FLAME Newsletter - October 24, 2012


QUOTE OF THE WEEK:

“If saving money is wrong, I don’t want to be right” - William Alan Shatner, Canadian actor

YOUR FINANCE DEMYSTIFIED:

Lost share certificate: Steps you should take for issue of duplicate certificates

Read on to know what you need to do to prevent yourself from a financial loss in case you have lost or misplaced your physical share certificate

What will you do if you lose an important document like your share certificate? The thought itself can prove to be a nightmare as there are chances of the document being misused leading to a financial loss. This article elaborates on the steps you should take to get duplicate share certificates from the company / registrars to avoid any financial loss.

If you have lost or misplaced your share certificates of any listed company, you need to immediately inform the respective company—of which you had the shares. You also need to quote the folio number and details of share certificates to the company for their reference. When a company receives an intimation that you have lost the shares, the folio number or the details provided to the company are frozen in lieu of the lost one. This is done by the company to prevent any fraud or transfer of shares… Read more

Mutual Funds: Which one to choose: Growth or dividend option?

In case of growth and dividend payout, number of units remains the same. If your goal is to build wealth to meet your long-term financial goals, then growth option would be the right choice

While investing in a mutual fund scheme, we often get confused when asked to select among ‘growth’, ‘dividend’ and ‘dividend reinvestment’ option. If you don’t select any of these options, the fund house will select the default option for that scheme as mentioned in the application prospectus. However, you can always change the option later.

Remember, it makes NO difference whatever the ‘basic returns’ that you will earn whether it is growth or dividend (payout/reinvestment) option of your mutual fund schemes. The only aspect which you should look is the tax perspective—while choosing the growth or dividend option. In other words, the ‘post-tax returns’ will differ. This is so because the tax treatment is different for (a) Dividend and Capital Gains, (b) Long Term and Short Term holding period and (c) Equity Fund and Debt Fund. Let’s understand some simple rules that you can follow in making the right choice.

Dividend payout option: In case of dividend payout option, the mutual fund scheme will pay you from the profits made by the scheme at regular periods (quarterly, half-yearly or yearly). But, dividends are not guaranteed i.e. you may get the dividend or you may not it.

When a fund house declares dividend, this dividend gets deducted from the NAV (net asset value) of your MF scheme and is paid to you. For instance: If your scheme has an NAV of Rs. 50 and the fund house declared a 10% dividend (Re. 1 on a face value of Rs. 10 per unit), the NAV will decline by Re. 1 to Rs. 49 after paying the dividend. Thus, in dividend payout, the NAV of the scheme falls after the dividend is paid. You receive the dividend in your savings bank account and the NAV goes down to reflect the impact of the dividend paid. If you need regular income, then dividend payout is a good choice. 

Dividend reinvestment plan: The term dividend reinvestment plan itself suggests that dividend is not paid to you but is used to buy more units of the scheme by the fund house. Also, in case of dividend reinvestment, the NAV of the scheme declines after the dividend is paid.

Growth option: In growth option, the scheme does not pay any dividend, but continues to grow. Therefore, nothing is received in the bank account and there is nothing to re-invest. Whatever gains are made by selling any fund holdings are invested again into the scheme. This gain can be seen in the NAV (net asset value) of the scheme, which rises over time.

The number of units with the investor also remains the same. Please note in case of growth and dividend payout, number of units remains the same. If your goal is to build wealth to meet your long-term financial goals, then growth option would be the right choice. 

Capital gain taxation

Asset

Min holding period for long term

Taxation + Education cess 3%

Equity

1 year

Nil

Debt

1 year

Whichever is beneficial

10% without indexation

20% with indexation

Dividend distribution tax: Dividends from mutual funds are tax-free. However, there is a dividend distribution tax (DDT) payable on dividends for debt schemes). The DDT for debt schemes is 13.519%. Besides, the tax treatment of returns from debt schemes investment periods should also be taken into consideration. Here's how different funds are taxed and who should invest in them:

Debt schemes held for short term: If you fall under 10% tax bracket, growth option would be better—as there is no DDT (13.519%). Dividend option is better if an individual falls under higher income brackets (20% or 30% & above) as the DDT is lower. Debt schemes if hold for short term ( less than one year), then capital gains tax will added to income and taxed according to the slab.

Debt funds held for long term: If you want to invest in debt schemes for more than a year, growth option is a better choice. In case of debt schemes, long term capital gains are taxed at 10% without indexation and 20% with indexation.

The current rise in inflation, it is better to hold debt scheme investments for long term and reap the benefits of indexation which is 20% on net capital gains. Thus, an individual’s long-term capital gains tax liability of 20% on net capital gains is lower than the dividend distribution tax of 13.519%.

Equity schemes: It is usually recommended that investments in equity should be for long period (definitely not less than one year) to beat inflation. Dividends from equity schemes do not attract any DDT. If we remain invested in equity for more than one year, then long term capital gains are tax free. If you hold your equity investments for less than 12 months, you will have to pay a 15% tax on the capital gains (if any).

Hence, in case of equity mutual fund schemes it makes no difference whether you opt for the growth or dividend option—as both dividends and long term capital gains from equity funds are tax free.

Read more:

Dividend payout or dividend re-investment: What should you opt for?

Basic services demat account for small investors

Introduced by SEBI, basic service demat accounts will offer limited services and reduced costs compared to conventional demat account

Most of us who don’t invest regularly in stocks, bonds, gold ETFs, IPO, etc may find maintaining our demat accounts a pain because of the charges. The costs, such as annual maintenance and statement charges, make these accounts relatively expensive.

But with the introduction of basic service demat account (BSDA) by SEBI (Securities and Exchange Board of India), the annual maintenance charges structure will be on a slab basis. Here we provide you with the fundamental information about BSDA… Read more

DID YOU KNOW?

Rs. 2.8 annas worth more than Rs. 2.5 lakh today

All of us know that banknotes are available in nominal values of Rs. 5, Rs. 10, Rs. 20, Rs. 50, Rs. 100, Rs. 500 and Rs. 1,000. Rupee coins are usually available in denominations of Re. 1, Rs. 2, Rs. 5 and Rs. 10.

But do you know that the Indian government had introduced the exotic Rs. 2.8 annas note in November 1917. The issuance of these notes was discontinued in January 1926 on cost benefit considerations. These notes first carried the portrait of King George V. The Rs. 2.8 annas note—a prized possession— is today said to be worth more than Rs. 2.5 lakh.

Also Read:

Your complete guide to money

TERM OF THE WEEK

What are offshore funds?

An offshore fund refers to a mutual fund that invests its assets abroad and not in India. Offshore funds offer investors access to international markets and major exchanges. They are similar to traditional mutual funds… Read More

IN THE NEWS THIS WEEK

RBI may restructure SLR to meet Basel-III norms: Reports

Old-age pension to be given after verifying documents

SEBI says, no case pending for more than year

Maharashtra govt to introduce insurance plan for women artistes

ABOUT FLAME

FLAME (Financial Literacy Agenda for Mass Empowerment) is an IIFL initiative to promote financial literacy amongst the masses in order to make them an integral part of India’s spectacular growth story.

In an era of accelerating GDP and rising per capita growth, financial literacy has become more critical than ever before such that we all reap the tangible benefits of the nation’s economic prosperity. Financial inclusion has been quite high on the governmental agenda, given its emphasis on widening the Banking & Financial services network across the country. IIFL’s FLAME initiative stands committed to complement this effort by helping common people gain financial growth and security though better awareness and education on the variety of financial products while avoiding the lure of and loss from unrealistic claims made by unscrupulous agents and ponzi schemes.

Our objective is to light a FLAME, as the name suggests, which will set ablaze a chain of FLAMEs across the country. The new-found light of knowledge will undoubtedly dispel the dark clouds of financial illiteracy and ensure the bright sunshine of financial growth and prosperity.

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