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How about getting bonus without having to pay up any tax on it? Sounds interesting. Wondering whether it can be possible? Perhaps you have not heard of Bonus stripping.

Bonus stripping is buying a financial asset like shares/mutual fund unit on which bonus is declared before the record date of declaration of bonus to the investors and later selling the original quantity of financial asset bought, to book a loss for income tax purposes.

So legally and technically you would be booking a loss whereas its a major gain. Quite legal of course, it can be called tax avoidance or deferring tax payment.

For instance lets say an individual buys 10,000 units of a fund at a net asset value of Rs 10 per unit for a total amount of Rs 1,00,000. With the bonus announcement of 1:1 on the fund the NAV would go up to Rs 11 per unit.

After bonus the individual would be having a total of 20,000 units and the NAV of the fund post-bonus would drop to Rs 5.50 per unit which means his total amount would be Rs 1,10,000. After bonus you would be having a total of 20,000 units and the NAV of the fund post-bonus would drop to Rs 5.50 per unit which means the total amount would be Rs 1,10,000. On the sale of the original 10,000 units, you would suffer a short term capital loss, as the mutual fund units are held for a period not exceeding one year.

Hence for income tax purposes you will be registering a short term loss but financially speaking you have made a gain.

Moving of fund managers are a common occurrence just as it would in any other industry. While it is a fact that the key skills of stock picking are unique and individualistic you need not panic as soon as your fund manager makes an exit.

There are a number of factors that influence the performance of your fund. These include your funds exposure to risk, the sector it is operating in, the political scenario etc. Besides know that just as no amount of research or study can help one accurately predict the market sentiments no individual howsoever well he studies the scrips can be right all times.

There are times when inspite of strong fundamentals a particular scrip takes a beating and vice versa. Funds have risk filters set in order to limit exposure and ensure safety apart from the investment do’s and don’ts laid down

Monitor the performance of your fund on a regular basis and compare between funds of the same category. If you fund there is a drastic fall it may be better to ship out.

You wish you knew the right time to invest in the market. Who would not want to make handsome gains and exit the market making a neat profit in the bargain. But even experts have not been successful in timing the market accurately. Yet, there are ways you can invest wisely with minimal risk exposure. How? Through Systematic Investment Planning.

The systematic Investment Planning method allows you to regularly set aside a given amount on a monthly or a quarterly basis towards an investment avenue of your choice. It could be bonds, mutual funds, debt or any other. Such systematic planning is especially beneficial for those who lack the financial acumen to keep a track of the NAVs to enter the market at the right time. Regularly setting aside a sum on a monthly basis would mean buying certain units of lets say a fund at varying NAVs since the volatility in stock market is high.

For instance, if the NAV has been around Rs 8 for a unit it may fluctuate in the next month and rest at Rs 12. Further on the NAV may be even lower at Rs 5 or it may go up at Rs 13. At each of these fluctuation levels you regularly purchase units and end up buying the units at a reasonable cost thanks to the power of Rupee Cost Averaging. With rupee cost averaging the investor is able to buy units at a lower price compared to the average price of the unit. So what are the benefits of systematic investment planning?

Systematic Investment Planning can take care of inflation since it acts as a cushion absorbing the ups and downs of rising prices. Through SIP the investor gets the benefits of compounding besides the convenience it offers. Also he need not worry about timing the market.

Not many of us give it a thought and rarely is it of concern to most when planning an investment. But, whether it is a small investment you are making or a huge one you must know your Investment horizon before you take the plunge.

But what is Investment horizon all about?

Investment horizon is the time period you would like your investments to stay put. This could be short or long depending on your goals, your age, your risk profile, liquidity requirement.

Are you around 25 years? You can afford to try high-risk category investments at this juncture. Growth funds equities are for you. Higher the risk higher will be the returns. Besides equities outperform other investments in the long run. Opt for a long-term investment horizon.

Are you around 35 years? What are your objectives? Are you looking at a moderate investment horizon of around 3-5 years? Consider mutual funds. If you would like to try your luck with equities pick some diversified equity funds and for the safety factor bonds and postal savings would do.

Nearing retirement? Forget equities now. You may have already gained handsomely from equities in the past. Considering anymore risk is not recommended. Pension plans, PPF, annuities, pure debt are your bet.

Has the turbulent market taken its toll on your investments? How about being a winner at all times be it the highs or the lows. How about gaining heavily when the market is at its peak as well as when it has tanked out. Unbelievable isn’t it? But you definitely can be an all-time gainer. How? Through asset allocation.

Asset allocation or asset mix in simple terms means diversifying your investment portfolio in such a manner that the negative impact of your investment in a particular sector of funds is offset by the positive impact in another with the result that the overall value of your investments does not show a negative growth.

It is the proportion of equities, bonds, stocks, etc you hold in your portfolio. Financial experts opine that as a prudent investor your portfolio must consist of an assorted mix of investments that can help you hold your own in case of turbulent times.

More investment avenues means more risk: Unlike the past, in today’s complex financial investment market there are several avenues to invest your money and multiply returns. And each of them has its inherent risks too. While some may aim at quickly maximizing returns for instance stock investments, for others it is safety of principal that is of prime concern.

In such a situation it would be foolish to invest all your money in a single investment avenue since a loss in that sector may mean a huge colossal loss. So as the famous saying goes- Do not ever put all your eggs in one basket. In other words even if you plan to invest in fixed deposits – say an amount of Rs 30,000 it makes more sense to spread out your investment into small amounts of Rs 10,000 rather than invest the entire lot as a single deposit.

Have a Diversified investment portfolio: To maximize your returns at the same time bring down your risk, the ideal solution would be to have a diversified investment portfolio. That way you will not have to worry about any given asset class, earning negative returns since your risk will be spread.

Step I: If you are at the prime of life say around 22 years you could consider investing a major amount of your money in stocks and the rest spread out in mutual funds and bonds. At that age you are prone to be more enthusiastic and have the drive for quick returns. That way as time passes you would have made windfall gains through 70 per cent of investment in stocks and the balance locked up in more secure investments. Given a thought to insurance? Buy insurance now. It makes sense to buy insurance at the earliest. Not only for tax purposes, but ascertain your requirements and buy accordingly but why complain if tax benefits come along. Given a thought to Retirement Planning

Step II: Over a period of time you may enter family life. Having your own family and providing for your children’s comforts will take priority. And in no way can you compromise. Expenditure mounts and the amount of risk you can take with your investment in stocks may come down to a certain extent. By this time you have already gained a tidy sum by investing in stocks and those windfall gains you have made will come in handy. Besides you would also have covered yourself against any and every risk sufficiently through insurance.

There will also be a rise in your salaried income. So you may choose to have a more balanced portfolio with investments in select equities only. Also you may have timed your investment returns to match the requirements of your family for a lumpsum at certain stages of life.

Through the right asset allocation mix you will be a better gainer than those who have been banking only on equities or on a single asset lot to maximise their returns.

The strategy is so simple that it almost appears unbelievable. All you need to do is set up SIPs in different types of funds based on your desired asset allocation. A young investor with an aggressive risk appetite can invest in a clutch of diversified equity funds to save for his golden years. As he grows older, and his risk appetite wanes, he can reduce the exposure to equities. As a middle-aged person, he can opt for less volatile balanced funds.

The problem is that this does not happen automatically. The investor needs to shift his investments from high-risk options to low risk avenues himself. A few mutual funds offer schemes that are based on the risk appetite of the buyer. The Advisor Series from ICICI Prudential Mutual Fund has five funds ranging from the Very Aggressive fund for young investors to the Very Cautious scheme for older buyers. “These funds can be used to save for any goal, including retirement planning,” says Chaitanya Pande, head of fixed income, ICICI Prudential Mutual Fund. Similarly, the Life Stage Funds of Funds from Franklin Templeton Mutual Fund offers five schemes starting from the 20s Plan right up to the 50s Plus Plan.

But as we have pointed out, the investor needs to take a call on the right time to shift. Not everybody has the discipline or understanding to do this when required. In developed markets, there are mutual funds that take into account the age of the investor and automatically reduce the exposure to risky assets. These target date funds (also known as lifecycle funds) progressively shift money out of equities into debt.

A similar arrangement is available in the New Pension Scheme (NPS). An investor in the NPS can choose his investment mix in equities (E class), corporate bonds (C class) and the ultra-safe government securities (G class) funds. But there is a 50% ceiling on investments in E class funds.

However, if the investor does not indicate his desired allocation, his corpus is put into the default option that is governed by his age. Till the age of 35 years, 50% of his corpus will be in the E class fund and the remaining will be split between C class and G class funds. After that, the fund will reduce the exposure to stocks and bonds. Every year 2% of the assets in the equity fund and 1% of the assets in bonds will be shifted to the gilt fund. In five years, by the time he is 40, the equity exposure of his NPS corpus would be down to 40%.

By the time he is 55, he would have only 10% in equities, 10% in bonds and 80% locked in the safety of government securities (see table). “It is an excellent arrangement that aligns the portfolio risk with the investor’s risk appetite,” says Dhirendra Kumar, CEO of Value Research. It is especially beneficial for lay investors who don’t understand or want to track their investments every closely. The only glitch is the assumption that everyone in the same age will have the same risk appetite. The ability to take risk is dependent on several factors and varies for each individual.

A young person with a low income and several dependants may have a lower capacity for risk than someone in his 50s who is earning well and has fewer liabilities. Some experts feel that the NPS is far too conservative in its approach and, therefore, not suited to someone with a high risk appetite. “Why should someone in his 30s not be allowed to put more than 50% in equities?” asks PV Subramanyam, financial trainer with Iris.

But he points out that it is far better than the traditional pension options which invested 100% in debt. Also, these schemes are funds of funds (FoF) and invest in a mix of equity and debt plans from the fund house. A typical FoF will have 5-6 schemes in its portfolio. This dual layer adds to the costs of the fund. The investor is charged the expense ratio of the FoF as well as the schemes it holds. “Low costs are imperative when you are looking at a long-term investment of 15-20 years,” says Dhirendra Kumar. Besides, FoFs are not eligible for the tax benefits that equity and balanced funds enjoy. The long-term gains are not tax-free even though your fund invested a large chunk in equities. This is a major drawback because the tax could erode your returns.

What�s there for small investors in the Rajiv Gandhi Equity Scheme?

Paying tax is a big concern for Indians and this new deduction will certainly be a big incentive to enter the market. Right now there are about 3.5 crore equity investors in India, but over 10 crore people earn more than Rs 2 lakh a year. My guess is that many of them will want to avail of this new exemption after they exhaust their Section 80C limit. They may not invest Rs 50,000, maybe Rs 10,000-20,000. Even so, this will bring long-term money into the market. It is a step in the right direction because it will give a fillip to equity investing. Besides, Rs 50,000 a year is a sizeable limit and will add depth to a market that is on FII steroids.

Should mutual funds be included?

Mutual funds should certainly be a part of this because a fund manager can handle the risk much better than a first-time investor in equities. There are indications that the scheme will be confined to the top 100 stocks but I don�t think this is enough of a safeguard for small investors. Satyam Computer was an index-based stock and look what happened. Institutional investors had started exiting Satyam much before the scam broke out. Similarly, they got rid of Unitech much before the writing was on the wall. However, small investors got stuck with these stocks. Mind you, both Satyam and Unitech were in the top 100 stocks by market capitalisation. If a small investor is left holding such scrips and cannot get out before the lock-in period, he will be ruined.

What is the way out?

The government should open the scheme to mutual funds. Let mutual funds manage it and diversify the risk for the investor. Remember, these are first-time investors, who may not understand the risks involved. An investment of Rs 50,000 is a big sum for a person earning Rs 5 lakh a year-it�s more than the money he earns in a month. Mutual funds will allow him to invest systematically through SIPs, which will reduce his risk.

Peerless Mutual Fund focuses on tier II and tier III towns. What has been your experience there?

The concerns of the first-time investor are no different from those of the repeat investor. The risk-reward ratio is the uppermost concern. They compare the returns with those of fixed deposits and real estate. The memory of the Indian investor is very short and his investment strategy is sharply focused on certainty of returns. He will prefer to lock in at 9% assured returns offered on a fixed deposit for five years even though equity investments would yield a better return.

How difficult it is to convince a first-time investor to put money in stocks?

It is an uphill task. You have to show them charts of SIP returns, tell them the India growth story and explain why stocks will do well in the long term. In smaller towns, real estate is the preferred investment choice, followed by gold and fixed deposits. People don�t understand stocks as an asset class, so it is very difficult to convince them to invest in equity mutual funds. In large cities, people are familiar with stocks and the acceptance ratio is far higher.

Are the KYC norms a major hurdle in smaller towns?

They are because a lot of people don�t have the basic documentation in place. Investors in tier II cities have PAN cards but in tier II towns, many don�t have these. They have either not applied or may have applied but the issuance has become an operational hazard.

Have the unified KYC norms been of any help?

They have, but I will be happier if all the regulators come together and have a common KYC platform. I believe this is happening and will ease the investment process for the customer as well as lower the costs for the industry.

Capital protection funds are back. ICICI Prudential Mutual Fund and Tata Mutual Fund have recently launched these schemes. These funds are coming at the right time when volatility is the order of the day on Dalal Street, and many investors are desperate to preserve their capital. Look at these numbers: S&P CNX Nifty returned 2.9% in the past five years, making investors revisit their assumptions of long-term investing.

A weak rupee and the credit crisis in Europe have made it even more difficult to guess the future course of the market. This is where the capital protection schemes enter the scene. “Capital protection oriented funds make good investment option in volatile markets. The fixed income portfolio ensures that investors get their money back at maturity and the equity allocation brings the return kicker,” says Chaitanya Pande, head- fixed income, ICICI Prudential AMC, explaining the rationale behind the schemes.

According to CRISIL default study 2011, from 1988 to 2011, no AAA-rated instrument defaulted over one-, two- or three-year period. This makes a strong case that the money comes back to investors at the end of the third year. Rest 20% of money is invested in equities. If over three years this investment appreciates 20%, the portfolio value becomes 124 (fixed income portfolio worth 100 plus equity portfolio of 24) over three years, a CAGR of 7.43%. If equity investment doubles over the three-year period, investors take home 40% point-to-point return, or a CAGR of 11.87%. As the tenure of the scheme increases, allocation to equities also goes up as less money is required to ensure the capital at the end of the tenure, compared to a scheme with a shorter tenure.

Should you invest?

“Markets have been range bound with downward bias for the past couple of years. Most of the negatives are already in the price. The attractive valuations of Indian equities make good investment case with a three-year view,” says Abhinav Angirish, managing director, Investonline, an online mutual fund distribution entity. If you are keen on investing in stocks, but really worried about the downside risk, you can consider investing in a capital protection oriented fund. “These funds make sense for risk-averse investors looking for options to invest in equities, provided they are willing to remain invested throughout the term of the scheme,” adds Abhinav Angirish.

The Downside

But capital protection oriented funds have some disadvantages as well. “Being a closed-ended scheme, it is listed on the stock exchange and there is little chance that you will get to exit at fair value because of the poor liquidity of most such products listed on the exchanges,” says Dhruva Raj Chatterji, senior research analyst at Morningstar India. The second big disadvantage is that these funds are taxed like debt mutual funds. Long-term capital gains are taxed at 10.3% without indexation or 20.6% with indexation, whichever is lower. Also, according to mutual fund experts, the performance of these schemes has been a mixed bag. There are 45 capital protection oriented funds across 11 fund houses listed on the stock exchanges.

Do it yourself

“If you do it yourself, you need not sacrifice liquidity all together and can bring down the tax impact, too,” says a wealth manager. You can pick up a combination of three-year fixed maturity plan from a reputed fund house and an equity fund with good track record. Decide your extent of investment in the FMP by looking at the prevailing yields for that tenure and invest the rest in equities.

For example, in case of the three-year tenure, if the yield for the three-year paper is around 8%, you should put 80% of your corpus in FMP. For 7% and 9% the share of FMP should be 82% and 77% in your money. Rest of the money goes into an equity fund. Here the tax impact will be lower than CPOF, but money invested in the FMP won�t be liquid. If you are in the lowest tax bracket, you can also consider investing in a combination of a bank fixed deposit and an equity fund. But if you don�t have time to zero in on the right schemes and find mathematics difficult, opt for a CPOF.