Long Term Returns for Going “Direct” Can Give You Many Lakhs More

Last week, we wrote about how investing in Direct Plans vs Regular Plans could give an investor up to 0.7% extra returns annually. The differential is because of commissions that the distribtors get versus none in the Direct route. 

Take the HDFC Equity Mutual Fund, for instance. The Fund was started on January 01, 1995 with a starting NAV was Rs. 10. The Direct Plan was introduced in January 2013.

This is how the NAVs of both the Plans of the Fund have grown since Jan 01, 2013:

NAVs - Reg vs Direct

On January 01, 2013, the NAV of the Regular Plan (the only one existing at that time) was Rs. 296.88. The Direct Plan was then introduced. Now, if investors chose to, they could enter into either Direct or Regular Plans at the same price. As of March 05 this year, the NAV of the Direct Plan (Rs. 494.84) is Rs. […]

By |March 10th, 2015|Categories: MutualFunds|Tags: , , |39 Comments

Mutual Funds: Direct Plans Beat “Regular” Plans By 0.7% Per Year!

Mutual Funds have been in vogue as an investment class ever since their introduction in the 1960s with UTI introducing the first Mutual Fund in India. It has undergone a sea of changes and upgrades since those days, with public sector banks and other NBFCs throwing their hat in the ring as the years went by. The first private sector funds were set up in 1993, and this coincided with greater awareness among the general public about investing in Mutual Funds.

Currently, there are more than 40 AMCs in India that offer 1000+ MF schemes. Mutual Funds are currently offered in 2 forms – Direct Plan and the Regular Plan. This was based on how a customer invested in the Fund, either directly or through a distributor. This segregation, or rather the additional choice that the investor community was given, surfaced only in Jan 2013. Up until then, an investor would compulsorily have to approach a distributor in order to invest […]

By |March 5th, 2015|Categories: MutualFunds|Tags: , |26 Comments

Bonus Stripping and the Impact of Arb Fund Unwinding on the Market

You gotta hand it to Manoj Nagpal (@nagpalmanoj). (He’s a great guy with excellent insights on mutual funds!) In a conversation on the impact of converting arbitrage funds to debt funds, potentially in the budget, he spoke of the strange happenings at JM Mutual Fund’s Arbitrage scheme.

The Massive JM Fund Inflow

JM Arb Fund was one of the big recipients of investor money, which according to Manoj came in even before the budget (which was on July 10 or so). This money amounted to Rs. 5,500 cr. (approx). The entire idea was to do bonus stripping. That is: […]

By |February 9th, 2015|Categories: Budgets, MutualFunds|Tags: , , , |25 Comments

Tax Arbitrage Using Arb-Funds To Be Removed?

Value research says it’s likely that in the budget, Arbitrage funds will be considered debt funds for the sake of tax.

After the last budget (July 2014) you had to hold “debt” mutual funds for three years before they were considered long term. Equity funds, however, were tax-free after a year. A special species of such funds, called “Arbitrage funds” came into demand.

India loves the concept of fixed income, but hates the concept of tax. While you could get returns of 9% in debt funds, the post tax return fell to under 7% for the richest. Arbitrage funds would provide, in all probability, about 8% – a tad lower than the short term debt fund – but the returns weren’t taxed.

Debt funds, if held for a year, were earlier held to have long term capital gains taxes. Here, you could subtract inflation and pay tax only on what was extra. In a high inflation era, this meant that 9% was […]

By |February 6th, 2015|Categories: MutualFunds|Tags: , , |9 Comments

Closed Ended Mutual Funds: Why You Shouldn’t Bother

Many fund houses have come up with “closed ended funds” which have been the rage with distributors lately, largely (almost entirely) because of the much higher commission structure. Should you buy into the madness?

If it’s the rage with distributors because of commissions, the answer should be a BIG NO.

Let’s see why. Firstly, what the heck are closed ended funds?

Here’s a video we did a long time back:

(Ignore the points about capital gains after one year, now it’s three years for debt funds. )

The concept is:

  • You buy now
  • You can’t sell until the “term” of the fund is over
  • You can’t buy any more either, because closed ended actually means closed right after the beginning.
  • At the end of the term you’ll get your money (if it’s grown, with a profit, else with a loss)

Why do distributors like it?

Because they get more commissions. Remember that mutual funds pay commissions to distributors and adjust it as part of their management […]

By |December 26th, 2014|Categories: MutualFunds|Tags: |6 Comments

Equity Mutual Fund Inflows Till November At Highest In Over 8 Years

This year seems to have really kicked off for Mutual Funds. Especially Equity Mutual Funds, which have recorded a Rs. 86,816 cr. worth of inflows for the current Financial Year till November end. This includes inflows into already existing Mutual Funds, as well as new entrants.

All the data used here was taken from AMFI’s website.

In the 8 months of FY15 till the end of November, the amount of inflows into Equity Mutual Funds are at an all-time high. For the same period in previous years, the inflows pale in comparison to this year’s collection. In fact, till now, Inflows (Gross) have been greater than the last five full years!

Mutual Funds November 14

Before this year, FY 2008 was the best year for Equity Mutual Funds, with a near Rs. 1.2 lakh crores in inflows for the whole year. On a comparison, even for that year, until November the […]

By |December 9th, 2014|Categories: MutualFunds|Tags: , |2 Comments

Equity Mutual Funds Outperform Nifty; AUM Increases Over 60% In 15 Months

Following up on our earlier posts on Mutual Funds (Read “Why AMFI Should Not Ban Upfront Commissions” and “Mutual Funds Hike Exit Loads, Hoping This Time Investors Will Stay”), we take a closer look at the monthly performance of Mutual Funds.

The data that is used in our analysis provides a monthly look at Total Inflows, Redemptions/Repurchases Assets Under Management (AUM) and a few more metrics. The data was obtained from AMFIs database. […]

By |October 15th, 2014|Categories: MutualFunds|1 Comment

Why AMFI Should Not Ban Upfront Commissions

I am all for regulation. As in, I do not think a world without regulation, in the financial space, is worthwhile. But not all regulation is good, and the specific nature of my argument is that while I like the concept of regulation, I think we fail in the implementation.

Latest in my disagreement series is that AMFI is considering banning all upfront commissions to distributors by mutual funds. I think this is a bad step, and I think so even as I find it agreeable that we have no “entry loads” by regulation.

After our earlier post about Mutual Funds Hiking Exit Loads, we received notice that much of this is due to large upfront commissions demanded by distributors has gone up as much as 6% to 8%! This, ostensibly, is the reason why funds want larger and longer exit loads.

If you are a Capital Mind Premium member, you can access our report on how Mutual Fund […]

By |October 13th, 2014|Categories: MutualFunds|4 Comments

Mutual Funds Hike Exit Loads, Hoping This Time Investors Will Stay

In a strange move, Mutual Funds are increasing exit load time frames. This is usually a desperate situation by MFs to retain investors, or they are just using the current interest in equity funds to ensure that these investors stay even if the market gets volatile.

 

(Pic from the Business Standard Article)

Even bond funds haven’t been spared! Sure, the recent budget has made it less lucrative to exit fixed income funds within 3 years (short term capital gains tax applies) but surely, that should be incentive enough for people to stay.

While funds charged a 1% exit load in the past for about a year, it was mostly so after SEBI removed entry loads on funds. Funds used the 1% exit load to reimburse distributors, until a change in SEBI rules in 2012 ensured that the exit loads would be placed in the fund’s balance instead, not to be used for reimbursements.

Given this change, exit loads are […]

By |October 10th, 2014|Categories: MutualFunds|12 Comments

Jaitley Removes Retrospectivity in Debt Mutual Funds, But FMPs Will Still See Tears

NDTV reports that the higher tax on debt mutual funds will apply only from July 10 onwards, and not “retrospectively”, from a statement given by Arun Jailtley (Finance Minister) to Parliament.

Which needs a change in the finance bill, to state that units of non-equity mutual funds that have been sold between April 1 2014 and July 10, 2014 and held for more than one year from purchase will be attract long term capital gains. This means a “proviso” needs to be added stating this intention.

However for investors in FMPs who bought for a year’s holding for the tax exemption, their exit will be classified as a short-term gain, and it’ll be added to their income. For them it’s retrospective by implication, since they had no idea about this when they invested.

Read: The Murder of the Debt Mutual Fund in this budget.

But the concept of retrospective taxation […]

By |July 25th, 2014|Categories: Budget2014, MutualFunds|8 Comments

Mutual Fund Commissions Go Up in FY14, But The Future Is Scary (Freemium)

Each year AMFI releases data on all commissions paid to agents by all mutual funds, to distributors that meet any of:

  • Manage more than 100 cr. Of assets
  • Commissions of Rs. 1 cr. In total (all MFs) or Rs. 50 lakh from a single fund house
  • Presence in 20 locations or more

What we have found after a multi-year analysis of this data is:

  • Commissions go up marginally, AUMs too, but share of total mutual fund assets decline.
  • Banks and financials continue to dominate commissions by a huge margin
  • Many large agents including banks have lower assets under management (AUM) than the previous year
  • Outliers: Axis Bank saw a whopping 698% increase in its AUM this year, while […]
By |July 18th, 2014|Categories: MutualFunds, Premium|Tags: |Comments Off on Mutual Fund Commissions Go Up in FY14, But The Future Is Scary (Freemium)

No Easy Choices for AMCs as They Stop Issuing FMPs

There are no easy choices for Mutual Fund Asset Management Companies. After Budget 2014 raised the tax on debt mutual funds, they have pulled out Fixed Maturity Plans from the market, even returning money collected to investors (before the fund would have actually launched).

FMPs have more than 160,000 cr. invested – most of which will mature in a year. That money will not come back to new FMPs – and assuming a 9% return and an average of 20% tax, the tax collections will be more than Rs. 2800 cr. That’s the stake on the table now.

Some AMCs want SEBI to fight for them. Yet others want SEBI to let them make the FMPs open-ended so that investors get to stick around for 36 months.

FMPs can be moved to open-ended, but there are high operational costs. They’ll have to change the mandate, get investor approval (90% must approve) and […]

By |July 14th, 2014|Categories: Budget2014, MutualFunds|4 Comments

The Murder of the Debt Mutual Fund By Closing a Tax Loophole

 

Invested in an FMP?

Bought a Liquid Fund And Stuck around for a Year?

Bought Debt Funds for the “Inflation Indexation”?

You’re going to hate Arun Jaitley.

 

Let’s start with the basics. You can invest in a fixed deposit with banks. Which pays you interest. The interest is added to your income, and taxed at the highest rate you qualify in. So a 9% fixed deposit falls down to 6.3% if you are in the 30% bracket.

For companies, it was always going to be 30%.

But there was the Great Indian Debt Fund Tax arbitrage. If instead of buying a fixed deposit, you bought a debt mutual fund which bought bank wholesale deposits, a massive tax arbitrage worked in your favour.

If you held units for a year, then the gains were “Long Term Capital Gains”. These gains are taxed at lower rates of 10% of absolute gains, or 20% of “indexed” gains. When […]

By |July 10th, 2014|Categories: Budget2014, MutualFunds|51 Comments

How Much Are You Paying Mutual Funds in Commissions?

A question on Ask Capital Mind goes like this:

Is there any link from which I can get to know the Trailing commission which the AMC pays to the distributor?

The one simple way to find out what it costs you in commissions is to check the mutual funds’ direct plan versus the regular plan. Check only the growth options because dividends distort the NAVs since the payouts could happen at different times.

Here’s a quick comparison of a few funds mentioned in that question:

 

image

Notes:

  • Since Direct plans were introduced on Jan 1, we don’t have a full year to compare. I have taken the values on Jan 15 (some funds took a few days to create such their direct plans) and compared them to the November 5 value. (Approximately 10 days short of 10 months)
  • The first two funds are ultra-short term plans, […]
By |November 6th, 2013|Categories: MutualFunds|18 Comments