RAMA NAVAMI

The epics were set to story,

From the lives and deeds of real men;

The Avatar is allegory,

And inspiration for the real!

Maryada Purushottam,

Ideal man who walked the earth;

In the act of worshipping him,

We imbibe some of his qualities!

We need lodestars to guide us,

On what's right and what's moral;

Gods are personification,

Of all that's high and good in us!

The Lord didn't have an easy time,

When He chose to walk this earth;

His troubles were like the rest of us,

So were his joys and sufferings!

His life serves as lesson for us,

His deeds act as inspiration;

In each one of us there is Ram,

Waiting to emerge with his blessings!

Stand up call-edy

Friend of mine just told me she has to attend a stand up call. She is of course a techie. 

I am confused. What has standing up got to do with a call? Is she not allowed to sit during the call, which she said is not face to face. Wait! If not face to face, it will be bum to bum or what? I mean all meetings are face to face, especially online meetings, or am I mistaken? 

No no it's a scum meeting , she said. Oh, you mean your colleagues admit they are scum, I asked? 

No you dodo , that is scrum meeting , we are all agile, she said. Hello, just yesterday you were complaining of backache, how come you are claiming to be agile?, I said. What do you know, she said, every week  we plan for the next sprint. Now I knew something was wrong, she is hardly the running type, she is more the samosa jalebi rest on her chair type. She was obviously pulling my leg. 

Anyway, back to the stand up call. A few questions come to mind: 

Substituting someone in a stand up call: is it called standing in

Not allowed to attend stand up call as punishment: is that what is standing out

Funny stand up call: that I think is what they call  stand up call-edy

Sex worker soliciting customers at Street corner: should then ideally be a stand up call girl

Cancelled stand up call: is it called a  stand down call

These techies I tell you, what what new terms they invent...

Change in Debt Fund Tax Rules: what should you do?

Following up on my previous article of 25^th March (link: https://www.dineshgopalan.com/2023/03/change-in-tax-rules-on-debt-investments.html )

 

The changes will be effective from 1 April, 2023, for all investments made on or after 1 April. What this means is that if you invested anytime on or before 31^st March, 2023, the old rules will apply even if you sell after 1/4/23.

 

Why has the government done this? Debt funds enjoyed an unfair advantage over bank deposits because of their tax treatment. This differential treatment has now been removed. This move was always on the cards – it was not a question of if, it was only a question of when.

 

There are three levels to any investment:

 

 

1.     Protect principal, in other words, the risk element. Investments in government securities are better than investments in AAA corporates are better than investments in other companies and NBFC's are better than investments in risky companies, etc.

 

2.     Protect against inflation. Inflation eats your money away. The "real" return of your investment is the return you get over and above inflation. You hope for at least a zero ( and not negative) real rate of return.

 

3.     Get a real return. The return you get is proportional to the risk you are willing to take, at least in theory. Philosophically, this makes sense, and practically, this is where the whole subject becomes murky and subjective. How do you assess the risk? How do you decide whether the additional returns are commensurate with the additional risk? Anyway, everyone wants to have their cake and eat it too, but in most cases people struggle for their bread!

 

Debt is supposed to protect your principal and protect against inflation. It will never really give you a real return. The real return from debt will always range between plus or minus 2 percent. If it is anywhere above plus 2 percent, you need to be wary – there is likely to be additional risk involved.

 

The options for debt investments are, practically speaking:

 

1.     Bank deposits and 2. Debt mutual funds.

 

We are ignoring PF and PPF in this discussion, since it is not a like to like comparison. Investing directly in corporate or NBFC deposits does give a slightly higher return than the above two options, but at a significantly higher risk, so that route is not worth it.

 

Even when it comes to debt mutual funds, choose only low risk funds which invest in the best quality paper – the extra percent or so that you get from funds that invest in riskier paper is not worth it.

 

All right, now that the tax arbitrage has been removed, what should one do?

 

The entire discussion assumes that the returns from debt MF's and Bank FD's are broadly the same which is broadly true (if you wonder why I am hedging in that statement, well, that is in the interest of being broadly correct!).

 

Advantages of Bank FD's: They are easier to understand.

 

Disadvantages of Bank FD's: You need to decide which bank and what tenor (duration of investment). The decision on tenor is not an easy one. Every time the FD matures, you have to remember to roll it over. Tax  on FD is payable every year, even if it a "cumulative" FD not paying out periodic interest, thus reducing the effect of compounding. If you cancel an FD prematurely, you pay a penalty.  If the Bank collapses, the Deposit Insurance covers you for only five lakhs; this risk can be mitigated by investing in highly safe banks which the government will ensure will not collapse, and by spreading your FD's across banks.

 

Advantages of Debt Mutual Funds: They are automatically diversified, since the investments are in a basket of companies and securities, and you can never lose all your money at once. Once you put the money in, you don't have to track maturity, reinvestment, etc. There is no TDS deduction as in banks, which, in my view, does not matter so much, but it does seem to matter to most people. The "capital gains" on sale can be set off against other capital gains and losses.  You pay tax only on sale, and not annually.

 

So, the answer is clear. Debt funds are the way to go! 

 

Well, but that is only the first step. A few additional pointers, that you need to keep in mind:

 

1.     Do not invest in Funds that invest in riskier paper. The additional one or two percent is not worth it.

2.     There is something called interest rate risk which even the safest of debt funds carry. ( see : https://www.dineshgopalan.com/2023/03/revisiting-investments-and-investing.html ). To avoid interest rate risk, it is better to invest in funds that invest in shorter duration paper, like liquid funds, ultra short, short duration funds, and money market funds. However the interest rate cycle is at or near the peak and this is not a concern for the immediate future. In case it looks like there will be an increase in rates at any point in time, one needs to pull out the investments from Funds that invest in longer duration paper and put them in the above mentioned Funds that invest in shorter duration paper.

 

Huh! I can see you staring at the above paragraph incredulously, thinking – yeh kya tamasha hai, no one tells me all this, and even if they do, I don't understand anything! Kucch samajh me nahin aa raha!

 

Well, I am sorry, but anything can be made only so simple as to make it understandable, but not so dumbed down that the content is lost. The subject is inherently complex, and I do not know of a simpler way to explain it.

 

 

The sum and gist? The advice? You may continue to invest in debt funds, in preference to Bank FD's.  But that still does not absolve you from learning about them and keeping an eye on the market. But then that is true of life in general – nothing absolves you from knowing enough to safeguard your own interests.

 

Non-Finance people can stop reading at this point.

 

For Finance folk: d

 

These changes in rules are for funds that have less than 35 percent equity component. For funds with greater than 65 percent equity, equity rules apply for taxation purposes (15 percent for STCG and 10 percent for LTCG, no indexation).

 

For the funds holding between 35 and 65 percent equity, the rule continues to be: add to income and pay at slab in case of STCG ( less than three years); if greater than three years, that is, for LTCG, twenty percent tax rate with indexation of purchase price is still applicable!

 

Isn't that yummy? Even as a person with a reasonably good understanding of Finance, I find that my head it spinning. It is too early in the day, otherwise I would have poured myself a stiff peg of whiskey.

 

Sigh…

Change in tax rules on debt investments

Starting April 1, 2023, investments in debt funds will no longer be eligible for indexation benefit on Long Term Capital Gains. 

A small tweak, in small print, in the budget. The government proposes, and the government disposes! But the implications for the investors are quite big.

But it is not easy to understand what this means. Understanding that one sentence above presupposes a knowledge of tax laws and of investment options in financial markets.

So, a small primer on the required essentials first. 

1. You have broadly four kinds of investment options ( there are more but these are the primary ones). Equity, debt, real estate, and gold. They are called asset classes. Each of these carries a different risk-return profile.

2. For each of the above asset classes, you can choose to invest either directly or through mutual funds. 

3. Debt mutual funds are mutual funds that invest in debt paper of various kinds, like debentures of companies, bonds, treasury bills, government securities,  deposits, certificates of deposits, money market instruments... The names are many, and confusing, but essentially debt MF's invest in debt paper of the government or of  various companies or financial institutions. They earn interest on their investments and get their principal back on maturity ( hopefully). All these investments are of the form where they can be bought and sold in the secondary market to other investors, meaning they don't have to wait for the redemption date to get money, someone else is always available to buy the debt paper from you.

4. All investors pay income tax on their income. The tax is based on a slab rate from zero to thirty percent. Income consists of whatever you earn, including interest on your debt investments and dividends on your equity investments, and of course your salary, pension, etc. 

5. What about when you invest in equity shares or land? When you sell them you make a profit ( or loss) . Let's say you buy equity shares of Infosys for one lakh rupees and hold them for seven years. Or buy a piece of land and hold it for 7 years. You get dividends on the  shares every year and nothing on the land of course. The annual dividends  are part of your annual income, and they are just added to your income on which you pay tax.  Let's say you sell the shares, or the land,  after seven years for six lakh rupees.  You have made a "capital gain" of five lakhs. How is this taxed? 

If it is "short term" capital gain, meaning you held the investment for less than one year in case of equity and two years in case of land, the sale price minus purchase price, in other words, the gain of five lakhs is just added to your income for the year, on which income you pay tax.

If it is long term capital gain, you pay tax as follows: 

a) Your purchase price of one lakh is "indexed" upwards based on the  inflation in those seven years that you held the investment, based on an "income tax indexation table". Thus your one lakh becomes, say, one lakh eighty thousand.

b) your capital gain on sale is sale price less indexed purchase price, which is six lakhs minus one lakh eighty thousand, which is four lakh twenty thousand. You pay tax at the flat rate of twenty percent of that, and your tax works out to 84000.

6. All investments in mutual fund units are considered "capital " investments, like the investments in Infosys shares or land above. On sale, they are taxed as per the procedure explained in Point 5.

7. To determine whether the gains are long term or short term, in case of equity mutual funds, the cutoff is one year. In case of debt mutual funds, the cutoff is three years. 

Ok, now let's talk about the amendment to the tax law that is effective from April 1, 2023. Go back and read the first sentence of this article. The special tax treatment for long term capital gains on investments in debt mutual funds will no longer be applicable. In other words, when you sell units of your debt fund, your gain, that is sale price minus purchase price, will just be added to your income for the year, and taxed accordingly. 

Still confused? Don't blame yourself, blame the tax laws, they are designed to befuddle us and create a state of brain freeze. Just go back and read the whole thing again. 

Ok, you went back and read the whole thing again. Or you called your  friend the CA and regretted it, for now you are even more confused. I know very few CA's who can explain things to the layman, forget that, they can't even explain things to each other! 

In any case, you read it again , and now you think you understand what I am talking about. 

The next obvious question is, what is the implication for you? 

We will save that for the next article, coming up soon. 

Now, go and have that coffee, or that stiff peg of whiskey, you need it. Reading about tax is always taxing.

Revisiting Investments and Investing

There is no such thing as a risk-free investment.

Holding cash at home is not risk-free since inflation eats the money away.

Investing in a bank involves varying levels of risk:

- the most safe banks are the scheduled public banks. You expect the government to cover losses if the bank fails. Officially , the deposit insurance cover is only 5 lakhs, but in general the expectation is that the government won't allow the bank to go bust. Ditto for most major private  banks.

Safety does not imply solidity. The balance sheets of most banks are suspect.

The risk is that the real return, that is, return net of inflation, may still be negative, especially on a net of tax basis.

As to investing in banks other than the big ones, the less said about it the better. 

Investing in the stock market is highly risky for several reasons. It is a rigged game, where the muppets keep entering only to get slaughtered in hordes. 

Debt mutual funds carry risks as we saw in the case of Franklin Templeton. In search of a little extra yield, they could invest in illiquid  securities of not so strong companies. In case they invest only in 

supposedly safe long dated  government bonds, that carries interest rate risk, which , as the SVB collapse shows, can be deadly. 

Equity mutual funds carry the same risks as investing in direct equity, plus some more. As an individual investor you would never have invested in Anil Ambani's power project or in Nyka. The fund managers, however, are part of a cosy cabal, which believes in mutual scratching of backs, and what the hell, it is not their money anyway.

Every player in the financial markets has an incentive structure that is at variance with the wellbeing of the investor.

The financial markets are a giant suction machine that keep rotating our  money at great velocities, sucking out a little bit in each round, and to add to it, the machine breaks down once in a while.

Gold, as in physical gold, is always safe. It will protect you from inflation in the long run,  but is highly volatile in the short run. However, central banks are scared of gold, in the same way as religions are scared of sex, it is the only power strong enough to threaten their hegemony. So central banks will do everything in their power to curb gold, ban it, demonise it, and in general harass those who hold it. 

Money is supposed to be a "store of value". That is the biggest bullshit fed to us by economists. Economists, by the way, are a totally clueless bunch whose job depends on pretending to be erudite.

An economist consulting a tarot card reader, to raise interest rates, might end up in a better outcome, 

Ditto, an equity fund manager consulting a monkey with a dartboard , to help him choose stocks. 

Cryptos, commodities, options, futures, derivatives, currencies and the like are all  scam games to divest the investor of his money, except that the word investor is inappropriate, hopeful idiots is a better term. In a gambling den, only the house wins. Always.

So then, what to do? 

Money loses value hence one needs to invest in things other than money.

Which things? 

For that, let's go back to the basics of investment.

Anything that will not result in the investor losing his principal. That is the first rule: not to lose the principal.

Anything that is real: that is, is tangible, has a use for someone, and carries real value.

Anything for which the demand from the people will increase over time. Rising demand gets reflected in the price.

Anything that will not collapse overnight, like banks tend to do nowadays.

Anything that has been considered as investment for ages, and will continue to be considered as such.

Anything not subject to black swan events. Black swans seem to be getting  increasingly frequent nowadays. 

Any suggestions? 

Responses are welcome