Privatisation of Pension Funds picks up; Reliance ADAG beneftis

In a major boost to pension reforms, that would chalk the path for the future, the government finalized four private asset management companies to manage the funds of the Employees’ Provident Fund Organisation (EPFO), its largest pension fund from September. The chosen four are HSBC AMC, ICICI Prudential AMC, the already shortlisted SBI AMC and a last minute entrant in the group Reliance AMC. The decision ends the 56-year monopoly of the SBI as the sole EPFO fund manager. Around 4.5 cr workers are expected to gain from their asset management expertise on their retirement savings from September 1. The move will also save the fund Rs 2.5 cr per annum in fund management fees. At present, EPFO pays Rs 5 cr to SBI. But the new fund managers have quoted lower fees. While HSBC AMC quoted an asset management fee of 0.00063%, ICICI’s fee was 0.00075%. Both SBI and Reliance Capital quoted 0.01%.

Reliance AMC, was not among the managers shortlisted by the Finance and Investment Committee (FIC) earlier. More so, as SBI scored over Reliance on technical grounds. It was also decided to keep only a minimum three companies were to be finalised to replace SBI. However, Central Board of Trustees of EPFO decoded the rules to appoint four.
The four finalised AMCs will, however, only manage the annual incremental funds of around Rs 30,000 cr. They will also render custodial services for maintaining the previous investments, currently held by SBI. The allocation of fund for the management to the successful bidders, based on the asset management fee, will be decided by the EPFO's finance and investment committee. The funds will however, continue to be managed as per the existing norms, which allow up to 5% equity investment. Currently, EPFO does not invest in the stock market, though there is a proposal to allow the fund to invest up to 10% of its corpus in equity. This plan has been however, intensely resisted by trade union representatives on the CBT.

Tax Saving Fundas !!

Tax planning, these words ring a bell in the minds of an average tax payer only in the months of January-March of every year, where individuals frantically invest in tax saving instruments to save on their hard-earned money to go to taxes. However this is not a good ploy, its more important to start tax planning at the beginning of the new financial year to put finances. For most individuals, financial planning and tax planning are two mutually exclusive exercises. When it comes to tax planning, more often than not, we simply go the traditional way and do the same investments that we did in the earlier years. This should not be the case. One must view tax planning in the same manner as one views long term financial planning. One must also make full use of tax breaks on offer so as to minimize taxes and maximize income.

In India, an individual gets an exemption of Rs.1 lakh from one’s taxable income under Section 80C, if the amount is invested in tax saving instruments. There are no internal caps for any particular tax saving instrument. As far as possible, it is advisable to invest the entire eligible amount. A wide variety of tax saving avenues are available from the equity based ELSS and ULIPs to life insurance, home loans, bank fixed deposits, National Savings Certificates, EPF (Employee Provident Fund), PPF (Public Provident Fund), etc. Investing Rs.1 lakh in a manner that saves both taxes as well as helps one achieve long-term financial objectives is not a difficult exercise. All it requires is some thought in drawing up the best-suited plan and executing the same in a disciplined manner. One must also have a proper mix of instruments depending upon one’s risk profile.

Depending upon the age-profile, at the start of one’s career when the near-term needs are limited, one should consider taking on maximum risk. Thus, allocate a higher portion to equity like ELSS but take care to select the right funds and remember, there is a lock-in of 3 years. A Systematic Investment Plan (SIP) would be beneficial to take advantage of rupee-cost averaging. The allocation can change in favour of low-risk instruments as age advances. Among low risk avenues, first is EPF, which is compulsory for salaried individuals. Next, one should look at PPF, which currently gives 8% tax-free returns but the scheme has a 15-year duration. Regular investment in PPF is advisable to enjoy the benefits of compounding. Here investors must know that the FM has indicated that withdrawals from PPF would be made taxable but details are awaited. As and when, PPF withdrawals become taxable it may no longer be the most preferred option. Bank FDs of 5 years or above which are eligible for tax-benefit under Section 80C may become a better alternative then, as the lock-in period is much shorter. Currently, interest on bank FDs is added to one’s income and is taxable.

Life insurance is also a must in one’s tax-planning. However, policies such as moneyback, endowment etc may not make good investment sense as premiums are high, returns are low, lock-in period is long and surrender value on premature closure is not attractive. One must therefore look at insurance purely for covering risk to life in the form of term policies, which are much cheaper. Owning property is another important tax-planning tool. One can save tax by taking a home loan as interest (upto Rs.1.5 lakh per year under Section 24) and principal repayment (upto Rs.1 lakh per year under Section 80C) carry tax benefits.

Besides investment types, other essential tenets of tax planning are:-
Start investing from April, do not make lump sum savings at the end of the financial year in March.
Make saving a habit (direct monthly debit from one’s salary account could be one way)
Select the right options in terms of security, risk-return trade off and liquidity.

Thus tax planning today is no longer just putting money in some designated options but has become a source of prudent wealth planning.

WTO fiasco : its US fighting India

After inking nuclear deal to encourage nuclear trade between India and the US, both countries are at loggerheads on terms of trade for agricultural items. It’s the second week of the all important World Trade Organisation (WTO) talks at Geneva, already finger pointing and blame game had began. Trade ministers have repeatedly broken up their meeting, while blaming others for the break up. The WTO secretariat is releasing the revised texts reflecting the convergence achieved so far in agricultural goods and industrial products. But the texts also have blank spaces denoting disagreements. The US without naming India and China has accused them of unraveling the talks. Meanwhile, India in its own might has blamed the US of digging in its heels.

A major point of objection for a large number of developing economies, including India and China, is the safeguards against import surges. An effective remedy will have to wait till imports surge by 40% by volume, a trigger they think is too high. To lower cotton subsidies the US wants China to lower import duties. It wants the large developing countries to abolish import duties on automobiles, chemicals and textiles, while itself taking 10 years to lower high duties on items of interest to India and China, that is textiles and garments. Though there is agreement on many issues, unless some of these politically sensitive issues are settled, the talks could be back to where they were.

Meanwhile, India’s Commerce Minister, Kamal Nath, said that, "We have issues on NAMA (non-agricultural market access), we are opposed to anti-concentration, we want to protect our auto sector. We have given nothing and got nothing because nothing is settled yet. "

With just few days to go for the talks to end, time is wearing out and patience is wearing thin. The developing countries say they have yielded a lot, but have got little in return, though these talks were supposed to address their developmental concerns.

However there is still hope for a positive development in the time left. As Commerce Minister Kamal Nath said that, India still hopes make-or-break talks at WTO to salvage a global trade pact will make progress even though he disagreed with last week's compromise.

We will have to wait and watch in the next few days, whether these WTO talks churn out something fruitful, or will it end in a fiasco.

Economic fallout of Trust Vote

Now that government is done with trust vote and markets are about to wind up the sentimental rally, it the time to ask the question will government take tough economic decision as desired by the markets?

The coalition’s new partner SP has much neither much knowledge nor much penchant to interfere in economic policy until unless someone ask them to do it. So, in past four years they were very much against insurance, retail and pensions reform, which communist were insisting. But, in the new context they seem to be more concerned about their economic benefactor, which implies strict no-no to FDI in retail which may benefit Mukesh ambani. Also, petroleum ministry will be mired by all sorts of lobbying.

DMK is happy with its RamSethu bargain and rest like JMM has no clue whatsoever with the kind of reforms will take place. That leaves us with Congress, which is driving the UPA now.

Congress only faces the problem of perception and it matters a lot before elections. The party is already seen a failure in the economic matters concerning “Aam Admi” and its slogan is more or less read as “Congress ka hath NOTE ke sath”. Markets and traders will all like to see every bit of legislation that can benefit the markets get passed on, specially the Pension reform, which will benefit the markets most. A push in the market will also add to Congress’ election coffer. But it is the million dollar question; will Congress face all criticism just before elections to push the markets?