Latest Mutual Funds Articles

Using Technical Analysis To Manage Risk And Maintain Top Quartile Performance

Sat, 12 Sep 2009 12:44:59 -0700

Recent market reversals brought about by the Sub-Prime mortgage melt down is clearly a significant market correcting event. No matter if you work in the risk department of a large bank with many employees or a small fund of funds as co-manager, you share the same basic concerns regarding the management of your portfolio(s).

1. how to maintain top quartile performance;

2. how to protect assets in times of economic uncertainty;

3. how to expand business reputation to attract new client assets;

It remains common in the financial industry to hear experienced Portfolio Managers state their risk management program consists of timing the market using their superior asset picking skills. When questioned a little further it becomes apparent that some confusion exists when it comes to hedging and the use of derivatives as a risk management tool.

Risk management analysis can certainly be an intensive process for institutions like banks or insurance companies who tend to have many diverse divisions each with differing mandates and ability to add to the profit center of the parent company. However, not all companies are this complex. While hedge funds and pension plans can have a large asset base, they tend to be straight forward in the determination of risk.

While Value-at-Risk commonly known as VaR goes back many years, it was not until 1994 when J.P. Morgan bank developed its RiskMetrics model that VaR became a staple for financial institutions to measure their risk exposure. In its simplest terms, VaR measures the potential loss of a portfolio over a given time horizon, usually 1 day or 1 week, and determines the likelihood and magnitude of an adverse market movement. Thus, if the VaR on an asset determines a loss of $10 million at a one-week, 95% confidence level, then there is a 5% chance the value of the portfolio will drop more than $10 million over any given week in the year. The drawback of VaR is its inability to determine how much of a loss greater than $10 million will occur. This does not reduce its effectiveness as a critical risk measurement tool.

A sound risk management strategy must be integrated with the derivatives trading department. Now that the Portfolio Manager is aware of the risk he faces, he must implement some form of risk reducing strategy to reduce the likelihood of an unexpected market or economic event from reducing his portfolio value by $10 million or more. 3 options are available.

Do nothing - This will not look favourable to investors when their investment suffers a loss. Reputation suffers and a net draw down of assets will likely result;
Sell $10 million of the portfolio - Cash is dead money. Not good for returns in the event the market correcting event does not occur for several years. Being overly cautious keeps a good Portfolio Manger from achieving top quartile status;
Hedge - This is believed by all of the worlds largest and most sophisticated financial institutions to be the answer.

Let's examine how it's done.

Hedging is really very simple, and once you understand the concept, the mechanics will astound you in their simplicity. Let's examine a $100 million equity portfolio that tracks the S&P 500 and a VaR calculation of $10 million. An experienced CTA will recommend the Portfolio Manager sell short $10 million S&P 500 index futures on the Futures exchange. Now if the portfolio losses $10 million the hedge will gain $10 million. The net result is zero loss.

Some critics will argue the market correcting event may not happen for many years and the result of the loss from the hedge will adversely affect returns. While true, there is an answer to this problem which is hotly debated. After all, the whole purpose of implementing a hedge is because of the inability to accurately predict the timing of these significant market correcting events. The answer is the use of technical analysis to assist in the placement of buy and sell orders for your hedge.

Technical analysis has the ability to remove emotional decisions from trading. It also provides the trader with an unbiased view of recent events and trends as well as longer term events and trends. For example, a head and shoulders formation or a double top will indicate an important rally may be coming to an end with an imminent correction to follow. While timing may be in dispute, there is no question a full hedge is warranted. Reaching a major support level might warrant the unwinding of 30% of the hedge with the expectation of a pull back. A rounding bottom formation should indicate the removal of the hedge in its entirety while awaiting the commencement of a major rally.

It is evident that significant market correcting events occur infrequently, in the neighbourhood of every 10 to 15 years. Yet many minor corrections and pullbacks can seriously damage returns, fund performance and reputation.

If you have ever been confronted with upcoming quarterly earnings or a topping formation which has caused you to consider liquidation then you should have first considered a hedge used in conjunction with the evidence from a well thought out analysis of technical indicators. Together they are a powerful tool, but only for those who have the insight to consider asset protection as important as big returns. I guarantee your competition understands and so does your clients who are becoming more sophisticated each year. It's important that you do too.

Cheyne Capital appoints two partners for macro equities team

Wed, 19 Aug 2009 07:31:30 -0700

Cheyne Capital Management has appointed two new partners: Paul Ruddleston and Paul Keohane, who were previously managing directors at Morgan Stanley. Paul Ruddleston and Paul Keohane join from Morgan Stanley where they worked for a combined 26 years, much of which as managing directors. Alongside former colleague and head portfolio manager Jorge Giampaoli, who joined Cheyne in June, they will be managing the Cheyne Equity Macro Fund employing a liquid, macro-based trading strategy.
The pair have been recruited to broaden the team managing the Cheyne Equity Macro fund, which launched earlier this year under the lead management of their former colleague Jorge Giampaoli. Giampaoli joined Cheyne from Morgan Stanley in June to head up the fund, which follows a short-term, macro-based equity trading strategy.
Ruddleston headed the global market trading strategy unit at Morgan Stanley, working with the firm's principal market risk takers and with key clients across all asset classes. He is credited with calling a host of major market turning points over the years, most recently predicting the exact 666 low point of the S&P 500 this March.
Keohane worked as number two to Ruddleston and brings with him extensive experience in bond trading and fund management from his career in the City.
Chris Goekjian, Cheyne's chief investment officer, says: 'We are delighted to have a team with such strong analytical and trading skills on board and look forward to continuing to build the track record of our new equity macro offering.'
Cheyne Capital launched its first fund in 2000 and today manages net assets of approximately $6 billion across a diversified suite of products. Cheyne currentlyemploys approximately 170 people with its primary offices in London, New York, and Bermuda.

Headstart settles 2003 dispute with the SEC

Wed, 01 Jul 2009 05:15:47 -0700

Headstart Fund Ltd, Headstart Advisers Ltd, an FSA-regulated hedge fund adviser and Mr Najy Nasser, its Chief Investment Officer, today announces they have settled their dispute with the United States Securities and Exchange Commission relating to Headstart's historic involvement in market-timing from which it disengaged in September 2003 prior to re-focusing on its other trading strategies. This will allow Headstart to concentrate on its core business as an investment adviser to offshore hedge funds and expand the business with the launch of new funds.

Without admitting or denying the allegations, the civil settlement includes payments of $17 million by the defunct Headstart Fund Ltd (domiciled in the Bahamas), $200,000 by Headstart Advisers Ltd and $600,000 by Mr Najy Nasser, the Chief Investment Officer. This settlement will conclude the case brought by the SEC against Headstart Fund Ltd, Headstart Advisers Ltd and Mr Najy Nasser arising from Headstart's historic market-timing strategy.

Headstart has since September 2003 focused its business on other successful strategies. The Headstart Fund of Funds has returned 65% (or 5.4% average annual net return) since its inception in 1999, whereas most European and US equity markets are down over the same period.

Najy Nasser, Chief Investment Officer of Headstart Advisers Ltd said:

"Headstart is very pleased to have reached a settlement. We responded to US concerns about market timing and immediately ceased this element of Headstart's business in September 2003. We have since worked hard to build up Headstart's funds using different strategies. As we equalled or bettered our overall returns against our benchmark, we are especially pleased with what we have achieved.

"We have superb long-term performance against both the market and our peer group and have some interesting plans to grow Headstart's investment business"

For further information:
M:Communications
Adrian Flook +44 (0)20 7153 1588 / (0)7768 608396 / flook@mcomgroup.com
Caroline Villiers +44 (0)20 7153 1521 / (0)7808 585184 / villiers@mcomgroup.com

Mergers and acquisitions within the Hedge Fund market

Mon, 22 Jun 2009 09:27:10 -0700

Another man's pain is another man's gain and more so now than ever. The beleaguered hedge fund industry is rife with talk of consolidation as the downturn provides an opportunity for larger firms to acquire smaller firms at a bargain rate. This is driven by dramatically shrinking assets making the smaller firms not the lucrative business they once were. This is leading to businesses being sold to a larger partner that can keep assets managed at a minimum level.

However, in an industry dominated by individual managers and executives, barriers to deals still remain. For instance, having built up a business during the good times, executives may be reluctant to see it absorbed by a larger firm. There are a lot of egos with executives wanting to be the consolidator rather than consolidated as the entrepreneurial spirit defies logic.

The entrepreneurial spirit exists as hedge due to opportunities driven by minimal regulation. Hedge funds have built a reputation of being lightly regulated in comparison with mutual funds as hedge funds do not fall under the 1940 Act because they participate in 'private offerings' to sophisticated investors alone unlike 'public offerings' of mutual funds. Academics, industry professionals, and regulatory authorities overwhelmingly agree that due to much less regulations, hedge funds benefit the economy by mitigating price downturns, bearing risks that others will not, making securities more liquid, and ferreting out inefficiencies. Compared to mutual funds, hedge funds are less restricted and transparent and they prosper for it, until now. This has forced the question of whether the high returns outweigh the high risk. In this economic climate, many are saying no.

One solution to this scepticism is to introduce better regulation. This would produce more accountable hedge fund managers in future and the investors would be able to simply research the background of a hedge fund manager before entrusting their money into his or her hands. The result is beneficial for both investor and hedge fund as regulation would produce a safer hedge fund market that would attract a larger number of investors.

With increased industry regulation the mergers and acquisitions of hedge funds could increase as executives calculate the viability of operating under red tape.

Fund management of the future

Mon, 22 Jun 2009 09:25:08 -0700

The force of the knock across the financial sector over the past 12 months has exposed the weaknesses in the global financial tectonic plates. From New York to London to Hong Kong to Tokyo, the newly formed global network cracked under the strains of the economic quake as the ground shook. Some of the institutional pillars of the financial world shook. Iceland fell; Lehman Brothers and Bear Stern crumbled; Merrill Lynch saved itself by securing an all-stock buyout with Bank of America; Goldman Sachs found comfort in Birkshire Hatherway. The financial landscape remodeled itself nearly everyday as Hedge Fund executives observed through pink pages.

The quake also exposed some significant cracks within the financial foundations. Bernie Madoff showed the world how an unregulated sector of the financial ecosystem could be fuelled purely on self-confidence and yet still report colossal gains. The global networks that supported the highs of the FTSE 100 and Dow Jones showed vulnerability as a domino effect fell across the globe. As the seismologists arrived and the Governmental aid and private investment doused out the flames the land looked bleak. The public confidence in institutional governance and reporting became sulfuric and the frustrations into the prohibitive workings of such operations as hedge funds solidified into forms of regulatory reviews.

And now that the land is still and the dust has settled people, companies, markets and economies are looking for learning's from the past to strengthen their future prospects. And like all scorched land, grass roots are beginning to appear as a newly fertilized financial ground bears opportunity. Within the hedge fund market acquisitions are strengthening the larger firms while newly considered regulation is potentially increasing the accountability and transparency of their every day business. This bodes well for public confidence in fund and asset management.

The regulation of hedge funds, rather like the funds themselves, is a complex matter. Because of their different properties and practices, hedge funds as a group are best understood from a legal, not economic, perspective, as hedge funds typically are exempt from the registration and disclosure requirements of the financial industry. This results in no official hedge funds statistics with little outside knowledge about their financial movements. This is not helped by hedge funds being based in offshore jurisdictions, making them look even more suspicious.

One solution to this scepticism is to introduce better regulation. This would produce more accountable hedge fund managers in future and the investors would be able to simply research the background of a hedge fund manager before entrusting their money into his or her hands. The result is beneficial for both investor and hedge fund as regulation would produce a safer hedge fund market that would attract a larger number of investors.

So, though the once scorched landscape may currently look barren, with it brings re-fertilized opportunity and prosperity where public confidence and fund management accountability will fuel green shoots and provide sustainable and stable growth throughout the sector.

You Need to Know Your Mutual Fund

Sat, 14 Feb 2009 05:57:47 -0800

There are some basic things you should know about mutual funds in general and about the specific fund in which you are about to invest. Mutual funds with a bad track record are dissolved. The fund assets are absorbed by another fund and the fund manager is given a new fund to manage. Also, an average fund manager has limited experience.

A mutual fund company does not want to keep a poorly performing fund in its fund family for very long. A poor performer brings down the average performance of its funds. Also, when the financial media makes comparisons between funds in the same fund category, new assets go to the best performer rather than to one near the bottom of the list. For example, if you were looking at the relative performance of 50 large-cap growth funds, and saw that fund ABC returned an average of 19% a year for the last 5 years and that fund XYZ had lost 2% a year over the same period, where would you invest your money? The company that owns XYZ would not be blind to the fact that their offering in that fund category is not attracting new investors and that it is likely to lose the investors it already has. The company would want a stronger and more attractive offering in that fund category. Therefore, after a few years of poor performance, the poorly performing fund will disappear completely as the fund is dissolved and its assets are combined with those of another fund. The fund manager will often be given another fund to manage. If you are an owner of shares in the receiving fund, your account will receive the toxic assets transferred over from the poor performer. Your fund manager will then try to unload those assets quickly.

When the poorly performing fund vanishes, the average performance of the funds in the family increases. The toxic assets are placed in a larger fund where they are less conspicuous and they are sold off quickly so that they simply add assets to the receiving fund. They do no harm to the receiving fund (they actually serve as a bonus to that manager), and they no longer harm the reputation of the company. On the other hand, you may have bought a small fund that has performed very well for three years. The company that owns the fund will want to place that manager in a more conspicuous place so he can attract more money to the fund family. It is in the company's best interest to promote the manager by rewarding him with a larger fund to manage (and with a bigger paycheck). Your fund may then end up getting the manager who performed so poorly that his fund was buried to save face for the fund-company. If you follow the high-performance manager to the new fund, you may discover that he cannot perform as well as he did before because of the larger size of the fund. However, he will probably do a better job than the poorly performing manager you would have inherited had you stayed put.

Keep this switch and merge procedure in mind when you compare the performance of mutual fund families or when you read in the financial press that the average growth fund had a return of 18% last year. The average given is always skewed by the fact that the poor performers have been eliminated so that their performance is not counted in the averages. Poor performing managers are switched to smaller funds that have such a good track record that their managers were given a larger fund to manage. New investors may be buying shares in the small fund because of the performance achieved by the manager who has left. They are not aware that the fund has a new manager whose prior performance was an embarrassment to the company. The performance of that once spectacular smaller fund may now take a dramatic downturn.

Without some real digging on the part of the investor, it is difficult to know whether the performance of a fund over the last ten years was really due to the efforts of the current manager. Stockdisciplines.com is no longer managing accounts for people, but one of my duties when they were in the business was to call mutual funds and ask a lot of questions. When a star stock-picker leaves, investors often try to follow. Funds do not like to lose assets. Therefore, I noticed that over the years more and more funds claimed that the "manager" is a "committee." I found that fund management increasingly assigned a committee to work under the star stock picker. That way, when a top performing stock-picker left, he or she is replaced, but "the same committee still manages the fund." This reduced transparency, but the funds kept accounts that might otherwise transfer. To the best of our knowledge, this practice has continued to expand throughout the fund management world. Funds will try to capitalize of a star performer's celebrity until he or she leaves. Then the emphasis becomes "the same committee is managing the fund that has always managed the fund." Though individuals come and go, the committee remains.

The problem here is that committees never perform like a star stock-picker. They cannot because committees represent the best thinking of a group of people. What makes a star performer a "star" is that his picks are better than average by definition. His picks and his timing are outstanding, and are not the result of "group-think." This trend toward management by committee is an illustration of how mediocrity is triumphing in the fund business as excellence takes a back seat to a fund's desire for the long-term retention of assets. Think of it this way. In a class of 100 students, perhaps 5 will achieve a level of excellence that will mark them as outstanding achievers. In any class, only a few can be outstanding relative to the others in the class. If 50 students not included in top 10 of the class combined their talents to write an essay, the end result may be a good essay, but it will not be as good as that of the top achiever in the class. Funds try to promote the idea that many heads are better than one. Though the idea seems logical on the surface, it is not true. Though it is true when it comes to something like physical strength, it is not true when it comes to creativity or genius. Fifty thousand average thinkers would not be able to combine their intellectual resources to come up with the theory of relativity. Here, the one is greater than the many.

The bottom line is that extreme care should be exercised before placing your hard-earned money in a mutual fund. Call the fund and ask for its performance history. Be specific. Ask for the total return, the capital gains distribution and income distribution for each year for at least 5 years. Try to determine how often the manager is replaced and when the last change was made. Simply ask who the previous manager was and when he or she left. Then ask who the manager was before that and when that manager left. Be sure that with all your questioning you find out who the current lead fund manager is and how long he or she has been in that position. If the manager has not been there at least five years, ask which funds he or she managed before. Go to the library and check the performance of those funds during the time that manager was in charge (Morningstar is a good resource for this). If the fund is managed by a committee do not expect outstanding performance. On the other hand, average performance may be preferable to that achieved by a manager about whom you know nothing.

Copyright 2009, by Stock Disciplines, LLC. a.k.a. StockDisciplines.com

Pension Plans with Mutual Fund Investments.

Tue, 27 Jan 2009 01:30:04 -0800

Pension Plan helps the average investor to accumulate wealth over the period in order to meet his/her expenses after retirement. Usually it is the insurance companies that draw customers with the array of pension plans that they provide, but the lesser known fact is that Mutual Fund also manages pension products. Currently only one private sector mutual fund has a pension plan catering to the investor and there is more than one reason for you to look at this plan seriously. The Plan is none other than Templeton India Pension Plan (TPP), the country's first and only central government approved private sector pension scheme under Section 88. In other words, investing in this pension plan will also provide you with tax saving benefits similar to tax saving Mutual Funds (ELSS) and other investing instruments such as National Saving Certificate (NSC) and Public Provident Fund (PPF). Though both tax saving mutual funds and pension plans are in the same investment genre as they offer tax-deduction benefits, both have varying rates. The investment amount on which tax benefits can be claimed by investing in tax-saving funds is restricted to a maximum permissible limit of Rs 10,000 (approximately). However, the maximum permissible investment limit under TPP is Rs 70,000(approximately).

Coming to the points as to why the average investor should consider this investment as a part of their investment portfolio. The main feature of a good pension plan is to be deterrent for early withdrawals. Templeton Indian Pension Plan (TIPP), generally allows you to withdraw your money after 58 years of age or after 3 years of investment. If you do want to withdraw your money after 3 years of investment, even if you aren't 58 years old you can do so after paying a 3% exit load (administrative charges you pay when you sell your units or assets). The power of equities will provide you long term capital gains if your investment portfolio has a time period of a minimum of 10 years. Templeton Pension Plan offers better tax-saving options when compared to other investing instruments of the same genre. Returns from NSC or PPF will be hard to match the returns generated by TPP if one is willing to consider a comparison given that PPF and TPP are retirement-oriented investments.

Whenever you opt to invest in a Mutual Fund, two prime factors that needs to given due importance are Asset Allocation and Fund Manager. TIPP has increased its exposure to IT stocks in the latest quarter and reduced exposure to stocks in the metals space such as Hindalco. A well-diversified equity portfolio with limited exposure to mid-caps makes it a less risky portfolio. As far as performance goes the plan has delivered an impressive cumulative annual return of 18 per cent for the last five years. The fund has been able to beat its benchmark returns and has also recorded lower losses than its benchmark in the last quarter, when the market turned weak. So for investors who are looking for a good investment module to invest in other than the regular insurance product TIPP is an excellent option.

Investments through Mutual Fund SIP â€“ Systematic Investment Planning.

Wed, 21 Jan 2009 00:02:39 -0800

There are a couple of ways that you can invest in a Mutual fund; one is a one time payment and the other through periodic investments. The later is termed to be Mutual Fund SIP. When you go for one time investments, you just hand over the cheque and you get your fund units depending on the value which is called Mutual NAV (Net Asset Value) of the units on that particular day. When you go in for this kind of investments a couple of factors creep in that determines the number of units you get. A small percentage of your investment is charged as an administrative fee and is termed as entry load. The other charge that is levied is the Mutual Fund NAV, which is the price of the unit of a fund. Say if you are investing Rs 9000/ and if one particular unit costs Rs 30/, then the total number of units that you get to purchase is 300. The other type of investment is done periodically instead of a one time down payment. This kind of investment planning is called Mutual Fund SIP (Systematic Investment Planning). This type of investment is done when you tend to go for high capital gains and you need to invest a bigger amount, but find it difficult to invest it at a single time.

It is then that the concept of Systematic Investment Planning creeps in. If you intend to invest a sum of Rs 10,000/ into a particular Mutual Fund, but your current financial obligations prevents you from doing so, then with the concept of SIP, you breakdown your investment principle into equal installments month wise. If a monthly investment of Rs 1000 is done at the end of the year you end up investing a sum of 12000/. Unlike general investment where you pay an entry load, SIP usually doesn't charge any fee, though as of late some companies have started to in the form of exit loads, which is a fee charged when you sell your units. The minimum amount that has to be invested during a one time investment is Rs 5000/, where as incase of a SIP it could be Rs 500/ or more (depending on the company). In most cases payments through SIP is done month wise, but companies also gives their customers the option of making the payments half-yearly or quarterly. Payments are basically made Electronic Clearance Service from your bank; this means the mutual fund will, as per your instructions, debit a certain amount from your account every month. If you don't have the required money in your account, then for that month, no units will be allocated to you. But, if this continues periodically, the mutual fund will discontinue the SIP.

It is a compulsion that you state to the company as to how long you long you would want the SIP. After that during the course of the period if you realize that you can't continue with the SIP, all you have to do is inform the fund 15 days prior to the payout. The SIP will be discontinued. You can continue to keep your money with the fund and withdraw it when you want. The amount invested till then will be considered as the total investment made. Investing in Mutual Fund through SIP makes your budget more disciplined. Every month you are forced to keep aside a fixed amount. It helps you make money over the long term. Since you get more units when the NAV (charge/unit) drops and fewer when it rises, the cost averages out over time. So you tide over all the ups and downs of the market without any drastic losses. In case of SIP basically no fees are charged, but if you sell your units in a year time you pay and exit load. Hence it pays to invest in a longer run. The best way to enter a mutual fund is via an SIP. But to get the benefit of an SIP, think of at least a three-year time frame when you won't touch your money.

ELSS â€“ Secret of Tax Saving with Mutual Fund Investments.

Tue, 13 Jan 2009 02:07:10 -0800

As the name suggests ELSS (equity linked savings scheme), invests primarily in equity shares of companies. As per financial regulations, the scheme Fund manager has to invest 80% of the total amount in the equity shares and the remaining 20% per cent can be invested in other instruments like bonds, debentures, government securities and others. When you invest in ELSS your money is locked for a period of three years (minimum). Once you invest in tax saver funds you cannot withdraw the amount for three years, this acts as a blessing in disguise as tax saving funds generally yield high returns during a 3year period. The common man is basically afraid of investing his money in equity shares as he is afraid of loosing money. But a look at the recent past shows that investors who have invested in tax saver funds have never lost out on their money, rather tax saver funds have been the front runners in terms of returns to investors. A small illustration will clarify comprehensions.

If you make an investment of Rs 1,00,000/ ( 1 lac), then under section 80c this complete amount is deducted from your gross income for that particular year. If your annual income puts you in the highest tax paying zone, i.e -34%, then the investment of Rs 1,00,000/ will ensure that you get an annual tax deduction of Rs, 34,000/. So logically speaking you invest Rs 66,000/ considering the deduction. Assuming that the Mutual Fund declares an annual dividend of 10% then your total return on Rs 66,000 is [(10,000/66000)* 100] = 15.15%. This particular dividend earned is also tax-free, hence more profit. Another profitable venture out of this investment is that after a period of 3 years the capital gain that you obtain out of the investment is also tax-free. This is what makes ELSS the most attractive investment for those who have the appetite for moderate risk. However, prior to making an investment selecting a good fund house based on its reputation and track record is important. Elss are considered to be the best tax saving mutual funds in India.

ELSS is a good option to save tax and generate long term capital gains. These gains are obtained from the equity market only if you are investing in a long time horizon. Adding money in a disciplined manner creates a good corpus. The basic confusion that the average investor could have is that they consider Equity Mutual Funds and ELSS to be the same, which in true sense isn't correct. Normal equity funds could be purchased today and disposed off tomorrow. Incase of ELSS there is a compulsory 3 year lock in period. As per the rules related to long-term capital gains, profit from equity MFs after one year becomes tax-free. As per latest sources the top 5 ELSS schemes are 1) Principal Personal Tax-saver, 2) DSP ML Tax Saver Fund, 3) Taurus Libra Taxshield, 4) Lotus India Tax Plan, 5) Franklin India Tax Shield ( FIT). Going by the current volatile market trends and with the current fiscal year approaching an end, investing in a good ELSS fund is a clever option to save taxes.

Tax Planning with Mutual Fund Investments.

Thu, 18 Dec 2008 00:12:08 -0800

By nature Mutual Funds are not tax saving instruments but some mutual fund investment products also offers tax saving plans. Generally income that is earned from Mutual funds is categorized under two heads dividend and capital gains. Given that the tax implications can have a significant impact on the return earned it is necessary to understand the tax for both these heads of income. Income earned through dividends is tax free in the hands of the investor. The tax on most occasions is actually paid by the Mutual Fund Company itself. Investors who fall in the highest tax bracket should opt for the dividend option in mutual fund schemes. Capital gains from mutual funds are of two types - short term (1-3year) and long term (more than 5 years). This classification is based upon the period of holding. If the investment is sold within a year 15 days from the date of purchase, any capital gain made would be treated as a short term nature. Hence the tax deducted will be normal. If the mutual fund investment is sold after a year from the date of purchase, any capital gain made during that period will be treated as a long-term capital gain. Here the tax that would be deducted will depend on how long the investment is kept after a year prior to getting it sold. The longer the fund is kept the lesser the tax to be paid.

A Good Fund that could be used to invest upon is the equity linked saving schemes fund (ELSS). They are strong favorites for investing as they provide tax concessions on investments and are also exempt from long term capital gains tax. Apart from ELSS schemes, diversified equity schemes are a good investment considering that capital gains in equity funds below one year are taxed at a rate of 10% and over a year are tax-free. This option can be best exercised using Growth Funds. The primary objective of Growth Funds is to provide investors long-term growth of the capital invested. Dividend paid in Dividend Plans is tax free, and no distribution tax is deducted. However, every time we buy or sell equity shares a Securities Transaction Tax, STT, of 0.25% is paid and further when you redeem your investment, again STT is deducted from your redemption price.

Tax Planning & saving options requires a through study of the market conditions, especially if you are trying to do it in a period of slump. Proper Asset Allocation, research and the advice of the Fund Manager will definitely help. Long term capital loss can be set off only against long term capital gains. Short term capital can be set off against any capital gains, whether short term or long term.