Mutual Fund

Posted on by Devesh Deepak Asset Allocation, Diversification, Investment, Mutual Fund, Risk

Diversification – A lesson from Cricket

Indians treat Cricket not just a game but we eat, sleep and breathe cricket.  Cricketers are as popular as a movie star and every victory in the field is a festival for the masses. Since cricket is so much entrenched in our psyche that we think there is no better way but Cricket to explain the benefit of diversification in your investment portfolio. The cricket is the most watched sports in India and every other Indian claim to be the bona fide expert of the game. Even the youngster will tell, “I know my cricket as my mamma knows her household.”

But for few tyro, Wikipedia explain the game as – Cricket is a bat-and-ball game played between two teams of eleven players on a cricket field, at the centre of which is a rectangular 22-yard-long pitch with a wicket (a set of three wooden stumps) at each end. One team bats, attempting to score as many runs as possible, whilst their opponents field. Each phase of play is called an innings. After either ten batsmen have been dismissed or a fixed number of overs have been completed, the innings ends and the two teams then swap roles. The winning team is the one that scores the most runs, including any extras gained, during their innings.

So what are the basics, there are eleven players on the field for each team during a match and every member of the team has an assigned role to play. The top order players are the batsman, the middle order consists of wicket keeper and all-rounders and lower order players are bowlers. The team has to score runs and restrict the opposition team to score as many runs as they have scored to win the match. The players who score runs are called batsman and the players who restrict the opposition team to score are called bowlers. Hence the reward is to score as many as runs you can and risk is the rival team can score more run than what you have scored.

If scoring the runs is the most important aspect of the game then why we can’t have a team with eleven specialist batsmen to maximize the rewards or eleven specialist bowlers to minimize the risk? If you ask this question even to somebody who wasn’t a big cricket fan, they could probably tell you that everyone has a job to do during any given match. If you don’t have a bowler in your team, your risk will magnify and it would be difficult for your team to restrict opponent to score more run than your team. Similarly, the team consisting of only bowlers can’t expect to score many runs and thus lose out to the opposition. This exactly explains the reason for having a diversified portfolio – as in cricket, every asset class has a specific job to do within the portfolio.

So if you are an investor trying to build a portfolio, let see what Cricket can teach you.

Go for Diversification

Holding several investments in a single asset class doesn’t mean a portfolio is well-diversified. Generally, diversification may lower risk when investments are negatively correlated, meaning their prices typically move in opposite directions. Your portfolio should be diverse enough to weather all sorts of markets – a mix of aggressive and defensive assets, such as stocks and bonds, may reduce the general risk of investing in the market. Dividend-paying blue chip stocks or mutual funds could be the core of your portfolio, while smaller growth stocks can give your portfolio speed and agility.

Diversification doesn’t mean sacrificing return

A well-balanced cricket team with six specialist batsmen and five specialist bowlers will have greater chance to win. A good all-rounder only adds the strength. Similarly, diversification may boost returns while lowering risk when compared to a single asset class. It’s possible at times that a portfolio holding separate asset classes produces a total return greater than the respective returns of each individual asset class. Since the portfolio is not subject to the volatility of a single asset class and covariance among the assets also lower the portfolio risk.

Build a core for Long Term Success

A team works best when they are built for a long period of steady success rather than a single, brilliant season. The best teams build a talented core group of players and only make changes when they need to address weaknesses in the team. M S Dhoni and Saurav Ganguly was the most successful captain of the Indian cricket team and both back their players to the hilt and gradually built a core which remains constant throughout their captaincy.

It’s the same in your portfolio. Rather than constantly rebalancing your portfolio and guessing the next winner, find some mutual funds that you like and plan to hold them for long time period. You should not obsess over whether your portfolio is up or down on a given day. Plan for the long-term; it’s better to have your portfolio perform above average over years than to have a few big years but performing sub-optimally in most of the other years.

Identify and stick with steady Manager

In the first decade of this century, we have two very successful coaches – John Wright and Gary Kirsten. In between, we also have Greg Chappell. The records of these coaches speak for themselves. Rather than firing the players after disappointing performances, the successful coaches kept faith in their long-term ability to win and stuck with them, even in the bad times. Whereas, Greg Chappell’s firing policy proves a disaster for Indian cricket team.

An investor should do well to analyse the performance of the fund house instead concentrating on a single scheme. One should not quit a fund if it is going through a rough patch. A steady, successful fund management team always pull out of rubbles and steer the fund back to its winning way by adhering to winning strategies, putting up good numbers in the long run. The track record matters and investing in a hotshot new manager with no track record can be risky.

Conclusion

The great team doesn’t build in a jiffy; it takes years and load of patience. Even the best team loses sometime hence one should not lose sleep if your portfolio gives negative returns when market capsizes. We all are well aware of the history of US stock market crash of 1929. Some investors must have first-hand experiences during market meltdown in 1999 and 2008. The reality is that some market crashes are so sudden that even the most diversified portfolios suffer. Risk can only be minimised, can’t be wished away. However, portfolio diversification may stabilise risk to help lower a portfolio’s sensitivity to market volatility.

 

 

Posted on by TeamGenus Asset Allocation, Investment, Mutual Fund, Risk

White Paper – Investment Plan

One of the parts of developing a comprehensive financial plan is the development of an investment plan. Investment Planning is the process of finding the right mix of investment option based on your future goals, time horizon, and risk profile. There are six steps that you should follow when you are developing your investment plan.

The Means to Invest

In order to even begin this portion of your financial plan, you must determine that you are ready to invest. In this step, you will determine if you are going to use the money for some good or service (spend it), or if you will invest or save the money.

Investment Time Horizon

In this step, you will be determining how long you plan to invest and when you will need the funds to meet your financial objective(s). You must decide, based on the time horizon of your objectives, among short-term investments, long-term investments or some combination. In this step, you are going to be determining what you will be saving for, which should give some indication of your time horizon.

Risk and Return

You will need to determine what your level of risk tolerance is. As the level of risk tolerance increases so does the potential for higher returns as well as larger losses.

Investment Selection

Based on 1, 2 and 3 above, investments should be selected to meet your goals. These investments must satisfy your time horizon and your risk tolerance.

Evaluate Performance

Once investments are chosen and expectations are established, the performance of your investments should be determined by comparing the actual realized returns against the expected returns. The returns should also be compared to a benchmark, such as the Sensex or Nifty index. In addition, the investments should be reevaluated to determine if they continue to meet your investment criteria.

Adjust Your Portfolio

Your portfolio should be adjusted to maintain your goals and your investment criteria. If your goals change, your investments should be reviewed to determine if they continue to meet your objectives.

Benefits of Investment Planning

 Investment planning helps you:

  • Generate income and/or capital gains.
  • Enhance your future wealth.
  • Strengthen your investment portfolio.
  • Save on taxes.

Investment Strategies – Passive vs. Active Strategy

Passive

Passive strategies do not seek to outperform the market but simply to do as well as the market. The emphasis is on minimizing transaction costs and time spent in managing the portfolio because any expected benefits from active trading or analysis are likely to be less than the costs. Passive investors act as if the market is efficient and accept the consensus estimates of return and risk, accepting the current market price as the best estimate of a security’s value.

A buy-and-hold strategy means exactly that – an investor buys fund or stock and basically holds them until some future time in order to meet some objective. The emphasis is on avoiding transaction costs, additional search costs, and so forth. The investor believes that such a strategy will, over some period of time, produce results as good as alternatives that require active management whereby some securities are deemed not satisfactory, sold, and replaced with other securities. These alternatives incur transaction costs and involve inevitable mistakes.

Active

An active strategy involves shifting sector weights in the portfolio in order to take advantage of those sectors that are expected to do relatively better and avoid or de-emphasize those sectors that are expected to do relatively worse. Investors employing this strategy are betting that particular sectors will repeat their price performance relative to the current phase of the business and credit cycle.

Most of the Mutual funds in India are actively managed. The goal of active management is to beat a particular benchmark. Because the markets are inefficient, the anomalies and irregularities in the capital markets are exploited by the active fund manager. Prices react to information slowly enough to allow skillful investors to systematically outperform the market.

Building an Investment Portfolio

Asset Allocation

Investors often consider the investment decision as consisting of two steps:

  1. Asset allocation
  2. Fund selection

The asset allocation decision refers to the allocation of portfolio assets to broad asset markets; in other words, how much of the portfolio’s funds are to be invested in stocks, how much in bonds, money market assets, and so forth. Each weight can range from zero percent to 100 percent.

The asset allocation decision may be the most important decision made by an investor.

The rationale behind this approach is that different asset classes offer various potential returns and various levels of risk, and the correlation coefficients may be quite low.

Portfolio construction involves the selection of securities or mutual funds to be included in the portfolio and the determination of portfolio weights. The Modern Portfolio theory provides the basis for a scientific portfolio construction that results in efficient portfolios. An efficient portfolio is one with the highest level of expected return for a given level of risk or the lowest risk for a given level of expected return.

Asset Classes

Portfolio construction begins with the basic building blocks of asset classes, which are the following major categories of investments:

  • Cash (or cash equivalents such as money market funds)
  • Stocks
  • Bonds
  • Real Estate (including Real Estate AIF)
  • Commodity, bullion or others

Each investor must determine which of these major categories of investments is suitable for him/her. The next step is to determine which percentage of total investable assets should be allocated to each category deemed appropriate.

Risk Reduction in the Portfolio

Diversification

One has to remember that no investment is Risk-free. Every investment has the potential gain as well as losses. The diversification is not a guarantee against any potential loss. Based on your goals, time horizon, and tolerance for volatility, diversification may provide the potential to improve returns for that level of risk.

A diversified portfolio is built by a judicious mix of assets—stocks, bonds, cash, or others—whose returns haven’t historically moved in the same direction, and to the same degree. This way, even if a portion of your portfolio is declining, the rest of your portfolio, hopefully, is growing. The intention of using this strategy is that the loss incurred due to the negative performance of a particular asset class is partially or wholly offset by gains via the positive performance of another asset class. Another important aspect of building a well-diversified portfolio is that you try to stay diversified within each type of investment.

Modern Portfolio Theory

Covariance is a measure of the co-movements between securities returns used in the calculation of portfolio risk. We could analyze how security returns move together by considering the correlation coefficient, a measure of association learned in statistics.

As used in portfolio theory, the correlation coefficient is a statistical measure of the relative co-movements between security returns. It measures the extent to which the returns on any two securities are related; however, it denotes only association, not causation. It is a relative measure of association that is bounded by +1.0 and -1.0, with

Pi,j = +1.0, perfect positive correlation

Pi,j = -1.0, perfect negative (inverse) correlation

Pi,j = 0.0, zero correlation

With perfect positive correlation, the returns have a perfect direct linear relationship. Knowing what the return on one security will do allows an investor to forecast perfectly what the other will do.

With perfect negative correlation, the securities’ returns have a perfect inverse linear relationship to each other.

With zero correlation, there is no relationship between the returns on the two securities. Knowledge of the return on one security is of no value in predicting the return of the second security.

Rupee Cost Averaging

The systematic investment with mutual funds, along with consistent periodic new purchases of the mutual fund, creates risk reduction by creating a lower cost per unit owned over time. This is known as rupee cost averaging. This strategy allows one to take away the guesswork of trying to time the market. You invest a fixed amount of money at a regular interval, regardless of whether the market is high or low. By doing so, you buy fewer units when the prices are high and more units when the prices are low. Because rupee cost averaging involves regular investments during periods of fluctuating prices, you should consider your financial ability to continue investing when price levels are low. However, this approach reduces the effects of market fluctuation on the average price you pay for your shares. Additionally, it helps you maintain a regular investing plan.

Conclusion

Even the best-laid investment plan will fail if you can’t control your behaviour.  That’s one of the biggest reasons for keeping your disciplined investment strategy as simple as possible.

It’s much easier to control how you behave with a simple strategy since you won’t be tempted to jump in and out of the market or find the next best investment trend.  And basing your decisions on complex and structured products won’t keep you in your plan when turmoil hits.

There is enough statistical evidence to suggest that if you invest regularly for a long term, your money will grow on a consistent basis.

References

  1. Investments: Analysis and Management by  Charles P. Jones

  2. US SEC
Posted on by Devesh Deepak Bonds, Mutual Fund, Risk

Deciphering Bond – 2

In a country like ours, the bank fixed deposits and government sponsored products like Tax-free bonds, PPF and Post office schemes created an illusion that Debt is risk-free. This is a bit surprising because there were numerous defaults in NBFC FDs, Company deposits, RNBC deposits and chit funds in last two-to-three decades but every such default only strengthens the views that the government sponsored product are high in security and returns and what’s the need to invest in other debt products.

There is another counter view which is gradually catching the imagination of investor is Debt mutual fund. The AUM (Asset under management) of Debt schemes in the Mutual fund industry stands at over Rupees Ten lakh crore as on September 30, 2016. Often there is a great deal of discernment about an investment avenue that brings clueless investors down the wrong path. Investors also have such beliefs for Debt funds that could be partly true at best and misleading at worst. Here we will try to decipher risk associated with investment in Debt, which is equally true for debt mutual funds.

No market-related investment is risk-free, be it equity or debt. While debt funds are not as risky as equity funds, they are not without risks either.

The two prime risks in a debt instrument are the interest rate risk and credit risk.

Interest Rate Risk

Interest rates and bond prices carry an inverse relationship; as interest rates fall, the price of bonds generally rises. Conversely, when interest rates rise, the price of bonds tends to fall.

Let’s assume you purchase a bond from Company ABC. Because bond prices typically fall when interest rates rise, an unexpected increase in interest rates means that your investment could suddenly lose value. If you expect to sell the bond before it matures, this could mean you end up selling the bond for less than you paid for it (a capital loss). Of course, the magnitude of change in the bond price is also affected by the maturity, coupon rate, call option, and other characteristics of the bond.

One common way to measure a bond’s interest rate risk is to calculate its duration.

In general, short-term bonds carry less interest rate risk; less responsive to unexpected interest rate changes than long-term bonds are. This implies that short-term bonds carry less interest rate risk than long-term bonds.

Credit/Default Risk

Credit risk is the likelihood that a bond issuer will not make the interest payments or principal repayment to its bond-holders. It means the issuer may default. All bonds, except for those issued by the government, carry some credit risk. This is one reason why corporate bonds almost always have a higher yield than government bonds.

While the definition of credit risk may be straight forward simple, measuring it is not.  Many factors, like a business loss, poor cash flows, change in business environment, country’s socio-political situation etc can influence an issuer’s credit risk and in varying degrees.

Rating agencies like CRISIL, ICRA, Moody’s and Standard & Poor’s analyse bond offerings in an effort to measure an issuer’s credit risk on a particular security. Their results are published as ratings that investors can track and compare with other issuers.

These ratings range from AAA (the most secure) to D, which means the issuer is already in default.

Rating downgrades generally come from rating agencies. A downgrade from any one of them is a major signal that an issuer is more likely to default on its debt. If a bond is downgraded to a level below investment grade (aka, “junk”), there is often a serious sell off of those bonds, because most institutional investors are forbidden from owning junk bonds.

Ratings have a large influence on the demand for a security. Downgrades (or even rumours of downgrades) tell investors that a security is now believed to be riskier, which may have a negative impact on the security’s price. In turn, downgrades often lead to less trading activity and lowered liquidity.

Other Risks

a) Reinvestment Risk

Reinvestment Risk is the likelihood that an investor won’t have the opportunities to reinvest income streams from the Bond at a rate equivalent to the Bond’s present rate of return

For example, consider a Company ABC bond with a 10% yield to maturity (YTM). In order for an investor to actually receive the expected yield to maturity, she must reinvest the interest payments she receives at a 10% rate. This is not always possible. If the investor could only reinvest at 8% (say, because market yield fell after the bonds were issued), the investor’s actual return on the bond investment would be lower than expected. This risk becomes more pronounced if issuer has the call option to retire the bond before the maturity.

b) Inflation Risk

Inflation risk also called purchasing power risk, is the likelihood that the returns from the Bond won’t be worth as much in the future on account of changes in purchasing power because of inflation.

For example, Rs.1,00,000 in bonds with a 10% coupon might generate enough interest payments for a retiree to live on, but with an annual 5% inflation rate, every Rs.10,000 produced by the portfolio will only be worth Rs.9,523 next year and about Rs.9,070 the year after that. The rising inflation means that the interest payments have less and less purchasing power. And the principal, when it is repaid after several years, will buy substantially less than it did when the investor first purchased the bonds.

Inflation-indexed bonds were designed to provide a hedge against rising prices or inflation. They attempt to address this risk by adjusting their interest rate for inflation to prevent changes in purchasing power.

c) Liquidity Risk

Liquidity risk is concerned with an investor having to sell a bond below its indicated value, the indication having come from a recent transaction. Liquidity refers to how deep or liquid the market is for a particular security. If the market is deep, an investor can purchase or sell a security at current prices.

The risk that investors may experience issues finding a purchaser when they need to sell and might be compelled to sell at a significant rebate to market value. Liquidity risk is greater for thinly traded securities such as lower-rated bonds, bonds that were part of a small issue, bonds that have recently had their credit rating downgraded or bonds sold by an infrequent issuer. Bonds are generally the most liquid during the period right after issuance when the typical bond has the highest trading volume.

1 Comment Posted on by TeamGenus Mutual Fund, Tax

Tax Treatment of Mutual Fund Investments

Tax issues concerning Indian Mutual Fund:

Mutual Fund registered with SEBI and as such is eligible for benefits under section 10 (23D) of the Income Tax Act, 1961 to have its entire income exempt from income tax under the provisions of Section 10(35), this exemption does not apply to income arising on “transfer” (switching) of units of a mutual fund. The Mutual Fund receives all income without any deduction of tax at source under the provisions of Section 196(iv) of the Act.

By virtue of section 45 of the Wealth Tax Act, 1957, wealth tax is not applicable on  Mutual Fund and units held under the Schemes of Mutual Fund are not treated as assets within the meaning of section 2(ea) of the Wealth Tax Act, 1957 and are, therefore, not liable to Wealth-Tax.

Tax issues concerning Unit holders

I. Equity Oriented Funds – Tax Treatment of Investments

A.  Tax on income in respect of units
As per the section 10(35) of the Act, income received by investors under the schemes of any Mutual Fund is exempt from income tax in the hands of the recipient unit holders.

B. Dividend Distribution Tax:
By virtue of proviso to section 115 (R) (2) of the Act, equity oriented schemes are exempt from income distribution tax. As per section 115T of the Act, equity oriented fund means such fund where the investible funds are invested by way of equity shares in domestic companies (as defined under the Act) to the extent of more than sixty-five percent of the total proceeds of such fund.

C. TDS on the income of units:

As per the provisions of section 194K and section 196A of the Act, where any income is credited or paid on or after 1st April 2003 by a Mutual Fund, no tax is required to be deducted at source.

D. Tax on capital gains
i)  Long Term Capital Gains
Long term capital gains on transfer of units of equity oriented fund where security transaction tax is paid are exempt u/s 10(38) of the Act. However such long term capital gains arising to a company shall be taken into account in computing the book profit and income tax payable under section 115JB.

ii) Short term capital gains
Units held for not more than twelve months preceding the date of their transfer are short-term capital assets. Capital gains arising from the transfer of short-term capital assets being unit of an equity oriented scheme which is chargeable to STT is liable to income tax @ 15% under section 111 A and section 115 AD of the Act. The said tax rate is increased by the surcharge, if applicable.

iii) Securities Transaction Tax (STT)
As per Chapter VII of Finance (No. 2) Act, 2004 relating to Securities Transaction Tax (STT), as amended by Finance bill 2013 (section 98), with effect from June 01, 2013, the STT is payable by the seller at the rate of 0.001% on the sale of unit of an equity oriented scheme to the Mutual Fund.  The STT is collected by the Mutual Fund at the source.

With effect from 01st April 2008:

  • the deduction under section 88E of the Act has been discontinued, and
  • the amount of STT paid by the assessee during the year in respect of taxable securities transactions entered into in the course of business will be allowed as deduction under section 36 of the Act subject to the condition that such income from taxable securities transactions is included in the income computed under the head “Profits and Gains of business or profession”.

E. TDS on Capital Gains
(i) Resident Investors
As per Central Board of Direct Taxes (‘CBDT’) circular No.715 dated 8th August 1995, in the case of resident unitholders no tax is required to be deducted from capital gains arising at the time of redemption of the units.

(ii) For NonResident Investors
Long-term capital gains
No tax is deductible from the proceeds payable to nonresident investors from long-term capital gains arising out of redemption of units of an equity oriented fund.

Short term capital gains
As per Part II of the First Schedule to the Finance Bill 2010 {Clause 1 (b) (i) (C)}, the Mutual Fund is liable to deduct tax @ 15% on short-term capital gains. The TDS is to be increased by the applicable surcharge.

(iii) In the case of a Company
Other than a Domestic Company (foreign company, as defined under the Act):
Long-term capital gains
No tax is to be deducted from the proceeds payable to nonresident investors from long-term capital gains arising out of redemption of units of an equity oriented fund.
 
Short term capital gains
As per Part II of the First Schedule to the Finance Bill 2010 {Clause 2 (b) (vii)}, the Mutual Fund is liable to deduct tax @ 15% on short-term capital gains. The TDS will have to be increased by the applicable surcharge.

(iv) Foreign Institutional Investors (FIIs) (as defined under the Act): In the case of Foreign Institutional Investors (FIIs), no tax would be deductible at source from the capital gains arising on redemption of units in view of section 196 D (2) of the Act.

Retirement Benefit Plan, Unit Linked Insurance Plan, Equity Linked Savings Scheme: Tax benefits under section 80 C
The contribution made by individuals and HUFs in the above Plans / Scheme will be eligible for the deduction of the whole of the amount paid or deposited subject to a maximum of Rs.1,50,000/- under Section 80 C of Income Tax Act, 1961 as provided therein.

Rajiv Gandhi Equity Saving Scheme (RGESS)

The Rajiv Gandhi Equity Saving Scheme (RGESS) was launched after the 2012 Budget. Investors whose gross total income is less than Rs. 12 lakhs can invest in this scheme. Upon fulfillment of conditions laid down in the section 80CCG, the deduction is lower of, 50% of the amount invested in equity shares or Rs 25,000.

II. Other than Equity Oriented Funds – Tax Treatment of Investments

Tax issues concerning Unit holders

A. Tax on income in respect of units
As per section 10(35) of the Act, income received by investors under the schemes of Mutual Fund is exempt from income tax in the hands of the recipient unitholders.

B. Dividend Distribution Tax:
i) For Individual (Resident and NRI) and HUF:
As per section 115R of the Act, the dividend distribution is 25% plus surcharge. With effect from 1 October 2014, for the purpose of determining the tax payable, the amount of distributed income has to be increased to such amount as would, after reduction of tax from such increased amount, be equal to the income distributed by the Mutual Fund.

ii) For NonIndividual:
As per section 115R of the Act, income distribution tax shall be levied at 30% plus. With effect from 1 October 2014, for the purpose of determining the tax payable, the amount of distributed income has to be increased to such amount as would, after reduction of tax from such increased amount, be equal to the income distributed by the Mutual Fund.

C. TDS on income of units

As per the provisions of section 194K and section 196A of the Act, where any income is credited or paid on or after 1st April 2003 by a Mutual Fund, no tax is required to be deducted at source.

D. Tax on capital gains
(i) Long Term Capital Gains
Resident Unitholders
Any long term capital gain arising on redemption of units by residents is subject to treatment indicated under Section 48 and 112 of the Act. Long-term capital gains in respect of units held for more than 12 months is chargeable to tax @ 20% after factoring the cost inflation index or tax at the rate of 10% without indexation, whichever is lower. The said tax rate is to be increased by the surcharge, if applicable.

NonResident Unitholders
Under section 115 E of the Act, Long-term capital gains on transfer of unlisted units arising after April 01, 2012 will be subjected to the income tax at the rate of 10%. However, no benefit of Currency Inflation Indexation or the Cost Inflation Indexation is available. Long term capital gains on listed units will be taxable @ 20% After providing indexation. Tax rates are to be increased by the applicable surcharge.

FIIs
As per section 115 AD of the Act, long-term capital gains on the sale of units are to be taxed @ 10% and short term gains are to be taxed@ 30%. Such gains, in either case, would be calculated without indexation benefit as the first and second provisos to section 48 do not apply to FIIs by virtue of section 115 AD (3) of the Act. The applicable tax rates are to be increased by the applicable surcharge.

ii) Short Term Capital Gains
Units held for not more than twelve months proceeding the date of their transfer are short-term capital assets. Capital gains arising from the transfer of short-term capital assets will be subject to tax at the normal rates of tax applicable to such assessee.

E. TDS on capital gains
i) Resident Investors
As per Central Board of Direct Taxes (‘CBDT’) circular No.715 dated 8th August 1995, in the case of resident unitholders no tax is required to be deducted from capital gains arising at the time of redemption of the units.

ii)   for NonResident Investors
Long Term Capital Gains
As per Part II of the First Schedule to the Finance Bill 2010 {Clause 1 (b) (i) (D)}, the Mutual Fund is liable to deduct tax @ 20% on long-term capital gains.

Short Term Capital Gains
As per Part II of the First Schedule to the Finance Bill 2010 {Clause 1 (b) (i) (K)}, the Mutual Fund is liable to deduct tax @ 30% on short-term capital gains.

iii) Other than a Domestic Company:
Long Term Capital Gains
As per Part II of the First Schedule to the Finance Bill 2010 {Clause 2 (b) (viii)}, the Mutual Fund is liable to deduct tax @ 20% on long-term capital gains.

Short Term Capital Gains
As per Part II of the First Schedule to the Finance Bill 2010 {Clause 2 (b) (ix)}, the Mutual Fund is liable to deduct tax @ 40% on short-term capital gains.

(iv) FIIs:
In the case of Foreign Institutional Investors (FIIs), no tax would be deductible at source from the capital gains arising on redemption of units in view of section 196 D (2) of the Act.

 Cess and Surcharge:
The TDS is to increased by the applicable surcharge.

Certain common provisions for equity oriented funds and other than equity oriented funds

1. Double Taxation Avoidance Agreement (DTAA)
As per CBDT Circular No. 728 dated October 30, 1995, in the case of remittance to a  country with which a DTAA is in force, the tax is to be deducted at the rate provided in the Finance Act of the relevant year or at the rate provided in the DTAA, whichever is more beneficial to the assessee. For the unitholder to obtain the benefit of a lower rate available under a DTAA, the unit holder is required to provide the Mutual Fund with a certificate obtained from his Assessing Officer stating his eligibility for the lower rate.

2. Short-Term Capital Losses
As per section 94(7), if any person acquires units within a period of 3 months prior to the record date fixed for declaration of dividend or distribution of income and sells or transfers the same within a period of 9 months from such record date, losses arising from such sale to the extent of income received or receivable on such units, which are exempt under the Act, will be ignored for the purpose of computing his income chargeable to tax.

Further, as per Section 94(8), where additional units have been issued to any person without any payment, on the basis of existing units held by such person then the loss on sale of original units shall be ignored for the purpose of computing  income chargeable to tax, if the original units were acquired within 3 months prior to the record date fixed for receipt of additional units and sold within 9 months from such record date. However, the loss so ignored shall be considered as the cost of acquisition of such additional units held on the date of sale by such person.

3. Investment by Trusts:
Investment in units of the Mutual Fund rank as an eligible form of investment under section 11(5) and section 13 of the Act read with Rule 17C(i) of the Income Tax Rules, 1962 for Public Religious & Charitable Trust.

4. Higher TDS if PAN not available:
With effect from 01st April 2010, a new provision (section 206AA) has been inserted in the Act. As per this provision, any person entitled to receive any sum or income or amount, on which tax is deductible shall furnish his Permanent Account Number (PAN) to the person responsible for deducting such tax, failing which tax shall be deducted @ 20% or the prescribed rate, whichever is higher. The applicable surcharge, education cess, and secondary & higher education cess will also be deducted from such amount of TDS.

4. Wealth Tax
Units of Mutual Fund are not covered under the definition of ‘assets’ under section 2(ea) of the Wealth Tax Act, 1957, and hence the value of investment in units is completely exempt from Wealth Tax.

5. Gift Tax
The Gift Tax Act, 1958 has abolished the levy of Gift Tax in respect of gifts made on or after 1st October 1998. Thus, gifts of units on or after 1st October 1998 are exempt from Gift Tax. Further, subject to certain exceptions, gifts from persons exceeding Rs.50,000/- are taxable as income in the hands of donee pursuant to section  2(24)(xiv) of the Act read with section 56(2)(vi) of the Act.