Franklin Templeton crisis: SEBI needs to take investors' interest seriously

Sudden and unexpected winding up of 6 high risks debt funds by Franklin India AMC not only weakened the confidence of investors but also raised many questions about investment decision of mutual fund industry. When we advise our clients to invest in mutual fund the major point we highlight is the professional management and process driven investment decisions. But now the question is where the professional management and process?

Many experts believe that this is Franklin’s problem only but I don't think it is limited to Franklin India only.  It is possible that Franklin India might have taken very high risk compared to others but we should also not forget that even liquid funds have given negative returns in past. The mutual fund investors have lost more than one lakh crore in debt schemes in last 2-3 years. Right from the IL&FS to Yes Bank, Vodafone the problem is not showing sign of any relief. RBI’s move to give liquidity of Rs. 50,000 crore to meet the redemption pressure is not the solution but a temporary relief.

When investor puts his hard earned money in liquid or short term funds, he wants more of safety and little bit over savings bank and fixed deposits interest. But if such schemes give negative returns then it is difficult to hold the investors. I am really shocked when show that Franklin India Ultra Short Term Bond Fund invested in 5 and 10 year maturity paper. My understanding was ultra short term funds can invest only in 3 to 6 months maturity papers. As per SEBI scheme characteristic “ Ultra Short Duration fund can invest in debt and money market instruments such that Macaulay duration of the portfolio is 3 -6 months. Then how come a scheme can invest in Pvt. Ltd. Cos. and for duration of 5 to 10 years. This needs to be investigated and justice should be done to lakhs of investors who have suffered loss in so called safe schemes.  

I urge SEBI that Liquid, Ultra Short, Money Market, Floating Rate, Low Duration and Short term funds should be allowed to invest in quality papers only. Same criteria to be set for hybrid funds such as MIP and Equity Savings Fund. The investors in this category are low risk takers and lower quality paper in debt should not to be allowed in this category as well.

In debt funds the role of research organisation like ICRA and CRISIL is of utmost important as everything starts from there only. SEBI should review their role and assess the quality of research report they are giving. I don't know but have a feeling that is research reports are managed by the corporate? Is this also possible that some debt deals happen under the table? SEBI should go deep into this otherwise investors will shift their hard earned money to insurance and banks.

AMC and Fund Managers role also needs to be investigated. The process of investment decisions should be made public. They should also be answerable for every default. Quarterly review of the default needs to be done by expert panel of SEBI. AMC and fund managers to be penalized and the loss needs to be recovered from them if they are found guilty.

Most of investors and distributors look at the ratings given by Value research, Money Control and Morning star etc. and take the investment decision. I agree that distributors should also look at the portfolio before advising but ratings of this sites influence the decision of recommending and investing. They should be brought under the scrutiny of law so that they also give star ratings after due diligence. 

I firmly believe that loss in debt is permanent but in equity you can recover the loss if you have bought good stock or fund. The debt investment according to me is more risky than equity investment. SEBI needs to take this seriously and come out with strict guidelines to protect the investor’s interest. Damage due to lock down is not known, better SEBI awake early.

https://www.businesstoday.in/opinion/columns/franklin-templeton-crisis-sebi-investors-interest-mutual-funds-investors-debt-funds-equities/story/403508.html

5 measures that Sebi should consider

The regulator must look beyond just lowering the expense ratios of mutual funds to safeguard the interest of investors, says Pankaaj Maalde.

Abolish dividend reinvestment option

The dividend distributed by equity funds will now be taxed at 10%, reducing investors’ returns. This will make the dividend reinvestment option of equity funds unviable because it will saddle the investor with a tax he can’t avoid. Even earlier, the dividend reinvestment options of equity funds had no advantage over the growth option. It is time these plans are scrapped to protect the interest of lakhs of investors.

Stop monthly dividend plans of equity funds

Demonetisation led to huge inflows into mutual funds. To attract investors, fund houses launched monthly dividend options in balanced funds. Being equity funds, they carry high risk and should not be missold. However, they have been used to lure senior citizens in the name of regular income—‘higher returns compared to fixed deposits’. But the schemes cannot deliver dividends if the market tumbles. Also, it is unethical to declare dividend from the investment amount and not from the gain. So, there is no ‘guaranteed’ income. In fact, most investors are not aware that even their principal can erode, if the market falls. Sebi needs to immediately stop such schemes.

Merge multiple liquid, ultra-short-term plans from same fund house

Most fund houses offer two liquid and two ultra-short-term debt funds. But there is hardly any difference in the portfolio of the two plans offered under these categories, except their expense ratios. Multiple products simply help fund houses garner more businessdistributors push expensive plans to earn higher commission. In fact, you can judge how sound your financial adviser is by checking which liquid fund plan he recommends. If it’s the one with the higher expense ratio, then he is only looking at earning a higher commission. Sebi needs to ask fund houses to merge multiple plans of liquid and ultra-short-term schemes.

Stop closed-ended equity funds

Fund houses try to encash the market tops by launching new fund offers (NFOs). The NFOs’ names and themes are decided according to the market conditions to attract maximum investors. On the one hand, Sebi wants standardisation of mutual fund products and, on the other, it gives permission to launch NFOs that may be very similar to the existing schemes of fund houses. The market regulator should look back to 2008-09 to find out what happened to the NFOs launched then—what returns did they generate? Fund houses too should clearly state why they are launching an NFO, if the new scheme is in no way superior to existing schemes.

Lower the expense ratios of arbitrage funds

Arbitrage funds will be among the worst hit categories on account of the just-imposed long-term capital gains tax on equities, given their already limited returns. The management charges for these funds are very high—1% in case of regular plans—and fund houses pay large commissions to distributors to push these funds. In today’s market, the maximum return these funds can generate will be around 6%. This does not justify their high charges—made worse by the LTCG tax. This category will lose its importance if the charges are not revised immediately.

5 steps Government should take immediately

Post demonetisation of 500 and 1000 notes is announced there are lots of problems at the ground which needs be addressed at earliest.  The cash is not available to genuine people for day to day transactions.  The exchange limit is also reduced. ATMs are empty. There are long queues at the banks and bank staffs are also working under lots of pressure. There are serious issues where there is medical emergency and where there are marriages in the family. In light of this Government should also look at the ground realities and do following things immediately to reduce the panic and help common people to solve their problems.

1) Stop exchange of notes:  

It is already 12 days have passed and now the exchange of old notes should be stopped at earliest as some elements have misused this option in early 4-5 days which has created more problems. I think now the common people might have got the cash to run the house for next 8-10 days. Even limit of Rs. 2,000 does not serve the purpose. This will reduce pressure from the banking staff to regularize the banking system at earliest. I must say that banking staff has done a great job since 9^th November under great pressure and have sacrificed their personal life for the benefit of common man.

2) Ease cash transaction in ATMs: 

First of all give direction to RBI and Banks to see that all ATMs are working and have enough cash available. Even in city like Mumbai ATMs are closed since last many days. The bank people say that they don’t have smaller denomination notes to run the ATMs. RBI should ensure that 100 and 500 notes are available to banks to ease the pressure. Even the daily limit of Rs. 2,500 is very low and as the same person will come again and again at ATM to transact.  But if the limit is increase or been kept per week then this can help people to withdraw more and reduce the queues.

3) Reduce the demonetization period:

I am strongly of the opinion that 50 days window is too long and things will not change unless the period is over. I think the period should be reduced by at least 15 days so that life becomes normal. I also understand that the Government will not ease the cash limit unless the window is over as there are chances that many people will take undue advantage if the cash limit is eased before the window is closed. So it is important to close the window at earliest.

4) Penalise vendors for not accepting cheque’s:

There are reports in the media that vendors are not accepting the cheque’s. Not accepting any legal banking instrument should be made punishable and RBI should intervene immediately and issue a notification in this regard. Police should also take action against all those who are not accepting cheque’s.

5) Introduce 45% tax option immediately:

Last but not the least Government should announce the 45% tax option immediately to reduce the legal battle. There are many stories running in the social media about the cash deposit and the consequences of the same on tax liability. Even tax professionals are advising differently on the same. Few believe that 200% penalty is attracted but few also advise that only 30% tax is payable. To end the confusion and reduce the legal battle I think that Government should take the middle path of levying 45% tax as given in the Income Disclosure Scheme.

It is important to end the confusion at the ground at the earliest and Government needs to take proactive measured instead waiting till end of the window. It is not a good idea to punish 10% of the people having black money other 90% of the common people suffer.  I hope the Government will consider these options to reduce the tension across India.

This article first appeared at indianotes.com

http://www.indianotes.com/Analysis/5-steps-Government-should-take-immediately/204964/2/T

RBI could have waited for rate cut

RBI under the new head reduced the repo rate by 0.25% in its review meeting held on 4^th October’2016. The rate cut was in line with the market expectations. The CPI inflation came down to near 5% in August’ 2016 and Government is likely to achieve inflation target of around 5% for the year end March 2017. There is no doubt that monsoon this year is very good and again with record food grain production the inflation will soften further. But I think there are number of factors and events which are likely to unfold in coming two months which are very important for us. I feel RBI should have used pause button this time. I would like to highlight the points which are very important for us in coming days.

1) US President Election will be held in November’2016 and the result is very important for us. It’s early to predict who is ahead or win as in last minute anything can happen.  The result is important because the US government plays a very important role in the world economy. Not only India but the entire world will be watching the outcome very closely.

2) The big FCNR (Foreign Currency non resident) deposit redemption is due from this month amounting to $26 billion. Even Banks and RBI may be well prepared for this there is no reason to take chance till that happens smoothly. This is one of the biggest redemption in debt since last many years and market is curious to know the impact of this.

  

3) The crude oil price again has crossed $50 per barrel. OPEC members also met last month to cut the production but did not come to consensus. But any such move to cut the production can lead to increase in the crude price. Government recently increased the price of petrol and diesel and may have to increase again if crude price goes up. Increase in diesel price will put pressure on inflation.

4) It is now certain that federal bank will increase the rate in the month of December, which may have negative impact on the emerging markets like India. Any large withdrawal from India can weaken the rupee further which is not good for our economy.

5) It is also important to take cautious stand because of the tension at the border.  The recent surgical strike by our Army can also provoke the Pakistan to take some unwanted actions.  I do not have doubt about the capabilities of our Army but any serious situation can hit our economy badly.

6) Last but not the least, RBI is reducing the interest rate so that the money is available at cheaper rate which help corporate to improve their balance sheets. But we should not forget that banks have not fully transferred the earlier repo cut of 1.50% till date. Banks have maximum passed 80 paisa and still there is room to pass the balance 70 paisa so that end user benefits. I think RBI should also have considered this before reducing the rate further.

Across world the deposit rates are NIL and in some countries even the rates are negative. Indian government may also be eyeing that. But in Indian context we should be cautious as the large number of aged people survives on interest income. In the absence of good immediate pension fund options, senior citizens are likely to suffer if rates drop further. Government and RBI should not only aim at high growth but also look at ground reality.

This article first appeared at indianotes.com on 8th October'2016

http://www.indianotes.com/Analysis/RBI-could-have-waited-for-rate-cut/204289/2/T

Why MF Industry is not growing at faster pace

Mutual fund industry is celebrating touching 15 lakhs crore of assets under management. There is no reason to cherish but the industry should introspect why they haven’t done well even they are best in the country. Actually they are far behind banking and insurance industry. The growth and penetration of the mutual fund is limited to some cities and even today many cities may not know what mutual fund is.

I firmly believe MF investment is the best compared to all other investment products available in India.  I always advocate and only recommend mutual fund investment to my clients. Mutual fund industry is well regulated and it is very transparent. It does not provide only diversification and but also it is tax friendly. Sometime I surprise that why they are well behind banks and insurance industry, but when I look at the way they are operating I think in next decade also they will remain in the third position. I will not be surprised even PFRDA will beat the MF industry.

I am in the industry since last many years and summaries following areas which I think needs to be addressed so that people at large can take benefit of mutual fund investment. 

No ARN training:

There is no serious effort to recruit the new blood in the system. It is surprising that none of the AMC offer ARN training for freshers.  The strength of the insurance agents is around 25 lakhs and there is serious attempt to add the fresh blood every month. MF has only 80,000 ARN holders. Relying too much on direct plans and technology will not help grow them as fast as insurance and banking industry.

1 RM for 100 IFAs:

This is another area of concern where you have only one relationship manager for 100-150 IFAs. How he can handle and give justice to all distributors is a big question. Crores of rupees are spent on the TV and print media ad but if they increase the number. of relationship managers I think they can increase the productivity from the existing force itself. Sometimes IFAs get disconnected as there is no support available to them. Getting in touch of them and giving them periodic update can also increase the activity.

Fewer branches:

Forget about LIC even private life insurers have around 200 -300 branches across India whereas MF houses have only 10% of that. It is important to note that banks have also increased their strength in all suburbs and tier II cities. People want visibility. This is the major reason why insurance products are sold easily compared to MF products. The support of Cams and Karvy is good for the distributors but the investors need they can contact the branch if anything is urgent or there is nobody to service them.

Low Commission:

If insurance agent logs in premium of Rs. 1 lakh he will get commission of Rs. 35,000 whereas MF distributor will get maximum Rs. 1,000. SEBI, Fund houses should know that unless IFAs are paid enough to survive it will be difficult for them to stay in the industry. This can also be hurdle to increase the number of IFAs. It is important to note that many IFAs have moved to insurance industry post the entry load is abolished. In any profession it is necessary that intermediary earns decent income as they directly interact with the end customer.  Already commissions are low and further reduction in expense ratio can hurt the growth of the industry.

Frequent Changes in procedure:

We have seen many changes in the forms, KYC procedures in the MF in recent past. The latest Fatca and NACH have also disturbed the distributors. There are reports that there are some problems with NACH with few PSU banks. The form filling is also a hurdle for the investment. SEBI should promote the MF Utility platform so that the it’s become easy to invest across all the MFs with single form. It will not only reduce the paperwork but also will save cost in a big way.

Too many schemes:

MF has more than 5000 schemes and still we see flow of new NFOs in the market. It will be difficult not only for IFAs but also for investor to choose the correct one. We have average 2-3 schemes in each category in each fund houses. The flow of new NFOs in the same category when the market is at a peak also confuses to the investors. SEBI should seriously try to reduce the number of schemes so that IFAs also can give quality advice and convince the client to invest.

Non Performing Schemes:

SEBI puts so many restrictions on the IFAs and introduce more disclosure but is still silent on non performing schemes. There are many schemes in the mutual fund that do not beat bench mark for very long period of time. In many schemes principal is down.  The bad experience in these schemes also keeps investors away from the industry and also they spread negativity among the other persons.  

Just like insurance industry, MF business is also number game. You have to reach to masses.

I hope stake holders will take some serious steps to reach to the people without any further delay. SEBI should also stop unnecessary intervenes and changing guard every quarter. I urge Finance ministry to look into the matter and give a separate regulator for mutual fund industry.

This article first appeared at indianotes.com on 19th August'2016

http://www.indianotes.com/Analysis/Why-MF-Industry-is-not-growing-at-faster-pace/203451/2/T

Who will pay 45% tax under Income Declaration Scheme?

The present Government got absolute majority in last election because of the corruption issue. They also promised to curb the black money and assured to get back the black money lying outside India. In around two years of their tenure they have not got any breakthrough in this direction. Opposition also cornered them from time to time for depositing Rs. 15 lakhs in each Indians account which they promised in election campaign. The budget has now again tried to address black money issue and new disclosure scheme is announced. 

The Finance Minister in his budget speech announced income declaration scheme, 2016 so that Indian citizens can declare their undisclosed income and pay 45% tax. The total comprises of 30% tax, 7.5% surcharge and 7.5% penalty. The scheme will give immunity to assessee’s declaring black money from prosecution in future. This is another opportunity for tax evaders to come clean and be a responsible citizen. The government plan to open the disclosure scheme from 1^st June to 30^th September’2016 with the option to pay amount due within two months.

We have seen many such disclosure schemes in past and among them VDIS (Voluntary Disclosure of Income Scheme) of 1997 got a huge success and collected record tax of around Rs. 10,000 crores at that time.  It is also important to note that highest tax slab of 40% was reduced to 30% in that budget. I have doubt whether the present scheme will get the same response. The major difference is in 1996 scheme was the tax liability was kept at 30% only and full waiver of interest and penalty was given. The present scheme proposes to levy 45% tax on disclosed income which is 50% more compared to VDIS. To me this scheme will not get desirable response because of 50% higher tax compared to previous scheme. If you ask me seriously I will also not pay 45% tax if I had black money. 

In the last Budget also the government had announced similar disclosure scheme for declaring undisclosed assets held broad. The response to that has not been made public. To me this open and shut case and the Government is likely to get poor response unless the tax rates are revised.

So is there any better option available to curb the black money. Answer is yes if you think out of box and come out with new innovative idea. I herewith propose one scheme for the kind consideration of the finance minister. Instead of levying any tax on the undisclosed income, Government should try to issue 0% Government bonds for a period of 5 years against the disclosed income. The money is locked in for a five years period without any interest on it and after the completion of five years person disclosing the same will get full amount without any deduction as white money in his bank account. The advantage to the Government is they will not have to pay any interest on it and the advantage to person who is disclosing the same will get 100% amount back after completion of five years. I think this can be better option compared to asking to pay 45% on the disclosed income.

Other option which is there since last many years is the proposal given by Arthakranti. They propose to withdraw high denomination currency notes and restricting cash transactions up to certain limit. They also propose to change existing tax system and introduce transaction tax on banking transactions. But I think nobody is serious about the same because of the reason that large black money is with the politicians and bureaucrats and they will never punish themselves.

As middle class Indian citizen I can only dream of Achhe Din but in real life it’s never going to come. The budgetary proposal of levying tax on EPF after retirement is classic example of the same. We hope Government also looks at the middle class families who voted them to power and try to tax rich people more in future.

Don’t expect too much from Budget 2016

The nifty has crashed 22% from the top and now all eyes are on budget which will be presented this month end. There are lots of expectations from the finance minister but things are not going to be easy for him. The present economic situation reminds me the 20-20 match where in last over second team has to score 10 runs and 9 wickets are already down. As it is difficult to predict who will win the match the same way it is difficult to say everything will be all right after budget. But do not forget as that was not last match, this also will not be the last budget.

The analyst will look at the allocation to the new infrastructure and other projects to give boost to the economic growth and also watch the fiscal deficit closely. This year the target of 3.9% of fiscal deficit is likely to be met, but the next year target of 3.5% will be difficult to achieve. The additional burden of seventh pay commission and one rank one pension will not allow FM much room to allocate much for the economic growth. But anyway if he allocates more for this either he will increase the tax or keep fiscal deficit figure higher and in both case short term movements will be much volatile. The present NPAs of PSU banks will also add fuel to the situation.  FM also has to allocate some fund to them. It is really unfortunate that after 50 years of operation PSU banks are not self sufficient and always look for infusion of capital from the center. Really we must thanks RBI Governor for identifying the problem and taking necessary steps. Situation is alarming and I also urge him that funding to corporate should be made transparent and the names of all defaulters should be published and made available in public domain.

This budget is also important as nobody have thought that after having one party stable government our economic situation will worsen like this and rupee against the dollar will head towards 70 mark again. I don’t understand if 70% of our import bill is for importing crude oil and the crude oil is down 70% why still Indian economy struggle. Even after so many international visits of Hon’ble Prime Minister, we have not seen the desired foreign investment. There is no doubt unlike in 2008 this time the problem is external. The slowdown of Chinese economy and uncertainty over US interest will drive the market. We should also not forget that our stock market is FII driven and till they stop selling things are unlikely to improve immediately. The bad monsoon has also lead to higher CPI inflation and the rate cut is also not seen in near future unless we see a landmark budget this year. The market is also watching keenly capital gain tax issue which is talked around and also disinvestment target so that gap can be reduced.      

 

The investors should avoid the noise and rumors around them. They should continue their SIPs and if possible increase the SIP amount if their time horizon is 5 years plus. Also investor need to review their existing asset allocation and if the fund is available needs to be reinvested in equity for longer term. For lump sum investment it is always advisable to invest in hybrid funds like balanced funds and equity savings fund instead of putting money in pure equity schemes. Timing the market is difficult and it is to be avoided. It is important to stay invested for longer period without looking at daily volatility for better result. We should also not forget this year our economy will grow at 7.5% and likely to beat Chinese growth.

As far as budget is concern, I think hike in minimum exemption and deduction limit for individuals is unlikely. The rate of interest of postal schemes and PPF is very much likely to go down by minimum half a percentage. The service tax is also likely to be increased from 14 to 16% looking additional burden next year.  So don’t expect too much from the budget and keep your fingers cross. If it surprises you then it will be bonus for us.

This article first appeared at indianotes.com
http://www.indianotes.com/Analysis/Dont-expect-too-much-from-Budget/200028/6/PF

FATCA – A blow to Indian MF Investors

Investors in mutual funds again have to go through the painful exercise of filling another form known as Fatca. We have seen frequent changes in KYC and application forms in recent past and there is no end to it. Surprisingly nobody is bothered what happens at the ground level. Mutual fund investment, according to me, is one of the best investment avenue in India compared to insurance, fixed deposits and other financial assets. I think role of the all the stake holders should be to encourage people to invest through mutual fund but looking at the present situation neither SEBI nor AMFI looks interested in expanding the roots of  the industry. Even distributors are helpless as there is nobody who can listen to their problems.

India and US have signed bilateral agreement to implement FATCA (Foreign Account Tax and Compliance Act) wherein we have agreed to share the details of American investors details to the US Government. US Government is making changes to its tax laws so that any US citizen investing outside US doesn’t escape US taxes. After the implementation of the Act it will be mandatory for the Indian government to share investment and assets details to the US government. SEBI has implemented this for all the countries so that foreigner’s investments are easily traced. I don’t deny the importance of the bilateral agreement between the countries as we are also seeking details of foreign bank account holders with the other countries. The problem is the way it is implemented which is really going to increase the paper work for Indian investors which will not serve the purpose.

Surprisingly FATCA is immediately applicable only to mutual fund investment and not to any other investments like Insurance, Fixed deposits or postal deposits which is again highly objectionable. I would like to know is the agreement is signed only to share mutual fund investment or nobody wants to go beyond this.  FATCA is effective from 1^st November’ 2015 for mutual fund investors.

The other point is FATCA agreement was signed in July’2014 and it is implemented from November’2015 means no home work is done in last 15 months. It just like “Upper Se Order Aya hai, karna padega” without asking any question. According to me this details requires to be given by NRIs only who have invested in India and not by all the investor’s. The NRI investors in total will be less than 5% of the total, means 95% of the data of Indian investors is not relevant but still we are doing this unwanted exercise.

Investors should know that they have to do the FATCA with all AMCs for each folio. CAMS and KARVY have come out with PAN based online filling of FATCA form which will update details in all the fund houses they manage. But for other fund houses they have to contact them separately. This is really going to painful as average investor invests at least in 3-4 AMCs. According to me this is one time exercise and should have been included in KYC form wherein investors have to fill only one additional form. We are also hearing common KYC across financial assets but still that is also not happening.

In last few years we have seen many changes in the procedures and forms in mutual fund and tones of old forms have gone to wastage. Who is responsible for this? I hope SEBI will relook at it and implement it for NRIs only and make it part of KYC details. I don’t want to comment much on the role of AMFI but to me it’s silent spectator and needs to be dissolved if they can’t speak out in the interest of distributors and investors. 

This article first appeared at indianotes.com

http://www.indianotes.com/Finance-How-to/FATCA--A-blow-to-Indian-MF-Investors/199082/2/T

Budget - Mr. FM restrict tax deductions to expenses only

The Hon’ble Finance Minister is busy in finalising the Union Budget. After a stable government is formed in the Centre, people’s expectations have gone up and most of the people are expecting a landmark budget which can revive the growth and create more job opportunities. On individual front there is a demand for enhancing the basic limit of tax-free income from Rs. 2 lakhs to Rs. 5 lakhs and also people want tax deduction u/s 80-C to be increased from Rs.1 lakh to Rs. 2.50 lakh. All sections of society are making representation to Finance Minister and giving their wish list. I will represent middle-class families through this article and urge FM to take note of the same.

The middle-class at present is struggling with managing their monthly budget not only because of high food inflation but also increasing education and medical costs. The rise in fuel prices has also increased their transportation and conveyance expenses considerably. People think that food inflation is too high but are unaware that education and medical inflation has also risen much higher than food inflation in the recent past. Expenses are part of life and nobody can avoid the same. You can live happily without making investments but can’t survive without incurring unavoidable expenses. Personal finance is one of the most neglected areas and I think important issues need to be addressed so that people take necessary corrective steps to improve their life style.

At present tax deduction is available for few expenses as well as for investment in specified instruments. We have seen lot of mis-sell happening in life insurance segment as a tax saving avenue. Common investors always forget to take tax implications on their investment which reduces their overall return. Very few people plan their investments for tax saving purpose and most of others end up investing in a product which may not suit their risk profile or may not be in line with their future financial goals. Investing, just to get the tax benefit leads to wrong buying. There is lack of awareness and most of the selling for tax savings is driven by high commissions. Looking at the present scenario of tax saving investment, lots of mis-sell happens in the market, I am of the firm opinion that tax deductions related to investment should be abolished and should be restricted to the genuine expenses which are unavoidable and are also necessary for the family for their future. If expenses are given tax break automatically surplus will increase and would be available for future investment. But it is equally important to look beyond tax planning for making investment.

I would like that Finance Minister consider my points for the betterment of middle-class families as I firmly believe that the present government represents middle-class families.

1) Do not allow tax-deduction for any investment which is not mandatory as most of the products which are sold are driven by high commissions. People are not literate to plan their investment. There is lack of awareness which allows agents to sell the complex products only because they are tax deductible. There are simple products also like Bank Fixed Deposit, N.S.C and Postal schemes which are available for tax deduction but in reality very few opt for these types of avenues. Secondly, interest is taxable which many do not take into account, thirdly these are short-term in nature and can’t beat inflation in the longer run.

2) Allow deduction up to Rs.1 lakh per child for education expenses including tuition fees paid to classes. Every parent’s priority is children’s future and nobody is ready to compromise on the same. Today providing good education and establishing a professional career is expensive and will further go up with time. It is today’s expense but also investments, as children are future of India. This deduction will allow parents to spend more for higher education which ultimately is good for the society at large. FM should also make sure that education loans are also available easily for all the courses in India and abroad. The rate of interest is also high and should be lower like home loan interest rate.

3) Allow deduction up to Rs. 1lakh for life term plan premium, health and disability insurance premium, preventive health check up, medical bills incurred for parents who are not covered under health insurance. As we do not have social security mechanism in place, having adequate insurance can help a lot to the family. I will also request FM to withdraw service tax levied on life and health insurance plans as this will make products cheaper and affordable to the public at large.

4) Increase the home loan interest deduction amount from present Rs. 1.50 lakhs to Rs. 3 lakhs p.a. u/s 24. This home loan EMI again a fixed cost to the family for 20 years and has to go month on month just like other regular expenses. The home loans are available at very attractive rate of interest, I think it should be restricted to first home only. Any additional loan for second or third house for investment should be given under loan against property.  Availability of cheaper home loan with additional tax benefit has helped rich people to create wealth in real estate which has deprived many middle class families to buy their own home.

5) Allow deduction of Rs.1 lakh for retirement benefit under EPF, PPF. Living long is also a concern and has to be addressed carefully at younger age. The rising trend of nuclear family, advancement of science and medical facility has forced people to seriously think about the same. Both the investments are simple to understand, safe, secure and also give high tax-free returns as compared to other debt instruments. Both instruments are mainly long-term in nature which can help people build part of their retirement kitty.

Earn, Save and then spent, should be the correct way of planning your finances. This article is only about tax planning avenues which drives the investment market and people lose their hard earned money. I am hopeful that FM will consider this expenses linked tax deduction for uplifting the standard of living of millions of middle-class families. This will also ensure people will spend enough for their children’s higher education and also take adequate insurance which can help them in case of unfortunate event in the family. The need of the hour is spare poor, give maximum possible relief to middle-class and tax rich people. 

article first published at moneycontrol

http://www.moneycontrol.com/news/tax/budget-mr-fm-restrict-tax-deductions-to-expenses-only_1112005.html

7 year norm to declare missing person dead must be relaxed

The Kedarnath tragedy has killed thousands of devotees and death toll is likely to go up as thousands of people are still missing. The relatives of the missing persons are praying day and night for their near and dear ones to return but it is not clear that how many days this operation will continue. The rescue operation is still on and after military operation ends the State Government has to work hard for restoring the things in the Kedarnath Valley. It is also true that hundreds of dead bodies are also lying there and needs to be identified and if possible to be handed over to the relatives of the deceased. The major challenge before the Government is to identify the deceased person, but the recent news tells that Government is going ahead with mass funeral next week. Looking at the present condition in many cases either it will not be possible to identify the person or still there will be hundreds of dead bodies which will not be traceable. In the eyes of law person will not be declared dead until his/her body is recovered. What will happen to their finances in the absence of valid death certificate is also a major concern for the remaining family members. They will neither be allowed to claim the money lying in the bank account nor will insurance company or mutual fund house pay them unless they provide copy of death certificate. The life of legal heirs is also likely to be majorly affected financially if the problem is not addressed immediately. Legal heirs might have to also struggle for day to day expense even they have sufficient money and investment in the name of missing person.

If the dead body is not found then what to do to claim the money and investment of missing person requires immediate attention and people should know the provisions of the law in this regard. Those who are dead are unlikely to come back but we should also seriously think about the problems which living family members have to face for their survival. As per section 108 of the Indian Evidence Act’1872 “Person is presumed to dead who is unheard of for more than seven years by those who would naturally have heard of him/her if he/she had been alive”. It means in the absence of valid death certificate family members will not be able to even touch the money and investment for another minimum seven years. The procedure is also long. First family members have to file a missing complaint with local police and after completion of seven years they have to approach appropriate court for the necessary order stating the missing person is presumed to be dead. What time court will take is also not clear, means delay of another six months to one year time to claim the money. The Government has to seriously think about this real life problem and have to review the provisions and reduce the time required for declaring missing person dead particularly in case of natural calamities like what happened in Kedarnath valley recently.

There is also another one possibility if the State Government takes this seriously and acts immediately. Section 10 of Registration of Births and Deaths Act’ 1969 gives power to State Government to appoint any person in this behalf to notify birth or death or both which occurred in such areas as may be prescribed. I think positive step of Uttarakhand Government can solve many problems and give hope to many families who have lost their bread earner. If the death of missing person is notified by the State Government then on the basis of that it is possible to apply for and get the death certificate.

Whether this will happen or not nobody knows but it has highlighted the basic thing that we have to plan for our finances so that in case of unfortunate event loved ones have not to struggle financially in their life. It is important to open a bank account in joint name with either and survivor basis and also advisable to invest jointly with either and survivor basis. We have also to nominate one or two of the family members in all investments wherever such facility available. It is also important to execute a WILL in favour of loved ones so that there is no confusion thereafter. 

One should also note that till you get the death certificate, pay the life insurance premium to continue the policy as non payment of premium in time will lapse the policy. It is also possible to claim the money, if the amount is small, on the basis of indemnity bond filed with the concerned authority, if they agree do so. I also request all the three regulators, RBI,IRDA and SEBI, to do the needful in this regard so that legal heirs can easily get the money back and move forward in their life. 

This article first appeared at moneycontrol.com on 27th June'2013.

http://www.moneycontrol.com/news/others/7-yr-norm-to-declare-missing-person-dead-must-be-relaxed_906681.html

BUDGET 2013 – Dedicated To Foreign Investors

The Hon’ble Finance Minister presented union budget in the parliament on 28^th February’2013. The task was difficult as our economy is under pressure due to more of internal issues like fiscal deficit, current account deficit, inflation, higher interest rates and falling rupee. In the current year, the CSO has estimated the GDP growth at 5 percent while the RBI has estimated growth at 5.5 percent which is the lowest in recent past.  The budgetary deficit is estimated at 5.2% of the GDP for FY 2013 and is estimated at 4.8% for FY 2014. Given all circumstances prevailing presently he has tried his best to balance the budget by not increasing taxes on middle and poor class and  at the same time taken steps to maintain fiscal deficit levels to keep the foreign investors in good humour. He had no option but have to give world a message that he means business by maintaining the deficit. He did a good job by taxing the corporate and upper class more and spares the middle and poor class as the general elections are round the corner.

He started his speech with his concern over current account deficit. He quoted “My greater worry is the current account deficit (CAD).  There are only three ways before us:  FDI, FII or External Commercial Borrowing (ECB). That is why I have been at pains to state over and over again that India, at the present juncture, does not have the choice between welcoming and spurning foreign investment.  If I may be frank, foreign investment is an imperative.  What we can do is to encourage foreign investment that is consistent with our economic objectives”. The message was loud and clear that Government wants to address the deficit first as foreign investors have shown serious concern over the issue. Even RBI has taken a cautious stand on deficit and has reduced repo rate only by 0.25% in last review. He needs to address the same on priority as the threat of down grade was also looming large on our head since few months. Looking at seriousness of the issue he did not announce any major changes in Income Tax, Excise duty and service tax laws. There is no change in personal income tax slabs except   a rebate of up to Rs. 2,000 for the small tax payers having income less than 5 lakhs. A 10% levy of surcharge is also introduced on tax payers where the total income is above 1 crore. There is no change in the peak rate of basic customs duty of 10 percent for non-agricultural products. Also there is no change proposed in the normal rate of excise duty and service tax of 12 percent.

He has also announced some measures to attract foreign investment which are as follows.

§   FIIs will be allowed to participate in the exchange traded currency derivative segment to the extent of their Indian rupee exposure in India.

§     FIIs will also be permitted to use their investment in corporate bonds and Government securities as collateral to meet their margin requirements.

§     With a view to attract investment in long term infrastructure bonds in foreign currency, the rate of tax on interest paid to non-resident investors was reduced last year from 20 percent to 5 percent.  The same is extended for another year to investment made through a designated bank account in rupee-denominated long term infrastructure bonds.

The current budget for the society at large was like a non event as it has failed to address local issues and growth specifically. The stock market also reacted negatively and the mood of the market is not good for the investment as people fear down trend to continue. The real worry still is there is no road map suggested for reducing the current account deficit and also there is no word on disinvestments target for next year. The future course of course depends on how the foreign investors take their call on measured taken by FM to reduce the fiscal deficit. Investors need to be extra careful while investing in equity and should prefer SIP route of mutual fund. 

Three things FM must look into before presenting budget

Finance Minister will be busy in finalising the Union Budget’2013 to be presented on 28^th February’2013. There are really many challenges before him to address and present a budget which will boost economic growth of the country. The GDP growth for the year end 2013 is likely to be around 5.5% and all eyes are on union budget. Not only we Indians but the world is also looking very closely to the developments in India as this budget will decide the future course investment in the economy of the country. Fiscal deficit and current account deficit are the major concerns at present and overcoming people’s expectations is a big challenge for the finance minister. Corporate world are also looking positively that this budget will be pro growth and not a populist budget looking general election in one year’s time.

Recently Government has also taken many steps to contain the deficit including hike in diesel price and CNG prices. Now the diesel price is partly decontrolled and diesel price is likely to be increased by 45 to 50 paisa every month. The Government also collected a sum 12,000 crores by disinvestment of NTPC shares recently. But the measures are not sufficed but want more doses from Government to speed up the economic growth. Rupee has appreciated recently against dollar but the crude oil price on the other hand is near to $ 95 per barrel. In this scenario containing deficit will be a major challenge for the government. RBI has also taken cautious approach and has reduced repo rate by 0.25% only.

Increasing service tax and excise duty will lead to dissatisfaction across the class and may back fire Government. In my view Finance Minister look into the following areas which can really help in increasing revenue and as well as reducing the deficit.

1) Focus on Wealth Tax :

The wealth tax act is totally ignored in India and we have hardly seen any action based on wealth tax evasion. There is news in the media that Finance Minister is considering the inheritance tax as an option to increase the revenue but I think if wealth tax is reviewed totally and actions are taken seriously then this can help a lot in increasing the revenue. The basic limit of wealth tax exemption is 30 lakhs at present for Individuals and needless to say lakhs of people will be having bank fixed deposit or postal deposit more than 30 lakhs in India. Less than 3 crores people file their Income Tax Return and I don’t think even 1% of this people will be filing their wealth tax returns. Revenue collection has to come from rich and ultra rich peoples and not from the poor and middle class family. I request Finance Minister to make a new wealth tax law like done in income tax by making Direct Tax Code.

2) Promote Gold Deposit Scheme:

We are the largest importer of gold across globe and this disturbs our balance of payment situation. Government is keen to reduce the import of gold to overcome balance of payment crisis. Government has month back increased import duty on gold from 4% to 6%. RBI recently also allowed mutual fund Gold ETFs to invest part of the fund in gold deposit scheme. Gold deposit scheme is one of the best avenues to invest in gold for HNIs and is the only gold investment which pays interest to depositor. I think Government has to aggressively promote gold deposit scheme and banks are to be given targets to achieve the same. No bank talks about the scheme and are not taking any step to promote gold deposit scheme. We all know a religious charitable trust are having huge quantity of physical gold and is not used for years. If the scheme is promoted and advertised aggressively then things may change in coming years.

3) Reduce Expenses:

It is difficult for Government to reduce the subsidy burden over night as it has many political implications and no party can take a risk when you have general election within one year’s time. It is high time that Finance Minister must reduce the unwanted expenditure of the Government to reduce the deficit. Government should also make aggressive disinvestment plan next year to reduce the interest burden.

Increasing tax every time will not solve the problem. You have to search for other areas either to increase the revenue or to reduce the expenditure. I hope Finance Minister will take this in to account while presenting his budget and not load more taxes on poor and middle class family.