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NRE and NRO Accounts – Meaning, Comparison, Benefits, Taxation

 

NRE and NRO Accounts – Meaning, Comparison, Benefits, Taxation:

A Non-Resident Indian (NRI) may open an NRE Account or an NRO Account in India. While both accounts may be similar in a few features, they differ in some. As such, the selection of a suitable bank account is dependent upon the specific transaction requirements of the NRI. Let us discuss these bank accounts in detail.

 

NRE and NRO Account meaning:

 

NRE full form is Non-Resident (External) Account, which allows only foreign credits from outside India into the account. On the other hand, NRO stands for Non-Resident (Ordinary) Account. Such accounts allow both foreign currency credits from outside India as well as rupee credits from within India.

 

NRE and NRO Accounts comparison:

 

Here are some of the major points of difference between NRE and NRO Accounts:

 

Acceptance of Rupee Credits – As mentioned above, NRE Accounts do not accept rupee transactions from within India. On the other hand, NRO Accounts allow rupee transactions as well as foreign currency transactions. As such, if one wants to receive any amount from within India, NRO Accounts will be suitable for such persons, as against NRE Accounts.

 

Repatriability of Account Balance – NRE Account allows free repatriation of funds outside India without any limits. On the other hand, the interest income in NRO Accounts is freely repatriable, while the principal balance can only be repatriated up to specified limits.

 

Joint Operations – One can hold a joint NRE Account with another NRI. Also, in NRE Accounts, NRIs / PIOs can hold accounts jointly with a Resident relative on ‘former or survivor’ basis and the Resident relative can operate the account as a Power of Attorney holder during the life time of the NRI / PIO Account holder. On the other hand, you can hold a joint NRO Account with either a Resident or a Non-Resident.

 

 

NRE and NRO Account benefits:

Foreign Currency Remittance – Both NRE, as well as NRO Accounts, allow an individual to receive foreign currency credits from outside India. As such, one can open an NRI bank account and conveniently transfer funds into their account in India while staying abroad.

 

Mandate Holder – One can also appoint a mandate holder to the account, which adds convenience and accessibility to the operations in the NRI bank accounts. RBI has prescribed specific transactions for a Mandate Holder, hence it can be operated only with the permissible transactions.

 

Attractive Interest Rates – NRI bank accounts also allow better interest rates to the depositors, especially when compared to the foreign developed countries, most of which are operating on a near-zero or negative interest rates regime.

 

 

NRE and NRO Account Taxation

 

In terms of tax benefits, NRE Accounts enjoy tax exemption in respect of interest income on the bank accounts as well as Fixed Deposits. On the other hand, the interest income on NRO Accounts and deposits is subject to tax at applicable rates. However, one may avail of the benefit of Double Taxation Avoidance Agreements (DTAA). The DTAA benefits are subject to the relevant documentation being shared with the Bank and not by default.

 

While NRE Accounts offer repatriation and tax benefits, NRO Accounts are more suitable if one needs to accept rupee transactions. One may choose the account as per their specific transaction requirements.

 

Source- icicibank

Fake patterns in investing

 

Several decades back, a particular incident sparked Daniel Kahneman’s journey toward ground-breaking discoveries, ultimately leading to the birth of behavioural economics as a widely accepted field. Despite being a psychologist, Kahneman was honoured with a Nobel Prize in Economics for his pioneering contributions. However, for us investors, this story sheds light on how we can be misled into believing we are correct, even when we’re off the mark.

 

In the 1960s, Kahneman was a junior psychology professor at the Hebrew University of Jerusalem while having a part-time assignment of giving psychology lectures to the Israeli Air Force flight instructors. One of his recommendations was to advise instructors to praise trainee pilots for their achievements but to abstain from criticism when they erred. This approach was rooted in his psychological education and understanding.

 

However, the flight instructors argued that their real-life experiences taught a different lesson. They had seen that trainees often underperformed after receiving praise and improved after being reprimanded. Although Kahneman was confident in his ideas, he didn’t outright dismiss the instructors’ assertions, given their substantial real-world experience. He kept thinking it over. And then, he had the insight that set him on the path to behavioural economics.

 

Kahneman realised that good performance after a scolding was not a result of the scolding itself. Each pilot had a certain skill level, which gradually improved with training. Naturally, each trainee had some good days and some bad ones. These were distributed around an average that represented that trainee’s skill level. A good day in the aircraft had a higher likelihood of being followed by a bad day, and vice versa. However, because the instructors followed each day with either praise or criticism, it looked as if the feedback had a contrary impact. An almost random set of events created a powerful impression of cause and effect, which was utterly believable.

 

Isn’t it obvious how this has a great similarity to how we all make decisions about investments and how we come to conclusions about the impact of our decisions? The brain is an extremely powerful and persistent pattern-recognition system, to the extent that it will create believable patterns where none exist. After a few years of investing, whether in equities or equity mutual funds, all of our brains are likely to be as clouded with false conclusions and misleading rules of thumb as those flight instructors. The worst part is that, exactly like the flight instructors, we all have ‘evidence’ that our rules work. When we make bad investments, we explain them away by making more spurious connections that are, in effect, even more rules. Curiously, I find many more people who have made these little rules about timing the markets rather than identifying good investments. Everyone seems to have these signals they follow about when to buy stocks, when not to buy, and when and how to sell. Sometimes, purely due to chance, the rules appear to work, reinforcing our beliefs.

 

The way I have described this phenomenon, there is no solution. However, there is, and a very simple one. One word: automate. I don’t mean in the technology sense but in the sense of rule-based investing. A perfect example is investing through a SIP in an equity mutual fund.

 

That subjects you to an automated, rule-based system that is not amenable to the ad hoc timing you may be tempted by. For equity investing, do the equivalent. For stocks on your buy list, keep putting in a fixed amount of money at a regular period. That’s exactly the strategy we recommend in our Value Research Stock Advisor service.

 

Remember, the pattern recognition that serves you so well in many other aspects of life can be your biggest enemy as an investor.

 

Source- valueresearchonline

How does the transfer of shares get taxed?

 

Recently, one of our readers asked us about transferring shares. They asked, “What are the tax implications if I transferred shares to my spouse’s name? Does the spouse need to pay tax if they do not sell the shares? If I have it for a long term, when will it be considered long term after transfer?”

 

Firstly, you can transfer shares to your spouse or anyone else in two ways. Either you can transfer shares through a will/inheritance, or you can gift it to them.

 

The transfer process is simple. All it needs is simple online documentation and the usual transfer fee which varies from broker to broker, plus 18 per cent GST.

 

However, the tax-related implications of such a transfer can be significant and nuanced. The taxability of transferred shares depends on three major factors.

 

  • The mode of transfer
  • Holding period
  • Cost of acquisition

 

Let us look at each of them separately

 

Mode of transfer

 

Taxability of gifted shares depends on whether it’s a will/inheritance or a gift. Further, it also depends on who is the recipient of these shares. Let’s look at the three possible scenarios.

 

  • Transfer as a will or inheritance.
  • In this scenario, there is no tax liability, irrespective of whether or not the recipient is a relative.
  • Transfer as a gift to a non-relative.
  • In this case, if the aggregate value of such shares transferred in a year exceeds Rs 50,000, it becomes taxable for the recipient.
  • Transfer by way of gift to a relative.
  • There is no tax liability in this case, but the definition of ‘relative’ is quite elaborate and covers the following people:
    • Your spouse
    • Your siblings and their spouses
    • Your spouse’s siblings and their spouses
    • Your parents’ siblings and their spouses
    • Your lineal ascendants and descendants, as well as their spouses
    • Your spouse’s lineal ascendants and descendants, as well as their spouses

 

Holding period

 

 

Next, there is the consideration of the holding period.

 

Stocks held over the long term and short term are taxed differently. Also, if you transfer your stocks to a relative, they become taxable only when your relative eventually sells the shares.

 

The combined holding period is considered to decide whether the gains are long-term or short-term. It is the period for which you hold the shares before transferring them to your relative, combined with the period for which your relative holds them before they sell them.

 

For example, if you bought the stocks on January 1, 2022, and gifted them to your spouse on September 1, 2022 and the latter chooses to sell these shares before January 1, 2023, the combined holding period will be considered short-term (less than 12 months).

 

In this case, your relative has to pay a short-term capital gains tax of 15 per cent. But if your spouse chooses to sell it after January 1, 2023 – which is more than 12 months – she’d be taxed 10 per cent, provided the gains exceed Rs 1 lakh.

 

Cost of acquisition

 

 

Further, you need to consider the cost of acquisition.

 

  • If you transfer or gift your shares to a relative, then the cost of acquisition for your relative is the same as the cost at which you acquired the shares.
  • If you transfer the shares to a non-relative, and the transaction is non-taxable, then the cost of acquisition for them is the same as it was for you.
  • However, if you transfer the shares to a non-relative, and the transaction is taxable, then their cost of acquisition is the value of the gift, which is to be taxed.

 

Suppose you transfer shares worth Rs 49,999, their cost of acquisition remains the same as the cost on which you acquired the shares. However, if you transfer shares worth Rs 50,000 or more, their cost of acquisition changes to the value of the shares you gift them.

 

Grandfathering of gains

 

 

For those new to this term, a grandfather clause is a provision where an old rule continues to apply to some existing situations when a new rule is introduced. In all future cases, the new rule holds valid.

 

In this case, the grandfathering of gains applies only to equity shares and units of equity-oriented funds.

 

According to this clause, any long-term capital gains prior to February 1, 2018, become tax-free. However, any losses can be claimed only if they are absolute, which means if you sell your shares for lower than the buying price.

 

In short, grandfathering of gains boils down to what you can claim as your cost of acquisition.

 

Your cost of acquisition becomes the higher of
1. The actual cost of acquisition (whatever you paid to purchase the shares or units), and,
2. The lower of,

  • Fair market value as on January 31, 2018.
  • Sale consideration received.

 

Let’s look at three different examples that explain this phenomenon.

 

Case 1
Suppose you bought some shares on January 31, 2015, for Rs 10 each and sold them for Rs 100 each in 2023. You are now eligible for grandfathering of gains and do not have to pay any tax on your long-term gains up to January 31, 2018. The gains after January 31, 2018 are however taxable.

 

Case 2
Next, assume you bought these shares on January 31, 2015, for Rs 10 each. In 2018, their price increased to Rs 100 each, but in Jan 2023, their price dropped to Rs 20 each. In this case, while you will not have to pay any taxes, you cannot claim a loss either.

 

Case 3
However, if you bought these shares on January 31, 2015, for Rs 10 each. In 2018, their price increased to Rs 100 each, but in Jan 2023, their price went down to Rs five each; you could claim a loss and offset it.

 

You can look at your holdings and calculate how much gains are taxable.

 

Or better yet, head over to ‘My Investments’ and add your investments, and we will tell you what your gains are and how much tax liability you have.

 

Clubbing of income

 

 

Lastly, the clubbing of income provisions is applicable when income is generated from the asset transferred. In all the following circumstances, income from the asset is taxable for you instead of your relative.

 

1. When you transfer your assets to your spouse without adequate consideration except when,

  • As part of the agreement to live apart
  • Before marriage
  • Income is received when the relationship no longer exists
  • Spouse acquired assets out of maintenance money

 

2. Transfer of assets to your son’s wife without adequate consideration.

3. Transfer of assets to someone else without adequate consideration for the immediate or deferred benefit of your spouse or son’s wife.

 

In short, if you wish to gift wealth to your loved ones in the form of shares, you should do it with due consideration to the various nuances of taxation.

 

Source- Valueresearchonline

High returns or Appropriate returns?

Morningstar’s vice president of research, John Rekenthaler, on Bill Bernstein’s newly released second edition of his 2002 classic, The Four Pillars of Investing.

 

The book covers a wide range of territory: investment theory and history, financial advisory practices, portfolio construction, and investor psychology.

 

When Bernstein wrote the first edition of Four Pillars, as a relative newcomer to the field, he was enthralled by the numbers. Investment research is bounded by science. In contrast with many of his quantitatively minded peers, though, he recognized from the start that investment math could also be a trap. History never repeats exactly—sometimes not even approximately.

 

For that reason, he addressed investor psychology.

 

Twenty years later, he has expanded on that message. The second edition opens by contrasting two investors:

 

1) Hedge fund Long-Term Capital Management, run by two Nobel Laureates

2) Sylvia Bloom, a legal secretary who died at the age of 98, holding $9.2 million in assets

 

The former belied its name by surviving only four years, while the latter persisted for 67 years, with great success. Writes Bernstein, “Unlike the geniuses at LTCM, [Bloom] wasn’t trying to get rich quick, but rather to get rich slow—a much safer bet.” That sentence neatly summarizes Bernstein’s counsel.

 

Speculators pursue high returns; investors seek appropriate returns.

 

Four Pillars spends little time on the obvious forms of speculation, such as buying meme stocks or trading options. No need to beat that horse; the book’s readers either already realize the futility of tail-chasing, or they bought the book because they are ready to absorb that lesson.

 

Four Pillars instead addresses the type of errors that educated investors might unknowingly make—and that Bloom did not. They include:

 

1) becoming seduced by investment narratives, as made by intriguing but ultimately mediocre theme funds

2) succumbing to recency bias

3) believing too strongly in one’s own abilities, thereby discounting the wisdom of the crowd (Is the marketplace crazy? Perhaps. But that occurs far less often than most investors believe.)

 

The most dangerous delusion comes not from how investors perceive the outside world, but instead from how they view themselves.

 

The first edition of Four Pillars included a risk-tolerance table, to help readers establish their equity allocation. For example, investing 80% of one’s assets in stocks might lead to a 35% portfolio decline, under unusually bad (although not the worst possible) circumstances, while owning 40% would cut the loss to 15%.

 

Writes Bernstein in the second edition:

 

I neglected to ask whether readers had actually lost 15%, 25%, or 35% of their portfolio. Simply looking at this table or running a portfolio simulation on a spreadsheet is not the same as facing real-world losses. The stock market only rarely falls for no good reason – bear markets are almost always the result of incipient financial system collapse, hyperinflation, or the prospect of nuclear annihilation. The fear of real geopolitical and economic catastrophe makes such times the most dangerous mountain passes on the highway of riches.

 

That is, it is not enough to have been in the right place at the right time, as wealthy Americans have been during the past 40 years. Investors must also know how to convert their paper opportunities into tangible dollars, by making sound decisions that withstand the test of time. Underinvesting is an obvious problem, as one can’t pocket stock market gains without stocks. But overinvesting can also be a costly error. Getting rich slowly means finding the appropriate personal level.

 

That conclusion may seem simple, but enacting it proves surprisingly difficult. Over the years, tens of millions of investors have crashed upon the asset-allocation rock. Such a fate, however, is unlikely to befall those who read Four Pillars. By the time the reader encounters Bernstein’s homily on risk perception, the book already established 200 pages of context, with another 100 yet to follow. The advice is therefore not hollow. It echoes.

 

Source- Morningstar

Retirement: a fast disaster or a slow one?

 

A few weeks back, while googling retirement systems in other countries, I saw this headline: 100-year-old Brazilian breaks record after 84 years at same company. Brazilian Walter Orthmann joined a company named Industrias Renaux on January 17, 1938, and 84 years later is still working there. I guess the greatest achievement here is that at the age of 100, he is still active and alert and still enjoys working. In the article I read, here’s the advice he gives, “I don’t do much planning, nor care much about tomorrow. All I care about is that tomorrow will be another day in which I will wake up, get up, exercise and go to work; you need to get busy with the present, not the past or the future. Here and now is what counts.”

 

There are a lot of news stories about this man that you can Google and find out more about this man but it goes without saying that this kind of a ‘retirement solution’ is not on the cards for the salaried amongst us. Retirement is a scary thing. By the time salaried people reach that age, they’ve typically been working for close to 40 years. For most of them, their existence is pretty much defined by the routine of their jobs. More importantly, their finances are defined by getting that salary every month.

 

Some small fraction of people are lucky enough to have an inherently inflation-protected income – for example, rent or a government pension, or those who have generated enormous wealth during their working years – the spectre of post-retirement financial problems and impoverishment haunts most retirees. Nowadays, lifespans are long and most people have two or three decades of lives left at retirement.

During these long years, a lot can happen. For example, even though lifespans have become long, the rise of chronic diseases has meant that ‘healthspans’ have become short and many of us will face ruinous medical bills at some point in the latter part of our lives.

 

This fear of the unknown – the spectre of risk that comes with retirement makes it a natural instinct to be conservative with post-retirement investments. This is perfectly understandable. Once you stop earning, there is no plan B. If you make big losses in your investments, then that money is gone forever – you will not be able to earn more and make up for the losses. This makes people extremely conservative in their outlook. A considerable number will trust only bank deposits, sovereign schemes and perhaps LIC.

 

This feels safe but actually, it is not. The problem is that your savings can face a sudden, hard disaster, or they can face a long, gradual disaster. Like the proverbial frog in boiling water, the latter cannot be felt. Those who face this long, slow disaster do not even know that there was an alternative.

 

In fact, I’ve come to realise that some people choose this disaster knowingly. Why so? I’ve spent years explaining that after retirement, equity is a must in order to avoid this slow disaster. There are those who understand this very well and yet are so scared of the quick disaster that they willingly choose it. This is the worst of all worlds, and it comes entirely from a lack of confidence.

 

This confidence is hard to gain, and the only route to it is through knowledge and experience, coupled with real-life examples. That’s the part I try to play in this publication, along with resources you can find online, including a very comprehensive set on Value Research Online. However, I must point out that like all savings, fixing your post-retirement investment plan is something that needs to be done sooner rather than later. It may be a slow disaster, but the years roll by quickly and it does not take time for the slow one to arrive.

 

Source- Valueresearchonline

Mutual Fund Investment in India As An NRI

 

It is now common for many people to relocate abroad for work or study. In a few months, they settle down there and become NRIs (Non-Resident Indians). If you, too, are one of those people, a question might arise in your mind. What happens to your stocks and mutual funds investments if you leave the country?

 

Mutual Fund Investment For NRI

 

You can continue to invest in domestic mutual funds once your residency status switches to NRI (Non-Resident Indian). However, according to the Foreign Exchange Management Act (FEMA) of the Reserve Bank of India, you must modify your residential status in your bank accounts and other assets, like mutual fund schemes. While NRI mutual funds investment is not restricted in India, you must update your residential status and bank account information.

 

Things You Need To Keep In Mind After Becoming NRI

 

Even though there is not much difference between investing as a resident or as an NRI, there are some things that you need to keep in mind as an NRI while investing in mutual funds in India, such as:

 

Open an NRI bank account- You cannot maintain your regular account if your residential status switches to NRI, according to FEMA (Foreign Exchange Management Act) standards. Furthermore, Asset Management Companies (AMCs) in India cannot take foreign currency investments. As a result, you must open an NRE bank account or convert your ordinary account to an NRO account.

 

NRE and NRO account- You can save your foreign profits in an RBI-registered bank in India by opening an NRE (Non-Resident External) bank account. You can also open an NRO (Non-Resident Ordinary Account) account to deposit your Indian earnings, such as a pension, dividends, rental income, etc.

 

Update your Residential Area- After becoming a Non-resident of India, you must update your current residential address in your KYC (Know Your customer). You also need to inform the mutual fund house where you have invested. You can do it by submitting some documents like your PAN card, passport or address proof.

 

Taxation Policy For NRI’s

 

The mutual fund taxation rules for NRIs and residents of India are similar.

 

If the investment is made for a short period of time, such as one year or less, the tax rate will be 15% under the short-term capital gains taxation rules.

 

But if the investment is for more than one year or for the long term, then the tax charges will be 10% according to the long-term capital gains tax rules. If the gains reach Rs. 1 lakh, short-term capital gains are taxed at 15% and long-term capital gains at 10%.

 

However, If the NRI’s country of residence has not signed the DTAA (Double Tax Avoidance Agreement), the NRI has to pay taxes in both countries, the country of residence and India.

 

To Sum Up

 

In conclusion, as an NRI, investing in mutual funds in India is not significantly different from investing as a resident. However, understanding the taxation policy for NRIs is important, including the difference in tax rates for short-term and long-term investments and the impact of DTAA agreements. By considering these factors and investing wisely, NRIs can make safe and profitable mutual fund investments in India.

 

Source – Shoonya

Navigating finances for new couples

 

New couples have a choice to make. They can choose to open up about their finances or not. Those who are successful will watch their nest eggs grow and progress towards shared goals.

 

Success simply starts with an open dialogue. When it’s missing, arguments are inevitable.

 

“While fighting about money is not necessarily common, those arguments tend to be longer than other arguments, and more damaging to the relationship than other types of arguments,” explained Sarah Newcomb, when she was Morningstar’s Director of Behavioural Science. Hence, it is very important for couples to find ways to communicate in a healthy way about finances.

 

You will be surprised to know that money is the top reason for stress among adults. This is regardless of the economic climate.

 

If money is the number one reason for stress in people’s lives, we need to talk about it. Talking helps reduce stress. Unfortunately, not many do so.

 

People who feel that they are moving towards a committed relationship need to start a dialogue about finances. When you go out with the person, you get a sense of what their values are around money, family history and debt.

 

How do you start chatting about money?

 

The first conversation shouldn’t be about your credit scores or how much you earn or how much debt do you have. Neither should it be about how to merge your finances as a couple.

 

Newcomb suggests “get-to-know-you” questions that make the person open up. What was money like in your household growing up? What does the good life mean to you? Does money keep you up at night? Do you think of money as a necessary evil or as freedom and opportunity?”

 

Tell your partner that you are curious and want to learn more about him/her and their family. It is not about judgement, but about developing a deep understanding of who your partner is and what the stories are that are driving the financial decisions that you two will eventually make. Share your experiences too.

 

You need to talk even if you never combine bank accounts. Learning how to talk about difficult things together is the key to having a solid financial life together.

 

Debt.

 

What debt does your partner have? What is their attitude towards clearing it? If your partner has a huge credit card bill and is least concerned, it is a red flag.

 

Credit scores are important when you’re contemplating buying a home and taking a loan. So your potential spouse’s credit score may have a significant impact on your financial ability together.

 

Splitting expenses.

 

If both are earning, then the conversation must move to sharing expenses and splitting bills.

 

Splitting expenses comes down to asking each other “what feels fair”, says Newcomb. Let’s say one person makes three times what the other person does, then they might want to split the bill proportionally. That would mean one partner pays 25% and the other pays 75%. Others may just want to split it 50/50.

 

Be partners, not judges.

 

At some point, there needs to be an ‘I’ll show you mine and you show me yours’ numbers conversation where you will show one another your debt and your assets. So many of us will combine our lives, and never sit down and have that conversation where you just simply show one another your accounts.

 

Avoiding the subject is detrimental. The truth will come out and partners’ finances affect each other.

 

Financial intimacy is what a lot of couples don’t have. It’s a scary intimacy because it requires trust to show someone your situation. Often we are afraid of being judged and what our partner will think of us if they know our financial situation. Some people are afraid to be judged for having too much. Some people are afraid to be judged for having too little. People are afraid to be judged for being disorganized.

 

Be honest.

 

It’s important to tell the truth. As a basis for a committed relationship, being dishonest about how you manage money is a shaky foundation for your marriage.

 

Have the financial planning and financial future conversations before you get married. Talk about the way you will manage money. The goals you want to accomplish as a couple.

 

After the most difficult conversations take place, it will make what you have stronger. You’re setting yourself up for success because you did the scary, courageous thing.

 

Decide the path ahead.

 

Budgets are not sexy. Budgets are not romantic. But that’s the reality. Sit down at the end of each month and go over the expenses and savings.

 

It is just as important to keep the romance alive as it is to have financial discussions.

 

Source- Morningstar

Balanced-advantage funds: Are they the right choice for regular income?

 

Mr Naresh Gupta, a non-pensioner super senior citizen living in Delhi, recently took out fixed deposits (FDs) to manage his household expenses. However, he needed a regular income and sought our advice on whether to invest in a balanced-advantage fund (as suggested by his friend) for this purpose.

 

What are balanced-advantage funds?

 

  • Balanced-advantage funds, also dynamic asset allocation funds, are a type of hybrid funds that invest in both equity and debt instruments.

 

  • Unlike equity and debt funds that have fixed investment mandates, balanced-advantage funds have a dynamic equity-debt allocation. Broadly speaking, these funds put more money in equities and less in debt when markets are depressed, and vice versa.

 

  • Fund houses claim this dynamic allocation helps them capture potential upsides and limit downsides in volatile equity markets, making them popular among investors.

 

  • However, balanced-advantage funds widely vary in their risk-reward profile. Some funds are vastly conservative, while others can be high on the risk metre.

 

What does this mean for Mr Gupta?

 

  • Given these funds’ wildly differing risk profiles, Mr Gupta must exercise caution while choosing the right balanced-advantage fund.

 

  • For a regular-income portfolio, Mr Gupta can go for a balanced-advantage fund where the equity allocation stays in the range of 40-50 per cent, and doesn’t move to extremes.

 

  • For instance, if a balanced-advantage fund goes aggressive on equity and the market tanks, it can pose a hurdle in deriving regular income. At the same time, a balanced-advantage fund which takes a very conservative call on equities (around 15-20 per cent) may not earn enough returns to support regular income

 

 

That being said, Value Research is sceptical of mutual funds that rely on timing the market. We believe that static equity-debt allocations (such as 75:25, 50:50 and 25:75) based on your ability to take risks work better in the long run. It eliminates the chances of pre-empting market moves based on models or human judgement. Even in the case of funds with dynamic asset allocation, we would prefer the ones that do not take extreme calls. It brings higher predictability.

 

An alternate route

Mr Gupta can also follow the below alternate strategy:

 

  • Invest at least one-third of the money in equities at all times, preferably in good flexi-cap funds or large-cap funds (for very conservative investors) to achieve returns that beat inflation.

 

  • Invest the other two-thirds of the money in fixed-income investment avenues, such as government-backed guaranteed return schemes like the Senior Citizen Savings Scheme (SCSS). Also, allocate some of the funds to high-quality short-duration funds for emergencies.

 

  • Rebalance the portfolio every year and limit annual withdrawal to no more than 5-6 per cent of the corpus.

 

Source- Valueresearchonline

Should I allocate over half of my portfolio to small and mid-cap funds?

 

Is it advisable to build a core equity portfolio (50-60 per cent) in mid and small caps, considering an SIP tenure for 10 plus years? – Anonymous

 

When it comes to long-term investing, a time horizon of 10 years or more is well-suited for equity investments. However, it’s important to avoid over-concentrating in one type of fund or solely investing in mid and small-cap funds. For example, building a core equity portfolio where 50-60 per cent is allocated to mid and small-cap funds is not recommended.

 

Instead, a diversified approach to equity via flexi-cap funds is recommended, as they invest across large, mid, and small-cap stocks. By investing in a flexi-cap fund, around 25-30 per cent of your portfolio is exposed to mid and small-cap stocks, while large-caps make up about 70 per cent. When building a portfolio, it’s best to focus on stocks that provide growth with stability, which large-caps tend to offer. Riskier assets should only be allocated a small portion of the portfolio.

 

While mid and small-cap funds may provide higher returns than flexi-cap funds in the long run, they may fluctuate more in the short run and are generally considered riskier. Having a higher exposure of 50-60 per cent to mid and small-cap funds can make your portfolio much more volatile, which is not advisable.

 

In conclusion, if you’re willing to accept higher risk and volatility for higher returns, you can add a mid or small-cap fund along with a flexi-cap fund. This way your portfolio allocation to mid- and small-caps would be slightly higher. However, it’s not advisable to make them the core of your portfolio.

 

Source- Valueresearchonline

Direct plan platforms to charge a flat transaction fee either from AMCs or investors

 

Execution Only Platforms (EOPs) will become reality by September 1, 2023. In a circular, SEBI has introduced the concept of EOPs, which essentially says that digital platforms offering direct plans free of cost will now have to charge a flat transaction fee either from AMCs or directly from investors.

 

SEBI has introduced two set of norms of EOPs – category 1 EOPs can become agent of AMCs and charge transaction fee from them by obtaining license from AMFI and category 2 EOPs can become representative of investors and charge them directly by taking stock broking license.

 

SEBI has defined EOP as any digital or online platform, which facilitates transactions such as subscription, redemption and switch transactions in direct plans of the schemes of mutual funds.

 

All players who are into distribution of direct plan will have to obtain EOP license by December 01, 2023. Also, industry platforms like MF Central, MF Utilities, BSE Star MF and NSE NMF II will also have to obtain EOP license.

 

Further, the market regulator has clarified that platforms provided by SEBI RIAs and stock brokers to their advisory or broking clients are not covered under EOP framework.

 

Let us look at the other key details of the new regulation on this new distribution channel:

 

  • While Category 1 EOPs will have to obtain license from AMFI, category 2 EOPs will have to get stock broking license under SEBI (Stock Brokers) Regulations

 

  • Category 1 EOPs will act agent of AMCs whereas category 2 EOPs will act as agent of investor

 

  • EOPs will have to facilitate non-financial transaction like change of email id or phone number, bank account and so on

 

  • They cannot deal in regular plans of mutual funds

 

  • Category 1 EOPs can provide their services to other intermediaries

 

  • Category 1 EOPs will have to abide by AMFI norms to onboard clients. AMCs will be held responsible for carrying out KYC of investors coming through this channel

 

  • Category 2 EOPs will have to comply with KYC norms to onboard new clients. Further, they should have access to KYC data through KRAs

 

  • Both category 1 and 2 EOPs can charge transaction fee from AMCs and investors, respectively subject to upper limit capped by AMFI and stock exchange

 

  • AMCs cannot adjust such a fee with the scheme i.e. they cannot charge it to the scheme

 

  • Both EOPs will have to ensure comprehensive risk management, access control and prevent unauthorised access

 

  • EOPs will have to ensure all transaction are dealt in a fair and non-discriminatory manner

 

  • EOPs will have to formulate data protection policy, ensure data privacy and confidentiality and maintain all data

 

  • Entity will have to maintain arm’s length relationship with clients to avoid conflict of interest if performing multiple activities

 

  • If such an entity is into MF distribution at group level, they will have to ensure family level segregation between direct and regular business

 

  • Category 1 EOPs will have to route transaction directly through AMCs or respective RTAs whereas category 2 EOPs can route MF transaction through stock exchange platforms

 

  • Both EOPs cannot display advertisement of MF scheme or brand

 

  • Pooling of funds will not be allowed

 

  • EOP will have to disclose – name of MF scheme, name of fund manager, investment objective, scheme performance, scheme details, risk-o-meter among other things

 

  • EOP cannot list products based on ratings or rankings

 

 

Source- Cafemutual