Not Making the MOSt of it

Motilal Oswal Mutual Fund’s first product will be an exchange-traded fund. It has three major...

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Is an eighth straight day of rally likely?

The stock markets have rallied strongly for the past seven consecutive days. How will the markets perform today? We look at similar historical patterns to get a picture

The 30-share BSE Sensex has been on a roll for the past seven days. The Sensex has surged 6% to 17,617 on 17 June 2010 from 16,617 recorded on 8 June 2010. The index has been rising continuously over these past six days. Will this rally continue or is it time for the index to shed some of its gains?

Moneylife did a study of the past performance of the Sensex when the index had reported similar growth for a span of seven days. We found some interesting patterns in the data.

We looked at Sensex data from 1 January 1991 up to yesterday. We found that during this period of 20 years, there have been 33 instances of a sustained rally in the Sensex for seven straight days. One of these was on 2 March 1992 when the Sensex went up 10% two days after Dr Manmohan Singh presented a Budget that sent the market on fire. Big Bull Harshad Mehta was on the rampage at that time, which two months later led to the Securities Scam. 

What happened on the eighth day in these 33 cases? In 18 instances, the subsequent day has recorded a continuation in the Sensex rally. A 55% positive outcome (18 out of 33) is not significant, but a pointer nonetheless. On these occasions, the Sensex has risen by an average of 1.52%. The index has seen a maximum gain of 10% and a minimum gain of 0.01%.

It should also be noted that, on several occasions, the Sensex has faltered and failed to carry on the momentum on to the sixth day. In the 13 instances when the Sensex has actually reversed its trend following a five-week rally, it has averaged a drop of 2.04%, with a maximum fall of 5.71%.

In case the Sensex follows the overall trend and continues its momentum, what can you expect on the subsequent day (ninth day)? Out of the 18 instances when the index has rallied for eight straight days, it has carried on its growth on to the ninth day 11 times. This translates into a positive outcome of 61%. Thus, history appears to be mildly in favour of the index to stay in positive territory for the coming couple of days.

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Will tax-free NPS deal a blow to the ailing mutual fund industry?

Now that final withdrawals from savings schemes like NPS will become completely tax-free, they could potentially compete with the mutual fund industry

With the government proposing a long-awaited move to free long-term savings products from tax liability, schemes like the government's own baby the New Pension Scheme will potentially make life even harder for equity-linked mutual funds, which are likely to come under long-term capital gains tax.

The NPS currently comes in two flavours, a Tier-I account where savings for retirement are contributed into a non-withdrawable account, and a Tier-II account-a voluntary savings account from which you are free to withdraw your savings whenever you wish. If the proposals in the revised Direct Tax Code (DTC) are implemented, withdrawals from a Tier-II NPS account would effectively be free from the burden of tax. This would allow investors to withdraw amounts from their NPS account to meet contingencies without worrying about the tax implications.

This is where the equity schemes of mutual funds will perhaps take a hit. The government has proposed to introduce capital gains tax on sale of shares held for more than a year. This would dampen the return expectations of mutual fund investors to that extent. In doing so, the move could also make investors find more favour with products like the NPS. If the proposals in the reworked consultative paper of the DTC are implemented, will the wheels come off the struggling mutual fund industry?

A certified financial planner made his worries about the possible fallout on the mutual fund industry quite clear. "If constant withdrawals from Tier-II accounts are permitted and allowed to be exempted from tax, it would have a negative impact on the mutual fund industry. The NPS will essentially come in direct competition with mutual funds. It will be a final nail in the coffin for this ailing industry."

The pension regulator, Pension Fund Regulatory and Development Authority (PFRDA), had been calling for this tax exemption for a long time. The NPS has been slow to take off. Now that the boost has finally come, the regulator is hopeful of a turnaround in fortunes for the nascent pension scheme. PFRDA's official spokesperson said, "From our interaction with the PoPs (points of presence), we learnt that the EET status was one of the biggest roadblocks in the growth of NPS. This was especially true among the discerning subscribers. When they compared NPS to other products, they found it lacking in this particular aspect. Now that this change has been proposed, we are hoping for more interest from the public."

Speaking about the next course of action, the spokesperson said, "The only obstacles we were facing were with the EET status and the lack of awareness. The first hurdle has now been addressed. Now we need to create awareness among the masses about this product. Hopefully, this issue of lack of awareness will be resolved with the media plan we are currently working on. We are in the process of appointing a media agency. Now that we have a permanent chairman, surely things will move much faster."

Hemant Rustagi, CEO of Wiseinvest Advisors, said, "There could be an initial adverse reaction from mutual fund investors. But they will have to realise that equities still remain the best bet for long-term wealth building. The returns could be lower because of taxation, but for someone who looks at the long-term horizon, it shouldn't matter much. More and more people now invest in an SIP; so the intent is to stay invested for the long term."

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COMMENTS

Roopsingh

6 years ago

This is another big step in preparing COFFIN for mf industry-this coffin will be prepared out of MF industry to make ground for NPS(non performing scam)

Santhana

6 years ago

Mutual fund investments are made by middle class and salaried people. By taxing the long term capital gains we are putting the clock back on developing capital market investments by the comman man. Will the Govt also reintroduce taxation of dividends in the hands of the individuals and not on the company paying it. This will increase the tax collections, as majority of the shares are held by the rich and they are avoiding tax at the highest slab and reaping crores as tax free dividend income every year. There should be level playing field and Capital market should be for every one not restricted to only the rich. The corporate owners are already enjoying more benefits like salary, commissions and perks and hereditory ownership irrespective of the performance of their company.

saikat sen

6 years ago

very good one.

Tushar Choksi

6 years ago

Well the MF industry has got more trouble ahead if the nps is made eee and investments in mutual funds are subjected to long term capital gains tax

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