VIRUS FEARS WIPE $393 BN OFF CHINA’S STOCK MARKET
Kerala declares ‘state calamity’ after third student tests positive; GOM reviews readiness Unlike MF investors, those betting on direct equities may feel the pinch
Investors erased $393 billion from China’s benchmark stock index on Monday, sold the yuan and dumped commodities as fears about the spreading coronavirus — which has claimed more than 360 lives so far — and its economic impact drove selling on the first day of trade in China since the Lunar New Year.
In India, the Kerala government has declared the coronavirus outbreak a “state calamity” after a third student tested positive in the state. On the other hand, a Group of Ministers (GOM) formed to review, monitor and evaluate the preparedness to contain the deadly coronavirus infection in the country held its first meeting on Monday.
As coronavirus fears spread, there was a pall over Asian markets, even as the slide was contained, except for the Shanghai composite index. The nearly 8 per cent plunge in was its biggest daily fall in more than four years. The Chinese yuan blew past the 7-per-dollar mark and Shanghai-traded commodities from palm oil to copper hit their maximum down limits.
In Asia, only Indian and Hong Kong indices were up, as were the European markets. US stocks, too, were in green.
The wipeout in China came even as the central bank made its biggest cash injection to the financial system since 2004 and despite regulatory moves to curb selling.
The total number of deaths in China from the coronavirus rose to 361 by Sunday, compared with 17 on January 23, when Chinese markets last traded.
“You wanted to know what a real decoupling from China might look like, or what a 'What if everyone just stayed at home and didn't buy anything?' economic thought-experiment looks like? Well here you are, folks,” Rabobank strategist Michael
Every said in an afternoon note.
The yuan began onshore trade at its weakest this year and was down 1.2 per cent by the afternoon, sliding past the symbolic 7-per-dollar level to close at 7.0257.
Shanghai-traded oil, iron ore, copper and soft commodities contracts all posted sharp drops, catching up with sliding global prices.
The new virus has created alarm because it is spreading quickly, much about it is unknown, and authorities' drastic response is likely to drag on economic growth.
More than 2,500 stocks fell by the daily limit of 10 per cent. The Shanghai Composite closed down 7.7 per cent at 2,746.6, its lowest since August.
Opec+ may cut output
Opec and its allies are considering cutting their oil output by 500,000 bpd because of the impact on oil demand from the coronavirus, two sources and a third industry source familiar with discussions said. The demand from China has slipped nearly 20 per cent. Brent Crude was trading at $55.16 (2.58 per cent in the red at 11.42 pm IST).
Mutual fund investors, who have selected the growth option, can finally heave a sigh of relief after the Union Budget.
With Finance Minister Nirmala Sitharaman deciding to move the tax incidence of dividend distribution tax (DDT) from companies to individuals, the liability for this category of investors would fall dramatically.
But how? Even if they redeem their mutual fund units after a year or so, they will only pay a long-term capital gains tax of 10 per cent for over ~1 lakh.
Whereas, if they had taken the dividend option, the tax rate would be according to their income tax slab.
Nand Kishore, Partner, DSK Legal, says, “DDT has been abolished. Instead, the dividend paid by companies will be taxed in the hands of the individual shareholder.”
Suresh Sadagopan, director, Ladder7 Financial Advisors, says, “Before this, as far as equity mutual funds or direct equities were concerned, there was no tax up to ~10 lakh dividend. Beyond ~10 lakh, there was a tax of 10 per cent.”
However, before you received the dividend, there was a hefty DDT of 15 per cent plus a surcharge.
So what does this means to the common man: Kishore says: “If the individual is already in the 30 per cent bracket, this would have an adverse impact.” That’s not all; there’s a good possibility that this will push many taxpayers into a different tax bracket.”
What should you do in such a case? Vishal Dhawan, a certified financial planner, says, “Suppose an investor ’s income for the year is such that receiving dividend will push him into a higher tax slab. The investor may not want a dividend that year. On the other hand, he may be more receptive to receiving dividend in a year when his income is lower (and hence he will fall in a lower slab that year).”
In such a situation, a mutual fund investor is better placed than an equity holder. This is because in the latter case, he has no control over whether he can receive the dividend or not (the company will pay it anyway).
In mutual funds, the investor can control whether he wants dividend from a fund by shifting from the growth to dividend option.
He can also decide when he wants it and when he doesn’t. Thus, in mutual funds, the investor enjoys greater control than in the case of shares (direct equities).
Adds Mrin Agarwal, chief executive officer (CEO) of Finsafe: “Move to growth option. And, those seeking monthly income can take the systematic withdrawal plan (SWP) route.”
Dhawan says that the arbitrage in mutual funds gets created between the dividend plan and the SWP option in the growth plan.
In the dividend option, the investor gets taxed at the marginal income tax rate. In SWP of a growth plan, he will be taxed depending on whether he is eligible for long-term or shortterm capital gains.
On long-term capital gains from equity mutual funds, he will pay 10 per cent tax only on gains above ~1 lakh.
On short-term capital gains, he will be taxed at the 15 per cent rate. For investors in higher tax brackets, SWP from the growth option is likely to be a better bet in terms of tax payout.