november 2013 Three Simple investment options for ShorTerm

Transcription

1 november 2013 Three Simple investment options for ShorTerm

2

3 short term investing contents Three simple investment options... 2 Matching funds to needs... 6 Liquid funds... 8 Fixed maturity plans Capital protection oriented funds asst art director Anil PAnwAr Copyright Outlook Publishing (India) Private Limited, New Delhi. All Rights Reserved No part of this book may be reproduced, stored in a retrieval system or transmitted in any form or means electronic, mechanical, photocopying, recording or otherwise, without prior permission of Outlook Publishing (India) Private Limited. Printed and published by Maheshwer Peri on behalf of Outlook Publishing (India) Pvt. Ltd Editor: Udayan Ray. Published from Outlook Money, AB 5, 3rd Floor, Safdarjung Enclave, New Delhi-29 Outlook Money does not accept responsibility for any investment decision taken by readers on the basis of information provided herein. The objective is to keep readers better informed and help them decide for themselves. an investor education and awareness initiative by hdfc mutual fund 1

4 2

5 short short term term investing there are a class of funds that are tailored to provide safe investment options to retail investors Investing in mutual funds can be a profitable experience if one is able to do so in the right manner. The universe of mutual funds can be slotted into equity, an investor education and awareness initiative by hdfc mutual fund 3

6 debt and hybrid schemes (which have a mix of both debt and equity). A lot is documented about equity funds, but very little is highlighted about debt funds. The asset management industry handles more money under debt schemes than equity. For long, the range of debt funds were targeted at corporate and HNIs, with very little choice for retail investors. However, in recent years, a range of debt funds have emerged that are extremely useful for retail investors to create both income streams as well as have growth possibility. The penchant for Indians to save is reflected in the high sums of money that sit in our savings bank accounts. Take for instance the total bank deposits in scheduled commercial banks which was Rs. 706,01,822 million as on June 30, 2013 (Source: RBI). The reason for such undying faith in bank savings is the safety and liquidity that the instrument offers. However, most savers and depositors do not realise or evaluate the tax inefficiency of such deposits or 4

7 short term investing when adjusted to inflation, real return in bank fds, more often than not, tends to be negative the low interest rates that they earn. When adjusted to inflation, the real return more often than not tends to be negative. an investor education and awareness initiative by hdfc mutual fund 5

8 If you seek safety of capital with growth, a capital protection-oriented fund is a better option Matching funds to needs One of the biggest problems with investors is that they try fitting the fund they have invested to their needs. By reversing the process, one should be able to get a better result viz. first identifying the need and then selecting a fund. So, if you are looking at an alternate to surplus money lying idle in savings or post office account; go for a liquid fund. If you are seeking safety of capital with growth possibility, a capital protection-oriented fund is a better option and if you are looking for an alternate to term deposits of a bank or a post office for a predictable time horizon of say 6

9 short term investing match making fmps instead of bank and post office fixed deposits up to 3 years liquid funds instead of savings bank account and post office capital protection funds instead of bank and post office fixed deposits of 3 years or more one year, a Fixed Maturity Plan (FMP) with reasonable return and low risk is the right choice. But, a good start is made when you identify a class an investor education and awareness initiative by hdfc mutual fund 7

10 of funds that would meet your financial needs and invest in them. Having identified funds that address specific savings and investment need, the next step is to get a better understanding of how the alternates fare and then start investing in them. Liquid funds The idea of keeping emergency fund somewhere other than a savings account may not strike many, but it is an option worth exploring. No doubt, liquidity and safety are more important factors for emergency funds, but there is no harm in optimising returns, without sacrificing on safety and liquidity. It is in this context that liquid funds come into play which combines safety and liquidity, along with tax efficient returns when compared to savings account with bank or post office. However, NAVs of liquid funds are prone to capital erosion over shorter period especially when there is heavy redemption pressure or due to market fluctuations/rbi measures. 8

11 short term investing liquidity and safety are more important factors for emergency funds These funds have the primary objective to invest in money market and debt instruments with maturities of upto 91 days, generating optimal returns while an investor education and awareness initiative by hdfc mutual fund 9

12 How liquid funds stack up Savings ACCOUNT Liquid funds Liquidity High High Annualised returns (%) 4 and above 7-8* Lock-in None 1-day Principal guaranteed Up to Rs 1 lakh by the government as long as it is insured by the No guarantee DICGC Chequebook facility Available Not Available Income Tax As per tax slabs Taxed at concessional rate as per table below Resident Investors Mutual Fund Dividend Income Nil Dividend Distribution Tax (DDT) Individual / HUF %** Others 33.99%** Capital Gains Long Term 11.33%** without indexation or 22.66%** with Nil indexation Short Term Income tax rate applicable to the unit holders as per their Nil income slabs. * Source: Mutualfundsindia.com Returns as on 22 October, 2013 **Including applicable surcharge, education cess and secondary and higher education cess 10

13 short term investing the objective is to invest in money market and debt instruments, generate optimal returns and maintain safety and liquidity maintaining safety and high liquidity. Liquid funds primarily invest in instruments such as certificates of deposits (CDs), commercial papers (CPs) and government treasury bills. Such a portfolio helps liquid funds provide high liquidity to investors. Accordingly, for redemption requests submitted on any business day, the amount is made available on next business day. Why liquid funds? These funds provide good liquidity and the prevailing yield in the market. Due to investment in instruments with short maturities, the an investor education and awareness initiative by hdfc mutual fund 11

14 liquid funds have lower interest rate risk and provide stable returns because they invest in instruments with short maturities 12

15 short term investing portfolios of liquid funds have lower interest rate risk and provide stable returns to its investors. While liquidity is one factor of these funds, for long their safety has made them the preferred parking option by both HNIs and Corporates. Most of these schemes have no lock-in period and offer redemption proceeds within 24 hours and one can park from as less as Rs. 10,000 in these funds. Hence, liquid funds offer a good alternative to savings bank deposits. The other advantage of liquid funds is that their NAVs are computed on all calendar days (even on weekends and holidays). Therefore your money continues to earn even on weekends and holidays. What to look for when investing in them? Look for the credit quality of the portfolio before investing and the type of instruments in which it invests such as commercial papers (CPs), Collateralised Debt Obligation (CDO) and certificate of deposits (CDs). Higher an investor education and awareness initiative by hdfc mutual fund 13

16 Dividends from liquid funds are tax-free in the hands of the investors the investment in highest rated securities, lower the risk and vice-versa. Tax advantage. Short-term capital gains tax applies on liquid funds that are held for less than a year at the income tax slab that one falls in. However, there is tax efficient strategy that you can adopt. Dividends from liquid funds are tax-free in the hands of the investors, which makes them more attractive than bank fixed deposits. Consider opting for dividend reinvestment when investing in a liquid fund because dividends paid will be reinvested as units and will be considered as fresh investments. This way the capital gain will be very low. In case you do plan to hold the investment in liquid fund for over a year; opt 14

17 short term investing for the growth option to benefit from the indexation benefits. For those in lower income slabs, choosing growth option my be more beneficial. an investor education and awareness initiative by hdfc mutual fund 15

18 For investors who want to invest money for a short period of time, FMPs are a perfect fit Fixed Maturity Plans Bank deposits guarantee a fixed return for a fixed tenure, however, there is a type of scheme fixed maturity plan (FMP), which is a tax-efficient alternative to bank fixed deposits with marginal risk compared to bank deposits. FMPs are closed-end funds, which means you can invest in them only when they are launched and is automatically redeemed when the fixed term is over. Although returns on FMPs are not predictable, yet, for investors who want to invest money for short period, these are a perfect fit. These funds invest in instruments 16

19 short term investing that have the same or lower maturity period as that of the scheme. This makes FMPs least volatile. For instance, in case of a 1-year FMP, the average maturity period of the portfolio would be around days but not more than that. Therefore, irrespective of the variation an investor education and awareness initiative by hdfc mutual fund 17

20 in prevailing interest rates or the impact of the same on the market value of the bonds, the actual returns do not get affected. Opt for an FMP, which has tenure similar to your investment goal. FMPs are listed on exchanges to provide liquidity to investors during the tenure. Comparison of fixed maturity plan with bank fixed deposit Particulars FMP FD Amount Invested (Rs) 10,000 10,000 Assumed Rate of Return (For illustration purpose only) (%) Projected Maturity Value (Rs) 10,493 10,493 Gross Dividend/Interest (Rs) Dividend Distribution Tax Rate (%) Tax (Rs) Net Dividend / Interest (Rs) Post Tax Value (Rs) 10,384 10,341 Post Tax Returns 7.79% 6.91% Assuming income tax at the highest bracket (up to 1 crore income) of 30%. 18

21 short term investing fmp suitability Investors looking at stable returns over short to mediumterm Investors who want to invest money for a fixed tenure to meet certain financial goals in the future Investors with a conservative and risk averse profile Retired persons, instead of making random withdrawals from their savings, can invest to have a flexible and regular income Investors who are not pleased with returns from traditional fixed income avenues like bank deposits, bonds etc. an investor education and awareness initiative by hdfc mutual fund 19

22 Why FMPs? FMPs are less risky than equity schemes (though more riskier as compared to fixed deposit) due to their investment in debt and money market instruments. They also offer relatively better returns, especially post-tax returns in an FMP are better than a fixed deposit. As these investments are held till maturity, there is no exposure to interest rate risk, which also keeps them off interest rate volatility. The Tax Advantage Where FMPs score over fixed deposits is the way they are taxed. These are tax efficient both in the short-term and long-term. Moreover, with indexation, one can lower capital gains and thus lower one s tax liability. If one uses double indexation, it allows an investor to take advantage of indexing his investment to inflation for 2 years while remaining invested for a period of slightly more than 1 year. 20

23 short term investing capital Protection oriented funds Investors looking for safety and capital protection with growth possibility over medium term should consider capital-protection-oriented funds to invest money instead of bank fixed deposits (FDs). The main objective of such funds: capital protection with growth potential. These do not guarantee capital protection, or returns. The orientation towards protection of capital originates from the structure of the Portfolio of the Scheme and not from any Bank guarantee, Insurance Cover etc. Typically such funds invest in fixed-income instruments such as bonds, Treasury bills and certificates of deposits (CDs) with a marginal exposure to equity. Capital protection oriented funds are close-ended and have maturity period of generally three to five years, which are far easy to understand, especially for those who are used to saving in fixed deposits. Why Capital Protection oriented funds? These funds adhere to SEBI guidelines and in no way do they an investor education and awareness initiative by hdfc mutual fund 21

24 capital Protection oriented funds adhere to SEBI guidelines, but don t guarantee capital guarantee capital. The scheme invests ~ 80-85% in debt securities and balance in equities. The protection of capital comes from typical structuring of the portfolio wherein the debt component grows to the principal amount, net of scheme expenses, over the tenure of the scheme, say 3 years. This would leave about percent of the portfolio free for the equity component. These funds are required to have the highest credit rating which is periodically reviewed by the rating agency with the view that the debt component should grow to the initial amount invested (i.e. the principal amount) over the tenor of the scheme. The equity edge: For the equity allocations, two variants are followed by the fund: either the scheme may 22

25 short term investing invest directly in equity and liquidate the portfolio before the maturity or the scheme invests in index options wherein the fund manager purchases long dated call index options and the equity allocation is used to pay the premium on the index option contract. From a risk and return perspective the direct equity strategy is more conservative than an index an investor education and awareness initiative by hdfc mutual fund 23

26 options strategy, however, both strategies have their pros and cons and direct equity strategy is relatively low risk variant when compared to index option strategy. These fund are listed on stock exchanges to provide liquidity to investors during their tenure. 24 Currently, these funds are better placed then they were in the past on the debt allocation. Post recent RBI measures to control rupee volatility, the yields have moved up across maturities which makes it a more suitable option now. Suitable for people who require cash flows as the time of maturity is known when making the investment. capital Protection suitability The returns from these funds over its tenure are a function of prevailing yields in debt market and returns from equity allocation which has slight correlation to equity valuations.

27 DISCLAIMER The information given herein is as per the prevailing tax laws. Investors should be aware that the fiscal rules/ tax laws may change and there can be no guarantee that the current tax position may continue indefinitely. In view of the individual nature of tax consequences, please consult your professional tax advisor. As part of its Investor Education and Awareness Initiative, HDFC Mutual Fund has sponsored this booklet. The contents of this booklet, views, opinions and recommendations are of the publication and do not necessarily state or reflect views of HDFC Mutual Fund. HDFC Mutual Fund does not accept any liability arising out of the use of this information. MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.

28