Fixed Income
Investors use debt schemes mainly for tax benefits: Our online Survey results

Moneylife’s online survey on debt mutual funds shows that 65% of the respondents said they invested in these schemes to take advantage of the tax benefit


Moneylife conducted an online survey about how investors viewed Fixed Maturity Plans and Debt Schemes before and after Budget 2014. The focus of the survey was to gauge the views of savers—whether they still find debt mutual fund schemes attractive or not—after the Budget imposed taxes. Out of the 700 responses from members and subscribers, only 527 gave valid responses; the rest either did not invest in mutual funds (MFs) at all or did not complete the questionnaire. We have considered these 527 responses as the sample. Of these, 89% invest in equity schemes and as many as 458 (or 87%) invest in non-equity schemes like debt schemes, leading us to conclude that a high percentage of mutual fund investors would be impacted by the change in tax norms.
Based on their responses, many of them showed that they were knowledgeable about their tax management. Over 85% were aware of the tax advantage enjoyed by FMPs, debt schemes and other non-equity schemes over traditional fixed-income products, before the Budget. As many as 65% said they invested in these schemes to take advantage of the tax benefit.

Our Survey showed that investors use non-equity schemes mainly to avail of the tax benefits.
The taxation of FMPs and debt funds has not been raised. Earlier, it was 10% without indexation or 20% with indexation, whichever is lower. Now, it is only the latter.

A significant percentage of respondents hold units of liquid and debt schemes for a period of one year to three years. As many as 42% of the participants invest in liquid schemes for less than a year and an equal number hold investments in liquid schemes for a period between one year and three years. Just around 13% hold such investments for over three years. Similarly, just about 20% hold debt schemes for over three years, while around 70% stay invested between one year to three years.

When asked if they would invest in FMPs or debt schemes for period less than a year, as many as 65% said they would not; 20% were not sure. This is significant, because this explains three things to us, why investors used FMPs and debt schemes, was taxation the main driver or was it the inherent strength of the product and finally, whether they will invest in such schemes in the future. See the chart below.

If Investors pull money out from FMPs and Debt Schemes where will they put this money? On choosing alternatives to debt schemes and FMPs for an investment period less than a year, as many as 41% said that they would choose banks FDs. Surprisingly, 23% said they would invest in balanced mutual fund schemes, despite their high equity component. Many participants seemed to be aware of arbitrage schemes; 23% mentioned that they would invest in these schemes as well. Investing in corporate FDs and corporate bonds were picked as alternative options to debt mutual fund schemes by 21% and 14% of the respondents respectively. Just about 10% said they will continue to invest in FMPs and debt schemes. Hybrid schemes, such as MIPs found interest from just 5% of the participants.



Is the RBI’s Trade Receivables Discounting System-TReDS for MSMEs any good?

The system lacks a basic appreciation of the role of receivables financing and the way it is practised


Last month, the Reserve Bank of India (RBI) released its Draft Guidelines for setting up of and operating a “Trade Receivables Discounting System (TReDS)” and sought feedback on it. The aim of TReDS is to set up and operate an institutional mechanism to facilitate financing of trade receivables of micro, small and medium enterprises (MSMEs) from corporate buyers through multiple financers. The need for setting up such a system arises from the fact that MSMEs, despite playing a very important role in the country's economy, continue to face constraints in obtaining adequate finance, particularly in terms of their ability to convert their trade receivables into liquid funds.


The idea of setting up the TReDS is conceptually sound and its successful implementation would enable, (a) faster monetisation of receivables, meaning easier availability of credit; (b) lowering of costs (both operational as well as risk premium); (c) building of a database which would make credit risk (arising from payment of receivables) to be treated as a stochastic process (on the lines of credit cards), further reducing the costs, effort and time required for making detailed appraisal / monitoring / recovery.


However, the way the scheme is presently formulated and presented, it gives the impression that it lacks a basic appreciation of the role of receivables financing and the way it is practised. Any system would be more useful, if it takes into account the ground realities of receivables financing in India. Moreover, for a robust system to be built and operated successfully, costs would be high and would be justified only if large volumes can be built. Restricting its use for financing sales by MSMEs to large corporates might not result in generating required volumes. Moreover, this segment is a very small segment of the overall market and is already well serviced by existing banks. Therefore, it would fail in achieving its basic objective of helping those MSMEs, for whom availability of credit is a major problem.


Similarly, no reason has been given for excluding sales by one large corporate to another. It has also not done for financing receivables arising from sales to a buyer, who is a non-corporate (say another MSME) from being hosted on the same system. Excluding such players from operating on the platform would be counter-productive, as it would reduce generation of volume of transactions.


Another area where the system needs strengthening, is by making it explicit that receivables eligible for financing would cover sales of both goods and services. With more than 65% of the Indian economy comprising services, making this clarification is critical for allowing this large component of the economy to access institutional finance. Services could mean processing, jobs, supply of contract labour, advertising agency fees etc. This would open the door for “accommodation” receivables being financed – suitable mitigants can and should be designed. Similarly there is no reason to restrict it to receivables which are “without recourse” to seller? For a more vibrant market and price discovery to develop, both “with recourse” and “without recourse” should be eligible for financing and should be hosted on the proposed platform.


The draft guidelines seek, inter alia, to build safeguards against the risk of double financing, diversion of working capital funds and dilution of control over security. The proposed solution is a Master agreement between the MSME sellers and the TReDS, and an assignment agreement to be executed between the MSME seller and the financer. A simpler method would be to insist that proceeds of receivables financed should in all cases be payable only to the working capital bank account of the seller. Even in a case where the seller is not availing of any working capital credit limits from any bank, proceeds should be credited to the account identified in the one-time agreement between TReDs and the seller.


Since the law and practice of discounting “Bills of Exchange” is well established and accepted (including stamping), it would be simpler if the receivables being financed be evidenced by the equivalent of an electronic, dematerialised, version of the Bill of Exchange and all financing be done on this basis. There should be no confusion between “invoice” financing and “Bill of exchange” financing. Suitable changes in the Negotiable Instruments Act (NI Act) 1881 should be made, if required. This will also not require any assignments/ assignment agreements.


It is also important to explicitly acknowledge the ground reality, that whenever sellers are able to access finer rates due to implicit or explicit support of the buyer (as envisaged by the proposed system), the buyer invariably negotiates for finer pricing from the seller. As such, some of the benefits of lower costs/availability of liquidity will be passed on, to the buyer as well.


This initiative of RBI deserves the support of all concerned parties like banks, NBFCs, industry associations and the government, for its speedy resolution and implementation.



Bhuvarahan Seshadri

2 years ago

A welcome article on the subject by Sushil Prasad. Thanks for enlightening me.

Sensex, Nifty headed higher – Thursday closing report

As long as the Nifty holds above today’s low, we may see it rising further


We had mentioned on Wednesday that the NSE's CNX Nifty has to stay above 7,700 for the upmove to continue.  On Thursday the benchmark traded above this level for the entire trading session. Over the past four days, S&P BSE Sensex and Nifty have gained 774 points and 223 points, respectively. The market remains shut on Friday on account of Independence Day. After hitting the day’s low in the morning, the indices immediately surged and made a gradual move upward. The positive closing of the US indices on Wednesday added to the optimism on the bourses. Weaker-than-expected US retail sales data reinforced the view that the Federal Reserve won't rush to raise rates.

Sensex opened at 25,948 and hit a low of 25,945 after which it rose 100 points and moved sideways. In the last hour of the session it hit a high at 26,135. Nifty opened at 7,756 and moved from the level of  7,739 to the level of 7,797. Sensex closed at 26,103 (up 184 points or 0.71%) while the Nifty closed 7,792 (up 52 points or0.67%).


The NSE recorded a volume of 90.30 crore shares. India VIX fell 3.94% to close at 13.2200.

Market today awaited data on inflation based on the wholesale price index (WPI) for July 2014. The annual rate of inflation based on monthly WPI eased to 5.19% for July 2014, from 5.43% for June 2014. Meanwhile, the government revised upwards WPI inflation for May 2014 to 6.18% from 6.01% reported earlier.

The Indian government has reportedly sent the bill to liberalise the insurance sector to a parliament committee today after opposition parties opposed the legislation in the upper house, where it has a majority.

JSW Steel (8.65%) was the top gainer in the ‘A’ group on the BSE. It was in the news for the conclusion of the deal between Italian steelmaker Lucchini and the company.


However, it has said that it was yet to finalise any deal.

Bhushan Steel (4.97%) was the top loser in the ‘A’ group on the BSE. It has posted weak June 2014 quarter results, a net loss of Rs141.63 crore for the quarter June 2014, as compared to a net profit of Rs76.26 crore for the quarter ended June 2013. However, the sales for the relevant period increased from Rs2,490.86 crore to Rs2,801.68 crore.

HDFC (1.44%) was among the top two losers in the Sensex 30 stock. It hit its 52-week high today at Rs1,149.90 on the BSE.

US indices closed in the green on Wednesday. Sales at US retailers were unchanged in July, the weakest result in six months, as sales fell at auto dealers, but rose at gas stations and food and beverage stores, according to government data released on Wednesday.


Separately, business inventories rose in June by more than expected.

Asian indices showed a mixed performance. Among the trading Asian indices, Nikkei 225 (0.66%) was the top gainer while Shanghai Composite (0.74%) was the top loser.

European indices were trading higher. US Futures too were marginally in the green.

GDP in Germany, the currency block's largest economy, fell 0.2% from the first quarter, when it rose a revised 0.7%, the Federal Statistics Office in Wiesbaden said today. French GDP stagnated in the three months through June, the national statistics office Insee said today in a statement.


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