 years or more), not having the income from business or profession.

Scenario I

The senior citizen doesn’t have income from business/profession:

Earnings on investment in equity could be in the form of dividend & capital gains (long term or short term, depending upon the period of holding) which are chargeable to tax under the head ‘Income from other sources & Income from Capital gains, respectively.

In view of the provision discussed above, payment of advance tax provision doesn’t apply in this scenario.

Scenario II

Senior citizen derives income from business/profession (trading of shares):

Since the senior citizen is trading in equity (which may include shares held as stock-in trade, intraday transactions etc.), it would tantamount to carrying on a business.

Accordingly, the advance tax provision of section 208 shall apply and he is required to pay advance tax if the net tax liability exceeds ₹10,000 in a FY.

The writer is Partner, Deloitte India. Send your queries to taxtalk@thehindu.co.in

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Should you go for pre-IPO investing?

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With IPO subscriptions going through the roof and the pricing in IPOs expensive in many cases, investors have an option to participate early by investing in companies through the pre-IPO market or the unlisted market. This market, in which HNIs and even retail investors have started investing, helps invest in companies that are unlisted and are expected to go for an IPO in the mid to long term.

According to Unlisted Zone (amongst top 10 unlisted share brokers), their gross transaction value in the unlisted market has gone up from ₹2.1 crore in 2018-19 to ₹19.1 crore in 2019-20. In FY21 (so far), it has been more than ₹40 crore. Also, the number of transactions earlier were 5-10 per day compared to 20 per day now.

How it works

A typical deal in the unlisted market starts with a buyer (with a demat account) getting connected to an unlisted shares dealer. The price and brokerage is agreed upon. The buyer sends money to the seller after which the share transfer is done along with a transaction proof exchange. By T+0 evening or T+1 morning, the transaction is completed with unlisted shares reflecting as ISIN numbers in the demat account of the buyer.

There are no set rules on what is the minimum and maximum investment limit under the pre-IPO investing. It usually depends on the broker you are interacting with. Earlier, the minimum size for pre-IPO deals used to be a few lakh of rupees. But with the ecosystem gaining more depth, i.e., more brokers, more buyers, more ESOP sellers, more research and start-up investing gaining traction, one can start transacting with as little as ₹25,000.

The benefit of a pre-IPO deal is that you buy the companies at an earlier stage and at a cheaper valuation, if available, compared to buying as a normal investor at the IPO. If you can identify opportunities before the market at large does, it can translate to much greater gain when the company goes for an IPO and lists its shares.

Beware the risks

Pre-IPO investing certainly does look interesting but before pushing the pedal on this instrument, understand that it involves high risk.

First, the pre-IPO market is illiquid. You may not be able to sell your shares when you want as there may not be any buyer in the market. The liquidity is low because it is a niche segment that trades over the counter and not through an exchange.

Second, the risk of IPO timeline. The IPO of the unlisted company you invested in can get delayed due to market conditions. Also, it is better to check if the management has provided any guidance on their IPO plans.

Next is the valuation at which the unlisted shares are being bought. Unless, a comprehensive valuation check with listed peers is done, you may end up buying at high valuations.

Further, there is the risk of being charged higher transaction costs by the broker you are dealing with. Investors should note that they can pay maximum 1-2 per cent premium on the cost price as brokerage. So, check prices with a few other dealers and compare before you enter a transaction.

Note that pre-IPO investing comes with a one year lock-in once the company’s shares get listed. So, one may miss the listing gains if the company makes a successful debut on the markets.

Also, if the fundamentals of the company changes and that warrants selling the stock, you may not be able to do so until one year.

Finally, one has to be cautious of frauds. Last year, a Bangalore-based prominent wealth management firm’s founder was arrested for a pre-IPO investing fraud. They took the money for the shares but never delivered the shares. Always deal with a trusted broker with a good track record.

Note that since there is no ombudsman or appointed entity for redressal, the only legal option left is to file a police complaint against the individual or directors of the company.

Taking into consideration all of the above, it becomes apparent that only investors with mid to high risk appetite should take a look at this instrument.

The writer is COO at JST Investments

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Readers’ Feedback – The Hindu BusinessLine

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This is with reference to the article titled ‘Is tax harvesting that good an idea?’ published on March 14. The story is really good. If investors can benefit from tax harvesting without facing any hitches, it will help them save ₹10,000 in taxes.

—KS Raghavendra

This is with reference to the article titled ‘Fiem Industries: Easier ride ahead’ published on March 14. Nice analysis.

––Vijay

This is with reference to the Statistalk titled ‘The rise of SPACs’ published on March 17. Let’s hope they only allow accredited investors, or have a minimum investment/net worth amount for SPACs, if they come to India.

––Mrin Agarwal

In BusinessLine Portfolio Star Track MF Ratings, currently only the growth option schemes are listed. For those who have invested in the dividend option, we are not able to track current NAV or one-, two- and three-year returns. Is it possible to add dividend option to the ratings?

––Vijaykumar Shingade

I am a regular reader of BusinessLine Portfolio. Kindly try to incorporate the 10-year trailing returns in Star Track MF Ratings, which will give a better picture for a long-term investor in mutual funds. I take this opportunity to thank the entire team of BusinessLine for continuous good reports.

––Balamurali PK

BusinessLine Research Bureau says (for the above two comments): Thank you for your feedback. We will strive to incorporate your suggestions.

I have been a regular reader of Business Line Portfolio/ Investment World since its launch. I like the ‘Taking Stock’ page. If possible, kindly publish the IPO recommendations for the forthcoming week on Sundays.

––Tarakaram Bussetti

BLRB says: Thank you for your patronage. We will strive to cover IPOs, as much as possible, in the Sunday edition itself. We are sure you will appreciate that unlike many other publications, we do a deep-dive analysis of IPO stocks. Sometimes, we may not be able publish the analysis on Sundays when the IPOs are announced at short notice, as we require a reasonable amount of time to do research and write a recommendation. Under such circumstances,we carry it on weekdays.

BusinessLine is certainly different from the rest. It’s contrarian and independent writing is the key differentiating factor. It doesn’t look to politicise or ever put things in a diplomatic way. I always look forward to reading BusinessLine.

The Portfolio edition is especially really insightful and thought-provoking. The content is unique, independently written and covers a spectrum of topics in the field of investing. Appreciate all of this. Many thanks!

––Varun Bang

As a finance faculty, I always get excited to carry BusinessLine to my class. We do a lot of analysis on various topics highlighted in BL. My students also are very much eager to read BL Portfolio on Sundays. Thank you so much for publishing BusinessLine.

––Prof Dibyendu Sundar Ray

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Are target maturity funds safer than other debt MFs?

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The credit ratings downgrade of IL&FS in 2018 followed by that of a few others such as DHFL and Yes Bank in 2019, impacted the NAVs of debt funds and brought home the point that these funds are not immune to credit risk. This year, impacted by a rise in bond yields, many longer duration debt funds have been reporting negative returns the last few months. In the past too, there have been such instances, bringing to the fore the interest rate risk involved here.

In this backdrop, target maturity funds whichoffer certainty of return (to a large extent) and a fair degree of safety are an attractive option for investors seeking an alternative to fixed income instruments such as bank fixed deposits. This is particularly so for those in the higher tax brackets. Many asset management companies such as Nippon India MF, Edelweiss MF and IDFC MF have launched open-ended target maturity debt funds recently.

The brass tacks

Target maturity funds have a defined maturity as indicated in the scheme name and passively invest in bonds of a similar maturity constituting the fund’s benchmark index. On maturity of the fund, investors are returned their investment proceeds (initial investment plus return).

These funds buy bonds such as corporate bonds, G-Secs (GOI bonds), SDLs (state government bonds) or a combination of these, in line with their benchmark index. For instance, the newly launched IDFC Gilt 2028 Index Fund will invest in the constituents of the CRISIL Gilt 2028 Index. Other debt funds, on the other hand, may sell bonds before they mature.

From a credit quality perspective, target maturity funds investing in G-Secs or SDLs, both of which enjoy sovereign (government) guarantee, carry no credit risk (risk of default) and are safe. Also, while funds investing in corporate bonds issued by public sector entities may rank a notch lower (AAA instead of sovereign rating), the government backing enjoyed by these entities lends comfort.

Return visibility

The biggest USP of target maturity funds is that they provide a certain degree of return visibility for those who stay invested until maturity. While the fund NAV gets impacted by interest rate changes in the interim, in the form of mark-to-market losses (or gains) on bonds in the portfolio, if you stay put until maturity, you will get the return indicated at the time of investing in the scheme.

For example, the indicative return (yield to maturity minus the expense ratio) for the recently launched Nippon India ETF Nifty SDL – 2026 Maturity and the IDFC Gilt 2028 Index Fund (direct plan) is 6.15-6.25 per cent and 6.24 per cent, respectively. The two funds have a tenure of around five and seven years, respectively.

Today, you can get up to 5.5 per cent, and 6.7 per cent per annum, respectively, on five-year public sector bank and Post Office (PO) fixed deposits. Floating rate savings bonds from the Central government with a seven-year lock-in offer 7.15 per cent per annum (paid half-yearly) currently. Interest income from these products is taxed at your income tax slab rate. Note that, the interest rate on PO deposits and the GOI bonds is reviewed quarterly and half-yearly, respectively. Capital gains made on target maturity funds (debt funds) held for over three years are taxed at 20 per cent with indexation benefit, making these funds an attractive post-tax option for those in the higher tax brackets.

Unlike in fixed maturity plans, in open-ended target maturity schemes, investors can enter as well as exit at any time. However, despite the inflows and outflows to and from these schemes, the possible impact on returns for those invested until maturity may be very small. According to Arun Sundaresan, Head-Product Management, Nippon Life India Asset Management, this will not impact returns, just like how equity open-ended index funds work. Interest rate movements during the tenure of the fund, however, may have a marginal impact, possibly 10-20 bps under a normal interest rate situation. “Sufficient liquidity in G-Secs ensures trades can be done seamlessly with very little impact cost,” adds Sirshendu Basu, Head-Products, IDFC AMC. Note that, this may, however, not be true for corporate bonds and SDLs to the same extent.

Stay put

Today, with economic growth recovering, the risk of inflation rising, and the gradual unwinding of the liquidity measures, no further rate cuts are expected from the RBI. As a result, you must be prepared for the possibility of capital loss (interest rate risk) as rates move up gradually, if you exit a target maturity fund prematurely. So, it’s best to choose a fund where the maturity broadly matches your investment horizon to park a portion of your investment surplus. For those in the lower tax brackets and not prepared to stay put long enough, shorter-tenure bank and PO fixed deposits may be a better alternative.

(This is a free article from the BusinessLine premium Portfolio segment. For more such content, please subscribe to The Hindu BusinessLine online.)

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Why fund houses really launch NFOs

Personal Finance

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As the stock market soars, it’s not just the IPO market that is buzzing with a line-up of new issuers, the market for new fund offers (or NFOs) is hyper too. When an AMC makes a slick pitch for a new fund, it’s hard not to give in. But then, if an AMC has just discovered a great new money-making opportunity in international investing,

ESG or housing stocks, there’s no reason why it cannot put it to work in the dozens of schemes its already manages.

As an investor, you, should be extremely selective while buying into NFOs because AMCs have many business reasons for rolling out NFOs, that they’re not be telling you about.

Higher fee

AMCs make their revenues and profits from expenses that they charge to their schemes as a percentage of assets under management (AUM). NFOs allow AMCs to take home a larger fee for every Rupee of money managed than older and larger schemes. This is one big reason why AMCs like NFOs.

SEBI’s slab-based limits on TER ensure that the fee that an AMC charges you declines sharply as a scheme grows. Before 2019, mutual funds were subject to just four slabs on TERs. Equity schemes could charge 2.5 per cent of assets for assets upto Rs 100 crore, 2.25 per cent for the next ₹300 crore, 2 per cent for the next ₹300 crore and 1.75 per cent for all assets over and above that. Debt schemes were required to charge 0.25 per cent less in each slab.

From April 2019, SEBI decided to re-align the slabs and lower them. It capped TER for equity schemes at 2.25 per cent on the first ₹500 crore of assets, 2 per cent on assets between ₹500 and ₹750 crore, 1.75 per cent on assets beyond that up to ₹2000 crore, 1.5 per cent from ₹5000 crore to ₹10,000 crore, with further cuts beyond this.

This change has had the effect of reducing the fees that leading AMCs take home every year from their bigger and older schemes. To illustrate, a ₹5,000 crore equity fund earned roughly ₹90.5 crore in annual fees in the old structure but only ₹86.1 crore in the new one.

More important, the slab structure also makes attracting money into new schemes a much more lucrative proposition for the AMC than getting it into older funds.

Fresh inflows of ₹500 crore into an existing ₹5,000 crore equity fund now fetch an AMC just ₹7.5 crore in fees, while an NFO mopping up ₹500 crore earns it a cool ₹11.25 crore. A higher fee pads the wallets of fund managers and helps the AMC pay higher commissions to its distributors to drum up support for a NFO.

Size fatigue

Fund houses won’t readily admit it, but too much popularity can prove a dead-weight on scheme returns.

Small-cap equity funds when they amass assets beyond ₹5000 crore, for instance, can struggle to build new positions or exit old ones without impact costs. When a market correction pops up, they can struggle to find enough market liquidity to absorb their sales. While size problems are acute for small-cap funds, other equity categories face it too. A multicap fund that overshoots ₹15,000 crore in assets, for instance, can have trouble retaining its ‘multicap’ character as small-cap bets can get more difficult to make.

When a value or contra fund grows too big, it may find it tough to deploy its entire corpus in sound but cheaply valued stocks.

Large schemes therefore end up making compromises like having more index names or holding more cash, which dilutes returns. AMCs try to manage the size problem by regulating flows or completely gating them for limited periods. But beyond a point, the opportunity loss in terms of AUM and fees begins to hurt.

NFOs are a neat way to get around this. When a popular scheme becomes too big to outperform, AMCs subtly divert their loyal investors (and distributors) to a new scheme that can start out afresh and make more nimble market moves owing to its size.

NFOs with broad themes like economic revival, value or even ESG are often attempts by an AMC to make up for the flagging track record of a flagship scheme, with a new kid on the block.

Survival tactic

The Indian mutual fund industry operates on the principle of survival of the fittest. With open end funds dominating, investors have been prompt to pull out money from laggard schemes that chronically lag peers or benchmarks to invest in better performers. This has led to situation where a few AMCs that manage outperforming schemes garner the lion’s share of new inflows. With AMCs that manage middling funds or poor performers getting hardly any inflows, they’ve taken the NFO route. Rolling out an NFO that offers visions of great returns in future is after all much easier than repairing the battered track record of a bunch of older schemes.

Category curbs

If you’ve been wondering why there are hardly any plain-vanilla fund launches nowadays, with most NFOs playing esoteric themes this is thanks to SEBI’s new rules on fund categorization. In early 2018, SEBI decided that Indian AMCs were offering just too many open end funds to investors, confusing them. It therefore brought in new rulers that allowed AMCs to offer just 36 specific categories of open-ended schemes. It also decreed that every AMC could run only one scheme in each of these 36 categories. While this has forced AMCs to consolidate, merge and streamline their 800 odd open-ended schemes to fit into the new slots, it also deprived them of the opportunity to expand their AUMs further. Given that the category curbs don’t allow AMCs to offer more than one multicap, large-cap, large and mid-cap, mid-cap and small-cap equity fund to launch any more diversified equity schemes, they’re been going all out to unearth new thematic ideas that can side-step these curbs (thematic is the only category where an AMC may have multiple schemes).

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