The average small investor will find it much simpler to take the mutual fund route and invest in a gilt fund. Mutual funds are also more tax efficient compared to investing in G-Secs directly. This is because the interest received on G-Sec is taxable in the hands of investors. So it may not suit investors in the highest 30% tax bracket. If someone in this bracket buys a G-Sec with a coupon rate of 7.2%, his post-tax yield will be only 4.98%. However, in mutual funds, this taxable interest gets converted into capital gains. This is because the mutual funds are pass-through instruments and therefore, there is no tax-incidence at that time. The capital gains are taxed at 20% after indexation if the holding period exceeds three years. If we assume the same 7.2% return from the gilt fund and an indexation of 5% due to inflation, the 20% tax will be levied only on the remaining 2.2% (20% of the 2.2%). So the post tax yield from the gilt fund will be higher at 6.76%.
Another problem is the extreme volatility in the secondary bond market. Since bond prices are inversely correlated to interest rates, prices zoom when interest rates fall. On the other hand, G-Secs quote at a discount when rates are hiked. G-Secs are good products, but lay investors should not confuse them with assured return products such as bank FDs. There is a possibility of capital loss in GSecs. The volatility may emotionally impact investors even if they are ready to hold till maturity. If the interest rates start reversing and G-Secs trade at a discount, lay investors may feel cheated.
Who should invest
G-Secs can be a good option for senior citizens and retirees looking for long-term assured income. They can buy 20-25 year bonds and be assured of a steady income for the full tenure of the bonds. However, note that this income will be fully taxable. More importantly, it will progressively become insufficient as inflation pushes up their requirements every year. But it will still be a better option than annuities provided by insurers.
If you are investing for the shortto medium-term or don't have a fixed invest ment horizon, then go through gilt funds. Direct G-Sec investors have to keep on reinvesting coupons and the mutual funds route relieve investors from that headache. Gilt funds offer better experience because of the fund management expertise it brings in. This expertise comes at a price: fund houses charge 0.5-1% every year for managing your money. Actively managed gilt funds usually recover the fund management costs and beat their benchmark comfortably
Open-ended gilt funds are also more liquid. You can redeem and get your money within a day's time. In direct G-Sec investments, it can take longer. In the first step, only banks and PDs who have direct access to the NDS-OM will be doing it, so the liquidity may not be high, especially if you want to trade. Stock brokers are staying away for the time being because most of them are not PDs. As of now, we don't have access to NDS-OM. So we are evaluating the possible options to offer this service to clients. Since there is not much business expected from here, banks also may not try to popularise this avenue. G-Secs may not become popular in near future because banks may continue to push the products they are interested in.
Is it time invest in GSecs now?
The bond market has been rallying for almost 6 months now. The 10 year benchmark bond yield fell below 7.17% on Friday. The general expectation is that rates will continue to decline in the short term. Due to several favourable factors, the 10-year yield may break the 7% lev el and may remain below that for some time. However, experts say this is not the time to take aggressive bets because we may be close to the lower end of the cycle. G-Sec yield has not yet bottomed out, but the risk-reward is not favourable anymore. We studied the average 1-year return from gilt funds at various bands of the bond yield. When the 10-year yield is between 9% and 10%, the average 1-year return was 16%. Investors lost when the yield was between 5% and 6%. As of now, it is placed between 7% and 8% and historically, gilt funds generated only 6% returns in the next one year in such situations.
However, very long-term investors can get in without much worry. Investors getting in now should get into 10-year plus duration. The interest rate will come down in the long term because we are transforming from a developing economy to a developed economy
------------------------------
Top 10 Tax Saver Mutual Funds to invest in India for 2016
Best 10 ELSS Mutual Funds in india for 2016
1. BNP Paribas Long Term Equity Fund
2. Axis Tax Saver Fund
3. Religare Tax Plan
4. DSP BlackRock Tax Saver Fund
5. Franklin India TaxShield
6. ICICI Prudential Long Term Equity Fund
7. IDFC Tax Advantage (ELSS) Fund
8. Birla Sun Life Tax Relief 96
9. Reliance Tax Saver (ELSS) Fund
10. Birla Sun Life Tax Plan
Invest in Best Performing 2016 Tax Saver Mutual Funds Online
For further information contact Prajna Capital on 94 8300 8300 by leaving a missed call
------------------------------
Leave your comment with mail ID and we will answer them
OR
You can write to us at
PrajnaCapital [at] Gmail [dot] Com
OR
Leave a missed Call on 94 8300 8300
------------------------------
0 comments:
Post a Comment