Mutual Funds Investing

Transcription

1 Mutual Funds Investing (Source: AMFI Website- There's no rocket science involved with Mutual Funds. They are easy to understand. Most people get scared simply hearing the term Mutual Fund, let alone any other financial jargon. But when you look at it closely, there s really not much to fear and most definitely a lot to gain by simply understanding the fundamentals of Mutual Funds. So to begin the process, let s go to the very beginning and answer a basic question: What is a Mutual Fund? Simply put, the money pooled in by a large number of investors is what makes up a Mutual Fund. This money is then managed by a professional Fund Manager, who uses his investment management skills to invest it in various financial instruments. As an investor you own units, which basically represent the portion of the fund that you hold, based on the amount invested by you. Therefore, an investor can also be known as a unit holder. The increase in value of the investments along with other incomes earned from it is then passed on to the investors / unit holders in proportion with the number of units owned after deducting applicable expenses, load and taxes. History of Mutual Fund The mutual fund industry in India started in 1963 with the formation of Unit Trust of India, at the initiative of Government of India and Reserve Bank of India/The history of mutual funds in India can be broadly divided into four distinct phases: First Phase Unit Trust of India (UTI) was established in 1963 by an Act of Parliament. It was set up by the Reserve Bank of India and functioned under the Regulatory and administrative control of the Reserve Bank of India. In 1978 UTI was delinked from the RBI and the Industrial Development Bank of India (IDBI) took over the regulatory and administrative control in place of the RBI. The first scheme launched by UTI was Unit Scheme At the end of 1988 UTI had Rs. 6,700 crores of assets under management. Second Phase (Entry of Public Sector Funds) 1987 marked the entry of non-uti, public sector mutual funds set up by public sector banks and Life Insurance Corporation of India (LIC) and General Insurance Corporation of India (GIC). SBI Mutual Fund was the first non-uti Mutual Fund established in June 1987 followed by Canbank Mutual Fund (Dec 87), Punjab National Bank Mutual Fund (Aug 89), Indian Bank Mutual Fund (Nov 89), Bank of India (Jun 90), Bank of Baroda Mutual Fund (Oct 92). LIC established its mutual fund in June 1989 while GIC had set up its mutual fund in December By the end of 1993, the mutual fund industry had Assets under Management (AUM) of Rs. 47,004 crores. Third Phase (Entry of Private Sector Funds) With the entry of private sector funds in 1993, a new era started in the Indian mutual fund industry, giving the Indian investors a wider choice of fund families. Also, 1993 was the year in which the first Mutual Fund Regulations came into being, under which all mutual funds, except the UTI were

2 to be registered and governed. The erstwhile Kothari Pioneer (now merged with Franklin Templeton) was the first private sector mutual fund registered in July The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised Mutual Fund Regulations in The industry now functions under the SEBI (Mutual Fund) Regulations The number of mutual fund houses went on increasing, with many foreign mutual funds setting up funds in India and also the industry has witnessed several mergers and acquisitions. Hence, by the end of January 2003, there were 33 mutual funds with total assets of Rs. 1,21,805 crores. The Unit Trust of India, with Rs. 44,541 crores of assets under management was way ahead of other mutual funds. Fourth Phase - since February 2003 In February 2003, following the repeal of the Unit Trust of India Act 1963, the UTI was bifurcated into two separate entities. One is the Specified Undertaking of the Unit Trust of India with assets under management of Rs. 29,835 crores as at the end of January 2003, representing broadly, the assets of the US 64 scheme, assured return and certain other schemes. The Specified Undertaking of Unit Trust of India, functioning under an administrator and under the rules framed by Government of India and does not come under the purview of the Mutual Fund Regulations. The second is the UTI Mutual Fund, sponsored by SBI, PNB, BOB and LIC. It is registered with SEBI and functions under the Mutual Fund Regulations. With the bifurcation of the erstwhile UTI which had in March 2000 more than Rs. 76,000 crores of assets under management and with the setting up of a UTI Mutual Fund, conforming to the SEBI Mutual Fund Regulations, and with recent mergers taking place among different private sector funds, the mutual fund industry has entered its current phase of consolidation and growth. The graph indicates the growth of assets over the years. Source: AMFI Debt Mutual Funds Ten Key Things To Know About Mutual Funds Know the basics and you then know how to use it to your benefit/advantage

3 Units: A small but the powerful tool Here s a fun way of understanding the power and benefit of units. Let s say that there is a box of 12 chocolates costing Rs. 40. Four friends decide to buy these chocolates but they have only Rs. 10 each and the shopkeeper only sells by the box. So, the friends decide to each pool in the Rs.10 that they have and buy the box of 12 chocolates. Now based on their contribution, they each receive 3 chocolates or 3 units, if equated with Mutual Funds. And how do you calculate the cost of one unit? Simply divide the total amount with the total number of chocolates: 40/12 = So if you were to multiply the number of units (3) with the cost per unit (3.33), you get the initial investment of Rs. 10. This results in each friend being a unit holder in the box of chocolates that is collectively owned by all of them, with each person being a part owner of the box. What is an NAV? Our next step is to understand NAV, which stands for Net Asset Value. Just like a share has a price, a mutual fund unit has an NAV. To put it simply, NAV represents the market value of each unit of a fund, or the price at which investors can buy or sell units. The NAV is generally calculated on a daily basis, reflecting the combined market value of the shares, bonds and securities (as reduced by allowable expenses and charges) held by a fund on any particular day. Debt Mutual Funds Types of Funds Are you looking to invest for a short period of time or your plans are for long term? To be able to choose a fund that perfectly caters to your need, you need to be aware of the various kinds of funds that exist. As the name suggests, A Debt Mutual Fund works on borrowing. So what are the conditions that are usually laid down when one borrows? 1. Reasonable assurance that the principal investment will be returned. 2. The interest that will be generated based on the rate of interest (also known as the coupon rate). 3. Tenure or the time over which the principal will be returned. Companies, State Governments and even the Central Government all require money to run their operations. They offer various debt based instruments like T-Bills, Debentures, G-secs etc., and Mutual Funds buy the debt that is issued by them. Debt Funds help bring stability to your investment portfolio since they are lower in risk as compared to Equity Funds, yet riskier than Liquid Funds and their aim itself is to generate steady returns while preserving your capital.

4 These would typically invest in government securities, NCD, CDs, CPs bonds and other fixed income securities as well as lend money to large organisations or Corporates, in return of a fixed interest rate. Therefore, investing in Debt Mutual Funds would be ideal if you re looking at a potentially higher return than Liquid Funds over a medium-term time horizon, between 3 to 24 months. Equity Mutual Funds Unlike Debt Funds, you have absolutely no assurance whatsoever on the principal, rate of interest or tenure when investing in Equity Funds. When you invest in equity, you are considered as an owner of the particular company that you ve invested in, to the extent of your investment. So naturally, like any owner, your profit is linked with the performance of the company. The higher the profits of the company, the better share price would be your and hence the better your gains. Like with any high risk action, Equity Funds also carry the potential to deliver high returns. And to help counter this risk, Mutual Funds are invested in multiple companies that usually don t belong to one or correlated sectors. This is known as diversifying. In the long run, one needs to be guarded against inflation and in the short run, market fluctuations. Equity, though volatile, has proved to be a better bet against inflation, provided one has a long term investment. Liquid & Hybrid Mutual Funds In financial terms, the word Liquid simply means How fast can I get my invested money back? A highly liquid asset is as good as hard cash. Liquid Mutual Funds have the least risk factor and may give you returns that are slightly higher than a savings account. These funds invest in faster maturing debt securities, thereby making them less risky. The concept here is that the closer the debt instrument is to its maturity, the higher the chances and surety of you getting the principal and interest, if there is any. When would you choose a Liquid Fund? Without a doubt, a savings account is by far the best option for emergency funds. As the name suggests, a savings account is a savings option. It offers the highest liquidity since you can access your balance at any moment directly through the bank or through ATM machines. But if you are left with funds that are in excess of emergency funds, then Liquid Funds are good options. They endeavour to give you your money back the very next working day, subject to the receipt of a valid redemption request. In fact, Liquid Funds can be used for investments ranging from a day up to a month or even two. Hybrid Funds As the name suggests, Hybrid Funds are a combination of asset classes, such as debt and equity in their portfolio. That is, they invest in a blend of debt, money market instruments and equity. Breaking it down even further, depending on the mix of equity and debt, there could be various types of Hybrid Funds as well.

5 Mutual Funds are flexible Most people have differing patterns of earning and spending, which is why investments need to be flexible so as to allow you to invest as per your situation. In order to ensure this flexibility Mutual Funds have certain characteristics like: There are various types of Mutual Funds that invest in various schemes, from money market instruments to equities, thus catering to people who d like to invest for duration ranging from a day to several years. Minimum amounts of investment range from as low as Rs. 500, they have no upper limit. In the case of open ended funds, daily investment and withdrawal is possible. Invested funds can be received within 1 to 5 working days. There is no maintenance charge on portfolios. You can invest either directly with the Asset Management Company or through a Financial Intermediary. Mutual Funds are liquid As you would have learnt earlier, liquidity is all about having access to the money you ve invested at your convenience. After all, what is the point of getting high returns if you can t use the funds when you need it? Solid liquidity gives you the advantage of getting your money when you need it the most. In open ended funds, where you can buy and sell on any business day, you can get your money back generally within 3 working days. And to make things even better, there is a 15% penalty imposed on the Asset Management Company if you don t get your money within 10 working days. Mutual Funds are transparent and safe It is natural to have a feeling of uncertainty and you are cautious when you hand over your savings to somebody. You obviously need to be able to trust the person, and you definitely want to know what is happening to your money, at all times. In the case of Mutual Funds, your money is handed over to a professional, whose entire job is to keep track of markets and look out for the best opportunities for you. What s more, Mutual Funds publish a monthly fact sheet which basically lists out all the important facts you need to know about the scheme you ve invested in. These facts are: Your portfolio of holdings, that shows details of the companies and the amount invested in each company and the rating of the company s issuance in case the instrument is a debt instrument. Past returns, dividends and performance ratios. In addition, the NAV is published on AMFI and on every fund company s website on a daily basis, ensuring that you re always in the loop about your investments. Mutual Funds help you diversify Like the old saying, Don t keep all your eggs in one basket, diversifying your investments will help you lower your risk. By spreading out your money across different types of investments, investing it

6 by in multiple companies, and investing in more than one sector, you ensure that you always have a back-up plan intact. So when you look to invest, always consider a wide range of options. As you have previously read, Equity Mutual Funds invest in shares of various companies, whereas Debt Funds invest in government securities, NCD, CDs, CPs bonds and other fixed income securities. Thus, as an investor, you will be able to have a diversified investment basket. Mutual Funds reduce the transaction cost The power of bargaining lies in buying anything wholesale. The rate of buying in wholesale will obviously be much lesser compared to the retail rates. Now apply the same principal to Mutual Funds and what do you get? With many people pooling in their savings, you get the advantage of the power of bargaining which reduces the overall transaction cost. And what s more, as per prevalent tax laws, under provisions of Section 10 (23D) of the Act, any income received by the Mutual Fund is exempt from tax; which simply means that funds don t pay any tax on the gains obtained from selling securities that they buy on behalf of their investors. Myths Around Mutual Funds Let s shatter the myths; it s time to look at the facts! Myth : Mutual Funds are for experts. Fact : Part of the fear of Mutual Funds is that everything will go above your head and that only experts in finance can understand how they work. This is not true at all! Unlike the equity market, you don t have to take the call on when to buy or sell shares, the fund manager will do it for you. It is his job to track various sectors and companies. He will help you decide where to invest your money. So in actuality, even if you aren t a financial expert, you will still have access to someone who is, and with his help there s no doubt you will make the right decisions. Myth : Mutual Funds are only for the long term. Fact : Yes, long-term investments have a slight advantage, but that doesn t mean that Mutual Funds are only for such investors. In fact, there are various short-term schemes where you can invest from a day to a few weeks. Myth : Mutual Fund is an equity product. Fact : People usually associate Mutual Funds with Equity Funds, but this is not entirely true. Mutual Funds invest in a variety of instruments ranging from equity to debt. Within debt they may invest in debt instruments that mature in a day (also known as Money Market Instruments) to those that mature in 1 or even 10 years. Myth : Mutual Funds with a Rs. 10 NAV are better than Mutual Funds with a Rs. 25 NAV. Fact : This simply comes down to a subconscious movement towards what seems to be cheaper. But the fact is that what matters is the percentage return on invested funds. For example, given a similar performance level of 10% appreciation, a Rs. 10 NAV will rise to Rs. 11 whereas a fund with a NAV of Rs. 200 will rise to Rs The reality is, due to an already demonstrated performance, the chance of the Rs. 200 scheme posting the 10% appreciation is higher than the

7 one that has just started its journey. So instead of concentrating on a low NAV and more number of units, it is worthwhile to consider other factors like the performance track record, fund management and volatility that determine the portfolio return. Myth : One needs a large sum to invest in Mutual Funds. Fact : This is one of the most long standing myths which today has absolutely no truth whatsoever. Most funds today allow investments as low as Rs. 1000, with no limits on the maximum amount. In fact, even for Equity linked savings schemes the amount is as low as Rs What s more, there is no monthly or annual maintenance charges even if you don t transact further. Mutual Funds also offer the SIP facility in many of their schemes, which allows you to invest small amounts of your choice regularly. Myth : One needs to have a Demat account to invest in Mutual Funds. Fact : This is not true. There are multiple ways in which you can buy Mutual Funds, some of which are: Offline: By filling up a form through financial intermediaries, like independent financial advisors, banks and financial distribution houses. Online: Through the many accessible distributors websites Online: Through AMC websites If you have a Demat account, you can even consolidate the Mutual Fund holdings along with other holdings in the Demat account. You can also buy Mutual Funds through the same intermediary who helps you buy and sell shares on exchanges. Myth : Funds with a higher NAV have reached the peak. Fact : This is a very common misconception because of the general association of Mutual Funds with shares. But you must remember that Mutual Funds invest in shares, so they can get in and out whenever the Fund Manager deems appropriate. If the Fund Manager feels that a stock has peaked, he can choose to sell it. To understand the reality of this myth better you need to understand that the NAV is nothing but a reflection of the market value of the shares held by the fund on any day. In all probability the NAV is high on account of a good performance over the years. Imagine two schemes. Scheme A is a new scheme with NAV of Rs. 15, and Scheme B is an old scheme with NAV of Rs If the holdings of both these schemes increase by 10%, the NAV of both schemes will go up by 10%. The NAV of scheme A will be Rs and that of scheme B be Rs So you realise that it doesn t really matter if the NAV is Rs. 15 or Rs. 150.tual Funds reduce the transaction cost Understanding and Managing Risk Investments of any form - shares, debentures, deposits etc. -involve risks. There are broadly two

8 types of risks: i.e. diversifiable and undiversifiable. We are more bothered with the latter one as it is influenced by various uncontrollable factors, like monetary policies, fiscal policies, tax structure, political factors and other economic factors. An important point to be borne in mind is that risk cannot be eliminated but it can be mitigated through proper risk management. Mutual Funds help to reduce risk through diversification and professional management. The experience and expertise of Mutual Fund managers in selecting fundamentally sound securities and timing their purchases and sales help them to build a diversified portfolio that minimises risk and maximises returns. Mutual Funds- Beyond Equity There is a lot more to Mutual Funds than just equity. If you thought mutual funds were primarily about investing in shares or the equity market, think again. Mutual funds extend beyond the limits of equity. They also invest in Debt Instruments. The same principle of higher the risk, the higher the returns applies here. Debt products are lower in risk as compared to equity funds. Debt funds are also known as Fixed Income Funds or Bond Funds and they invest only in debt securities. Some examples of debt securities are as follows: 1. Corporate Debentures or bonds 2. Commercial papers 3. Certificate of Deposits 4. Government Securities or bonds 5. Treasury Bills Unlike in equities, where one is part owner of a company to the extent of their share holding, an investor isn t an owner in the case of fixed income investments. But on the upside, an investor is a lot more aware of the key variables involved, such as: 1. Reasonable assurance that the principal will be returned. 2. Tenure post which the principal is returned. 3. The coupon rate, or simply put, the interest rate. So the great thing about debt funds is that they are designed primarily to protect your capital and provide stable returns by investing in debt securities. How does your money appreciate in a debt fund? Broadly, there are two independent sources of revenue through which a debt fund earns: 1. Interest Income 2. Mark to Market gains Understanding Interest income When you invest in a Bank/Company deposit it offers you a fixed rate of interest with the principal being returned on maturity. Similarly, when a debt fund invests in various debt securities the issuers of these securities offer a rate of interest and the principal on maturity.

9 For example, let s say a debt fund with a starting NAV of Rs buys a Rs 100 GoI Security, paying an 8.5% interest semi-annually with a maturity of 5 years. The debt fund would earn Rs 8.50 annually and get back the principal of Rs 100 at the end of 5 years. Consequently, what the debt fund does is that it spreads the Rs 8.50 of interest it earns annually over the 365 days of the year, earning Rs per day. Understanding Mark to Market Similar to interest rates on Bank Fixed Deposits, the interest rates on debt securities also change. In fact, you could say that interest rates and debt security prices are on either end of a seesaw. Prices fall when interest rates rise, and rise when interest rates fall. For example, if the interest rates were to decline, then the newer bonds would be issued at a lower interest rate than the existing bonds. Consequently, the value of the older bonds will increase, leading to a rise in their price. In the same way, if the interest rates were to increase then the value of the old bonds would fall and the newer bonds would bear higher interest rates. So it s extremely probable that the traded price of a bond will differ from its face value. Hence, the longer a bond s period to maturity, the more its prices tend to fluctuate, owing to the constantly changing market interest rates. To illustrate further: If interest rates decline and the GoI issues new 5 year bonds at an interest rate of 7.5%, it leads to an increase in the value of the old bonds to 8.5%. The price of older bonds will increase from Rs. 100 to Rs If the old bonds are now sold, the buyer will now receive Rs 8.50 per year for 5 years but will make a loss of Rs. 5 on redemption of the principal at the end of 5 years. The investor, therefore, earns Rs by way of interest, over the course of 5 years and loses Rs. 5 on the principal amount invested, giving him a return of Rs over 5 years which is equal to the new bonds. On the day the old bond price is marked up to Rs. 105, the NAV of the fund will increase by Rs but from that day onwards the daily interest income will decrease from 8.5% p.a. to 7.5% p.a. What are FMPs? Fixed Maturity Plans are closed ended debt mutual fund schemes. Simply put, a closed ended scheme is one where you can invest only during the new fund offer period, post which it is shut for new subscriptions. As the name suggests, it has a fixed time horizon and the money is given back to you upon the expiry of this period. The time horizon can rangeanywhere from as low as 30 days to even 5 years. Since the maturity and the money are known beforehand, the fund manager can invest with reasonable confidence in securities that have a similar maturity as that of the scheme. Thus, if the tenure of the scheme is 1 year then the fund manager will invest in debt securities that mature just before 1 year. What also helps is the fact that there can be no redemptions in these schemes, unlike in other open ended funds, where one can buy and sell units from the asset management company. At most,you can sell units to other investors over the stock exchange, but the overall quantum of money that is collected during the NFO remains the same.

10 One important thing to remember is that here too the returns are neither indicated nor guaranteed. is average maturity and how is it useful? What is average maturity and how is it useful? Debt funds invest in a number of debt instruments, all of them having a varying maturity. That s where the average maturity comes handy. As the name suggests, it basically indicates the average maturity of all the securities in a portfolio, giving you the freedom to compare. Average maturity thus gives you a quick glimpse into the sensitivity of the bond to interest rates. Funds with higher average maturities tend to be more volatile in the short term since their objective is to deliver higher returns over the long term. Simply put, a fund with an average maturity of 5 years is definitely more volatile in the short term than a fund with an average maturity of say 9 months. That s because in the shorter term there is reasonable surety on the receipt of the coupon income. So matching your investment horizon with the average maturity is always a good idea. But remember, an average maturity of say 4 years doesn t necessarily mean that you have to hold it for 4 years. But it definitely indicates is that you can expect to get optimal returns, given the interest rate environment, over 4 years. Exit load is an effective mechanism that prompts investors to stay invested through the desired holding period. This ensures that investors, who move in and out of the fund and take away accrued gains during momentary positive market movements, do not short-change diligent investors who stay invested for the entire course. Why is it essential to match the investment horizon with that of the Scheme? Funds with a lower average maturity are ideal for short-term holdings as they are well protected from the fluctuating interest rate movements. However, holding them for more than their average maturity may not get you the optimal results.there can be various types of debt funds based on the average maturity of the instruments invested in. Although debt funds are less risky than equity funds, they are still subject to market volatility. The level of volatility, therefore, depends on the average maturity of the specific portfolio. The higher the average maturity, the greater the uncertainty in the short term, which is what results in greater volatility. Conversely, the lower the average maturity, the greater the certainty, which in turn lowers volatility. Liquid funds are the least volatile as their maturity is in days, and at the other extreme there are income funds, where the average maturity is in multiple of years. So, in order to really get the most out of debt funds, it is essential that you match your investment horizon with the average maturity of the scheme. What are Money Market or Liquid Funds? Liquid funds are also known as Income Funds. Their aim is to provide easy liquidity, preservation of capital along with moderate income. These schemes invest exclusively in safer, short-term instruments, such as treasury bills, certificates of deposit, commercial paper and interbank call money and government securities. Returns on these schemes fluctuate much

11 less compared to other funds and are most appropriate for corporate and individual investors as a means to park their surplus funds for short periods. Investor Service FAQs What is a Folio number? Much like a bank account number, a Folio number depicts your holdings in the schemes of a fund house. There is absolutely no restriction on the number of Folios that you can have with a particular fund house. However, it is good housekeeping to have a minimal number of Folios so that it is easier to keep track of your investments. What are cut-off times? The Cut-off timing is the time before which an investor has to submit a valid purchase or withdrawal/ redemption form to be eligible for a particular day's price or NAV.nd why do And why does one need to have cut off times for purchases and redemptions? A phrase you commonly hear is that mutual funds are market-linked investments. They can invest in either Equity, Bond or Gold markets, and these markets have fixed open and closing hours for trading. The NAV of the scheme is highly correlated with the state of the markets. So, in order to be eligible for a particular day s NAV, the fund manager needs to be aware of the amount that needs to be purchased or sold as per the settlement period and trading times of the markets. The timings also largely help in ensuring that all classes of investors get the same treatment irrespective of their quantum of investment. What is an account statement? As the name suggests, it is a statement that reflects your holding in a scheme. A statement of accounts is like a bank pass book. An account statement will reflect the following 1. The scheme in which you have invested. 2. The amount you've invested, the purchase price and the units you were allotted. 3. Other details, like Bank details, mailing and contact details, and nominee details. The industry issues a consolidated account statement across fund houses once a month. However, one is free to request for an account statement with each fund house that will solely reflect the holdings in the schemes managed by that particular fund house, although there are charges levied for requesting an account statement. Rights as a Mutual Fund unit holder As a unit holder in a Mutual Fund scheme coming under the SEBI (Mutual Funds) Regulations, ("Regulations") you are entitled to: 1. Receive unit certificates or statements of accounts confirming your title within 6 weeks from the date of closure of the subscription or within 6 weeks from the date your request for a unit certificate is received by the Mutual Fund;

12 2. Receive information about the investment policies, investment objectives, financial position and general affairs of the scheme; 3. Receive dividend within 42 days of their declaration and receive the redemption or repurchase proceeds within 10 days from the date of redemption or repurchase; 4. Vote in accordance with the Regulations to: a. Either approve or disapprove any change in the fundamental investment policies of the scheme which are likely to modify the scheme or affect your interest in the Mutual Fund (as a dissenting unitholder, you would have a rig ht to redeem your investments); b. change the asset management company; c. wind up the schemes. 5. Inspect the documents of the Mutual Funds specified in the scheme's offer document. In addition to your rights, you can expect the following from Mutual Funds: 1. To publish their NAV, in accordance with the regulations: daily, in case of most open ended schemes and periodically, in case of close ended schemes; 2. To disclose your schemes' portfolio holdings, expenses, policy on asset allocation, the Report of the Trustees on the operations of your schemes and their future outlook through periodic newsletters, half- yearly and annual accounts; 3. To adhere to a Code of Ethics which require that investment decisions be taken in the best interests of the unit holders. New Offers As the name suggests, it is a statement that reflects your holding in a scheme. A statement of accounts is like a bank pass book. An account statement will reflect the following 1. The scheme in which you have invested. 2. The amount you've invested, the purchase price and the units you were allotted. 3. Other details, like Bank details, mailing and contact details and nominee details. The industry issues a consolidated account statement across fund houses once a month. However, one is free to request for an account statement with each fund house that will solely reflect the holdings in the schemes managed by that particular fund house, although there are charges levied for requesting an account statement. I. Objectives and legal aspects of RGESS [Source: 1. What is RGESS Rajiv Gandhi Equity Savings Scheme (RGESS) is a tax saving scheme announced in the Union Budget (para 35), and further expanded vide Union Budget (para 61 & 144). The scheme is designed exclusively for the first time individual investors in securities market, whose gross total income for the year is below a certain limit. In , the income ceiling of the beneficiaries was raised to Rs. 12 lakh from Rs. 10 lakh specified in The investor would get under Section 80CCG of the Income Tax Act, a 50% deduction of the amount invested during the year, upto a maximum investment of Rs. 50,000 per financial year, from his/her taxable income for that year, for three consecutive assessment years. 2. What is the objective of the Scheme? As announced in the Union Budget , the objective of the Scheme is to encourage

13 the flow of savings and to improve the depth of domestic capital markets. This will help in promoting an equity culture in India. The Scheme aims at widening the retail investor base in the Indian securities markets, and also furthers the goal of financial stability and financial inclusion. 3. What is the legal provision for RGESS? A new section 80CCG in the Income tax Act, 1961, on Deduction in respect of investment under an equity savings scheme was introduced vide Finance Act, 2012 and amended vide Finance Act, 2013, to give tax benefits to New Retail Investors whose gross annual income is less than or equal to Rs.12 Lakhs, for investments in Eligible Securities up to Rs.50,000 in a single financial year, for three consecutive assessment years. The details of the RGESS Scheme were first notified on 23 November 2012 (Section No. 2777(E); Notification No. 51) and vide subsequent corrigendum dated 5 December 2012 (Section No. 2835(E); Notification No. 53) by Department of Revenue. The operational guidelines were issued by SEBI on 6 December Subsequent to the Union Budget , Section 80CCG was amended vide Finance Act, 2013, to expand the scope of the Scheme. The notification dated 23 November, 2012 was accordingly amended vide Notification dated 18 December 2013 (Section No (E); Notification No.94). 4. Would first time investors not lose money in the equity market? Would it be too dangerous for them to invest in it? The investors in the RGESS run the risk of losing money in the equity market, like any other investor in the securities market. The Scheme does not provide any guarantee of assured returns. Therefore, investors under RGESS are advised to do due diligence before making any investment in equity market. However, while designing the Scheme, safeguards, like, restricting the investments to select large cap stocks, lock-in period with enough flexibility to take benefits of the positive market movements, etc. have been provided to protect the interests of the first time investors. To give the benefit of diversification and consequent risk minimization, investments into Exchange Traded Funds (ETFs) or Mutual funds set up as per the criteria laid down in the Scheme, are also allowed under the Scheme. 5. We already have an Equity Linked Savings Scheme (ELSS)? Why do we need RGESS? ELSS and RGESS are entirely different schemes. They pertain to different asset classes, with ELSS offering passive investment avenues. ELSS is meant for indirect participation in the stock market, whereas RGESS aims at encouraging direct participation in the stock market. The operational differences are given below:

14 Operational differences ELSS Investments are to be strictly in mutual funds 100% deduction (upto Rs. 1,00,000) is allowed under ELSS ELSS benefits can be availed by an investor every year The ELSS benefit comes under Section 80C of the IT Act which has an aggregate limit of Rs.1,00,000 for all such eligible instruments like LIC policy, PPF etc Lock-in period of 3 years RGESS Investments are to be made directly in listed equity or into units of mutual funds and ETFs Only 50% deduction of the investment made (uptomax. of Rs. 25,000 in any one year) is allowed under RGESS. RGESS benefits are limited to the new investors and can be availed for only 3 consecutive years RGESS deduction is available under Section 80CCG. This is a separate investment limit exclusively for RGESS, over and above the Section 80C Limit of Rs. 1 lakh Lock-in period of 3-years. However, trading allowed after one-year, subject to conditions. Since investments are in mutual funds, it is perceived to be less risky Since investments are in equity, risk is perceived to be higher 6. What are the benefits / highlights of RGESS compared to other tax saving schemes? The following are the benefits of RGESS: The allowed tax deduction u/s 80CCG will be over and above the Rs. 1 Lakh limit permitted under Section 80C of the Income Tax (IT) Act, making it thus attractive for the middle class investors. Further, the Dividend income is tax free, if the company is liable to dividend distribution tax. The benefits can be availed for three consecutive years. Investor is free to trade / churn the portfolio after the fixed lock-in period, subject to certain conditions. Gains arising out of higher market valuation of RGESS eligible securities can be realized after a year, that means there is a fixed lock-in period. Provisions exist to protect the investor from general declines in the market to a certain extent. This is in contrast to all other tax-saving instruments. Facility for pledging stocks after the fixed lock-in period. For investments upto Rs.50,000 in your sole RGESS demat account, if you opt for Basic Service Demat Account, annual maintenance charges for the demat account is zero and for investments upto Rs. 2 lakh, it is stipulated at Rs 100. The investments can be made in installments during the financial year in which tax deduction is claimed.

15 II. Coverage of the Scheme: Investors and Investments allowed under RGESS 7. Who all will be covered under the Scheme? Who is a new investor? The Scheme is open for all New Retail Investors who have gross total income less than or equal to Rs. 12 lakh. A new retail investor is one: who is a resident individual (the benefit cannot be availed by HUF, corporate entities / trusts, etc.) who has not opened a Demat account and has also not done any trading in the derivative segment till RGESS account opening date, or the first day of the initial year in which he brings in the RGESS eligible investment into the account, whichever is later. who has opened a Demat account and has not made any transactions in equity and /or in the derivative segment till designating such account as RGESS, or the first day of the initial year in which he brings in the RGESS eligible investment into the account, whichever is later. In case of joint accounts, only the first account holder will not be considered as a new retail investor. All those existing account holders other than the first demat account holder (eg. second / third account holders or other joint holders) or nominees of the existing account holders will be considered as new retail investors for the purpose of opening of a fresh RGESS account, if otherwise eligible. In case the demat account is opened as a first holder, but there are no transactions in the equity or derivative segment, then the first account holder is eligible to be a new retail investor. For taking the benefits under RGESS, the new retail investor will have to submit a declaration, as in Form A, to the Depository Participant (DP) at the time of account opening or designating his existing demat account. Eligible securities, which are brought thereafter into such an account, will be automatically subject to lock-in upto a value of Rs. 50,000, unless the investor specifies otherwise through the Form B specified in this regard. 8. I am a non-resident Indian. Am I eligible for RGESS? The Scheme is for an individual resident in India as per the provisions of the Income Tax Act. 9. Can a Guardian claim RGESS tax benefit if investment is done in the name of Minor? Yes. Guardian can claim tax benefit for investments done in the name of minor, subject to overall limit for guardian as an individual.

16 10. I already have physical units of mutual fund and / or Exchange Traded Funds. Am I eligible for the RGESS? Yes. Prior investments in mutual funds and Exchange Traded Funds do not make an investor ineligible for the Scheme. However, you need to invest afresh in RGESS eligible mutual fund /ETF schemes and hold them in a demat account to avail of the benefits under RGESS. 11. I possess some physical shares. Am I eligible under RGESS? Yes. You will be considered as a new retail investor, if otherwise eligible. However, you need to make fresh investments to avail the benefits under RGESS. You will not be eligible to claim benefits of RGESS on dematerialisation of such shares. It is advisable that you first designate / open the account for RGESS and then undertake the dematerialisation of physical shares in your custody. 12. I possess some shares in the demat account; but they are of unlisted companies. Am I eligible? No. 13. I have shares in demat account under the ESOP category? Am I eligible for tax benefit in RGESS? No. 14. What are the investment options available under the Scheme? What are the eligible securities under RGESS? The investment options under the scheme will be limited to the following categories of securities*: Listed equity shares / units a. The top 100 stocks at NSE and BSE, i.e., CNX-100 / BSE -100 (This does not mean that one has to trade through NSE or BSE only. If the securities constituting BSE 100 or CNX 100 are listed and traded in any new stock exchange that may come up on a later day, the same will be eligible for RGESS.) b. Equity shares of public sector enterprises which are categorized by the Government as Maharatna, Navaratna and Miniratna c. Units of Exchange Traded Funds (ETFs) or Mutual Fund (MF) schemes with RGESS eligible securities as mentioned in (a) and / or (b) as underlying, provided they are listed and traded on a stock exchange and settled through a depository mechanism.) d. Follow-on Public Offers (FPOs) of (a) and (b) e. New Fund Offers (NFOs) of (c) above

17 Unlisted equity shares a. Initial Public Offers (IPOs) of PSUs, which are scheduled to get listed in the relevant financial year and where the government holding is at least 51% and whose annual turnover is not less than Rs cr for each of the immediate past three years. (*Investment criteria as applicable at the time of investment) 15. Where can I get information about these eligible stocks? The consolidated and updated list of eligible securities from time to time is published on the websites of exchanges / Depositories / The Association of Mutual Funds in India (AMFI). For detailed information see the relevant pages of the websites of SEBI NSE BSE, NSDL, CDSL and AMFI. As regards eligible IPOs /FPOs/NFOs of mutual funds or ETFs, companies/mutual funds would be publishing this information in their offer documents / public advertisements. 16. Why are RGESS Investments limited to top 100 stocks? The Scheme is designed for new investors who are venturing in the equity markets for the first time. The choice of investments has been restricted to the stocks included in BSE 100 or CNX 100. But if you look at PSU stocks even they have generally shown higher liquidity, relatively. Moreover, there is adequate reporting and analysis of the PSUs available in the market. The range of 100 stocks also provides enough scope for diversification of investments. 17. When I made the investment, the particular stock was in BSE 100; thereafter it was removed from the BSE 100 list by the exchange, Is my investment still eligible for RGESS when I file my returns? A stock has to be in BSE 100 or CNX 100 only at the time when the investments are made. This means that even if the stock moves out of CNX 100 / BSE 100, the investor would be deemed to be compliant for RGESS. However, his rights are limited to just selling those stocks off from RGESS portfolio. If he repurchases / make additions to the existing stock, then the additional stock will not be counted as a part of the RGESS portfolio. 18. When I enrolled for RGESS my annual income was below Rs. 12 lakh. However, in the subsequent year it crossed Rs. 12 lakh. Am I eligible to claim benefits? The income limit is applicable for each of the year in which an investor is investing in RGESS. If his income crosses Rs. 12 lakh in the subsequent year, he will not be eligible to invest in that year and thereafter, provided income continues to be above Rs. 12 lakh. However, investments made in the relevant year(s) [i.e., year(s) in which investor s income was eligible as per the scheme] will be considered eligible for claiming benefits (and no refund needs to be made for such claims). If you receive an increment in the middle of the year by which your annual income crosses the Rs. 12 lakh barrier then all the investments made in that financial year become ineligible. It is the responsibility of the investor to indicate immediately to the depository through his

18 Depository Participant when he ceases to become eligible for claiming tax benefits. Depositories would make available an application (in a specified format) that can be submitted to your Depository Participant stating that none of the fresh investments to be made in that year be kept under lock-in by the depositories. If such an investor continues to remain ineligible in the third year and if he had submitted the aforementioned application stating his ineligibility only for the second year, then he has to submit a fresh application stating his ineligibility for the third year. Otherwise, the investor will be considered as eligible for the third year and depositories may start locking-in investments for that year. Once the aforementioned application is submitted stating that you are not intending to avail the benefits under RGESS for the relevant financial year(s) then the position cannot be reversed for those financial year(s). If, after being ineligible in the second year, the annual income of the investor happens to fall below Rs. 12 lakh in the third year, then he would be considered eligible for making investments under RGESS in the third year, unless he has submitted otherwise through the aforementioned application earlier. ( i.e,, if an investor submits aforementioned application for two years, the position cannot be reversed for those financial years). 19. I applied for the IPO / New Fund offer (NFO) in the month of March; However, the company / Scheme got listed in the stock exchange only in April i.e, in the next financial year. Is my investment eligible? No, only if it is scheduled to be listed in the same financial year, the investment is eligible. 20. For how many years I can avail of RGESS benefits? RGESS benefits can be availed for three consecutive financial years, beginning with the financial year in which the investment under the Scheme was made for the first time by the investor. 21. When does counting of my three year starts? What is initial year? The financial year in which the investor makes investment in eligible securities for availing deduction under the Scheme for the first time through his RGESS designated demat account is the initial year, even if the demat account was designated for RGESS in an earlier financial year. The counting of three consecutive years starts with this initial year, i.e., the financial year in which the investments under the Scheme are made for the first time by the new investor after opening / designating the demat account for RGESS. For example, if an investor who has opened /designated RGESS account in the FY does not invest in RGESS eligible securities during but makes investment in the FY , then, he is eligible to invest and claim benefits during FYs , and , subject to the fact that he doesn t make any investment in any other equity / derivative in FY The investor shall also be not allowed to claim deduction under the Scheme for any previous year other than the previous year relevant to that assessment year. Thus, if the investor has forgotten to claim benefits for a particular year, he cannot carry over that benefit to the subsequent year.

19 22. Do I have to make my first investment, after designating my account, only in eligible scrip? A composite reading of the definition of initial year and new retail investor demands that you shall make your first investment only in RGESS eligible scrip. Thereafter, you are free to invest in other securities. This is because you will be disqualified as a new retail investor if the financial year in which you designate the account for RGESS is different from the financial year in which you make your first investment in RGESS eligible scrip (i.e., initial year). For instance, imagine that you have opened / designated your RGESS account in the FY and make investment in other equity or derivative, but fail to make any investment in RGESS eligible scrip in that year. In the next financial year, i.e., FY , if you invest in RGESS eligible scrip, then that year is considered as the initial year. Definition of new retail investor is such that you should not have traded in equity or derivative as on the date of designating your account or on the first day of initial year, whichever is later. According to this definition, in FY , you are not a new retail investor and hence would be disqualified from availing RGESS benefit for any year. However, this is not an issue if you are investing in RGESS eligible scrip in the same year as you opened / designated your demat account. Sr No Client Date of Designat ing Account Under RGESS F.Y. in which account is designa ted Trade Date Investment Type Initial Year Eligibility Status as a new retail investor Can he claim RGESS Benefits in subsequent years of eligibility 1 A 28-Nov Dec-12 1-Mar-13 RGESS Eligible RGESS Ineligible Eligible Yes 2 B 5-Dec Dec Mar-13 RGESS Ineligible Eligible Yes RGESS Eligible 3 C 1-Mar D 21 Jan Mar Apr Mar Oct Feb Jun-15 RGESS Ineligible Ineligible No. RGESS eligible RGESS eligible RGESS ineligible RGESS ineligible RGESS eligible Eligible He cannot claim any benefit for the 2 nd year as there are no RGESS eligible investments made in that year; But the 3 rd Year he can claim for the investments made in June Am I mandated to make investments in all three years?

20 No. If the new investor does not invest in any financial year after opening /designating an account for RGESS, he shall be allowed to invest and claim benefits in the subsequent financial years, within the three year limit, however, subject to an investment limit of Rs. 50,000 in a single financial year. i.e., an investor opening/designating RGESS account in the FY need not necessarily invest in RGESS eligible securities during ; he is eligible to invest and claim benefits during FYs , and This is possible only if he does not make any ineligible investments prior to the initial year. Similarly an investor who claimed benefits under RGESS in FY need not necessarily invest in FY ; but can invest in FY However, he will not be eligible to invest in FY In such a scenario, he may need to submit Form B/ general application to the DP concerned for the FY (If there is no investment in the second year, Form B need not be submitted. The same needs to be submitted only if he does not want his investments made in the second year to be considered under RGESS.) 24. How much tax deduction will I be eligible under RGESS? You will be eligible to get tax deduction u/s 80CCG of the Income Tax Act, on 50% of the amount invested subject to a limit of Rs. 50,000 as investment in any financial year. Let us say, you invest Rs.50,000 under RGESS, the amount eligible for tax deduction will be Rs.25,000 from your taxable income. Similarly if you invest Rs.40,000 under RGESS, the amount eligible for tax deduction will be Rs.20,000 from your taxable income. This deduction is over and above Rs. 1 lakh limit specified under Section 80C. In other words, for those who are in the 10% income tax bracket, savings from tax liability for investments upto Rs. 50, 000 under RGESS is Rs (plus cess as applicable) and for those who are in the 20% income tax bracket, savings from tax liability is Rs. 5000/-(plus cess as applicable). This deduction can be claimed for three consecutive years as mentioned above. Illustration for tax benefit is as below Amount (Rs.) Amount Invested in RGESS Maximum Eligible investment in RGESS % deduction RGESS on Deduction RGESS Deduction Tax Savings under RGESS 10% Tax Bracket Tax 20% Savings Tax Bracket under RGESS % Tax Bracket 25. What is the amount of deduction I am eligible 2500 for in a 2500 single financial 1500 year? Clause (1) of Section 20% Tax 80CCG Bracket of the Income-tax Act has limited the allowable deductions per % deduction on RGESS Deduction