Guide to GILT Funds

Since g-secs are the most liquid of all instruments in the debt market, g-sec funds or gilt funds carry no credit risk as the GoI is the borrower

You've heard of sector funds in the equity funds space. In the debt funds space, the closest thing to sector funds is those that invest solely in government securities. These are more popularly known as g-sec or gilt funds. However, unlike sector funds, gilt funds benefit from concentration.

What is it about GILT Funds?
Corporations need money for their day-to-day requirements and therefore borrow from lenders such as banks, mutual funds and insurance companies. Similarly, when the Government of India needs money, it borrows through its banker, the Reserve Bank of India (RBI).

The RBI, in-turn, takes money from the lenders like banks, insurance companies and mutual funds; and passes it on to the government, and issues g-secs in return.

These g-secs have a specific tenure, at the end of which lenders give back the g-secs and take their money back. Many types of debt funds invest in g-secs but g-sec funds invest only in g-secs. Although debt funds were introduced to the Indian mutual funds industry in 1994, Kotak Mahindra Asset Management Co. Ltd launched India's first gilt fund in December 1998.

Returns and risks of GILT Funds
Since g-secs are the most liquid of all instruments in the debt market, g-sec funds carry no credit risk because the Government of India is the borrower. Since the government typically doesn't default unlike a corporate, gilt funds don't carry a credit risk.

That is also why government securities are sovereign rated. That's as good as-or considered to be better than-a AAA rating.

Does that mean g-sec funds carry no risk? No. They carry interest rate risk. Typically, g-sec funds invest in securities that mature over a long period of time. As a debt security's maturity goes up, it becomes more sensitive to interest rate movements.

If interest rates drop, prices of debt securities rise. The higher maturity scrips' prices rise sharper than the rest. Similarly, when interest rates rise, prices of debt securities fall. Here's where g-sec funds can suffer the most, as their average maturity is typically the highest.

Typically, a g-sec fund's average maturity is higher than the fund house's own bond fund that invests a part of its portfolio in gilts. In fact, for a bond fund manager, the easiest way to increase a bond fund's maturity is by buying gilts. Hence, gilt funds are usually more volatile than bond funds.

As per figures provided to us by Crisil, a rating agency, gilt funds have given 3-year returns of as high as 16% and as low as little less than zero returns-which means they have also lost money-between January 2007 and now. The 5-year returns in the same period have gone as high as 13% and as low as 1.02%.

What's special about GILT Funds?
If you understand debt markets well, then gilt funds are for you. If you expect interest rates to fall, then a small exposure to gilt funds is a good idea because, typically, these funds move the most of all debt funds when interest rate move. Remember: in such times, you make money only when you actually withdraw your money and encash.

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How to Plan Post Retirement Income

 

The conventional wisdom on retirement savings is condemning Indian savers to old age poverty. Retirement is not an event but a long phase in your life that can last up to 30 or 35 years. During those decades, inflation cuts down the value of your savings ruthlessly. If your savings do not earn enough, then you are going to run out of them within your lifetime. Nothing can be worse than a long period of old age where you are gradually losing prosperity and then eventually entering poverty. And yet, all around you, you can see any number of senior citizens to whom this is happening.

So how can you prevent this from happening to you? The first part, which I wrote about in detail last week, is to save enough during your working years and then invest the savings in equity-backed mutual funds. The second part, which I'll discuss today, is how to derive income from these savings after you have retired.

If you have understood what I've been saying about inflation, then the basic requirement is self-evident: you should spend only that part of your investment returns that exceed the inflation rate. This is another way of saying that you must preserve the value of your principal. However, the single most important thing to understand in this whole business is that you must reserve the real, inflation-adjusted value of your principal, and not just the nominal face value. So how do you do this?

Let's take a simplified example. Suppose you retire today with say Rs 1 crore as your retirement savings. You place it in a bank fixed deposit. A year later, it is worth Rs 1.07 crore. So you have earned Rs 7 lakh, which you can spend, right? Not so fast. Assuming a realistic inflation rate of 5 per cent, if you want to preserve the real value of your principal, you must leave Rs 1.05 crore in the bank. That leaves Rs 2 lakh that you can withdraw to spend over an year, which is Rs 16,666 a month. Is that enough? For a middle class person, surely not. It could be a little worse with some banks, and it could be a little better for something like the Post Office Monthly Income Scheme, but basically, this is it for any supposedly fixed income asset class.

The interesting thing is that this calculation does not change even when interest rates rise because inflation and interest track each other quite closely. It's actually a publicly declared goal of the RBI (from Rajan's time) to keep the real (meaning inflation-adjusted) interest rate between 1.5 and 2 per cent. However, the actual rate tends to be lower, especially when compared not to the official inflation rate but the real inflation that you face. This means that if you need Rs 50,000 a month, you need Rs 3 crore. Of course, at that level, income tax also kicks in and about Rs 30,000 a year will have to be paid. It's actually worse, there have been long periods of time when the fixed income interest rate has been below the inflation rate. Moreover, the tax has to be paid whether you realise the returns or not. There can be a situation (often is, in fact) when the interest rate barely exceeds the inflation rate and the income tax on the interest is effectively reducing the value of the money.

The situation is very different in equity-backed mutual funds. Unlike deposits, they are high-earning but volatile. In any given year, the returns could be high or low, but over five to to seven years or more, they comfortably exceed inflation by six to seven per cent or even more. For example, over the last five years, a majority of equity funds have returns of 12 per cent p.a. or more, some as high as 20 per cent. The returns may have fluctuated in individual years, and that's something that the saver has to put up with, but the threat of old age poverty does not exist.

In such funds, one can comfortably withdraw four per cent a year and still have a comfortable safety margin. On top of that, there is no income tax. As long as the period of investment is greater than one year, returns from equity funds are completely tax free. This means that to have a given monthly expenditure through equity funds, you need just half the investment than you would need in deposits. So, for a monthly income of Rs 50,000 a month, Rs 1.5 crore will suffice instead of Rs 3 crore. And no matter how high your savings and expenditure, it's all tax-free.

I find that a small but growing number of people have begun to understand and appreciate this idea and have started doing it. These tend to be those who have used equity funds as their savings vehicle anyway and are used to the idea of ignoring short-term volatility in the interest of long-term gains. However, the vast majority of Indian retirees are still wedded to the mythical safety that deposits provide and end up facing tragic problems as they grow older. There's no need for you to be one of them.

Invest Rs 1,50,000 and Save Tax up to Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds. Save Tax Get Rich

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Income Tax Refunds

After income tax returns are filed by assessees, they are processed by the income tax authorities at the Centralised Processing Centre (CPC) in Bengaluru. After processing the returns, if any refund is payable to the assessees, the refund orders are generated and transmitted to the income tax refund banker--State Bank of India, CMP Branch, Mumbai.

Direct credit of refund

Refunds are processed in two ways: Direct credit through RTGS NECS or by a paper cheque. It is important to mention the correct and complete bank account number (at least 10 digits), MICR / IFSC code of bank branch and correct communication address in the income tax return in order to enable refunds through RTGS or NECS.

Refund through paper cheque

In a situation where the MICRIFSC details of the bank account number are not mentioned in the income tax return, a paper cheque is issued to the assessee payable to the account number mentioned in the return.

Status of refund

Within 10 days of the refund being processed by the IT authorities and the same being sent to the refund banker, the status of refund can be viewed by the assessee on the following link: https:tin.tin.nsdl.comoltasrefundstatuslogin.html Details such as assessment year and PAN need to be submitted to generate refund status.

Reissue of refund

In case the refund (cheque or direct credit) has been not been credited to the bank account for any reason, a reissue request needs to be made by the assessee on the income tax online portal. Updated address bank account numberIFSC code must be entered for the department to reissue the refund.

Status of refund paid is also reflect ed in the tax credit statement in Form 26AS.

It is important to preserve the income tax payment challan coun terfoil for record.

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Equity Savings funds

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The relatively new 'Equity Savings' funds could fit a lot of needs that savers have by combining equity returns, income stability and zero capital gains tax

The exact nature of a lot of mutual funds are driven by the structure and rates of the capital gains tax that are applicable on them. The effect can be good, or it can be bad. Balanced funds were supposed to be low-risk alternatives to equity funds, but the logic of our tax rules has meant that equity-oriented ones have become too equity-heavy and risky. However, over the last couple of years, a new type of balanced fund has become prevalent that combines tax efficiency with a more conservative, safer exposure to equities.

So far, these funds used to be known by the rather odd name of 'Equity Income Fund'. Now, under SEBI's 'Categorization and Rationalization of Mutual Fund Schemes', they have officially been named 'Equity Savings' funds. Let's see what's different about these newly named funds, and how they can deliver lower-risk while having the same lower tax liability as the balanced or equity funds that investors are used to. Fund investors know that under the tax laws, capital gains from equity investments are zero if you stay invested for more than one year. At least, that's the status right now, notwithstanding rumours that this could change in the coming budget. To qualify as an equity investment, a fund must invest more than 65 percent of its assets in equity. If the equity exposure drops below this level, then the risk will be lower, but investors will have a heavier tax liability, as for any income fund.

That's the problem that Equity Savings funds solve. They deliver lower equity exposure, combined with the lower taxation of equity funds. They do this by utilising equity derivatives in such a way that the returns are predictable and safe, while the investment is still classified as equity for tax purposes. Therefore, if one creates a balanced fund where some of the equity exposure is in the form of arbitrage trades, then one gets the very useful combination of lower risk and lower tax.

The idea is straightforward. The fund manager looks for opportunities where there is a price gap between a stock price and its futures price. To take a simplified example, let's say the market price of a stock is Rs 100, and the price of its futures a month hence is Rs 101. Then, the fund manager could buy the stock and simultaneously sell the derivative. Effectively, this is a predictable and safe gain of one per cent over the month. However, it is an equity trade, and therefore a fund composed of such investments would get classified as an equity fund, and its investors would pay no long-term capital gains tax. In principle, this kind of an investment does not have the safety level of the kind of investments that short-term debt mutual funds make, and definitely not of bank fixed deposits. However, in practice, they offer a much higher post-tax return in exchange for a small technical increase in risk.

There are now fifteen such funds. In comparison to balanced funds, their returns are modest--over the last year, an average of 14.3 per cent compared to 24.2 per cent. However, their potential for quick decline is also limited. The average decline in the worst month that equity savings funds have suffered is 4.5 per cent. The equivalent for balanced funds is 13.3 per cent.

Of course, as I mentioned earlier, the existence and utility of such funds depends heavily on the current tax laws. As it happens, the periodic rumours that there will be a change in the tax exempt status of long-term capital gains is particularly strong before this year's budget. If they are true, there will be some readjustment in the approach to these funds, but their basic utility is unlikely to be dented.

Invest Rs 1,50,000 and Save Tax up to Rs 46,350 under Section 80C. Get Great Returns by Investing in Top Performing Tax Saving ELSS Funds. Save Tax Get Rich

Top 10 Tax Saving Mutual Funds of 2018

Best 10 ELSS Mutual Funds to Invest in India of 2018

1. Tata India Tax Savings Fund 

2. Mirae Asset Tax Saver Fund

3. DSP BlackRock Tax Saver Fund

4. Sundaram Diversified Equity Fund

5. Birla Sun Life Tax Relief 96

6. ICICI Prudential Long Term Equity Fund

7. Invesco India Tax Plan

8. Reliance Tax Saver (ELSS) Fund

9. Axis Tax Saver Fund

10. BNP Paribas Long Term Equity Fund

Invest in Best Performing Tax Saver Mutual Funds of 2018

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Download Top Tax Saver Mutual Funds Application Forms

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How to buy right Health Insurance Cover?

Best SIP Funds to Invest Online 

There are many different policies offering health cover only some of which may fit you. Here's a check on each of the major categories

Buying health insurance is not easy. And the quantum of complaints indicate that consumers are not getting the deal they are looking for. Clearly, either the insurers are not doing a good job of delivering what they have promised, or consumers are confused about what they need and what they are getting.

In short, there is a huge gap between what consumers are looking for and what is delivered. The situation is not made easy by the wide variety of terminology concerning the range of services available from insurance companies. There are many different health covers available, each with a different name and a claim to be different and superior to all others.

That is why it is extremely important to get your basics right before buying a health cover. Here is a primer.

Individual Health Plans: These are the 'traditional' health insurance covers, known as 'mediclaim' policies informally, even though the word 'mediclaim' is just a brand of one of the companies. These generally cover hospital treatment expenses provided the treatment is on in-patient basis and lasts for at least 24 hours. The expenses covered include hospital bed/room, nursing, surgeon's fees, consultant doctor's fees, blood transfusions, oxygen and operation theatre charges. These days most plans come with sub-limits for each of these heads. They usually do not cover pre-existing diseases or complications arising from them for the first four years of the policy. Besides, there are specific conditions that may not be covered for a certain initial period. There is generally an enhancement for every year during which no claim is made.

Family Floating Policies: These consist of a shared Individual Health Plan (for a family). The benefits are mostly the same, but the sum insured can be used for the treatment of any or all members of the family and not a single person. Rather than buying, a R2 lakh health cover for each member of the family of four by spending for a total cover of R8 lakh, if you buy a Family Policy for R8 lakh, each person covered under it can avail benefits up to R8 lakh as opposed to R2 lakh in the earlier instance. This reduces the need for you to pay from your pocket. Also, it comes at a lower premium than individual polcies would have done. A Family Policy can be bought by an individual who becomes the proposer along with spouse, dependent children up to 25 years or even unmarried, divorced, widowed daughter and dependent parent.

Critical Illness Plan: This is not a substitute for the basic individual or family policy, but designed to be added as an addition to the former. The fact that these have to be bought separately is a major flaw in the way health insurance is sold in India. An illness plan provides financial assistance if the insured develops a serious ailment, such as cancer, or has a stroke. Each cover has a list of ailments, usually 9-12 of them. One can get it in the form of a rider attached to a life insurance cover, or as a standalone policy from either a life insurer or a non-life insurer. If critical illness occurs, it pays the entire sum insured and terminates and can happen only once for any particular illness. To get the payout, the insured has to survive for 30 successive days after the diagnosis. No claim can be made during the first 90 days of the inception of the policy.

Senior Citizens Health Plan: Most basic mediclaim plans cap the starting age at around 60 years, while SCHPs are generally for the age group of 60-80 years. Most can be renewed lifelong or up to the age of 90, and have a fixed coverage of, say, R1 lakh or R2 lakh. Besides looking for sub-limits, those buying these plans should watch out for certain illnesses as many ailments are excluded from the plan. These plans could possibly have an option of a crtitical illness plan.

Medical Cover From Life Insurance Companies: Life insurance companies, too, have started offering health plans. Most of these are, however, defined benefit plans - the pre-specified amount which is the sum insured is paid as compensation, irrespective of the actual amount of expenses incurred. Also, these are long-term, having a fixed premium for, say, three, five, or even 10 years. If you opt for a good combination of basic mediclaim, family policy and a critical illness plan, then these are not needed.

SIPs are Best Investments when Stock Market is high volatile. Invest in Best Mutual Fund SIPs and get good returns over a period of time. Know Top SIP Funds to Invest Save Tax Get Rich

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Investing strategies for equity and debt funds

 

After a stellar rise to its all-time highs, the capital market has retraced a bit. However, most experts feel that the Indian stock market is the midst of a long bull run and will once again resume its upward move.

In such a situation, if you are a mutual fund investor looking to capture the market trend to make gains through equity funds, you must be wondering what your investment strategy should be. Should you invest in funds through a systematic investment plan (SIP) or lump-sum?

Most advisors suggest SIP is the best way to approach the market since it helps you to average out the purchase price of the units over a period of time. However, this may not be true in all market conditions, especially when the stock market is moving up on a sustained basis.

If you are a risk-averse mutual fund investor looking to park your money in debt funds for gain to avoid stock market volatility, there are many options. However, choosing a debt fund can also be tricky and would depend on various factors including your risk-profile, your financial goals and time horizon.

Your investment needs alter drastically as you approach retirement with your time horizon getting reduced and your risk appetite shrinking. So as your retirement approaches, how do you allocate your money among various assets to generate a decent return and maintain a healthy lifestyle?

Financial planners suggest that one needs to be careful with risks as one approaches retirement or is retired. So, cutting down on direct exposure to equity and raising debt investment for regular income is one of the main pillars of a good asset mix. As a thumb rule, retirees should have an asset allocation which is based on their needs and not age

On the homebuyers' front, attempts have been made to assuage homebuyers who are struggling after Jaypee Infratech was declared insolvent recently. The National Company Law Tribunal (NCLT) appointed an Interim Resolution Professional (IRP) for the company in the form of Anuj Jain, who during the week clarified that the company will obtain homebuyers' claims from the firm's records and verify the amounts with them if they fail to submit the claim forms by August 24 deadline.

However, the bad news is that things could get worse on the real estate front for homebuyers. With the Real Estate (Regulation and Development) Act 2016 (RERA) tightening the noose around the developer community, some of them may have found liquidation proceedings or the bankruptcy law as an avenue to escape the ambit of the state regulator, say legal experts. 

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You can Take Loan against Mutual Fund Investments

 

When there is urgent need of money for short tenures such as three months to a year, one option is to borrow against your mutual fund units. It is similar to an overdraft facility on a bank account, and the advantage is that you do not have to prematurely redeem your units, nor does your SIP get affected.

 The process and the type of funds that can be offered as collateral.

How can you get a loan against your mutual fund units? What would it cost?

 
Loan against your equity or hybrid mutual fund units could be taken from a bank or a non-banking finance company (NBFC) by pledging your mutual fund units.

You can pay back the loan at the interest rate agreed with the financier. Depending on the quantum of loan you take and the tenure, the interest rate could be in the range of 10-11 per cent on these mutual fund units. When the units are under lien, you can not sell or switch the units.

Financial planners recommend taking on equity-oriented mutual funds and not against liquid or debt-oriented funds.

How does one apply for a loan?

Some online portals offer you loans quickly, if you hold units in demat form and have a prior approval. If you hold units in physical form, you first need to execute a loan agreement with your financier.

The financier will write to the mutual fund registrar like CAMS or Karvy and ask them to mark a lien on a certain number of units that are being pledged.

 

Financiers typically lend about 60-70 per cent of the value of the pledged units. The registrar in turn will mark the lien and a letter is sent to the financier with a copy to the investor confirming the marking of a lien on the units.

How can the lien on the mutual fund units be removed?

Once the loan is repaid by the borrower, the financier can ask for removal of the lien and send a request letter to the fund house. A financier can also request for a partial removal of lien in which case, lien on some of the units will be removed and these units are Rs free' units. This can happen when financiers receive part payments.
 

What happens if the investor defaults in making payment to the financier?
In case the borrower defaults in making payment, the financier can enforce the lien i.e. send a signed request to the mutual fund to redeem the units and send the proceeds cheque to the financier.

What is the advantage of borrowing against your mutual fund units?
Loan against mutual funds gives you the option of receiving immediate liquidity against the mutual fund units that you own. It is like an overdraft facility for short-term monetary requirements, with a relatively shorter tenure than other loans.

It is a beneficial monetary tool for those looking to leverage their otherwise idle mutual fund investments, and also raise capital quickly for short -term financing needs. You need not sell your mutual fund units, hence your financial plan remains intact and neither is your ownership of fund units divested after pledging them for a loan.

Invest Rs 1,50,000 and Save Tax up to Rs 46,350 under Section 80C. Get Great Returns by Investing in Best Performing ELSS Funds. Save Tax Get Rich

For further information contact SaveTaxGetRich on 94 8300 8300

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