Fema Relating To Non-Residents
Tax Incentives For Non-Residents
Other Important Matters
Frequently Asked Questions

Investments into Mutual Funds

It is strongly advised to make investments in equity markets through Mutual Fund. Historically, investments in equity have provided highest returns on a long term basis.
Almost everyone can buy mutual funds. Even for a sum of Rs 1,000/- an investor can invest in a mutual fund. For an average investor, it is a difficult task to decide what securities to buy, how much to buy and when to sell. By buying a mutual fund, you employ a professional fund manager who manages your money. This is the person who decides what to buy for you, when to buy it and when to sell. The fund manager takes these decisions after doing adequate research on the economy, industries and companies, before buying stocks or bonds. With an investment of Rs 5000/-, you can buy stocks in some of the top Indian companies through a mutual fund, which may not be possible to do as an individual investor.

Diversified Equity Mutual Funds as on 30-11-2009
    Return Return
SN. Name 5 Years 10 Years
Size in Crores
1 DSP BR Equity 31.70% 21.70%
2 Franklin India Bluechip 24.70% 23.70%
3 Franklin India Prima 19.20% 23.20%
4 HDFC Equity 30.00% 26.60%
5 HDFC Top 200 30.30% 25.50%
6 Kotak 30 26.80% 19.30%
7 SBI Magnum Contra 32.80% 27.00%
8 SBI Magnum Multiplier Plus 30.20% 14.40%
9 Reliance Growth 32.50% 30.10%
10 Reliance Vision 26.20% 28.10%
11 Sundram BNP Paribas Select Midcap 31.60% NA
12 UTI ServicesIndustries 16.30% 24.40%
Above are the returns compunded annually

Liquidity Unlike several other forms of savings like the Public Provident Fund or National Savings Scheme, you can withdraw your money from a mutual fund on immediate basis.

Tax Benefits Mutual funds have historically been more efficient from the tax point of view. A debt fund pays a dividend distribution tax of 12.5 per cent before distributing dividend to an individual investor or an HUF, whereas it is 20 per cent for all other entities. There is no dividend tax on dividends from an equity fund for individual investor.

Ground Rules for Investing

Develop a Plan: For your short-term goals, make sure you are not taking adequate risks. Invest money that you'll need in the next two years to five years in cash and short-term bonds.
Keep It Simple: To keep fund selection simple, stick with a diversified equity funds of well-established fund families. Equities prove to be the best performing long-term asset class.
Invest Regularly: Investing a little bit of money each month is the surest way to reduce the risk of investing, because you lessen the possibility of buying at the market top. Also, no one is smart enough to anticipate all the moves, whether up or down.
Start Early: It is not the "market timing" but time in the market that matters. Power of compounding will turn things in your favour.

Systematic Investment Planning

Systematic is the word that describes you. Organised, well-managed and planned in all your activities. Whether it is earning, saving or spending, everything is done in a methodical manner. Well… err… except for investing. But then you are not to blame. You never had enough money. Or, sometimes it was shortage of time. If this is the case, then it's time you had a look at the systematic investment plan (SIP) of mutual funds. A SIP is nothing but a planned investment programme, which takes a small sum of money from you and invests it in a mutual fund at regular intervals. This simple programme has a number of advantages:-

  1. First, if saving is an arduous task for you, then SIP can do this for you.
  2. Money deducted from your account (through post-dated cheques / ECS) and invested is money you cannot spend. And a rupee saved is a rupee earned.
  3. Even if each investment is small, over a period of time this can add up to a neat kitty. And the power of compounding can do wonders. In due course, a small amount can grow into a significant amount.
  4. More importantly, an SIP does away with the need or effort to time the market. When the market is falling you may feel that it may decline further and that you should wait a while. Often stock markets make a recovery before you notice and the opportunity is lost. When markets are rising it is scary to invest money. Isn't it better that you wait for a correction and then make an investment? But if the correction doesn't come about, then even this opportunity is missed. And if markets are going nowhere, then what is the point in investing at all?
So, trying to find out which is the best time to invest can be a tough task. And that's why it is said that timing the market is futile. If one could take advantage of the ups and downs that markets encounter, it would be great. And this is where SIP fits in. By the process of regular investing one gets to invest in the highs as well as the lows, and this helps in averaging out the volatility in the market.

The STP Advantage

What is an STP? Through an STP, the investor can transfer parts of a lump sum from one MF scheme to another, within the same fund house, at regular intervals. Such a transfer averages the cost of purchase and thus mitigates market-related risks. The investor can first park his funds in a liquid or floating rate debt fund, and then get it transferred to the scheme (usually equity or balanced) of his choice at regular intervals.

Who needs an STP? STP works well for investors who have a large sum of money to invest in equity markets, but do not have the skill or information to judge market movements and time their entry into the market.

Why should you invest through an STP? STP allows averaging of the cost even as your money earns more returns while in the waiting mode. Periodic transfer of money to an equity fund would mean that the investor gets more units when the markets are down and the net asset value (NAV) is low and fewer units when markets are high. Therefore, the STP route will help the investor average the cost of acquisition of units. Thus, in effect, an STP follows the same approach as a systematic investment plan (SIP), which many of us are more familiar with, giving the benefit of cost averaging. The major difference between the two is that STP works better for lump sum investments. Of course, STP hands you another advantage. The money parked in liquid or floating rate funds earn a higher return, currently as much as 6-7 per cent per annum. This is much higher than the 3.5 per cent per cent per annum that you would get from a savings account if you were to wait for the market to calm down. Last, but not the least, STPs provide the flexibility of reviewing the amount to be transferred and the intervals at which the transfer takes place.

Where should the funds be parked and where should it be transferred? Generally, investors choose to park their money in a liquid or floating fund as the NAVs of these do not fluctuate much. Opt for the dividend reinvestment option in liquid funds. Even though dividend distribution tax has been raised to 28.32 per cent, up from 14.03 per cent, it still works out better for those in the 30 per cent tax slab. However, even before you determine the parking slot, or the liquid or floating rate fund, you need to zero down on the ultimate destination of the funds: the equity fund. This is important since this will determine the fund house you will choose for both the schemes. Of course, fund houses also offer STP combinations involving lower risk options such as balanced funds. The equity fund you choose for the STP could already be part of your portfolio or could be one that you are seeking to invest in.

Utility to the fore STP’s utility comes to the fore especially in volatile market conditions such as those today. They would have worked well in the past too but unfortunately, they didn’t exist then. If we assume that a person invested Rs 1 lakh per month in index funds from January to December 1993, a period when markets were volatile, he would have seen a growth of 39.70 per cent in his investments. The Sensex, on the other hand, gained only about 36 per cent in that period. But, the STP does not work as well in a market steadily going up. The return on STPs (index funds) was 24 per cent between January and December 2006 (when the markets went up steadily except for a couple of months in between) as against the Sensex growth of 48 per cent. The periodicity of the transfer is an important determinant, too. A monthly transfer imparts greater cost averaging benefits compared to a quarterly transfer since it captures greater market movements.


Dipping refers to Transfer of funds from a debt scheme to equity or balance scheme on a day when the market has take a considerable dip (i.e., fallen drastically). This can be done only if you have sufficient balance in debt fund & transfer the same to equity plan by doing the online transaction before the cut off time (which is 3.00 PM at present). This way you shall be buying more units on the same day’s NAV which shall be lower due to fall in the market. Dipping can be done from your STP also. The other advantage is that you may do the dipping into the same or, any different scheme you wish to within the same fund house.

Investments into Bonds

If the investor is quite risk averse, and does not wish to make investment into equity market in any way what so ever, then he has an option to purchase the bonds of banks / Psu’s from the secondary market. The returns on the same would be better then what is offered on the bank’s fixed deposits. Moreover, there are other tax related benefits as well. The bonds normally carries AAA rating by 2 or more credit rating agencies & carries fixed annual compounded returns till maturity. Kindly contact for more details.

December 2009.