Mutual funds houses lure agents through contests, incentives

Faced with net outflows from equity schemes, some leading Indian mutual fund (MF) houses are indirectly funding contests for agents of big distributors that promise upfront incentives for each systematic investment plan (SIP) application.

Since April, equity schemes of MF houses have seen a net outflow of Rs 17,534 crore, data on the Association of Mutual Funds in India website show. More than half this outflow was in the three months ended November 30.

“Mutual funds are forced to pay upfront incentives to top distributors to garner equity assets,” said a sector official, on condition of anonymity. “To avoid the regulatory scanner, the contests run by distributors for their agents are indirectly funded by MF houses. This is done by various ways, like giving an advertisement in the magazine or website run by the distributors.”

A New Delhi-based leading MF distributor is presently running one such contest for its agents. For fresh equity SIPs of Rs 1,000-1,999 and having tenures of three or more years, the distributor is offering Rs 130 per application. For an equity SIP of more than Rs 2,000 and tenures of three or more years, he is giving Rs 300 per application.

In another contest for schemes of an MF house sponsored by a South Korean financial services company, the same distributor is offering Rs 200 per SIP application of Rs 1,000 having a tenure of 24 months to as much as Rs 5,000 per SIP application of Rs 10,000 with a tenure of 60 months.

In one of the terms of the contest, the distributor has mentioned that in case the SIP is discontinued, the incentive will be reversed and recovered from the ongoing brokerage. “However, generally, if the SIP continues for an year, the distributor doesn’t reverse the incentive,” said an official working for an MF distributor.

This per-application incentive is in addition to the upfront and trail commissions of about 1.5 per cent to 1.75 per cent given to the agents.

The Securities and Exchange Board of India had last year banned the entry load on MF schemes. After that, MF houses have to pay all upfront incentives and commissions to distributors from their own pockets. Before the ban, fund houses used to charge about 2.25 per cent load on equity schemes and pass these on as commission to distributors.

NEW NORM - KYC must for MF investors from Jan 1, 2011

Mutual fund (MF) investors, irrespective of the amount they invest, will have to complete the Know Your Customer (KYC) requirements for all purchases, switches and new systematic investment plan registrations from January 1.

Investors have to submit the KYC form, which is available with fund houses, along with necessary documents at the nearest investor services centre. They have to provide a photocopy of the PAN card, proof of address document and a passport size photograph. Earlier, only resident individual investors making investments above Rs 50,000 were required to complete the KYC formalities.

Fund houses have made arrangements with CDSL Ventures for KYC compliance. On submission of KYC application along with the prescribed documents, a KYC acknowledgement letter will be issued. Investors have to provide the letter for carrying out transactions in MF schemes.

The category of investors who need to comply with the KYC norms also include power of attorney (PoA) holders (for investments done through a PoA), each of the applicants in case of investments in joint names and guardian for investments made on behalf of minors.

Non-individual investors (such as corporates, Hindu undivided families [HUFs], partnerships and trusts) that already have an MF Identification Number (MIN—not valid anymore) and have not provided PAN at the time of obtaining MIN should also complete the KYC formalities mentioned above.

Investors who have already completed KYC formalities should submit a copy of the acknowledgement along with a list of folio numbers. After verification, the status will be updated in records and investors would be able to transact as usual. Applications by investors without valid KYC acknowledgement letter are liable to be rejected from January 1, fund houses said.

Why should we invest in Mutual Funds?

Investing in the equity market directly is exciting and glamorous. You are in the thick of things and are able to take responsibility for yourself. Though the volatility and the information overload makes it a daunting task. The present subprime quagmire makes it even more daunting.

How about investing through Mutual finds? Doesn't it have its own loading and administrative charges and the fund managers making merry on your hard earned money? And can't we see the best performing mutual funds and follow their portfolio? The performance of a scheme is reflected in its net asset value (NAV) which is disclosed on daily basis in case of open-ended schemes and on weekly basis in case of close-ended schemes. NAV of mutual funds are required to be published in newspapers.

Here are some points to ponder:

* We should allocate our time to investment decisions in proportion to our income generation goals.
* Convenience and hassle free investing should be a major factor.
* Fund managers are into it full time. If we able to identify fund managers who have consistently performed over last 3-5 years, nothing like it.
* The fund manager also has the muscle power of crores of Rupees and is able to take entry and exit decisions impartially.
* MFs continuosly churn their portfolio. When MFs buy and sell stocks, they don't have to pay capital gains as you do when you churn.
* We are likely to panic over market crashes. MFs can take advantage of a crash!
* With Systematic Investment plans (SIP), you can start investing with as low as Rs 500 per month.

The NAVs are also available on the web sites of mutual funds. All mutual funds are also required to put their NAVs on the web site of Association of Mutual Funds in India (AMFI) www.amfiindia.com and thus the investors can access NAVs of all mutual funds at one place.

The mutual funds are also required to publish their performance in the form of half-yearly results which also include their returns/yields over a period of time i.e. last six months, 1 year, 3 years, 5 years and since inception of schemes.

Investors can also look into other details like percentage of expenses of total assets as these have an affect on the yield and other useful information in the same half-yearly format. The mutual funds are also required to send annual report or abridged annual report to the unitholders at the end of the year.

Various studies on mutual fund schemes including yields of different schemes are being published by the financial newspapers on a weekly basis.

Apart from these, many research agencies also publish research reports on performance of mutual funds including the ranking of various schemes in terms of their performance. Investors should study these reports and keep themselves informed about the performance of various schemes of different mutual funds.

Investors can compare the performance of their schemes with those of other mutual funds under the same category. They can also compare the performance of equity oriented schemes with the benchmarks like BSE Sensitive Index, S&P CNX Nifty, etc. On the basis of performance of the mutual funds, the investors should decide when to enter or exit from a mutual fund scheme.

Debt Mutual Funds for NRIs

The NRI Conundrum and How Debt Mutual Funds Can Be A Viable Option

For any one individual to invest in India directly, he needs to show that he is a person of Indian origin. If they are holding an Indian passport, that serves the purpose. Else, they need to apply for a OCI, Overseas Citizen of India card, or a PIO, Person of Indian Origin card. Here they need to show that they were born in India, or any of their previous 2 generations, parents and or grandparents, were born in India. The process takes anywhere from 3 weeks to 2 months at present. Simultaneously, they need to apply for a PAN, Permanent Account Number card which can be done online. They will need to provide documentary evidence of identity proof and address proof, both overseas, and in India.

Mutual Funds vs. Direct Stock

For buying or selling shares, there is a need to have a broking or trading account, a demat account, to store the shares in, and of course a bank account that is linked. For NRIs the cost of transacting in direct stocks is higher than that for resident Indians. NRIs must use their equity accounts to build a long term portfolio as active trading turns out to be expensive. Further, restrictions on derivatives also exist. It may be prudent for them to consider mutual funds as a simpler way to start investing in India.

You Do not Have to be in Equities only

While every NRI seems to be focusing on equities, they seem to miss out a simple trick of improving their returns without enhancing risks considerably. The long term trend for the Indian rupee is expected to be stronger. The investor is sitting with GBP 10,000 in his bank in the UK earning less than 2 percent pa.

Debt Mutual Funds

Since most bonds do not allow NRI investments, the investment can be made through debt mutual funds. The investor also has the flexibility of aiming for a higher return with addition of corporate bonds to his portfolio, having the liquidity to withdraw whenever there is a spike in returns and also taking advantage of currency movements to make additional returns on currency. Of course, all this requires understanding of debt markets, currency markets and also tax implications, both in India and abroad. So do not try this on your own without expert advice.

7 Tax Saving Strategies for Salaried Individuals

At the end of every financial year, many tax payers frantically make investments to minimize taxes, without adequate knowledge of the various available options. The Income Tax Act offers many more incentives and allowances, apart from the popular 80C, which could reduce tax liability substantially for the salaried individuals. Here are seven smart tips to help you save more and reduce taxes.

1. Salary Restructuring
Restructuring your salary may not always be possible. But if your company permits, or if you are on good terms with your HR department, restructuring a few components could reduce your tax liability.
* Opt for food coupons instead of lunch allowances, as they are exempt from tax up to Rs 60,000 p.a.
* Include medical allowance, transport allowance, education allowance, uniform expenses (if any), and telephone expenses as part of salary. Produce bills of actual expenses incurred for these allowances to reduce tax.
* Opt for the company car instead of using your own car, to reduce high prerequisite taxation.

2. Utilizing Section 80C

Section 80C offers a maximum deduction of up to Rs. 1, 00,000. Utilize this section to the fullest by investing in any of the available investment options. A few of the options are as follows.
* Public Provident Fund
* Life Insurance Premium
* National Savings Certificate
* Equity Linked Savings Scheme
* 5 year fixed deposits with banks and post office.
* Tuition fees paid for children’s education, up to a maximum of 2 children.

3. Options beyond 80C
If you have exhausted your limit of one lakh under section 80C, here are a few more options.
* Section 80D – Deduction of Rs. 15,000 for medical insurance of self, spouse and dependent children and Rs. 20,000 for medical insurance of parents above 65 years.
* Section 80CCF- Deduction of Rs 20,000, in addition to the Rs 1 lakh under 80C, for investments in notified infrastructure bonds.
* Section 80G- Donations to specified funds or charitable institutions.

4. House Rent Allowance
Are you paying rent, yet not receiving any HRA from your company? The least of the following could be claimed under Section 80GG.
* 25% of the total income or,
* Rs 2,000 per month or,
* Excess of rent paid over 10% of total income
* This deduction will however not be allowed, if you, your spouse or minor child owns a residential accommodation in the location where you reside or perform office duties.
* If HRA forms part of your salary, then the minimum of the following three is available as exemption.
* The actual HRA received from your employer
* The actual rent paid by you for the house, minus 10% of your salary (this includes basic + dearness allowance, if any)
* 50% of your basic salary (for a metro) or 40% of your basic salary (for non-metro).

5. Tax Saving from Home Loans
Use your home loan efficiently to save more tax. The principal component of your loan, is included under Section 80c, offering a deduction up to Rs. 1, 00,000. The interest portion offers a deduction up to Rs. 1, 50,000 separately under Section 24.

6. Leave Travel Allowance
Use your Leave Travel Allowance for your holidays, which is available twice in a block of four years. In case you have been unable to claim the benefit in a particular 4 year block, you could now carry forward one journey to the succeeding block and claim it in the first calendar year of that block. Thus, you may be eligible for three exemptions in that block.

7. Tax on Bonus
A bonus from your employer is fully taxable in the year in which you receive it. However request your employer for the following.
* If you anticipate tax rates to be reduced or slabs to be modified in the subsequent year, see if you could push the bonus payment to the subsequent year.
* Produce your tax investment details well before, to prevent your employer from deducting tax on bonus before handing it over.

A Final Word
Keep in mind the below points, to avoid the hassles of last minute tax planning.
* Give your employer details loans and tax saving investments before hand, to prevent any excess deduction.
* Check the Form 16 received at the end of each year from your employer thoroughly.
* It is important to start your tax planning well before 31st March, and to file your returns before the 31st of July each year.

Best Tax Saving Investments

It’s already December and most companies will require the 80C investment proofs by the end of January 2010. Do not leave this task for the last moment. Earlier you start the better it is. Investment decisions should never be made in a hurry.

The investment avenues to maximize tax benefits available under Sec 80C & 80D.

• Invest in ELSS schemes: It is one of the best investments to make if you can afford to take the risk. It is also one of the options where the lock in is least. There are a lot of ELSS (Equity Linked Savings Scheme) which offer a good avenue to invest to save tax as well as avail growth. SIP (Systematic Investment Plan) is a good way to invest in this asset class as it averages your cost over the year. Get your Insurance check up done: Do not take an insurance policy just to avail tax benefits. Get your insurance check done; calculate what your dependants need to stay financially fit even if you are not around. Life Insurance is for your loved ones’ goals and happiness. If you cannot afford a huge cover, take a term policy. It is one of those investments that will give you peace of mind and it is light on the pocket.

• Add to the PPF account: PPF is one of the best debt products. The investment is Exempt from taxes, the interest is Exempt and so is the maturity amount. You can only invest up to Rs.70,000 in a financial year
• Home loan Principal: The principal component being paid in the EMI of your home loan is also eligible under this Section. Don’t forget to get a break up from your bank.
  

• Medical Insurance premium: You can now avail up to 15,000 of deduction if you pay your medical premium (your, spouse and dependants). In addition to this, if you are paying medical insurance premiums for your parents, that is eligible for another deduction (of up to 15000; up to 20000 if they are senior citizens).

But before you do this, do check what your contribution has been to the PF account, because that is also eligible under 80C. So, if your annual contribution to PF account is Rs.25,000 invest only the balance (Rs.75,000) for availing the 1 lakh deduction under Sec 80C.

In a nutshell:
- Check your PF contribution
- Check the principal component of the home loan payment
- Invest according to your financial goals
- Evaluate your insurance requirement
- Invest 1 lakh over the year not just the last 15 days