Track your Portfolio

Login / Sign Up

Month: March 2023

Posted on

2023: End of a golden era of tax-free investment products

One of the most important criteria while deciding the feasibility of an investment is its tax impact. In a country of 140 crore population, 70% own a mobile phone, 40% are employed but only 5.7% pay taxes on income. Further, a small subsection of Indians (specially the salaried class) pays a large portion of all personal income tax. In contrast, in the U.S., about 45 per cent of the population pays taxes.


Without any doubt, the 8-crore tax paying Indian community always preferred to invest their savings in tax free investment products. However, the things have changed in the last decade – the government has introduced a host of tax laws to tax/ withdraw tax exemption from most of the tax-free products that were available in the Indian financial market:


  1. Dividends:

    Before 01/04/2020, dividends from shares, mutual funds and ULIPs were tax free in the hands of recipients. However, dividends received during the financial year 2020-21 and onwards are taxable in the hands of the recipients as per normal slab rate.

  2. Employees provident fund:

    Effective 01/04/2022, any interest on an employee’s contribution to EPF/VPF upto INR 2.5 lakhs per year is tax-free and any interest earned on a contribution over and above INR 2.5 lakhs is taxable in the hands of the employees under ‘income from other sources’ at normal slab rates.

  3. Equity/Equity mutual funds:
    Section 112A of the Income Tax Act was introduced in order to levy long term capital gains tax on equity share transfer, equity-oriented funds and business trust units. The tax rate of 10% is applicable on investments in aforesaid products w.e.f. 01/04/2018 subject to a tax-free limit of INR 1 lakh.

  4. Real estate:

    Budget 2023 has put a limit on tax deduction on capital gains through reinvestment in residential house property at Rs 10 cr. Limit on the roll over benefit claimed under section 54 and section 54F of the Income Tax Act will adversely impact the HNIs.

  5. Debt/Gold/International mutual funds:

    In another major move by the government, w.e.f. 01/04/2023, investments in debt mutual funds (<35% equity), gold ETFs/ mutual funds, and mutual funds investing in international securities will be chargeable to tax at normal rate without the benefit of indexation. As of now, they enjoy the benefit of indexation and lower tax rate of 20%.

    How it is going to impact a common man?

    Suppose an investor buys a debt mutual fund for INR 100 and sells for INR 120 after 3 years. If invested before 31/03/2023, indexed cost would have been INR 115 and tax would have been payable on INR 5, that too, 20%. Only, INR 1 went to the government in tax. After 01/04/23, the whole gain of INR 20 will be taxable at slab rate (30%+ in most cases) and therefore, INR 6 will go to the government in tax.

    Corporates and HNIs will be adversely impacted by the change in this law.

  6. Insurance:


    Unit Linked Insurance Plan:     Budget 2021 had proposed to remove the tax-exempt status on the proceeds of ULIPs if the annual premium exceeded INR 2.5 lakh.

    Traditional policies: Budget 2023, in another significant move, proposed to remove the tax-exempt status on the proceeds of traditional insurance plans if the annual premium exceeded INR 5 lakh. However, the change in provision is applicable w.e.f. 01/04/2023 and is not going to impact the policies issued before 01/04/2023.

  7. Cryptocurrencies:

    Profits from sale, swap or spend of any crypto assets are taxed at a rate of 30%. Also, Section 115BBH prohibits offsetting crypto losses against crypto gains, or any other gains or income for that matter.

  8. Market Linked Debentures:

    In a major blow to HNIs, the budget 2023 announced taxation changes to market-linked debentures (MLDs), eliminating the tax advantage enjoyed by these investments. Previously, MLDs were a popular investment choice among high net-worth investors due to the favorable tax treatment of only 10% if held for over 12 months. Now, the tax will be based on investors income tax bracket, which can be as high as 35%.

    Going forward, the investors have limited options that will be totally tax free:

    1. Public Provident Fund: The tenure of PPF is 15 years. But the maximum annual contribution is restricted to INR 1.5 lakh.

    2. Sukanya Samriddhi Yojana: The Sukanya Samriddhi Yojana is a government savings scheme created with the intention to benefit girl child under the initiative called “Beti Bachao – Beti Padhao”

      The maximum tenure of the scheme is 21 years and maximum annual contribution is INR 1.5 lakh.

    3. Tax Free Bonds: NHAI, PFC, REC, IRFC, HUDCO and NABARD bonds are traded in open market but the yields are sub-par (5-6%) viz-a-viz 7.5% on a 10-year government bond.

We strongly believe that India is still an underpenetrated financial market. Complicated as well as unfavorable tax laws will hamper the growth of financial sector in India.

Further, the debt market, which was majorly dependent on debt mutual funds and insurance/pensions funds for market operations will find a tough time in the near future.

Retail investors (directly and through mutual fund investments) have played a significant role in protecting the stock market from aggressive FII selling in the last three years. If not compensated, their interests should have been considered while changing the tax laws.

What may be on cards?

  1. Gold declaration scheme: Gold, along with crude and electronics, is one of the major reasons for forex outflow. Electronics are being manufactured locally through the PLI scheme. India is now a net exporter of mobile phones. To curb high crude imports, EV and hydrogen-based infrastructure is being set up. Another INR 30,000 crore was set aside in Budget for energy transition. To promote digital gold investments, government introduced Sovereign Gold Bonds.

  2. Exit tax on Indians surrendering their citizenship on the lines of the US exit tax: India has lost close to $233B because of 9.3 lac Indians surrendering their citizenship between 2017-21.

  3. ULIP inter scheme switches

Posted on

Inflation vs. Growth – Biggest challenge faced by global central banks

Sixteenth largest bank in the United States of America, Silicon Valley Bank, collapsed last week. It catered to technology startups and venture capital community.

 

The primary reason for the failure can be attributed to the poor risk management policies of the company. The bank suffered a loss of $15billion by holding a portfolio of bonds yielding 1.6% (current yield 5%).

 

We are living in times when the global economies are doing well but the central banks around the world are raising interest rates at a record pace to control the inflation.

 

Why is inflation so important for central banks that they are willing to trade off the growth? Before proceeding further, two universally important relationship needs to be recalled:

Demand/supply and inflation

As evident from the graph above, prices of any product increases when the demand increases or/and the supply falls (& vice versa).

Interest rates and bond value

Market price of a bond reduces when there is an increase in the interest yields by the government (& vice versa). However, face value and interest payout of the bond remain the same throughout the tenure of the bond.

2001-2008: How it all started

 

Post dot com burst, interest rates (federal rates) in the United States went down from 6% to 1%. Everyone started borrowing heavily and a large chunk of low interest loans went towards sub prime mortgages (home loans to low credit score borrowers).

 

As inflation started to move upward, Central Bank of the United States raised interest rates, which went as high as 5% in 2008. Many borrowers could not afford to repay home loan EMIs and therefore, defaulted. As a result of a high number of defaults, 465 banks, including Lehman Brothers and Merrill Lynch failed, starting the Global Financial Crisis.

 

To save the economy, the Central Bank acted swiftly and reduced interest rates to a record low of <1% within a few months.

 

2009-2020: Cheap $

 

Interest rates in United States were kept below 1% for the next 12 years. As a result, the national debt in US increased from $10trillion in 2008 to $31trillion in 2020 (68% of GDP in 2008 to 123% of GDP in 2022). This low cost money was invested across the world, in real estate, startups, shares, bonds etc. Low interest rates have following effects:

 

  1. Businesses are willing to take more risks triggering expansion. Profitability increases because of low cost of loans;

  2. Accelerates growth of the economy – Government prints money at low interest;

  3. Consumers prefer to buy on credit;

  4. Increases asset values (discounting future cash flows at lower rates)

 

2021-Present: The new normal?

 

During COVID, the United States provided $1.9trillion in financial aid to Americans. This accelerated the demand for products when the global supply chain was disrupted resulting in record high inflation (prices of goods rise when demand increases or/and supply falls).

 

However, in late 2021, the US government was of the view that inflation is transitory (Inflation that moves above a steady rate for a short period and then reverts back to normal).

 

Russia-Ukraine war reduced the supply of oil, grain and gas to developed nations- further accelerating the prices. As a result, Inflation in US touched a 40 year high of >9%. The stance of the government changed suddenly and it carried out steepest rate hikes in the history of America. [Interest rate hikes curb the demand for goods/loans which in turn controls the prices (inflation)].

 

However, labour market in US is very strong as extremely aggressive subsidy regime has made America attractive again for manufacturing. Unemployment rate is at 50 year low and only 3.5% of Americans, willing to work, are unemployed. This makes situation even more difficult for the central bank as demand for goods does not fall as per expectation.

 

Indian markets:

 

As interest rates are hiked in United States, the dollar appreciates with respect to other currencies (INR fell from 74 to 84 in last one year).

 

  1. To protect INR from sliding further, the Reserve Bank of India also hiked the interest rates in India (Interest rate parity theory);

  2. Foreign investors withdrew money from emerging markets as investing became costly because of higher interest rates & falling currencies (However, there was no major impact on Indian equities as huge inflows from mutual funds, LIC and Employees provident fund provided cushion).

 

As I write this memo, foreign investors are sitting on $400B of cash, which will be eventually invested across geographies (Just to give you an idea – foreign investors just withdrew $5B from Indian equities – a lot of money will be moving back once the global situation stabilises).

Way ahead: No one knows with certainty

 

Scenario 1: Fed hikes interest rates by another 1-1.5% -> inflation cools down -> fed starts rate cuts later this year/early next year

 

Everyone is expecting as well as wanting this as no one wants to bear the consequences of high interest rates. Even if Fed gives an idea about rate cuts, a bull rally in equities may not be ruled out.

 

Scenario 2: Fed aggresively hikes interest rates going forward:

 

Recession can not be avoided. Money will move from equities to short term bonds. However, Fed will step in (like they did in 2008) and cut interest rates to normalise the situation. But this will take some more time.

 

Either ways, rate cuts are bound to happen.

Portfolio strategy:

 

Debt, as an asset class, has become attractive again. Indian 10 year bond is yielding around 7.4%. It is prudent to lockin the interest rates before they slide.

 

Equity: As valuations moderate, we continue to remain bullish on the Indian equities, considering the fact that India is the fastest growing major economy in the world. Historically, equities have always rewarded the patient.

 

Gold: Allocation should be increased considering the recent price correction.

 

Real estate: as an investment should be avoided considering the fact that interest rates are high. There will be slowdown in demand.

 

However, your personal portfolio should be aligned as per your goals and risk appetite. Please get in touch with your wealth manager in case of any query.

Posted on

Monthly market update & outlook – February’23

India – Coming of age – A report by Government of India’s Invest India:

  • India received $950 billion FDI since 1947, of which $532 billion FDI came in the last 90 months,

  • India added a unicorn every 9 days in 2022,

  • From the start of 2015, India’s GDP rank jumped from 10th to 5th,

  • 2/3th of India’s GDP is driven only by domestic demand,

  • 2nd largest working population of 522 million with median age of 29 years,

  • Services GDP to grow 13X to $20 trillion by 2047,

  • Manufacturing GDP to grow 15X to $6.2 trillion by 2047,

  • Per capita income to grow 10X to $20,000 by 2047,

 

9,000 days from now, India will celebrate the 100th year of independence & India’s per capita GDP will be $20,040 (BCG report). Now multiply that by 1.6 billion Indians. $32 Trillion economy – Deepak Bagla, MD & CEO – Invest India. Watch the full video here:

From the industry leaders:

When investing in equities, always remember:

Indian macro dataflow moderated but remained strong:

  • Manufacturing PMI: Manufacturing PMI moderated to 55.3 in Feb from 55.4 in Jan but remained in expansion zone (>50 points) for the 20th straight month;

  • Services PMI: Reached a 12-year high of 59.4 in Feb (from 57.2 in Jan);

  • GST Collection: Collections of Rs. 1.49 Tn in Feb’23;

  • Credit growth: Credit growth remained elevated in Feb at 16.1% viz-a-viz 10.2% growth in deposits implying high liquidity crunch;

  • Inflation: CPI accelerated to 6.52% YoY in Jan after touching twelve month low in Dec. CPI is above RBI’s tolerance level of 6%;

  • Forex: India’s foreign exchange reserves stood at $562 billion as of March 10;

  • GDP: grew 4.4% YoY for the quarter ended Dec’22;

  • Trade Deficit: narrowed in Jan to USD 17.7 Bn as compared to USD 23.8 Bn in Dec.

     

Key indicators remains robust:

Equities:

  • Domestic equity markets fell for the third straight month as persisting concerns over higher interest rates weighed on the market;

  • FPIs sold Rs. 5,294 cr. of Indian equities in the month of Feb;

  • Mutual Funds SIP inflows remain elevated at Rs. 13,600 cr. for the month of Feb. Net investments in equity through mutual funds surged 25% to Rs. 15,685 cr. as domestic investors remain optimistic about the Indian market;

  • The Indian equities have witnessed a time correction in the last one year (Increase in corporate profits leading to fall in valuations without any major fall in prices). A few percentage fall may make equities attractive for lumpsum investments.

Fixed income:

  • RBI MPC hiked rates by 25bps to 6.5% on February 8, 2023;

  • The 10Y G-Sec traded in a band of 7.28%-7.46% and closed at 7.46% in Feb as compared to 7.34% in Jan;

  • The current curve remains very flat with everything in corporate bonds beyond 1 year up to 15 years is available @7.5-7.65% range.

Outlook:

  • We are likely to face volatile markets for the next 3-6 months as equity markets grapple with central banks focus on calibrating interest rates in the context of slowing demand scenario in 2023;

  • However, we remain constructive on equity markets from a 3 years perspective;

  • India’s growth story is a long term one and will face some volatility from time to time. We remain convinced that the best is yet to come, and advise investors to stay the course and build their portfolio in a disciplined manner.

Disclaimer: The views expressed herein constitute only the opinions/ facts and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. This information is meant for general reading purposes only and is not meant to serve as a professional guide for the readers.

Posted on

Ten key takeaways from the annual letter of the greatest investor in history

Warren Buffet is the chairman & CEO of Berkshire Hathaway. He turned an ailing textile mill into a financial conglomerate.

 

Also known as the Oracle of Omaha, his networth is $108 billion making him the fifth wealthiest person on this planet.

 

 

Since 1965 he has generated an absolute return of 37,87,464% (viz-a-viz 24,708% for S&P500) – outperforming the index by 10% on an annual basis. Today one share of Berkshire Hathaway trades around $ 4,61,705 (a whopping Rs. 4 crore) – up from $19 in 1965.

 

In 11 out of 58 years (19%), stock of Berkshire Hathaway has given negative returns. Still it has managed to generate an annual return of 19.8% in the last 58 years. Every equity investor should accept the fact that volatility will be a part of journey.

Buffet published his annual letter to shareholders on February 25, 2023. Here are the key takeaways from the letter:

 

1. Buy businesses not stocks

 

Our goal in both forms of ownership is to make meaningful investments in businesses with both long-lasting favorable economic characteristics and trustworthy managers. Please note particularly that we own publicly-traded stocks based on our expectations about their long-term business performance, not because we view them as vehicles for adroit purchases and sales. That point is crucial: Charlie and I are not stock-pickers; we are business-pickers.

 

2. Be an investor in world of gamblers

 

The world is full of foolish gamblers, and they will not do as well as the patient investor.

 

3. Ignore short term forecasts

 

Charlie and I plead ignorance and firmly believe that near-term economic and market forecasts are worse than useless.

 

4. Markets are not efficient

 

“Efficient” markets exist only in textbooks. In truth, marketable stocks and bonds are baffling, their behavior usually understandable only in retrospect.

 

5. Think long term

 

The cash dividend we received from Coke in 1994 was $75 million. By 2022, the dividend had increased to $704 million. Berkshire’s purchases of Amex were essentially completed in 1995 and, coincidentally, also cost $1.3 billion. Annual dividends received from this investment have grown from $41 million to $302 million.

 

Don’t focus on the froth of the market. We seek out good long-term investments & stubbornly hold them for a long time!

 

6. Invest in equities for wealth creation

 

Assume, for a moment, I had made a similarly-sized investment mistake in the 1990s, one that flat-lined and simply retained its $1.3 billion value in 2022. (An example would be a high-grade 30-year bond.) That disappointing investment would now represent an insignificant 0.3% of Berkshire’s net worth and would be delivering to us an unchanged $80 million or so of annual income.

 

<Buffet compared 30-year bond returns with the investments in Coke and Amex>:

7. Be ready to accept failures:

 

Over the years, I have made many mistakes…… Along the way, other businesses in which I have invested have died, their products unwanted by the public. The lesson for investors: The weeds wither away in significance as the flowers bloom.

 

Over time, it takes just a few winners to work wonders.

 

8. Avoid leverage

 

There is no such thing as a 100% sure thing when investing. Thus, the use of leverage is dangerous.

 

9. Importance of diversification

 

As for the future, Berkshire will always hold a boatload of cash and U.S. Treasury bills along with a wide array of businesses.

 

10. Be grateful

 

We owe the country no less: America’s dynamism has made a huge contribution to whatever success Berkshire has achieved – a contribution Berkshire will always need. We count on the American Tailwind and, though it has been becalmed from time to time, its propelling force has always returned.

Onesta Capital Ventures is a Multi Family Office based out of Gurugram (India). We aim to provide tailored independent wealth management and other family governance solutions to individuals and corporates.

Download Mobile App

Apple Android
Quick Links
Our Services
Get In Touch

Office Address

207-208, 2nd Floor, Apna Bazar, Gurudwara Road, Gurgaon 122001

Call Us

+91-9810423511

Send us Email

support@onestacapital.in

Facebook Instagram

AMFI Registered Mutual Fund Distributor | ARN-224076 | Initial Date of Registration: 04 March 2022 | Validity: 03 March 2028

Copyright 2022. Onesta Capital Ventures. Disclaimer | Disclosure | Privacy Policy | Terms & Condition