Safe And Secure In An Mf
India is blessed with a population with high saving habits. With savings assessed at over 30 per cent of GDP, its economic growth should have taken it to numero uno in global economic strength. The Indians are sincere, hard working professionals and most importantly, more intelligent than their counterparts elsewhere.
But alas! Most investors have chosen to remain illiterate in the art and science of investment. One does not have to look far for the reason. Traditionally, the Indian is very conservative and refuses to move with time. He has developed some misplaced affection and attachment to bank deposits, post office. Granted, once upon a time, these were the best. Now, especially during the last decade, other avenues have moved up the value chain with higher returns, comparable safety, better liquidity and stronger tax shields.
I am afraid the authorities are taking a mean advantage of this emotive attachment of the investor and his inertness. The interest on bank deposits and post office schemes are blatantly reduced, hurting the common man of small means more than the elite. This is a disguised tax imposed upon one and all. And now there are proposals to reduce PPF interest.
If the common man did react instantaneously and move over to greener pastures, the authorities would think twice before reducing the benefits. Its distressing to see that investments in these areas continue to rise in spite of these becoming less attractive.
Yet another malady the common investor suffers from is an instant faith in explicit promises given in black and white, even if these promises are laced with `indicative' and are not enforceable. He does not have the time or inclination to look into an implicit assurance flowing from the strength of the balance sheet as well as the integrity of the management. This attitude has resulted in an epidemic of fly-by-night operators who launch their dream schemes which turn into nightmares for the investors.
Unfortunate but true, the various regulatory authorities including SEBI, RBI, CLB, wake up only when rigor mortis sets in. Again, strangely, the regulator can only regulate but have no teeth to take punitive action. The actions can be taken by law and police but we know what has happened to them.
One Size Fits All
There are different horses for different courses. For a punter, it is a huge task to study the backgrounds of the horses and the courses. Fortunately, for the real investors, a `one size fits all' solution has emerged with the highest degree of safety, liquidity and returns, thanks to the regulatory authorities who have now put their measures in place arising out of their past debacles.
It is an accepted economic tenet all over the globe, that investment in the share market with long-term view beats all other avenues put together. Even those with short-term view can mint money if they are in constant touch. It is impossible for an individual to acquire this acumen. Only Mutual Funds, with their team of professionals trained in the various facets of market analysis can do this. The conclusion is written on the wall _ Invest in equities through UTI/MFs.
In the USA, there are more MFs than listed companies. India decided to follow in 1964 with UTI and a little before the last decade, it went all out by bringing in public sector banks, Indian financial institutions and the foreign financial institutions.
Unfortunately, all this was typically carried out in a hurry without placing any regulatory measures. Naturally, there were scams, one from a single operator in 1992 who took mean advantage of systemic faults and the other in 1994 from several fly-by-night operators who benefited from the IPO euphoria.
UTI/MFs suffered heavily because of these two debacles resulting in many investors losing their shirts and many of them lost more sensitive garments.
This is history. Coupled with the regulatory measures, the liberalisation process has put the Indian industry on roller-coaster wheels.
Simply put, MFs have emerged as the one and only parking place for the investible funds of all and sundry, including the small investor, high net worth individual and, of course, the NRIs.
Options
As I said, there are different horses for different courses. If you have no risk appetite, MFs offer debt-based schemes. Such schemes may not give any explicit promise, but the implicit one cannot be and should not be ignored. The current returns are around 12 per cent annually, and likely to slide down because of the interest rate pull down.
Those who have a high risk appetite, should have a look at the equity-based schemes of the MFs. Thanks to the recent revival of the market, the current returns are _ well, sky high.
Those who have a medium appetite, may go in for the balanced schemes which invest around 60 per cent in equities and 40 per cent in debt.
Tax Benefits
FA99 has blessed the dividend income from any of the schemes of UTI/MFs with freedom from tax! However, there is a covet, rather two of them. The Fund has to pay 11 per cent tax directly to the exchequer before giving the `so-called' tax-free dividend to the investors. Fortunately, the Equity-based and Balanced Schemes having an exposure of over 80 per cent to equities will not have to pay tax for dividends paid upto April 1, 2002. It is only the debt-based that suffers from this indirect tax to be paid by all, even those whose income is below the tax threshold.
Fortunately, there is a way out. Do not choose the dividend option. Go for the growth option. Here, the tax shield is quite strong. Let us have a quick look at it.
Suppose you invest Rs 1,00,000 and it grows to Rs 1,12,000 (12 per cent) at the end of one year. This is long-term growth and there is benefit of indexation plus the concessional flat tax rate of 22 per cent, irrespective of the size of the fund.
This year, the cost inflation index is 389 and last year it was 351. Assuming the index grows at the same rate in the future, the indexed cost would be Rs 1,08,262. This results in capital gain of Rs 3,738 only. The tax thereon works out at Rs 822. This is 6.85 per cent of Rs 12,000 only. The normal tax rates are 10 per cent, 22 per cent or 33 per cent depending upon the tax zone. Even this small tax of 6.85 per cent can be bypassed by investing Rs 3,738 in section 54EB option of any of the MFs including the same from which the investor has earned the capital gains.
Conclusion
The message is loud and clear. Merge with UTI/MFs.Do not submerge with anyone else. A little time spent on the basics would be the best investment.