Finance Minister Pranab
Mukherjee’s recent
budget announcements
have come as a relief to the
taxpayer. Under the revised
tax structure, incomes
between Rs 1.6 lakh and Rs 5
lakh will attract 10 per cent
tax, while on incomes
between Rs 5 lakh and Rs 8
lakh, 20 per cent tax will be
applicable. For incomes
above Rs 8 lakh, a rate of 30
per cent will be levied. The
threshold for tax-free income
remains unchanged at Rs 1.6
lakh. These tax concessions
will put more money in the
hands of consumers.
The revision in income tax
slabs will increase the takehome
salary of an individual
earning 10 lakh per annum
by Rs 50,000. This means
that if he was earlier able to
afford to pay EMIs for a loan
of Rs 10 lakh, thanks to his
increased disposable income,
his eligibility for a housing
loan has now increased by
approximately Rs 5 lakh. The
new tax slab would certainly
bring a smile on the face of
the aam aadmi.
For example, Ramesh, a
resident of Delhi, earns a
gross salary of Rs 1,00000
per month (Rs 12,00000 per
annum). His salary structure
and investments are as
follows:
■ Basic – Rs 40,000
■ HRA – Rs 35,000
■ Conveyance – Rs 800
■ Medical reimbursement -
Rs 1,250 (or Rs 15,000
annually)
■ House Rent – Rs 15,000
■ Investments under 80 C -
Rs 1,00000
Therefore, his taxable
annual income is Rs 9,43,400.
While Ramesh would have
paid Rs 1,87,020 under the
old tax structure, he would
now pay Rs 1,37,020.
Thus, Ramesh will now
have Rs 50,000 (or Rs 4166.67
every month) more at his disposal.
With the additional liquidity,
Ramesh can either
make further investments or
increase his home loan
affordability by that amount.
This means he can now afford
to buy a house that costs Rs
4.5 lakh more (calculated
basis an 8.25 per cent interest
for a 20-year loan).
The writer is CEO and MD,
Rupeetalk.com

Overall, a lackluster budget for the economy but no shocks! The middle class can celebrate a bit with the Income Tax slabs now helping them to fight the inflation. Believe me, the inflation rate will make sure that most of the tax savings will go towards meeting higher prices.
Here are some predictions and suggestions for home buyers specifically:
1. Nothing concrete has been done for the high prices in Metros. So don’t expect the prices to fall.
2. Interest rates will not rise, and that will be good for existing borrowers.
3. People will have more in-hand salaries from April, to the tune of around 4K per month. This means they can borrow around 5 Lacs more for buying their home. Is this what the builders were waiting for? It will be interesting to see what this does to prices in the 30-50 lac mid range houses.
4. Interest rate subsidy of 1% extended to Rs 10 lac loans. Now this is good news for those who want to invest in a second home. Think of buying a sub 20 lac home, with a 10 lac loan, in the name of your spouse perhaps? Getting 1% extra subsidy is equivalent of earning 1% more on your investment, and over years, this can really add up.
5. FM has extended some tax benefits to builders, but it is unlikely that the builders will pass on any benefits to buyers.
6. More disposable income in the hands of people will also mean rents may go up a bit, and people may also look at upgrading their rented houses.

7. Service tax will now be applicable on payments before construction, and on various things like society club membership. This is likely to increase the costs around 4% right away. Buyers must ask justification for any charges towards this.

So those who are waiting on the fringes to buy their own home, may consider acting if they find something feasible. And for those who want to buy for investment, may like to look at smaller properties.

With two home loan EMIs running, almost no news about home loans escapes ones eyes. With most banks announcing that they will withdraw the ‘teaser’ schemes, I finally decided to get one of the loans refinanced. Now my current lender, India’s largest private bank, was never good to me. I had a great deal from them in 2008 with a huge 2.5% discount to their benchmark rate. But their new customers today are getting 4% discount on benchmark. And teaser rates on top of it. Net-net I will always pay 1.5% more than others, forever. So refinance was inevitable and I was just wondering what is the right time.

The teaser rate is just the right incentive for refinancing. I am paying 10.25% right now, and will save the 2.5% odd total costs of refinance in 15 months. And then I will have a discount rate which will be better than past customers.

Which bank should I go with? Certainly not private banks this time, except say HDFC. All others private banks just milked borrowers by arbitrarily increasing the benchmark rate and yet passing higher discounts to newer customers. And also the private banks are giving smaller discounts to loans above 30-50 lacs, even when their teaser rates are comparable to the public sector banks.

One used to worry about customer service from PSU banks, but now there are banks like Axis, IDBI and others who are giving equally good service.

So let me do the bold thing, get out of my comfort zone with the fancy banks, and save some money!

Meanwhile, RBI is finally planning to deliver justice for all the heartburn I have had with increasing EMIs. It is asking banks to pass on discounts to existing customers as well. It even asked banks ‘Why can the existing customers be ‘teased’?’ Again, its anybody’s guess whether it will be Private banks or PSU banks who will try to bypass RBI guidelines to make quick bucks!

In the months following the introduction of stricter norms, it appeared that FMPs had lost their attractiveness. But they have staged a remarkable comeback. The Indian mutual fund industry, which until October 2008 was riding high on the bull run in equities, was halted in its track by the global liquidity crisis. Almost all mutual fund schemes came under redemption pressure, but Fixed Maturity Plans (FMPs) were hit particularly hard. In 2008 many FMP new fund offers (NFOs) had been launched, taking advantage of regulatory loopholes.

Highlights

SEBI’s special lending window and stricter guidelines help FMPs survive the difficult times Their revival was made possible by debt, liquid and liquid plus funds that performed poorly in the volatile market conditions To draw maximum benefits from FMPs, one needs to remain invested for a long term

But once the crisis struck, these very loopholes — indicative yields, unregulated portfolio declarations, and average maturity mismatch — resulted in a systemic breakdown for FMPs as panicky investors withdrew money from them. Finally, the Securities and Exchange Board of India (Sebi) had to intervene. To provide immediate relief, it opened a special lending window for mutual funds and later followed up with stricter guidelines for FMPs. Besides plugging the regulatory loopholes, it also made it mandatory for all closed-ended funds, including FMPs, to be listed on exchanges.

Read: Impact of Online Mutual Fund trading on Exchanges

Sebi regulations and their impact

The new Sebi regulations initially had a crippling impact on FMPs. FMPs were major contributors to the Indian mutual fund industry’s total assets under management (AUM). But investments in FMPs started dwindling after the new regulations took effect as institutional investors, the biggest patrons of these funds, stayed away from them.

On the positive side, listing of FMP schemes rid fund managers of liquidity-related worries (caused by sudden and large redemptions). With monthly portfolio declarations being made mandatory, there was greater transparency. The ceiling on allocation to a particular company led to more diversified portfolios. Exposure to risky real-estate and non-banking finance companies was curtailed. And finally, with disclosure of indicative yields being banned, there was less pressure on fund managers to invest in riskier securities in order to produce outsized returns.

Apply for a Demat Account – Click Here

New FMP era

With the passage of time, however, fund managers have learnt to live with the new regulations. In fact, FMPs appear to have been rejuvenated. Between February and April 2009, 40 NFOs of FMPs were launched in which cumulatively mopped up Rs 6,000 crore from the market. Leading from the front were Reliance Mutual Fund and SBI Mutual Fund which raised Rs 2,000 crore and Rs 1,000 crore respectively. This strong showing helped FMPs find their feet again. The quality of investments has also improved as fund managers have refrained from investing in risky assets, including securitised debt.

Benefits of FMPs

FMPs are an attractive option in the current market scenario. Why? Debt instruments, which were favoured by investors for their extra returns over fixed deposits, have lost their sheen in the current volatile conditions. Returns from liquid funds and liquid plus funds have dipped to around 3-4 per cent and 5-5.5 per cent respectively after Sebi restricted them from investing in securities having maturity greater than three months. FMPs, by contrast, are exhibiting a lot of promise.

Besides, FMPs also offer investors tax benefits. Investors can avail of double-indexation benefit to improve their post-tax returns. For example, an FMP launched in February 2010 and having a tenure of 15 months can avail of double-indexation benefit for fiscal years 2010-11 and 2011-12.

Strong performance

In the past, FMPs caught investors’ attention as most funds beat their indicative yields as promised. It is assumed that since FMPs mostly invest in debt and debt-equivalent securities, their returns would range from 8-10 per cent. However, this is not the case. The top 10 mark-to-market (MTM) gains among FMPs (see table) range from 15 per cent to as high as 72.2 per cent. The MTM returns are mainly on account of the decline in interest rates, which has resulted in an increase in bond prices. Even the annualised returns of some of the schemes are startling. Schemes such as ICICI Prudential S.M.A.R.T.’s Series F, Series G and Series H have given annualised returns of more than 30 per cent.

Table: FMP Schemes with High MTM* Gains in 1-year Category
Scheme	Launch Date	1-Year Return (%)	Annualised Returns	YTD (%)
ICICI Prudential S.M.A.R.T.Sr G – 36M Ret	Nov-08	72.2%	59.65%	72.6
Birla Sun Life Equity Linked FMP Series A Ret	Jul-08	47.21%	8.81%	13.5
ICICI Prudential S.M.A.R.T.Sr F – 36M Ret	Oct-08	35.65%	29.84%	38.6
ICICI Prudential S.M.A.R.T.Sr H – 36M Ret	Dec-08	34.15%	34.90%	34.9
DWS FTF Series 50 Plan A	May-08	33.73%	6.98%	11.9
DWS FTF Series 43 Reg	Feb-08	25.28%	3.76%	7
DWS FTF Series 50 Plan B	May-08	20.5%	8.35%	14.3
Birla Sun Life Equity Linked FMP Series B Ret	Jul-08	19.85%	11.98%	18.5
Reliance FHF V 3Y Plan Series I Retail	Sep-07	15.94%	10.67%	26.7
Reliance FHF IX-Series 10 Inst	Jul-08	15.16%	13.24%	20.5
* Mark-to-market                                                              Source: www.valueresearchonline

Had investors been allowed to exit, as they could till December 2008, many would have preferred to take these gains even if it meant paying an exit load. But the lack of trading volume on the stock exchanges prevents them from doing so.

Since the central government and the central bank are likely to withdraw the monetary and fiscal measures provided during the crisis period, interest rates are likely to move up in the coming months. Since this will lead to a decline in the value of debt papers, returns are likely to be more moderate in future.

FMPs were pulled out of the morass by stricter Sebi regulations and improved market sentiments. They are now once again looked upon by investors as an attractive investment avenue that offers attractive returns along with tax benefits. But remember, if you want to reap maximum benefits from FMPs, you must stay invested in them till maturity.

The Securities and Exchange Board of India (SEBI) has opened a new window of opportunities for the Indian mutual fund industry by allowing online trading of MF units through stock exchanges. This move is intended to offer both investors and mutual fund houses a cost-effective and convenient way to trade in mutual funds. But this is not all; there are some questions that have cropped up regarding the usage of this facility. Let us deal with them one by one:

What is this trading facility?

The online mutual fund trading facility comes in the form of an electronic platform that acts as a transaction point for MF unit trading, now available at both the Indian stock exchanges – BSE and NSE. The important thing is it will exist along side the existing facility where one invests in MFs through distributors or fund houses directly.

How will trading of MF units take place?

It is important to note that trading in MF units will not be similar to that in stocks. In fact, there will be no trading or listing of units.  Investors can just place an order or submit application forms online to buy or sell MF units. Only exceptions are exchange traded funds (ETFs) and some close-ended schemes that are listed and traded based on real time quotes.

There is a lock-in period for fresh subscription. The lock-in period is equal to the time taken for the physical application to reach the back office of the asset management company. But there is no lock in in case of investors with demat accounts. The allotment and redemption of units would be determined by the NAV of the day concerned.

Looking for Demat Account: Click Here

What is the application process?

Firstly, investors need to open a client account with a stock exchange broker. They can then submit an application for buying or selling MF units with this broker. They do not need a demat account to use this facility, instead they can fill up the application form for the scheme they want to invest in and get units created in folio. Old investors can have their new unit purchases credited under their existing folio.

Is this platform open to all schemes?

All open-ended equity schemes (except index funds) and debt schemes wherein the investment is less than Rs. 1 crore can be traded on this platform while fixed monthly plans (FMPs), interval schemes and liquid schemes are kept out. Moreover, investors can only make amount-based purchases and not unit-based purchases.

What are the transaction features?

• Investors can apply for fresh subscriptions, additional subscriptions and redemptions through this platform.
• Systematic Investment Plans (SIPs) and switches from one scheme to another are not allowed.
• In case of a dividend-based scheme, investors have to choose from dividend payout and dividend reinvestment options only. There is no dividend sweep option.
• Transfer of funds or payment should be done in favour of the stock exchange broker an investor is registered with.

Also Read: SIPs – made simple!

How to apply for redemption?

In case of investors with demat accounts, redemption application has to be made in the format prescribed by the Depository Participant (DP).  Investors with no demat accounts need to submit the preprinted transaction slip that is provided with the account statement.

Since amount-based redemptions are not possible in this case, investors can apply for only unit-based redemptions. After redemption, the amount is credited directly to investors’ account – an account provided in the bank mandate or the one linked to the demat account.

How cost-efficient is this facility?

Investors purchasing MF units through the exchange-based platform will have to bear high costs due to the additional outlay of brokerage and demat fees. This could be particularly expensive for those who don’t have a demat account. They will have to shell out close to Rs. 800 for opening a trading account with the broker and starting a depository folio, besides a brokerage of 0.25-0.5 per cent.

Also Read: I want to open a Demat Account

On the other hand, investors investing directly through mutual fund web site will not incur any costs as entry load on MFs has been abolished. Brokerage in such transactions is on an average 0.5 per cent and demat account fee is around Rs. 500. In case they already have a demat account, there will be only brokerage charges.

In conclusion

Exchange-based trading platform is a facilitating mechanism aimed at expanding the reach of mutual fund houses. It is just an alternate avenue for allowing mutual fund transactions. As of now, the mechanism is not as versatile in terms of the actions that investors can take but enables them to perform the basic transactions. Moreover, the cost considerations also favour direct investing through investment portals of mutual funds. We expect improvements and modifications in the system with time and increase in popularity.