If one wants to make a one-year bank FD at 9 per cent. On maturity, he says, the capital will be preserved and he would get assured return on it.
It is true that fixed deposit is safe and gives assured returns. However, after adjusting for inflation, the real rate of return can be negative.
Formula: Real rate of return=[(1+ROR)/(1+i)-1]*100
Type in: =((1+9%)/(1+11%)-1)*100 and hit enter. -1.8% is the real rate of return.
ROR: Rate of return per annum;
i: rate of inflation (11 per cent here).
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Sunday, August 30, 2009
If one wants to make a one-year bank FD at 9 per cent. On maturity, he says, the capital will be preserved and he would get assured return on it.
Saturday, August 29, 2009
PUT simply, the repo rate is simply the annualised interest rate at which banks borrow money from the Reserve Bank of India (RBI) over a short term. This is generally seen as a way of tiding over a short-term liquidity crunch that is experienced by banks. However, to understand how this works, we need to understand the word repo. Repo technically stands for the word repurchase agreement. Most banks generally have a certain amount of government bonds or securities in their possession. When banks are in need for money they borrow money from the RBI using these government bonds or securities as a collateral. There is however the assurance that the bank will recover these later when the borrowed money is returned. The cost of the transaction takes the form of the repo rate. The repo rate is dependent on factors such as the credit worthiness of the borrower, how liquid the collateral is and the rates of other money market instruments.
What is reverse repo?
The word reverse repo generally accompanies most definitions of repo and is generally considered to be the opposite process. A reverse repo is when the RBI borrows money from the bank. The interest rate at which the bank borrows the money becomes the reverse repo rate. While the repo is generally used to infuse liquidity into the system, the reverse repo is used to reduce the supply of money in the market.
What’s the impact of a repo rate reduction?
While the RBI last initially slashed the repo rate by 100 basis points, This reduction, now makes it easier for banks to borrow money from the RBI at lower rates of interest. This is expected to increase the supply of money in the system. It is expected that with banks being able to arrange their own funds more easily, they will also extend this privilege to their customers and allow them to borrow at lower rates of interest.
The RBI had taken a similar decision to cut repo rates in August 2003. However, in the last few years, the rate has repeatedly been increased in order to tackle inflationary pressures.
Friday, August 28, 2009
If one wants a bank FD at 10 per cent return for five years. He/She pays income tax. What will be the returns?
The post-tax return has to be calculated here. The idea is to know the final returns on a fully taxable income. Interest income from the bank is taxed as per your tax slab.
Formula: ROI / (ROI * TR)=Post-tax return
Type in: =10 / (10 * 30.9%) and hit enter. You will get 6.91%
ROI: rate of interest;
TR: tax rate (depends on tax slab)
Also used for: Calculating post-tax returns of national savings certificates, post-office time deposits, and Senior Citizens' Savings Scheme.
Thursday, August 27, 2009
Home loan borrowers have experienced a roller coaster ride of highs and lows over the past few years. The interest rates hovered around six to seven percent about four years ago. Until a few weeks ago, they had touched 13-14 percent. Today, some banks offer a modest eight percent home loan interest rate. The fluctuations in interest rates have an impact on a borrower's EMI dues and loan tenure.
Scenario 1: When rates go up
Increase in the interest rates translates into greater burden on the borrower. The borrower has to pay more from his pocket towards his home loan. When rates go up, the borrower has the option to either increase his EMI or tenure. Increase in EMI keeping tenure constant means greater cash outflow every month towards your loan. Increase in tenure keeping EMI constant amounts to increasing the number of years you'll be repaying the loan.
Scenario 2: When rates go down
A reduction in rates is good news that borrowers yearn to hear. When interest rates go down, the monthly EMI amount comes down automatically. Otherwise, the borrower can keep the EMI constant and bring down his loan tenure. This way he will be free of debt sooner.
Scenario 3: When you switch
When a borrower switches from fixed to floating, or vice versa, the EMI and loan tenure depends on the principal outstanding. The new rate of interest applicable after you pay the conversion fee also determines the quantum of loan. The borrower could fix at a higher rate or float at the prevailing market rate. It is up to the borrower to adjust the EMI or tenure of the loan to his convenience.
Wednesday, August 26, 2009
Getting Started in Futures Trading
By visiting this page on Futures Education page, you've taken the first step in learning everything you need to know about futures trading, commodity futures trading and all the little things that will help you make your financial goals a reality. The pages on this site are specially designed to be educational and informative for both the beginner and the advanced trader.
When getting started, it's important to know the facts. Knowing the facts about futures trading is crucial for people who work in one of the most adventurous corners of the business world. You are about to embark on a journey where the explorer must rely solely on his common sense and ingenuity, and face challenges that require intelligence, strength, and an adventuresome spirit. There are risks, but futures trading is a journey where the rewards justify the risks.
What is the Futures Market?
Futures markets have been described as continuous auction markets and as clearing houses for the latest information about supply and demand. They are the meeting places of buyers and sellers of an extensive list of commodities. Today, commodities that are sold include agricultural products (grains trading), metals (such as gold and silver), Energies trading (crude and petroleum), financial instruments, foreign currencies, stock indexes and more.
For futures traders, one of the best suggestions they can take in order to be successful is to follow the trends. Many futures traders trade without a plan. Even if they have a plan, they second guess it and make the mistake of not sticking to it--especially if the trade is a loss. After several profitable trades, using futures trading facts, many speculators become fierce and radical, basing their trades on hunches, and long shots rather than intelligible reasoning.
Successful futures traders are good businessmen and good money managers. Traders risk their capital, true, but those who are successful follow conservative and disciplined business practices. Money management is as important as being correct in the market.
When considering futures trading, people should not concern themselves with capital needed for daily sustenance. The capital recommended for futures trading is risk capital. Risk capital is money that, if lost, would not materially affect ones living standards. This is a very important concept to understand as you embark on your career in futures trading.
Today's futures market has also become a major financial market. Participants in futures trading include mortgage bankers, farmers, and bond dealers, as well as grain merchants, food processors, savings and loan associations and individual spectators. Anyone buying or selling futures contracts should clearly understand that the risks of any given transaction may result in a futures trading loss.
While there are a number of steps that can be taken in an effort to limit the number of losses that a futures trader has, there are no guarantees that these steps will prove effective. Well informed futures traders should be familiar with available risk management possibilities. Just as different degrees of probable risk and reward vary, so may different futures contracts. A serious futures trader will want to employ the help of an experienced commodity trading advisor or broker to help them make the most of their opportunities.
Tuesday, August 25, 2009
If you get rich through a windfall, such as an inheritance, plan finances to build on it
Building a corpus during your working years requires effort, discipline and planning. But a privileged few get rich through a windfall - sale of a business or property, settlement of a lawsuit, receiving an inheritance, or insurance settlements. Financial planning can help you leverage this to your advantage.
Many beneficiaries are not prepared for the consequences of sudden wealth. They are often clueless about how to deal with a large amount of money. Studies show that more than 35 percent of lottery winners declare bankruptcy in 10 years.
There are two main reasons why people lose windfall wealth. One, many are emotionally ill-prepared. Windfalls can stir feelings of guilt, anger, confusion and fear. They may even be accompanied by a sense of loss in the case of an inheritance from a loved one. And two, it's hard for them to plan how they will live and invest, now that they are rich. Should they take a luxury cruise? Invest the money in safe instruments? Get into highly aggressive and risky investments?
If you receive a windfall, introspect and understand your current situation. Gain control over your emotions, and settle into your new routine. Plan your wealth carefully to make it grow, and review the plan regularly.
Review your situation
For people without much savings and investments, it makes sense to use the windfall to create an investment portfolio, bearing in mind future goals. If you have high-cost debts like personal loans and credit card balances, settle them first.
A windfall can make some wishes come true, which had to be ignored before. For example, you may be able to send your children to a good university, or buy your dream house, or create a charitable trust. Such goals can be met with some advance planning.
Get a sense of control
- First things first - a portion of the wealth should be kept liquid for an emergency, ideally for three to six months' living expenses.
- Then review your goals and allocate resources accordingly.
- Setting quantifiable goals will give you a sense of control, and help you set the direction and pace to achieve them.
You may find you can set aside less of your future earnings for your retirement fund. Your ability to withstand risk may improve, and you could consider allocating more of your assets to equity, to build a larger corpus. You could retire early, perhaps start a business. But such decisions should be taken in consultation with your family and a reliable financial planner.
Choose your advisors well
Perhaps the most important decision is to choose the right professionals to advise you. The best way is to seek references from friends who use the services of an advisor, as such a person is more likely to be trustworthy. Ideally, meet with at least three advisors before deciding on one. Choose someone of good repute, who shares your values. A good financial advisor would be familiar with all asset classes.
Review your plan periodically
Once your decisions are executed, ensure that your investments are working towards achieving your long term goals. Keep track of succession planning and insurance needs, and your tax situation.
Watch out for obstacles
- Overspending: Keep that urge firmly in check. Ensure that your good fortune is not spent only on luxuries. Investments serve you better in the long run.
- Advice from friends and family: You may be deluged with this. It may be difficult to turn down advice from a close friend, but be firm, set emotions aside, and insist on evaluating all your options.
- Advice from financial intermediaries: Relationship managers of banks, distribution companies, or fund houses may contact you. Choose wisely. It's better to select a financial planner who offers advice on various asset classes to meet your needs, rather than limited product-based advice.
Solicitations for charity
People may expect to borrow or receive some of your money - maybe a relative wanting to start a business, or a friend in dire need of money, or a charitable institution with an important and noble cause. It's natural to want to help others, but it's important to do this prudently. It is not bad to turn people down, as long as you treat them with dignity.
Monday, August 24, 2009
An Equity-linked Fixed Maturity Plan is a debt fund which intends to invest primarily in the bonds issued by the corporate, banks, non-banking financial institutions, etc. These bonds are generally zero coupon bonds whose returns are set with the returns of underlying assets (e.g. group of stock or index) they choose. There is no fixed coupon rate, instead a participation ratio is fixed and on that ratio, the return is generated. The participation ratio is the fixed proportion of upside in the underlying asset that the investor is entitled to get. But here’s a catch, there is a cap on the upside known as knockout level. That is, if the value of the underlying asset reaches or exceeds a pre-determined level the investor will just get a fixed rate of return.
Birla Sun Life Mutual Fund is introducing two Equity linked FMP schemes, Series-A (Aviator Plan) with maturity of 36 months and Series-B (Gladiator Plan) with maturity of 21 months. The participation ratio of Aviator & Gladiator Plans are 140-145 per cent and 97-100 per cent of the Nifty returns, respectively. Knockout levels of these two plans are 190 to 200 per cent and 140 to 145 per cent, respectively.
Pros and Cons of this fund:
This product is suitable for risk averse investors who would like to ride the market upside but do not like to participate in the downside. Equity-linked FMPs provide this very facility to investors. That is, if the underlying asset does not go up as expected, the investors would at least get their initial capital back. Thus the only risk associated with these is that there will be no capital appreciation.
On the downside, unlike conventional FMPs these types of schemes have an entry load or exit load. Entry loads on the Aviator and Gladiator Plan are 2.25 per cent and 1.50 per cent, respectively. An exit load of 2 per cent will be borne by the investors if redeemed within one year and 1 per cent if redeemed after 1 year but before the maturity date.
While ICICI Prudential AMC's Equity Linked FMP does not have any entry load but has higher than average exit load of 5 per cent for redemption before maturity.
Sunday, August 23, 2009
I can get 12 per cent return on my equity investments. In how many years can I double or even triple my money?
Formula: No. of years to double = 72/expected return
Type in: =72/12 and hit enter. You will get 6 years.
For tripling, type in: =114/12 and hit enter. You will get 9.5 years.
Formula: No. of years to double = 114/expected return
For quadrupling, type in: =144/12 and hit enter to get 12 years.
Formula: No. of years to double = 144/expected return
Saturday, August 22, 2009
IT IS a blend of value investing with aspects of behavioural finance. It tends to be bearish when the market is bullish and vice-versa. Welcome to the world of contrarians — who believe in going against the wind. Although it is never easy, remember what doesn’t kill you makes you stronger.
The-60 year-old (a contrarian investor) is a firm believer that to be successful, you should invest in out of flavour stocks or sectors that are not of prime interest to most investing community. Rather than investing in then popular sector stocks such as realty, banking and others invested a large chunk of money in sugar stocks in January, when the market was at its peak. His intellectual independence with a healthy dash of agnosticism about consensus views reaped dividends. Unlike the other sector stocks, which are bleeding right now, His decision to invest in sugar, stock saw his portfolio’s worth increasing by almost 30-40%.
Here’s an insight into the contrarian world of investing, what you need to know and how you can learn this art to be successful on Dalal Street.
For the uninitiated, contrarian investing is based on the premise that a majority of investors (or consensus) are betting in one direction on the market or on a specific stock (or security) but these bets are wrong or unjustified based on the medium to long term outlook. Contrarian approach to investing has a different meaning.
He believes that being contrarian showcases your ability to identify companies that have robust business models which are fundamentally sound, but are grossly undervalued in the stock market. In such companies, the net profit margin is consistent and rising, general trend is upwards, book value is high, and the market price to book value is lower multiple. These stocks, in fact, belong to a sector that is likely to be on a growth trajectory in times to come.
IS IT PROFITABLE?
Contrarian investing, believe analysts, works both for investors who follow markets regularly as well for those who don’t, but only at certain times, and not always. There are many renowned investors such as Warren Buffett and John Marks Templeton who are contrarian investors, but following them may not pay dividends unless you are able to decode market dynamics. This approach requires the same, if not more, research into the stock as any other form of investing. Thus, if you do not follow markets, you should not invest directly, particularly contrarian investing.
The strategy, according to analysts, can be highly profitable, but only at key turning points like the turn of economic cycle or company business cycle. Most other times, contrarian investing may not yield gains and could actually result in losses. It is usually more profitable at the end of bull or bear markets. Also, you should do detailed research/ homework before taking a contrarian bet, because contrarian investing is only successful if you have superior information or research compared to the consensus.
Apart from this aspect of investing, the discipline of entry as well as exit and research while picking up, all go towards making an investment profitable. You shouldn’t forget that these investors tend to have higher profitable investments due to the discipline of research they seek before investment.
DECODING THE MATRIX
There are no strict rules to learn the contrarian way to investing. What you need is experience since this approach requires a strong information base. That’s why there is a famous adage — stock market is a place where people with money make experience, and people with experience make money. You learn the tricks through in-depth research and experience. Strong knowledge of valuation matrix and investment style would only help.
The detail lies in the definition. The simplest contrarian rule would be to invest when markets are low and there is general disinterest towards the stock market — which is a time like now. Apply the principle we apply in gold — we all like to buy gold when markets are down. So why don’t we apply the same principle to stock buying? Good stocks will always be good, they may not double your money in 20 days but they will multiply many fold in 20 years. Think about buying stocks like making an investment into ownership of business. Think about your investment as a seed you have planted to grow a money tree. Don’t treat buying stocks like buying furniture. However, thinks that you should read Benjamin Graham or Warren Buffet’s letter to shareholders of Berkshire Hathaway to understand the basic principles. There are many contrarian investing associations which have these principles. In fact, you can even search the Net to find them.
Friday, August 21, 2009
Here are some tips to help you put together a portfolio for wealth creation
With most asset products failing to offer the expected returns, investors have begun to wonder what the right investment approach to building a portfolio is. The choice of product depends on the risk appetite of the investor and tenure of investment. It takes a mix of various products in the current environment to build a good portfolio. The task is probably easier for a fresher. It is quite challenging for an investor with a short-term outlook. For instance, if an investor is bracing himself for a corpus creation by 2010, it could leave him with little choice as he has an uncertain one year ahead for his wealth creation and would be poorer by a good 25-30 percent (depending on his period of accumulation) in his wealth.
With the current year likely to unfold some more pain before bottoming out, the current environment also offers some lessons for building wealth in the coming years. Investors who have been unlucky by not participating in many bull runs in various assets, can strategise in a better way for the future.
Buy low and sell high
The golden principle was almost forgotten in the last five years, largely because of unprecedented buoyancy in various instruments. Much of it was also because of the liquidity flow from domestic and overseas investors. With liquidity drying up and economic growth sliding down, the prices have been relentlessly tracing backwards with respect to most instruments.
While the picture may look gloomy and offer less conviction for investments, long-term investors need to use the current environment to buy. After all, those who buy cheap and sell high are the ones considered smart over a long period of time.
While buying at a low is crucial, selling it at a high is an equally important component of wealth creation. The exit strategy could revolve around the market prices of your instruments, your liquidity needs or your allocation for a particular product. For instance, an allocation of 20 percent of your portfolio in favour of equity could go haywire during a market boom in equity and may account for 40 percent of your wealth. One of the options at such a juncture is to re-balance the portfolio by booking profits from equity and transferring them to debt or by increasing the debt allocation with the surplus funds.
Not only will such a strategy help in meeting your goals but will also ensure profit-booking which is an essential component of investment planning. On the other hand, the task of wealth creation can also be achieved if you have a long tenure at your disposal. In this scenario, risk management would be built into the investment process, as you would be staggering your investments, which in turn helps you in averaging out your costs.
Another important component of the accumulation strategy is sustained focus and discipline. These are necessities though you need not stick to the same set of products at all times. For instance, if you have signed up for a systematic investment plan (SIP) in a small cap fund for a period of five years, you can reduce the allocation in the current environment to that fund and shift it to a large-cap fund. In fact, large-cap stocks or funds would be the safest bets for a long-term portfolio as they have the ability to sustain in market volatility in a better way. On the other hand, mid-sized and small companies offer the potential to beat benchmark indices, despite carrying some risk. Irrespective of the choice of stock or mutual fund, no wealth creation is complete if you do not have the habit of monitoring the investments at regular intervals. With professional help being easily accessible, the task has become a lot easier.
Thursday, August 20, 2009
Use GOLD FUND to Capitalize on rising gold price - How Gold Fund works for investors keen on exploiting the yellow metal’s potential
With the recent spurt in the price of gold, gold funds are looking brighter. Recently, a gold exchange-traded fund (ETF) touched its all-time high of Rs 1,504 on the National Stock Exchange and closed at Rs 1,503 per unit. Other gold ETFs have touched new highs as well. There has been higher buying interest in gold ETFs. The price of gold here crossed Rs 15,000 per gram. The international price is around USD 962 per ounce.
Higher global gold prices, combined with the rupee going below 49 to a dollar, helped in the surge in gold prices here. Gold ETFs have delivered a handsome return of about 30 percent over last one year.
Gold ETFs have the basic characteristics of mutual funds. They are traded like stocks on the exchanges. The fund is available for investments on the stock exchange, and it can be bought and sold like any stock. An ETF is normally linked to an index. It mirrors the performance of the index.
In a gold ETF, the fund's performance depends on the price movement of gold. Hence, the movement in the value of the fund depends on the movement in the gold prices. This makes it a useful tool for those who want to consider gold as an investment option and gain from its price movements. The investors do not actually accumulate gold. In case investors require gold, they have to sell the units of the fund and buy gold.
As the price of gold increases, the price of the funds will also rise and vice versa. When the units are available on the exchange, they can be bought and sold like any stock. This also gives an indication to investors of the expenses that will be incurred. Brokerage charges have to be paid when units are purchased and sold. This is slightly different from other mutual funds where there are additional charges like entry and exit load when the investment is made.
The funds are open-ended, passively-managed, and designed to provide returns (before expenses), that closely correspond to the performance and yield from gold. Gold ETFs offer investors the advantage of investing in high quality gold without the burden of physical delivery. The gold ETF will be traded on the stock exchange (to start with on the National Stock Exchange) on a real time basis (i.e. buying/selling can be done any time during the trading hours) after the new fund offer (NFO) period.
After the fund is listed on the stock exchange, investors can buy or sell units directly from the exchange through a stock broker. While dealing with a stock broker there is no entry load, instead, investors have to pay brokerage/commission (usually hovering around 0.50 percent of the transaction value). The minimum number of units that an investor can buy or sell through the exchange is one. The value of each unit will equal (approximately) to the price of one gram of gold. Being an ETF, its performance will be closely linked to that of the domestic gold price.
These ETFs have high entry loads during the NFO period. The high load makes gold ETFs an expensive investment proposition and for a commodity, this could impact returns adversely. If the investor buys the gold ETF on the exchange, he has to pay the broker's commission however, which is a lot lower than the entry load during the NFO period.
The Securities and Exchange Board of India (SEBI) guidelines permit fund houses to charge up to a maximum of 2.50 percent. There are tax implications. Gold ETFs are treated as debt funds. Hence, tax incidence on sale of gold ETF will be similar to that of debt funds. This means tax on long-term capital gains is the lower of 10 percent without indexation and 20 percent with indexation. Short-term capital gains will be added to your income and taxed at the marginal income tax rate.
The funds invest in gold bullion and reflect the international price of gold in the market. Every unit of the gold ETF would approximately represent one gram of pure gold and the unit allotted under the scheme would be credited to your demat account.
These funds offer investors a new, innovative, relatively cost-efficient, and secure way to access the gold market without the necessity of taking physical delivery of gold.
Wednesday, August 19, 2009
IN an age when shares can be purchased at the click of a mouse, filling a life insurance proposal continues to be a major chore. More often that not it is the insurance agent who, in his eagerness to sell, fills in the details on behalf of the insured.
What the proposer doesn’t realise is that such a casual approach can make a crucial difference when it comes to pricing, and in ensuring that claims are not prejudiced. Unlike other transactions, insurance is based on faith. Since the insurance company cannot verify every bit of information, it accepts in good faith whatever details the proposer provides.
The flip side is that this gives the company the right to reject claims if there is non-disclosure of a fact that is material to the pricing of premium.
If there is a vague or incomplete entry in the proposal, the underwriter may play it safe and bracket the insured in a higher risk category. This is more applicable in case of policies where there is a high sum insured.
Taking a little more trouble in filling the proposal form can, however, help the insured save premium money. Here are some disclosures that make a difference
Proposers may be tempted to give a self-declaration, in the absence of certificates. Take this route when their age certificates are not readily available. However, it makes more sense to make available photocopies of birth certificates, passports or school leaving certificates, especially if you are above 40 years of age. The underwriter may raise the premium to accommodate the possibility of the applicant being older than the declared age. Sometimes, the increase can lead to a premium payable for a life five years older than that for the declared age.
Indians often fight shy of disclosing their full income. But there is a legitimate reason for an insurance company to seek the proposers’ income, particularly if the proposer is seeking a high sum insured. Insurance companies usually accept the sum insured as a multiple of present income. Under-declaring income could result in the company declining the proposal for a high sum insured.
It’s best if the occupation is not left vague. For instance, when you mention your occupation as ‘engineer’ with ABC Construction, the underwriter wants to know if you are a design engineer or a site engineer or an IT engineer maintaining the company’s systems. Do mention if you toil in an environment with high safety norms. This reduces premium hike on the grounds of “occupational extra.”
Here again, most applicants are reluctant to share information, and agents misguide proposers by asking them not to declare some medical procedures. The information, however, need not increase your premium. If a claim has arisen out of any pre-existing condition not disclosed in the proposal form, the insurer has a ground not to pay it.
Being clear on this front works in your favour if the family is seen enjoying higher life expectancy with good health. It makes a stronger case for cover at a higher age.
- List all the life insurance policies you have.
- Give details of the cover you enjoy under those policies along with the policy numbers, name of the insurer, sum assured and the date on which the policy started.
- If you have bought a policy from the same insurer at a standard rate in the recent past, you may get a favourable underwriting treatment. A lethargic attitude here can deprive you of better underwriting treatment.
- Mention the reasons behind the purchase of life insurance
- If you don’t have any insurance and are going in for a large sum assured due to a fresh home loan, mention it.
- Employment, wedding and child birth and are some valid grounds.
Tuesday, August 18, 2009
THE EVENTS of the last few days have caused almost everyone to reflect on the security provisions that are available in the country. In retrospect, the sheer lack of preparedness to cope with acts of terror like that experienced in Mumbai hits you in the face. The realisation, however, has only come after the dastardly event took place.
Retrospection on your portfolio may not be the first thing on your mind currently but in a sense, investors need to be reminded that preparations need to provide a certain degree of stability to your portfolio. And diversification is clearly the mantra that financial experts recommend. One step towards achieving this diversification could be by investing in Exchange Traded Funds (ETF).
WHAT ARE ETFs?
Technically speaking, ETFs are collective investment funds, which have underlying assets such as gold, stocks etcetera. However, what is significantly different about ETFs is that they are traded on the stock exchange in the same way that a share is traded. The funds are generally divided into units and an individual can purchase these through the broker and trade them on the exchange. Explaining the part played by an ETF in an investor’s portfolio, An ETF gives you low-cost access to asset classes which are not easily available with the added benefit of not having to possess it physically.
WHAT ARE THE DIFFERENT TYPES?
If you were looking at investing in ETFs, then there are only three kinds that are available in India - equity ETFs, gold ETFs and liquid ETFs. An equity ETF is one that tracks the performance of a particular index on the Stock Exchange. It invests either in securities on the index or a sample of the securities in the index. Indexes tracked include the Nifty Index, the Nifty Junior Index, Bank Nifty Index, PSU Bank Index and the Sensex. Commodity ETFs are another type of ETFs, which are available world over. However, in India, the only way to put your money in a commodity index would be by investing in a gold ETF. In a gold ETF, the fund invests in physical gold as the underlying asset. If you want an ETF that invests in money market instruments, then you could look at investing in liquid ETFs. However, opportunities in this segment are strictly limited.
WHY AN ETF?
In addition to being the diversifying agent on your portfolio, there is a certain degree of liquidity and flexibility that is available via an ETF. Trading can be done at any point of time during the day through your brokers. Cost-efficiency is also a pertinent point when one talks of ETFs as entry into these funds is available as low costs. For a person who has only small amounts to invest, certain gold ETFs will give him the chance to buy as little as ½ gram of gold. While a person can accumulate a good amount of gold by investing regularly in this manner, he/she does not have deal with problems of storage. A bonus point for gold ETFs particularly is that while physical possession of gold could bring upon wealth tax implications, there is no wealth tax on ETFs. By investing in an index based ETF, you can also hedge the style risk of your fund manager.
Also if you compare the process of investing in an ETF with that of investing in mutual funds, you would have to pay lower management fees for ETFs. As ETFs are listed on the Exchange, distribution and other operational expenses are significantly lower, making it cost effective. These savings in cost are passed on to the investor.
CHECK THE RATIOS
Experts feel that the first step when choosing an ETF would be to look at the costs involved. The expense ratio of the fund is a good indicator for this. Experts recommend that the lower the expense ratio, the better. Another measure that is generally used when considering index funds is tracking error. The tracking error would show how much an the returns of a particular fund deviate from the return given by the index. The lower the tracking error, the better the fund is. A low tracking error could also mean lower costs. Another thing that investors need to ask themselves is whether they want the underlying asset.
The risks involved in investing in an ETF are purely systemic risks. Risks in the fund would greatly depend on the risks experienced by the index it tracks. However, investing in a gold ETF may be a benefit in times of market turbulence, as gold often does well during periods of uncertainty.
Monday, August 17, 2009
INVESTING in equities is riskier than and definitely demands more time than other investments. However, it can probably be more rewarding than you can imagine and certainly very exciting! World over, and even in India, stocks have outperformed every other asset class over the long run. Stocks are probably your best bet against inflation too.
If equities tempt you but you are scared to take the plunge during these volatile times, here's a complete step-by-step guide on investing in equities.
Step 1: Understand how the stock market works
When you read you begin with A-B-C. When you sing you begin with Do-Re-Mi. And when you invest in stocks you begin with business-company-shares.
Before you embark on your journey to invest in equities, teach yourself how the stock market works.
Step 2: Learn how to choose a stock
Having understood the markets, it is important to know how to go about selecting a company, a stock and the right price. A little bit of research, some smart diversification and proper monitoring will ensure that things seldom go wrong.
It's not that difficult: Just follow these 4 golden rules. And while you are at it why don't you also check out How to buy low, sell high.
Step 3: Decide how much to invest
Since equities are high risk, high return instruments, how much you should invest would really depend on how much risk you can tolerate. Take this quiz to find out what your risk profile is.
Once you have done that, use this asset allocation test to calculate exactly how much of your savings you should invest in equities.
Step 4: Monitor and review
Monitoring your equity investments regularly is recommended. Keep in touch with the quarterly-results announcements and update the prices on your portfolio worksheet at least once a week.
Also, review the reasons you earlier identified for buying a stock and check whether they are still valid or there have been significant changes in your earlier assumptions and expectations. And use an annual review process to review your exposure to equity shares within your overall asset allocation and rebalance, if necessary. Ideally, revisit the Risk Analyser at every such review because your risk capacity and risk profile could have undergone a change over a 12-month period.
Sunday, August 16, 2009
A further drop in home loan interest rates is not expected as the inflation rate is under control now
The unpredictable rate movements, the Reserve Bank of India's (RBI) moves and mixed response from the lenders has put borrowers in some confusion. The inflation monster which had pushed prices to unimaginable highs has finally been tamed. From as high as 12.91 percent this year, the inflation rate has almost come down to half of that.
Does this mean borrowers can expect banks to reduce their home loan rates, if this trend persists? What is inflation?
Inflation is an increase in prices and/or decline in purchasing power. An increase in the amount of currency in circulation results in a relatively sharp and sudden fall in its value, and rise in prices. It can also be defined as a persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services. Inflation is caused more by global rather than by domestic factors today.
The year 2008 was extreme turbulence in all quarters. The stock markets tumbled down, wiping away tons of investor wealth. The inflation numbers touched new peaks and crude oil prices shot up. Prices of essential commodities and food rose sharply. And so did home loan rates, impacting borrowers adversely, especially those who did not see a proportionate increase in their pay purses.
High inflation rates are dealt with through a combination of market forces and government regulations. A host of RBI measures ensued. The RBI continuously monitors the monetary and liquidity conditions to maintain domestic macroeconomic and financial stability in the context of the global financial crisis. It hiked the repo rate and the cash reserve ratio (CRR), and then resorted to slashing them again.
The repo rate is the rate at which banks borrow money from the RBI. A reduction in the repo rate will help banks get money at a cheaper rate. When the repo rate is increased borrowing from the RBI becomes more expensive. The CRR is the proportion of reserves commercial banks must keep with the RBI. It has been slashed to 5.5 from nine percent. With the inflation rate declining, the RBI is expected to announce a further reduction in the repo and reverse repo rates.
Lending rates had gone up after the RBI took measures to tighten the money supply in a bid to bring down inflation. With inflation well under check, can borrowers expect a further fall in rates? Most public sector banks had lowered rates making it affordable. Some banks are yet to offer the reduced rates to their existing customers. In such a scenario, a floating rate loan would be an ideal choice. Since there is a possibility of reduction in rates, floating in these turbulent times is better than being locked at a high rate. Those who are unsure can wait for the turbulence in the markets to quell.
Real estate has been an ideal hedge against inflation over a long term. Limited land resources, a growing economy and increasing population make real estate an ideal investment avenue. When demand for housing goes up compared to supply, prices shoot upwards. With a fall in rates on the horizon and lucrative bargain deals offered by developers, it is time you seriously explored owing a house.
Saturday, August 15, 2009
Where can an investor get a form for applying/ bidding for the shares?
The form for applying/bidding of shares is available with all syndicate members, collection centers, the brokers to the issue and the bankers to the issue. These are also available with your friendly neighborhood news paper vendors and sub brokers.
How are offer documents prepared?
The offer documents such as prospectus etc. are prepared by an independent entity know as Merchant Banker, which is registered with regulatory authority SEBI. They are required to carry out due diligence while preparing an offer document. The draft offer document submitted to SEBI is put on website for public comments.
Is it compulsory for an investor to have a Demat Account?
All the public issues of size in excess of Rs.10 crore, are to made compulsorily in the demat more. Thus, if an investor chooses to apply for an issue that is being made in a compulsory demat mode, he has to have a demat account and has the responsibility to put the correct DP ID and Client ID details in the bid/application forms. This is very important as a lot of applications are rejected due to carelessness in putting right details in the application forms. You can open a DP account with any of the registered DPs and quote your BO/Client ID in the application.
Do I need to mention Bank Account Details in the application?
In case of refund of application money in case of non allotment of shares or partial allotment of shares, it is advisable to have funds directly credited to your bank accounts to avoid postal delays and frauds. Hence mention of your bank account details on applications has been made applicable for investors for their own convenience.
For How many days are IPOs open.
IPOs are open for a minimum of 3 working days and maximum of 10 working days. In case of Book Building issues, the period during which you can make an application is 3 to 7 working days.
Friday, August 14, 2009
systematic withdrawal plans (STPs) are for optimal and efficient investing
EARLIER in this series, we discussed the investment and redemption strategies of systematic investment plans (SIPs) and systematic withdrawal plans (SWPs). SIPs let you invest a specified sum of money at specified intervals—generally weekly, fortnightly, monthly or quarterly—irrespective of market conditions. SWPs let you withdraw money systematically from funds, as opposed to lump sum withdrawals. This week, we look at a plan that combines the best of systematic withdrawal and investing—the systematic transfer plan (STP).
An STP withdraws a pre-specified sum of your money from one scheme, and invests it another within the same fund house, at regular intervals. It thus lets you re-allocate your from a liquid fund (a money market debt fund with low risk, but much higher returns than a bank savings account) to one or more equity schemes of the same fund house. As there is no exit load on a liquid fund, nothing is deducted for the transfer from the liquid fund. However, investment in the equity fund may be subject to entry and exit load.
So an STP squeezes the maximum juice out of your regular investments, so that the money sits in a liquid fund account while waiting to be invested, instead of in a bank account that yields a lower interim return.
STPs are a systematic investing tool. The key to astute financial planning is to start early and invest on a regular basis. Such disciplined investing lets you fulfill financial obligations and long-term goals. STPs are best for retail investors who have surplus liquidity to invest in equity, but who lack the expertise and knowledge of market dynamics. STPs enhance returns on the surplus liquidity by keeping it in a liquid fund, instead of letting it idle in a savings account. Your money earns only around 0.50% a year in a savings account, but a liquid fund gives you 7% or more a year. Thus, an STP optimizes your returns while performing a similar function to an SIP.
Let’s take an illustration to understand how an STP can make a difference. Suppose an investor wants to invest Rs 75,000 in equity mutual funds. Rather than put all her money in an equity fund at one go, she can park the entire amount in a liquid fund relatively more safely. She can then opt for a monthly STP that will transfer Rs 5,000 each month to the equity fund, for the next 15 months. This helps ensure her money is invested in a systematic manner, over a period of time, no matter what the condition of the market. As long as there is a balance in the liquid fund, it will continue to earn returns.
If you invest through a SIP, you probably have liquid money idling in your bank account. Consider transferring it to a liquid fund, and earning twice the returns that your savings account is giving you. This higher return rate will apply to the balance in your liquid account, until all of the money is transferred to the equity fund account.
It is well known that timing the market is a tricky task, even for seasoned investing experts. Often, what drives stock prices is sentiments, not fundamentals. Timing the markets requires a high degree of expertise and skill—generally not the forte of most retail investors. A poor understanding of market dynamics can lead to heavy losses to investors. Thus, the volatility of equity markets often puts investors off. But STPs ensure disciplined investing, regardless of whether the market is going up or down. It thus mitigates the risk arising from volatility. Systematic regular investment irrespective of the state of the markets leads brings down the average purchase cost over time. This phenomenon is known as “rupee cost averaging”. When you invest a fixed amount at regular intervals, you end up buying more units when their NAVs are down, and fewer when they are costlier. A lower purchase price, of course, translates into higher returns. And an STP facilitates cost averaging while also allowing your money to earn better returns while it’s in waiting mode.
Now, you may ask, “Why opt for an STP instead of a SIP?” A SIP is an ideal way to invest, if there are regular cash flows and you can match these with the intended investments into mutual funds. In a SIP, typically, a salaried investor deposits a monthly pay cheque into his savings account, and out of this a certain pre-determined amount is transferred at a regular interval the savings account into a specified equity fund. But if there are already some accumulated savings in his bank account—money in excess of his requirements—then he can transfer it to a liquid fund account out, of which his equity investments will get deducted at specified intervals. Thus the investor takes advantage of higher returns accruing in a liquid fund.
One fear many investors expressed is that mutual funds might constrain their liquidity. But liquid funds are designed—as the name suggests—to offer very high liquidity. Your money is generally available at a day’s notice—not too different from the degree of liquidity in a bank’s savings account. When you need the money from your liquid fund account, you can have it credited to your bank account the next day. So why not keep it in a liquid fund, then, and opt for an STP, if you’re not really compromising on liquidity? The only drawback of an STP is that you can’t invest your money from one fund house’s liquid fund to another fund house’s equity fund. You would be constrained, if investing through an STP, to choose a liquid fund from the same fund house. But it’s not a significant limitation when you consider that there’s little difference in returns delivered by various liquid funds. So STPs are quite a viable option.
Systematic long-term investing through an STP enables you to reap the benefits of compounding. Essentially, compounding enables you to earn interest on interest. As time passes, compounding makes your investment grow increasingly rapidly. With inflation breaching the 7% mark, it has become imperative to regularly invest your money, to protect the erosion of your savings. By investing through an STP, you can get the same benefits as from a SIP, but with higher holding period returns. So you can get optimal returns on your investments.
Thursday, August 13, 2009
Here are some tips to help you choose the ideal insurance policy that meets your needs
Numerous insurance products such as children's education plans, life insurance plans with huge death benefits, and accident insurance covers are marketed aggressively. Often, people aren't aware of the actual insurance coverage. They jump onto the bandwagon, without reading the fine print.
Tax payers make hasty last-minute insurance purchases to avail tax benefits under Section 80C. Though you may be saving a small amount of tax money, you could be stuck to a worthless policy for long years.
Here are a few points to ponder over while buying an insurance policy:
- Insurance is not investment
Insurance products are designed to provide protection. A term cover usually offers insurance protection but no benefit in case the insured survives the term of the policy. A unit-linked insurance policy (ULIP) on the other hand provides dual benefits of insurance protection and a flexible investment option. A certain part of the premium is invested in equities, debt funds and bonds. The rest is used to provide for life insurance and fund management costs.
Some experts advice against mixing insurance and investment. You can always invest in some mutual funds that meet your goals and risk appetite.
- Keep in mind inflation
You might be setting aside substantial amounts of money towards your premium. But wouldn't you feel cheated if what you get after a long term is worth nothing? In an inflationary economy, products and services are bound to cost more than what they do today. Hence, will the benefits or returns cover your needs completely? Or will it only form a small portion of your actual requirement at the end of many long years?
Roughly compute how your benefits will look like after 10 or 20 years. It is advisable to stay away from insurance products that do not have inflation protection. Cost of living, education expenses and medical costs are bound to swell up after 10 years owing to inflationary pressures. See that the policy you opt for has insurance protection or hedge.
Wednesday, August 12, 2009
SILVER, which in European folklore, is believed to have saved the lives of many people who were attacked by vampires and monsters, now has the power to give investors good returns. And going forward, it is expected to outperform gold in terms of price appreciation.
In fact, silver had been beating gold till recently. Up to 2008, silver outperformed gold in terms of one, two and three-year compound annual growth rate (CAGR). Last year on March 11, silver registered a three-year CAGR of 131% against 106% CAGR posted by gold.
GOLD-MANIA HITS SILVER PRICE
In the last one year, gold prices have moved up sharply and beaten silver. Since March 11 last year, gold has appreciated by around 18%, while silver prices have corrected by around 12%. This is mainly because of the global financial crisis and weak performance of most of the other investment classes. Investors have been flocking towards gold, as it provides a hedge against uncertainty, which in turn fuelled gold prices to touch new highs.
Equity markets have become almost half in terms of loss in the index numbers in the last one year. NSE Nifty and BSE Sensex have lost 51% and 46%, respectively, in the same period. Diversified equity mutual funds followed suit. Even best performing mutual funds are down by more than 30%. For instance, as on March 9, Birla Sun Life Dividend Yield Plus — growth and UTI Dividend Yield Fund — growth, registered a negative return of around 31% and 33%. Real estate prices have corrected by an average 25-30%. Concomitantly, the gold prices have gone up by around 17% in the same period.
Silver prices, though, did not appreciate as much as gold in the last one year due to low industrial demand. They have appreciated by around 35% from the lowest price of the year — Rs 16,168 on November 21, 2008. Gold prices have appreciated by just 22% from November 21 last year.
FUNDAMENTALLY MORE INTACT
Silver has both industrial and investment demand. Also in terms of supply, 60% of the supply of silver comes from copper, lead and zinc mines in the form of byproduct. Silver and gold mines contribute the remaining 40% of the supply. This is one of the reasons that silver price movement reflects both gold and base metals’ price movement. The industrial demand for silver has been growing by around 6%. The investment demand for silver is on the rise due to introduction of new investment instruments such as silver exchange traded fund (ETF). Even the silver holdings of several companies, which run silver ETFs, have gone up.
FOLLOW THE LEADER
Commodity experts believe that silver, which has been outperforming gold for long, still has the competence to do that. Gold to silver price ratio is at around 72, whereas, the mean ratio is 55 based on the average price from 1970 to 2008. Going forward, the ratio is expected to come to its mean and that will give huge upside to silver prices. Consequently, silver prices will rise much faster than gold prices.
Silver is regarded as the poor man’s gold. A very large chunk of the demand for silver in India comes from the rural parts. High appreciation in prices may force many to spurn gold, specially people from middle-class families. They may prefer silver over gold.
As most of the economies are witnessing a surge in the supply of money, the inflation is expected to go up in the near future, which in turn will help increase gold prices. But since silver follows the gold prices, it is also expected to follow the suit. Also, after a period of time when the economy starts reviving, the industrial demand of silver will improve, which will further fuel the silver prices. Moreover, in the initial stage of upward rally in bullion, gold prices move faster but once the rally is fully on track, silver outperforms gold.
Silver prices are more volatile than gold price. Among the two, silver is more volatile and riskier. Moreover, any considerable decline in the industrial demand of silver may impact the silver prices adversely.
Tuesday, August 11, 2009
Some rules that specify when a tax deduction is available
Property is an important source of income. In case you own a residential property, it may either be self-occupied or rented out. If you rent out the residential property, a rental income is derived. Leasing out property and renting out property mean the same. The rental income earned is taxable in the hands of the recipient. It is taxable under the head 'Income from House Property'.
The tax liability is calculated according to the provisions of Sections 22 to 27, after allowing for the admissible deductions. No deductions are allowed except those specified by the Income Tax Act.
In case you have rented out your commercial property, the income earned from this source is also be taxable. It is taxable under the head 'Income from Business and Profession'. The lease rent earned through leasing out commercial property constitutes business income for the owner of the property. As such, it is taxed as business income.
The deductions allowed on business income are applicable here too. The expenses should pertain to earning the income from the commercial property.
In addition to the regular income from rent, you can also earn an income through capital appreciation. The owner may transfer or dispose off a residential property. In case the price realised is greater than the cost of the house, you earn a capital gain. This is taxable under the head 'Capital Gains'. In case the amount realised is reinvested in property or some specified securities, no amount is taxable.
What is taxed under the head 'House Property' is the inherent capacity of a property to earn an income called the 'annual value' of the property. This is taxed in the hands of the owner of the property. Gross annual value is the highest of rent received, fair market value or municipal valuation. If however, if the Rent Control Act is applicable, the gross annual value is the standard rent or rent received, whichever is higher.
In case the let-out property was vacant for any part of the previous year and owning to such vacancy the actual rent received is lesser than the sums mentioned, the amount actually received is taken into account while computing the gross annual value. Net value is the gross annual value less the municipal taxes paid by the owner, provided the taxes were paid during the year. Annual value is the net value less the deductions available under Section 24.
Deductions under Section 24
The Act specifies deductions that are exhaustive in nature. No deductions other than these are available.
- Percentage of annual value
It is specified that 30 percent of the annual value of the property as computed is eligible for deduction.
- Interest on loan
Interest on money borrowed for acquisition, construction, or renovation of property is deductible on accrual basis. Interest paid during the pre-construction or acquisition period will be allowed in five successive financial years starting with the financial year in which construction or acquisition is completed. This deduction is also available for a self-occupied property and can be claimed up to a maximum of Rs 30,000.
The Finance Act, 2001 had provided that effective the annual year 2002-03, the amount of deduction available under this clause is Rs 1.5 lakhs in case the property is acquired or constructed with capital borrowed on or after April 1, 1999 and such acquisition or construction is completed before April 1, 2003.
The Finance Act 2002 has removed the requirement of acquisition or construction being completed before April 1, 2003 and has simply provided that the acquisition or construction of the property must be completed within three years from the end of the financial year in which the capital was borrowed
Monday, August 10, 2009
Looking for an investment avenue when the stock markets are choppy? A fixed maturity plan not only guards against the unforeseen but also gives good returns.
STOCK market opportunities may look like a mirage in a desert. In fact, what may look like a lifetime opportunity can turn into a black hole, and swallow your hard-earned money. But it shouldn’t deter you to make a foray on Dalal Street. A smart investor is one who holds his fort secure while keeping an open eye for better avenues. Fixed maturity plan (FMP) is one such investment that guards your portfolio against unforeseen risks and gives the good returns on your investments. Here’s a low down on what you need to know before taking an exposure in FMPs.
Financial planners say that FMPs, which have been offering high yields during the last couple of years, have become an important investment avenue. Though all segments of investors can benefit from them, this investment option is especially advantageous to those who earn above Rs 5 lakh and fall under the tax bracket of 30%. Another advantage with FMPs is that they can be used for park funds temporarily in volatile markets. It is typically invested in highly-rated debt instruments which mature in line with the maturity of the scheme. This effectively immunises the portfolio from any interest rate risk.
Beside this, the product structure is such that the investment horizon more or less matches with the portfolio maturity. In a nutshell, it helps you earn a decent risk-adjusted return along with a well-planned regular cash flow. Given its basic nature, asset allocation towards FMPs could be higher for investors who are risk-averse and are looking for predictable returns.
An FMP is an effective guide to the indicative returns and hence helps plan the cash flow well in advance. Analysts hold view that the characteristics of an FMP is very similar to a fixed deposit. The tax treatment, however, is far more beneficial. FMPs are taxed under long-term capital gains, if investments are made for more than one year. Whereas in the case of a bank FD, you pay up to 30% plus surcharge subject to your individual income tax slab, FMPs actually increase your post-tax returns.
FMPs also attract lower dividend distribution tax at 14.1625% for retail and 22.66% for corporate investors (inclusive of surcharges). Further, if you manage to buy an FMP in March with a maturity of over two or more financial years, the tax liability becomes even lesser, making it more attractive.
Another advantage with FMPs is insulation from volatile interest rates. We generally think that it’s only stock market that is volatile but the truth is that interest rates are also volatile and FMPs manage this risk as well. You can also look at a plan, which has an equity component. It is one product which gives you the stability of fixed income with a small amount of equity participation and adds spice to your portfolio.
FMPs may be a good investment vehicle if you have a fair idea of your future cash requirements but you will have to sacrifice liquidity in turn. They generally invest in papers that mature in line with the tenure, to avoid re-investment risks. If you plan to redeem your investment prior to the maturity date, it attracts a high exit load, which reduces the effective yield.
Financial planners suggest that you should plan the cash flows in such a manner that you’re not forced to break the investment during the term. You should be clear about your investment horizon, which should be in sync with the duration of the FMP. This will help you get full benefits of higher post-tax returns.
You should analyse the track record of the AMC before taking any investment decisions. A look at the quality of the proposed portfolio before investing will also benefit.
Analysts believe that given the current attractive valuations in equity markets, such investments are likely to provide superior risk-adjusted returns. So, if you’re still saving money by opening fixed deposits, it’s time you start looking at FMPs. After all, they let you enjoy the triple benefit of predictable returns, minimal credit risk and most important, lower tax.
Sunday, August 9, 2009
Tax treatment of returns from Monthly Income Plans (MIPs) depends on the way you derive them. If you opt for dividend plan, then like all debt funds, MIPs are liable for Dividend Distribution Tax (DDT) which is 12.5 per cent for debt funds.
If you choose the growth plan, all gains will be treated as short-term or long-term depending on your period of holding. Any short-term gain (less than 1-year holding) from debt funds is added to your income. Long-term gain from MIPs is taxed at 10 per cent without indexation or 20 per cent with indexation, whichever is lower.
Deriving gain from an MIPs Growth option through Systematic Withdrawal Plan (SWP) could be more tax efficient than dividend plan. SWP is redemption of units worth predefined amount and periodicity. Besides, you will also have a greater control on your cash inflows.
Saturday, August 8, 2009
IN A move that is expected to create a flutter among mutual fund distributors, HDFC Mutual Fund has asked its distributors to refund a part of the brokerage they received for selling fixed maturity plans, as a result of premature redemptions.
HDFC MF — the country’s second-largest mutual fund in terms of assets under management — has decided to invoke a clause in its agreement with distributors, which mentioned that in the event of investors pulling out before the maturity period, brokers would have to refund the brokerage proportionate to the ‘unexpired period’.
What this means is that distributors are paid the entire brokerage upfront, assuming that the investor will stay invested in the FMP through its maturity. If an FMP had a maturity period of one year, and the investor withdrew from the scheme after nine months, the broker will now have to refund the brokerage for three months. Understandably, some of the HDFC Mutual Fund’s distributors who have been slapped with this demand are up in arms.
The letter to distributors, says As per the terms of the brokerage payable for each plan, in case of redemption by the investor before maturity of respective plans, the gross upfront brokerage paid to the distributor for collections during the NFO period would be recovered from them (proportionate to the unexpired period).
The move has surprised industry officials, because most asset management companies tend to cosy up to mutual fund distributors, who are seen as vital for sales of their schemes. This is the first ever instance of a fund house doing something like that. The distributors’ role is to advise investors at the time of investment. Once the sale is made, they have done their job. Thereafter neither can a fund house, nor a distributor dictate/control the actions of an investor.
Brokerages are paid for the period of investments. However, it is computed for the entire duration and paid in advance. Therefore, in case of premature redemption by the investor, HDFC AMC has a consistent policy to recover the proportionate brokerage only for the unexpired period. Its in the interest of the investor to seek, advise and invest through AMFI-certified distributors and the business received directly is insignificant.
On their part, distributors believe that it is not correct to seek a refund of brokerage from distributors when the fund house has charged an exit load from investors, who have redeemed prematurely.
Friday, August 7, 2009
It's like having two AMCs under one roof; a large, well-run fixed income one and an average equity one.
The fund house has been quite aggressive in its product launches. In the equity segment itself it came out with three schemes this year. By and large, it offers a lot of variety to investors. Unfortunately, its performance in equity does not match up to its debt funds. From its inception a decade ago, it has created history in the fund management industry. It followed a path of aggressive growth and reached the number two position in just five years. But ICICI Prudential is more dependent on institutional investors and debt assets.
Out of its asset base of Rs 49371.12 crore, around 28 per cent comes from cash funds and almost 20 per cent from Fixed Maturity Plans (FMPs). The fund house is credited with running the largest ultra short-term fund and floating rate short-term fund.
ICICI Mutual Fund was promoted by ICICI and later US-based investment bank JP Morgan acquired a stake in the company. In 1997, joint venture partner JP Morgan was replaced by Prudential plc, a British insurance and pension major. The result was a change in the name to Prudential ICICI since the AMC was now a joint holding (55:45) between Prudential and ICICI.
In 2007, the name once again changed to ICICI Prudential to reflect the change in the shareholding pattern.
Thursday, August 6, 2009
This one has had a colourful history of ownership. It started off as ANZ Grindlays Mutual Fund in 2000 and was renamed Standard Chartered Mutual Fund after the takeover of Grindlays Bank by Standard Chartered Bank. This year, the AMC was sold to Infrastructure Development Finance Company Limited (IDFC) for approx $205 million, a high price indeed.
A specialised debt fund house, it moved into equity in 2005. Since then, it has made a sustained attempt to increase its exposure to equity, which now stands at 23 per cent.
This AMC introduced many new products in the category of debt funds, like the short-term fund and the dynamic fund. It also introduced a fund of funds which invests only in debt funds. Another first was the introduction of funds which sought to provide capital protection and stable returns. The fund house also set new service standards- it was the first one to offer same day redemption for cash funds and next day redemption for income funds.
In the past, most of the debt funds delivered below average returns. In fact, none of them were rated more than 3-star. Recently that has changed and IDFC Dynamic Bond Fund and the gilt fund IDFC GSF PF are now rated 4-stars.
Wednesday, August 5, 2009
One of the ways in which the investing preferences in India are radically different from many of the first-world markets is our lack of interest in index funds. In the US, nine per cent of the money invested in mutual funds is in index funds, in India, this number is less than half a per cent, or about Rs 2,700 crore.
However, among the investing community, index funds take a mindshare that is out of all proportion to their size. The reason is that the concept of index investing is important, and so is the availability of index funds as an option for investors. Index funds are mutual funds that aim to replicate the performance of a market index. Thus, an index fund that is based on the BSE Sensex should have exactly the same 30 companies’ stocks that the Sensex has in exactly the same proportion. Thus, investors who put their money in such a fund would find their money gaining and losing in exactly the same proportion as the BSE Sensex does.
In some senses, an index fund completely reverses the main logic of mutual funds. Funds managers are supposed to provide individual investors the professional investment management that the investors don’t have the expertise for. Instead, the logic of index funds says that the fund managers themselves don’t have this expertise either and therefore, investors should simply follow the markets.
Is this true? In India, this wasn’t true till about a year back but in recent months, the performance of a majority of mutual funds is falling rapidly behind the indices. Over the last six months, barely 10 per cent of the 193-odd diversified equity funds have beaten the Sensex. This could be an anomaly of the falling market, but one thing is certain, equity funds are not beating the indices in an overwhelming way that they used to earlier.
Unlike other mutual funds, an index fund is not an investment management service at all--it’s just a convenience that enables you to buy and sell all the stocks of an index in an easy and tax-efficient manner. Since index funds do not need to do any research, fund companies should be able to charge less from investors for running them. Indeed, SEBI limits fund companies to charging 1.5 per cent a year from index fund investors, instead of the 2.25 per cent that is permissible for other equity funds.
So that means that index funds are a great investment options, right? Well, not quite. I’ve been describing the properties of ideal index funds and talking about the performance of the indices themselves (and not of index funds). However, there’s a bizarre twist to this tale. The Indian mutual fund industry seems incapable of running index funds that can actually replicate the performance of the indices they are based on. Of the 25 or so index funds that exist in India, only about 10 had returns that differed from that of their index by more than a per cent over the last year.
In fact, some index funds have had substantial variations from their indices. For example, LIC Mutual Fund’s as well as HDFC Mutual Fund’s Sensex index funds lost around 13.1 and 12.3 per cent respectively over a period during which the Sensex lost 7.7 per cent. This can hardly be described as a competent implementation of the index fund concept. This is not to say that all index funds are like this. There are many that track the indices much better. However, this variability brings an unwelcome element of complexity to choosing an index fund. Index funds of a type called Exchange Traded Funds (ETFs) are more capable of tracking the indices accurately. These are traded like shares and have to be bought from a stock broker.
With time, I expect index investing to become more and more relevant to investors. I just hope there are a range of well-run index funds to choose from.
Tuesday, August 4, 2009
I paid Rs 18,572 every year on a money back insurance policy bought 20 years back. Every fifth year, I received Rs 40,000 back and Rs 4.5 lakh on maturity. What was my rate of return?
The internal rate of return (IRR) has to be calculated here. It is the interest rate accrued on an investment that has outflows and inflows at the same regular periods.
In the excel page type Rs 18,572 as a negative figure (-18572), as it is an outflow, in the first cell. Paste the same figure till the twentieth cell.
Then, as every fifth year has an inflow of Rs 40,000, type in Rs 21,428 (40,000-18,572) in every fifth cell. In the twentieth cell, type in? 18572. In the twenty first cell, type in Rs 4,50,000, which is the maturity value of the policy.
Then click on the cell below it and type: = IRR (A1:A21) and hit enter.
5.28% will show in the cell. This is your internal rate of return.
Also used for: Calculating returns on insurance endowment policies.
Monday, August 3, 2009
While choosing a home loan option to buy a house, there are a few important aspects. You need to go into these
- Scheme of loan
Whether the loan is a fixed or floating rate one. As is common knowledge, in case of floating rate loans, the interest rate will move up or down with each revision in the benchmark rate of the bank. In case of a fixed rate loan, the interest rate may remain fixed for either a given period of time or entire tenure of the loan.
- Rate benchmark
In case it's a floating rate loan, what the rate is benchmarked against is important. Usually, floating rates are determined with reference to the prime lending rate (PLR), fixed at the time of taking the loan plus a mark-up. If your home loan is at a spread of one percent to the PLR, which is say 10 percent, you will pay an interest rate of 11 percent per annum.
How often the bank changes the benchmark rate should be checked. Banks periodically revise the PLR to which the home loan interest rate is pegged. The lending rates may not be automatically adjusted to the revised PLRs.
If one has opted for a fixed rate loan, it is to be checked whether the interest is fixed for a part of the tenure or the entire tenure. Do check the reset clauses. The bank normally reserves the right to revise the interest rates upwards or downwards, once in three or five years, even on a fixed rate loan.
Also check whether the loan can be prepaid, and if so, what the charges are. It may be a fixed fee, a percentage of the loan outstanding, or a percentage of the loan amount. Further, there may be a restriction on the number of prepayments you can make during the tenure of the loan.
Check what the other charges you will be required to pay to get the home loan are. There could be a fee for processing, services, and administration. These could be levied as a flat fee or a fixed percentage of your loan amount on sanction.
- Loan amount
The maximum loan amount offered by a bank is important to find out if it can finance the amount you are looking for. Some banks have set limits for maximum amounts they lend for particular purposes. This becomes all the more important because this is a long-term decision.
- LTV ratio
You should also check the maximum permissible loanto-value (LTV) ratio. The maximum loan you would get with regard to the value of the house needs to be checked. It may be worthwhile to see if a co-applicant is allowed. Some banks insist on only certain relationships as applicant and co-applicant. Some insist on a personal guarantor as an additional security.
Sunday, August 2, 2009
A lot of parents in India postpone or neglect crucial decisions pertaining to their own futures. Throughout their working career, the focus is almost always on providing the best to their children at every level. This often leaves them high and dry and dependent on their children to deal with their needs post-retirement. Such financial mistakes are common and often perpetrated generation after generation.
New parents are often the biggest spendthrifts. The spending sometimes begins even before your little bundle of joy makes his/ her arrival into the world. Your excitement levels are at their peak and when you enter a shop with baby supplies, almost everything on display seems like a necessity for the little one. But you need to return to ground reality and make the crucial distinction between a necessity and a luxury and incorporate this theory into the making of your budget.
- PUTTING OFF PLANNING
Many people put off the idea of formally making a budget and allocating what percentage of their income needs to be spend where. When the budget is made, it often remains unaltered for long periods of time and action is taken only when things begin to go out of control. Also, decisions are generally made in isolation, without the consent of the other partner.
People further fail to evaluate their financial goals and spending abilities. Many new parents have a four to five-year horizon and do not estimate the amount needed beyond play school. Normally, money doubles in six to seven years, so the parents lose the benefit of compounding. They often forget that they need to plan for the child till the time he/ she is dependent on them.
- NARROW FOCUS
Focusing on the education and marriage of children is a common phenomenon among Indian parents. You may believe in saving all you can to make sure that your children get to fulfil their dreams of going abroad to study and that your daughter is well provided for during her wedding. “ut providing for your child does not have to be done at the cost of your retirement plans. While this may still be an anathema to a lot of Indian families, many banks offer loans for higher studies and it may not be a bad idea to consider them.
- INSURANCE FOLLIES
To provide maximum safeguards against risk, most parents today have the tendency to take multiple insurance policies. But you should explore the possibility of increasing the life cover in existing policies instead of going for new policies. Many parents also take children’s policies on an ad hoc basis without exploring whether they will meet the need of the child in future. Also, while you may have a good life insurance cover, you may have forgotten to take a health or mediclaim policy, which will ultimately force you to take hefty sums out of your savings for medical expenses. When people have medical policies, they sometimes forget to include their children in these policies, leaving them exposed in the case of eventualities.
- DELAYING YOUR WILL
Many lawyers make a quick buck off this folly made by parents. Most parents leave the idea of making a Will for their gray-haired years. For the moment, they often feel that a nomination will serve the purpose. While nomination allows the nominee to receive the proceeds, it does not make nominee owner of the proceeds. Also, not leaving a Will paves way for a lot of legal and unwarranted disputes among family members.
The bottom line, however, is that you don’t have to feel selfish if every financial act that you indulge in does not seem to visibly benefit your child at the moment.
Saturday, August 1, 2009
People usually underestimate how much they need and over-estimate how much they have. This blog post explains why this is more important while financial planning for retirement
IF RETIREMENT planning is crucial to providing you and your loved ones a secure future, the same holds true for post-retirement planning as well. Particularly if you don’t want to run out of money in the sunset years, even while maintaining a comfortable standard of living when you are no longer earning.
The ultra-high standards of living that people achieve today using credit cards and other types of credit are based on the assumption that they will have an unlimited future during which they’ll tighten their belts and pay all the borrowed money back. Unfortunately, people can’t carry this lifestyle into retirement unless they become rich, and that’s unlikely.
Post-retirement planning, thus, acquires added importance because people usually under-estimate how much they need and over-estimate how much they have. For instance, people assume that after paying out their housing and other mortgages, their monthly expenses will reduce over time, but they forget that healthcare expenses are bound to rise as they become older.
There are other complexities too. For example, people today generally live longer and spend more years in retirement. They, therefore, need to save as well as protect their savings, more to cover the risk of living longer than their life expectancy. Traditionally, retirees moved most of their assets into investments that provided a fixed income. But many of today’s retirees need to invest for growth as well as income, so that their assets will continue to support them long into the future.
Moreover, as people are healthier and love pursuing new interests even in golden years, such as vacationing abroad and playing golf, their post-retirement lifestyles are not bound to be less extravagant than those prior to retiring. Therefore, investors many a times are faced with the issue of looking beyond those financial plans which assume that one’s post-retirement expenses would always be lower. Also, there are issues concerning financial responsibilities in the event of disability or impairments and the eventual distribution of assets to beneficiaries.
Start here. You need to know how to plan for your post-retirement life. Post-retirement financial planning can be a continuation of retirement planning or an independent financial planning exercise in itself.
In the first case, one needs to review the plan immediately after retirement and thereafter regularly. Your post-retirement financial plan should begin with the basics: net worth, income and expenses. Analysing these three factors will help you determine how long your assets will last at various rates of investment return, inflation, and spending.
Post-retirement financial planning, however, is taken independently when one doesn’t have a retirement plan. However, while in the case of retirement planning the focus is on achieving growth, in post-retirement financial planning the focus is on generating income as well as achieving growth. Since the retiree depends on the income from investments, managing cash flows becomes paramount.
Three important criteria to be considered while choosing a post-retirement investment avenue are:
- Rate of return and
Since most retirees have a fixed corpus and earnings, safety of these becomes very important. But the rate of return that an investment offers is also important as retirees depend on these returns for their income and most retirees prefer to have easy-to-liquidate investments to meet the regular and unforeseen expenditures.
Post-retirement, a person does not have his monthly paycheck and will have to depend on the annuity he receives from his investment corpus. Therefore, this corpus is the most critical to his survival. Financial planning, therefore, has to be done in earlier stages of life so that the person will have adequate money to suit his lifestyle. This only changes the way he is going to manage his money.
Unfortunately, however, there are very few investment avenues available today which meet the three criteria of safety, rate of return and liquidity. Safe investments offer low returns or come with a ‘lock-in’. Higher returns, on the other hand, come with relatively higher risks. It is, therefore, important to allocate the corpus intelligently so that near-term needs can be met with low-return yielding liquid investments and part corpus can be invested in ‘lock-ins’ or riskier investments. Also, apart from the regular investment options such as post office deposits, senior citizen bonds and RBI bonds, there are some varieties of mutual funds — Liquid Plus Funds, Arbitrage Funds — which can be considered.
The amount of risk a person takes, however, should be based his profile. For instance, if there is a large gap between the returns needed and the returns earned, equity exposure might become a necessity. However, once invested, investments should be monitored regularly and action taken, if necessary.
Also, since post-retirement many people are left with no other choice but only to control their expenses, it would also help them a lot if instead of finding a huge nest egg, they could simply find a retirement lifestyle that fits their budget!
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