Think Funsindia - July 2016

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Brexit aftermath: What you should do The markets reacted sharply on June 24, to Britain’s vote the European Union. As the uncertainty on how and when the exit will happen, and its impact on the UK and other nations slowly unfold, the markets are likely to remain volatile. You should use this chance to average your portfolio. As far as India is concerned, its exposure to the UK accounts for about 3.3 per cent of its total exports (or 0.5 per cent of its GDP) in sectors such as pharma, textiles, apparels, and gems and jewellery. Meanwhile, service exports, reportedly, make up 0.3 per cent of its GDP. So, while a fall in demand and a weakened pound may not help India’s exports to the UK, we think that its impact will not be significant, given India’s limited exposure. In terms of FDI, India received only 2.2 per cent of its total FDI inflows from the UK in FY2016. Conversely, some Indian companies also have FDI exposure in the UK, and a slowdown there can also impact the earnings growth for these companies. What to expect Brexit may set the stage for a prolonged period of uncertainty. We thought of two negative scenarios and their impacts on India: One, the uncertainty could lead to renewed weakness in global demand, which could cause commodity prices to move lower. Two, chances are, major central banks will go for further policy accommodations to mitigate negative macro implications. India may well benefit from lower commodity prices, keeping its inflation and deficit under check, and actually clearing the way for further interest rate easing. Besides, policy accommodations by central banks will mean a lot of money will be looking for opportunities to invest in. With India having sound tail winds in the form of lower interest rates and inflation, improving production numbers, and a comfortable deficit, a large part of this free money may well settle in India. What to do We would urge you to use this volatility to average your mutual fund investments. You could invest a chunk of your money today and add to it in phases over the next several weeks, as the markets remain volatile. If you are running SIPs, do not make the mistake of stopping them. Vidya Bala Head – Mutual Fund Research FundsIndia.com July 2016 Volume 06 07 An interesting month Greetings from FundsIndia! The month of June has been a very happening month for us. Here’s why: 1. We launched two much-awaited features our integrated automated advisory service – ‘Money Mitr’ (your money friend), and the ability to open an account using just your Aadhaar card (Aadhaar-eKYC). 2. We crossed Rs 2,000 crore in assets under management and, more importantly, we reached the milestone of processing 1 lakh SIPs in a month – that’s just over 1 per cent of all the SIPs that the industry processes. 3. Finally, we celebrated the 7 th anniversary of the launch of our platform – and what an eventful 7 years these have been! And, yes, one more thing – we won the national award for online advisory services for the third year in a row. All these milestones and accolades are proof that we are on the right track, and that doing right by the customer with sincerity and dedication does pay off. We’ll strive to continue doing so. Happy investing! Srikanth Meenakshi Co-Founder & COO FundsIndia.com www.fundsindia.com to exit

Transcript of Think Funsindia - July 2016

Brexit aftermath: What you should doThe markets reacted sharply on June 24, to Britain’s vote theEuropean Union. As the uncertainty on how and when the exit will happen,and its impact on the UK and other nations slowly unfold, the markets arelikely to remain volatile. You should use this chance to average your portfolio.

As far as India is concerned, its exposure to the UK accounts for about 3.3per cent of its total exports (or 0.5 per cent of its GDP) in sectors such aspharma, textiles, apparels, and gems and jewellery. Meanwhile, serviceexports, reportedly, make up 0.3 per cent of its GDP. So, while a fall indemand and a weakened pound may not help India’s exports to the UK, wethink that its impact will not be significant, given India’s limited exposure.

In terms of FDI, India received only 2.2 per cent of its total FDI inflowsfrom the UK in FY2016. Conversely, some Indian companies also have FDIexposure in the UK, and a slowdown there can also impact the earningsgrowth for these companies.

What to expect

Brexit may set the stage for a prolonged period of uncertainty. We thoughtof two negative scenarios and their impacts on India: One, the uncertaintycould lead to renewed weakness in global demand, which could causecommodity prices to move lower. Two, chances are, major central banks willgo for further policy accommodations to mitigate negative macroimplications.

India may well benefit from lower commodity prices, keeping its inflationand deficit under check, and actually clearing the way for further interest rateeasing. Besides, policy accommodations by central banks will mean a lot ofmoney will be looking for opportunities to invest in. With India having soundtail winds in the form of lower interest rates and inflation, improvingproduction numbers, and a comfortable deficit, a large part of this freemoney may well settle in India.

What to do

We would urge you to use this volatility to average your mutual fundinvestments. You could invest a chunk of your money today and add to it inphases over the next several weeks, as the markets remain volatile. If you arerunning SIPs, do not make the mistake of stopping them.

Vidya BalaHead – Mutual Fund Research

FundsIndia.com

July 2016 Volume 06 07

An interesting monthGreetings fromFundsIndia!

The month of Junehas been a very

happening month for us. Here’swhy:

1. We launched two much-awaitedfeatures – our integratedautomated advisory service –‘Money Mitr’ (your moneyfriend), and the ability to openan account using just yourAadhaar card (Aadhaar-eKYC).

2. We crossed Rs 2,000 crore inassets under management and,more importantly, we reachedthe milestone of processing 1lakh SIPs in a month – that’sjust over 1 per cent of all theSIPs that the industry processes.

3. Finally, we celebrated the 7th

anniversary of the launch ofour platform – and what aneventful 7 years these havebeen!

And, yes, one more thing – we wonthe national award for onlineadvisory services for the third yearin a row.

All these milestones and accoladesare proof that we are on the righttrack, and that doing right by thecustomer with sincerity anddedication does pay off. We’ll striveto continue doing so.

Happy investing!

Srikanth MeenakshiCo-Founder & COOFundsIndia.com

www.fundsindia.com

to exit

Options for monthly income

Post Office Senior Citizens’ Scheme (POSCS)

At 8.6 per cent per annum (from April 1, 2016, but subjectto change every quarter), this is the best rate that a 60-plusinvestor can get in the present scenario. This rate will befixed for all 5 years of your lock-in, even as new rates(linked to government security yields in the market) areannounced every quarter.

This is an ideal option for multiple reasons:

One, the interest rate will likely remain higher thanbank interest rates.

Two, the quarterly interest payout will give you theneeded income flow.

Three, investments in this scheme are eligible fordeduction under Section 80C of the Income Tax Act(in case you fall under a tax bracket and want to availdeduction). In fact, in the year of your retirement,when you still remain in a high tax bracket, this can bean ideal 80C investment option.

Four, in later years, although the interest is fullytaxable, the post-tax returns won’t be as bad, given thatyou will fall under lower tax brackets than you did inyour earning years.

Five, and very importantly, it is sovereign guaranteed.Remember, even bank deposits (and your savingsaccount together) only carry an insurance of up to Rs.1 lakh.

The only drawback is that there is a limit of Rs. 15 lakhthat you can invest (across all accounts, individually orjointly) in this scheme at any point. Besides, TDS will bededucted for all interest payouts exceeding Rs. 10,000 ayear (similar to bank deposits).

Hence, you should make sure you submit your Form 15Hif you are below the taxable limit for senior citizens.

SSuuii ttaabbiill ii ttyy: The POSCS is suitable for all retired investorsacross tax brackets. It is also an ideal investment option inthe year of retirement, especially for those who wish toavail Section 80C tax benefits.

Bank fixed deposits

While you will enjoy special rates for senior citizens’ bankdeposits, this is certainly not the best time to lock amajority of your funds in banks, given that rates havedwindled. The interest is also taxable at your slab rate.

Again, make sure you submit your Form 15H to avoidTDS if you are not within the taxable limit.

SSuuii ttaabbii ll ii ttyy : Bank deposits are a good option to diversifyyour investments. They are even better if you are not atax payer. If you are one, ensure you keep your exposureto this avenue limited in a low interest rate scenario suchas the present one.

Corporate fixed deposits

Do not scout for high returns in this space. Go for two orthree well-known Non-Banking Finance Companies(NBFCs), which are also governed by the RBI, to ensureyou park your money in safe avenues. While interest rateshave fallen in this segment as well, they still remain higherthan bank deposit rates, making this a good option fordiversification purposes.

SSuuii ttaabbii ll ii ttyy: Corporate deposits are a good diversificationoption for investors who are not in the tax ambit or are inthe lower tax bracket. For those in the high tax bracket, thepost-tax returns from these will not keep pace with costof living, especially when it comes to medical expenses.

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Vidya Bala

For those who have just retired and are looking to deploy their retirement money, bank fixeddeposits may seem like the simplest option. However, you may miss out on other superioroptions that can help you build a diversified retirement income portfolio that also returns well.Here is a low down on your options and the suitability of each such option, based on your taxslab.

“This (Brexit) is the worst period I recall since I've been in public service. This has a corrosive effectthat will not go away.”- Alan Greenspan, former Chairman, Federal Reserve of the United States

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Tax-free bonds

When tax-free bonds were issued in the market untilMarch 2016, there was a rush to buy them. Post that, manyinvestors are exploring the option of buying them in thesecondary market so as to get steady, tax-free interest untilmaturity. However, one fact to remember is that unlessthe yield is compelling when compared to your post-taxreturn from other options, this is not the most attractiveproduct for you.

Let’s do a comparison: The POSCS will give you 8.6 percent annually (until new rates are announced), while thelast tranche of IRFC bonds in March 2016 had an interestrate of 7.74 per cent. Now, if you are not in the tax ambit,you would be far better off with the POSCS than thesebonds. If you do fall under a tax bracket, you should stilldo a post-tax calculation of the POSCS rate and compareit with the rate of the tax-free bond.

Also, remember, in the secondary market, unless the pricesare trading at a discount (which is usually not the case ina falling rate scenario), you will be buying these bonds ata price higher than their face value (currently the case). So,you already lose a bit by paying that premium to fetch youthese tax-free yields.

SSuuii ttaabb ii ll ii ttyy : Tax-free bonds are ideal only for investors inthe high tax bracket. If you are buying bonds in thesecondary market, make sure that you aren’t buying themat a premium higher than their face value.

Debt mutual funds

Debt mutual funds will, by far, be the most tax efficientway for retired investors to generate regular income.

Many investors make the mistake of going for thedividend payout option to generate cash flows wheninvesting in debt mutual funds. It is, however, asub-optimal way to generate income and here’s why:

One, dividend payouts are not guaranteed and will notbe a fixed sum.

Two, dividends in debt funds are subject to a dividenddistribution tax of 28.3%. While you do not pay thisdirectly, it is deducted from your NAV, which meansyou are left with lesser money in your fund as a resultof this tax.

If you are in the nil, 10 per cent or 20 per cent tax bracket,then going for the growth option and starting a SystematicWithdrawal Plan (SWP) - an automated way to withdrawa fixed amount every month - is a far better option for thefollowing reasons:

- You get a fixed cash flow every month, irrespective ofthe gains in the fund.

- For resident Indians, there is no TDS for mutual funds.Hence, if you are not a tax payer, there is no risk of taxgetting deducted.

- For every instalment that you withdraw, only the gaincomponent is taxed (if you fall under a tax bracket)and not the principal. Hence, only a portion of yourmonthly cash flow gets taxed as opposed to the entireinterest income from your FDs.

- If you are in the 10-20% tax bracket, a SWP under thegrowth option makes more sense than going for thedividend options.

- After holding them for three years, you get to enjoyindexation benefits for your debt fund investments.This will further bring down your taxes

The key with debt funds, though, is to ensure you go withlow risk, stable funds and not with funds that take eitherhigh interest rate risk or credit risk.

Build a portfolio that provides you a combination ofsafety, fixed returns, and tax-efficient returns.

Vidya Bala Head – Mutual Fund Research

FundsIndia.com

“So far as India is concerned, it is an overreaction (to Brexit). We may have to redo our tradeagreements between UK and Europe separately. The issue really is for Great Britain.”- Deepak Parekh, Chairman, HDFC

FundsIndia explains: Capital gains on mutual funds

On all funds other than equity-oriented funds, short-termgains are taxed at your tax slab rate. For such funds,short-term is defined as a holding period of less than 3years. Long-term gains (holding period of over 3 years)are taxed at 20 per cent with indexation benefits.

Setting off

You pay taxes, where applicable, on the gains you make.What happens in the case of losses? You can set them offagainst the capital gains you made – that is, you can reduceyour capital gains by the amount of losses. As your gainsreduce, your taxes also drop.

If your capital gains aren’t enough to fully cover the losses,the unabsorbed loss can be carried forward into the nextyear and set off against the capital gains made. Such carryforward can be done for eight years.

Since you have both long-term and short-term gains, and,depending on the type of fund the taxation differs, thereare rules to such setting off.

- Long-term capital gains on equity-oriented funds,because they are tax-exempt, cannot be used to set offany loss whatsoever.

- For this same reason, long-term capital loss onequity-oriented funds cannot be set off against anycapital gain.

- Short-term capital losses from all funds(equity-oriented and others), can be set off againstboth long-term and short-term capital losses.

- Long-term capital losses on all funds other thanequity-oriented funds can be set off against long-termcapital gains only.

Therefore, always remember to omit long-term capitalgains on equity-oriented funds while arriving at the capitalgains available for set off.

Understanding all this is easier with examples. Say youmade short-term capital gains of Rs 50,000 on an equityfund, and also made a short-term capital loss of Rs 30,000on a debt fund in the same year. You can set off this Rs30,000 loss against the short-term gain. You now pay taxonly on the remaining Rs 20,000. If you had a long-termcapital loss on the debt fund instead of the short-term,you would not be able to do such a set-off, and would paytax on the entire Rs 50,000.

Take another example. You made long-term capital gainof Rs 50,000 on an equity fund, and had a short-termcapital loss of Rs 30,000 on a debt fund. There is noset-off that you can do. Take a third example. You madea short-term loss on a debt fund for Rs 30,000, and madea long-term gain on a gold fund for Rs 50,000. You can setthe loss off against the gain and pay 20% tax withindexation on the remaining Rs 20,000. If you had insteadmade a long-term loss on the debt fund, you can still setit off against the gain from the gold fund.

Set off against other assets

Now, it is important to remember that you can set off thelong-term and short-term capital gains in other assets(where tax is not exempt) such as property or gold againstyour mutual fund loss. If you have a short-term capitalloss in mutual funds, you can set it off against short-termor long-term capital gain in any other asset as well. If youhave a long-term capital loss in your non-equity fund, youcan set it off only against a long-term capital gain in anyother asset.

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Bhavana Acharya

We covered taxation rules on mutual funds last month. With tax-filing season around the corner,we’ll now explain how you can use set-offs in order to maximise your tax savings. First, a briefrecap on the tax rules. Long-term capital gains on equity-oriented funds (including equity balanced funds) aretax-exempt when held for over twelve months. Short-term gains on equity-oriented funds aretaxed at a flat 15 per cent, no matter your tax bracket.

“Multiple factors, like global presence, the ability to deliver newer solutions to an ever-evolvingmarket, continuous investment in R&D, and access to captive markets at global scale continue togive an edge to MNC stocks.”- Mahesh Patil, co-CIO, Birla Sun Life

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Showing capital gains

Mutual fund houses don’t deduct taxes when you redeemthe fund, unless you’re an NRI, in which case TDS willapply. Calculating capital gains and paying the taxes due onthem is your exercise.

Capital gains are a separate source of income, under theIncome Tax Act. Therefore, you need to list it separatelyas a different income head at the time you file yourreturns.

Now, what happens if your income outside of capitalgains is less than the basic exemption limit? Forindividuals below 60 years of age, the basic exemption isRs 2.5 lakh, for those between 60 and 80, it is Rs 3 lakhand for those above 80 years, the exemption limit is Rs 5lakh.

Income tax rules allow you to reduce your long-termcapital gains and short-term gains from equity to theextent your income falls short of the basic exemptionlimit. This rule applies only if you are a resident individual

(or HUF) and not if you are an NRI investor.

Let’s say you’re 25 years old. Your taxable income is Rs2,00,000 excluding capital gains. After completing all theavailable set-off, you have Rs 3,00,000 of long-termcapital gains from your debt mutual fund, on which youneed to pay tax. Your basic exemption slab is Rs 2,50,000.The difference between this limit and your actual incomeis Rs 50,000. You can use this Rs 50,000 to reduce yourtaxable capital gains. Therefore, you will pay 20% tax (withindexation) on Rs 2,50,000.

Similarly, if you instead had Rs 3,00,000 worth ofshort-term capital gains from an equity fund, you will haveto pay tax of 15% on Rs 2,50,000. But if the short-termcapital gains came from a debt-oriented fund, then yourtaxable income jumps to Rs 5,00,000 (Rs 2,00,000 + Rs3,00,000). This is because the gains are added to yourincome and taxed at your slab rate.

Bhavana AcharyaAnalyst - Mutual Fund Research

FundsIndia.com

"We have seven billion people on the planet and 1.2 billion of them are in India. Several people areon the farms — this is the market of tomorrow."- Philippe Delpech, President, Otis

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Q:Would now be a good time for picking up internationalfunds in small amounts for diversification? Specifically,European funds like Franklin Feeder European Growth,through a SIP, perhaps?

A: I would do that if there are no good opportunitieselsewhere. That’s not the case right now. Where you haveextreme uncertainty in a market like Europe, you have farmore clarity on the Indian market, and the Indianeconomy is set to grow. So, seeing as there are betteropportunities present now, there isn’t a good reason to beton uncertainty, especially when those markets have neverbeaten India over the long term.

Vidya BalaHead - Mutual Fund Research

FundsIndia.com

Q: Can’t we carry forward a long term capital loss onequity mutual funds? Is this why such a loss is called“dead-loss”?

A: Carry forward of losses is done when, in a year, youdon’t have enough gains to set the losses off. Such a carryforward can be done for eight years, for both long-termand short-term capital gains. The rules for set-off remainthe same when you when you’re carrying forward the loss.On long-term loss on equity, since you can’t set it offagainst any gain, there is no question of carrying it

Q & A

Index 1 Year 5 Years 10 Years

Nifty 50 -1.0 8.0 10.2

S&P BSE Sensex -2.8 7.4 9.8

Nifty Freefloat Midcap 100 6.2 11.6 13.3

Nifty Freefloat Smallcap 100 9.2 9.7 9.1

Nifty 100 -0.3 8.7 10.8

Nifty 500 1.2 9.1 10.5

Nifty Bank -2.0 9.8 17.1

Nifty Energy -2.1 0.2 5.9

Nifty FMCG 7.2 15.8 15.4

Nifty Infrastructure -12.5 -1.8 2.6

Nifty IT 0.7 10.9 10.9

Returns (in per cent as of June 30, 2016) for less than one year ison an absolute basis, and for more than one year on a compoundedannual basis.

Equity Performance Snapshot

forward at all. You will never be able to set this loss off.

Bhavana AcharyaAnalyst - Mutual Fund Research

FundsIndia.com

www.fundsindia.com

JK Tyre & Industries This stock was trading in a tight band between Rs. 79 toRs. 86 for the past four months before it tested a high ofRs. 93. Currently it has fallen to retest its support level ofRs. 86. We expect it to bounce back for a medium-termtarget of Rs. 103. Resistance is at Rs. 93 and Rs. 98.Support is placed at Rs. 79. The latest 100-day SMA is atRs. 84. The stock can be accumulated on declines. Stoploss is placed at Rs. 78.

This column is targeted at investors who are registered customers ofFundsIndia for trading and investing in equity as well as prospectiveinvestors who wish to open an equity account with FundsIndia.

The Nifty formed lower tops and bottoms (a bearishpattern) on the daily chart for the month of June. Theindex has bounced back sharply from the major supportlevel of 7,930. It can continue its rally towards theimmediate target levels of 8,300 and 8,520. The short-and medium-term trend will remain positive as long asthe index trades above 7,930. It is currently trading abovethe latest 50-days and 200-days Simple Moving Average(SMA) of 7,998 and 7,776. Major resistance is at 8,160and 8,300. A close below 7,930 will lead to furtherweakness to test 7,720 and 7,550.

Perumal RajaTechnical Analyst - Equity Research Desk

FundsIndia.com

Bank of Baroda Bank of Baroda has remained volatile for the past fourmonths building strong support at Rs. 132. Currently it istrading near the trend line breakout level of Rs. 152.A breakout above this will lead to a medium-termtarget of Rs. 192. Major support is placed at Rs. 142 andRs. 132, while resistance is placed at Rs. 163 and Rs. 181.The stock can be accumulated on declines. Stop loss isplaced at Rs. 130.

Technical View Nifty

Disclaimer:Mutual fund investments are subject to market risks. Please read the scheme information and other related documents beforeinvesting. Past performance is not indicative of future returns. Please consider your specific investment requirements before choosing a fund,or designing a portfolio that suits your needs. Wealth India Financial Services Pvt. Ltd. (ARN code 69583) makes no warranties orrepresentations, express or implied, on products offered through the platform. It accepts no liability for any damages or losses, howevercaused, in connection with the use of, or reliance on its products or related services. The terms and conditions of the website are applicable.Think FundsIndia, a monthly publication of Wealth India Financial Services Pvt. Ltd., is for information purposes only. Think FundsIndiais not, and should not, be construed as a prospectus, scheme information document, offer document or recommendation. Information inthis document has been obtained from sources that are credible and reliable in the opinion of the Editor.Publisher: Wealth India Financial Services Private Ltd. Editor: Srikanth Meenakshi

"India stands out as one of the fastest-growing economies. Macro-economic factors such as lowerinflation, monetary easing by the RBI, reduced current account deficit and fiscal deficit havehelped."- Akash Singhania, Head-Equities at DHFL Pramerica Asset Managers

1. The Asian Infrastructure Investment Bank (AIIB)has recently approved $509 million to finance fourprojects in which four countries?

2. What is India’s rank in terms of Foreign DirectInvestment (FDI) inflows, as per the latest 2016World Investment Report?

3. Name the platform that was launched by India andSouth Korea to promote investments.

4. Which state government has recently abolishedincome tax on agricultural income?

5. Which country is the world’s largest oil consumer, asper the recently released BP Statistical Review ofWorld Energy?

Answers may be sent to [email protected].

Answers for June 2016 Investment Quiz:

1. National Aluminium Company Limited (NALCO)2. HDFC 3. 7.5 per cent 4. Odisha 5. Binod K.Chaudhary

The winner of the June 2016 Investment Quiz is KumarGaurav Dhakate.

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FundsIndia Select Funds Investment QuizEquity Funds - Moderate Risk

These are funds that will seek to generate inflation-beatingreturns, and limit downside risks. The recommended holdingperiod is five years.

Axis Equity ICICI Pru Focused BlueChipBirla SL Frontline Equity Invesco India GrowthBNP Paribas Equity Kotak Select FocusFranklin India Bluechip Mirae Asset India

Opportunities

Franklin India Prima Plus SBI BlueChipICICI Pru Dynamic Plan UTI Equity

UTI Opportunities

What is FundsIndia Select Funds: This is a listing ofmutual funds that we think are most investment worthy fora regular investor. We review this list on a quarterly basis.Do note, however, that past performance is not a guaranteeof future results. Please consider your specific investmentrequirements before designing a portfolio that suits yourneeds.

Please click here for a complete listing of our preferredfunds.