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Monday, May 31, 2010

Mutual Fund Review: UTI Opportunities



The right sectoral calls have helped this fund's performance in recent years


As the name implies, the fund has accomplished what it stated it would do. And in the bargain, has made money for its investors.


Launched in July 2005, it got off to a weak start. It delivered a meagre 11 per cent in 2006, underperforming both, its category and benchmark by huge margins. One of the reasons being the high allocation to mid cap stocks when it was large caps that rallied that year. Coupled with sector picks that went wrong, such as being overweight on Auto (BSE Auto was among the worst performing indices that year).


Come 2007, the fund began to make up for lost ground. Upadhyaya took over in March 2007 and since then the fund's performance has been more than impressive. Over the 3- year period ended February 28, 2010, it was the best performing fund in its category with an annualised return of 20.01 per cent, double than that of its benchmark (10.30%) and category average (10.32%).


The mandate of this fund requires Upadhyaya to dynamically shift between sectors depending on the macro economic outlook and opportunities available in the market. How does he take such a call? "We hold on to a sector until we see a huge valuation gap between that sector and the market. Or, there has to be some fundamental development which is negative in the sector leading to a sell-off. Alternatively, it could just be that there is another sector that looks more attractive," he explains. In 2009, he moved out of FMCG and into IT. He got into Metals early in the cycle. He continued with Hero Honda and his bets on Tata Motors, ICICI Bank, Hindalco and Lanco Infratech made it for the fund.


By and large, Upadhyaya attempts to keep around 65-75 per cent of his portfolio in 4 to 5 select sectors which he believes will outperform the broader market in the short to medium-term. He also sticks to a 70 per cent large cap tilt and averages at around 40 stocks in the portfolio.


The high cash levels in the fund don't imply that he is not fully invested but indicate derivative exposures. "We employ derivatives either to hedge part of the portfolio or employ it for reverse arbitrage trades. Also, entry and exit is easier in the futures market because of high liquidity," he says.


Fidelity MF to pay bonus to loyal investors

Eligible investors will receive two free units at present NAV for 500 units of fund

In an effort to keep investors locked in for a longer duration in its scheme, Fidelity Mutual Fund has announced a loyalty premium to those who have remained invested in Fidelity Equity Fund since its inception.

The eligible investors will receive two free units at present net asset value (NAV) for every 500 units of Fidelity Equity Fund held since inception. The units will be added to investors' portfolio on May 18.

Fidelity Equity Fund was the first fund of FIL Fund Management, which opened for subscription in May 2005. Since inception, the fund has given an annualised return of 25.23 per cent. The scheme had Rs 2,871 crore asset under management as on April 30.

Ashu Suyash, MD and country head of Fidelity International, said: "We are delighted to offer this loyalty premium. We hope this will encourage more customers to stay invested in our equity funds in their own best interest."

The mutual fund industry in India suffers from investors' short-term investment patterns. The average investment period in an equity fund in India is 18 months. According to recent Amfi (Association of Mutual Funds in India) data, close to 40 per cent of retail investors pull out their money from equity funds in less than two years. In the high net worth individual category, only 48 per cent investors remain invested in equity funds for more than two years.

Friday, May 28, 2010

Understanding Power Of Attorney


What does power of attorney mean?

A power of attorney (PoA) is an instrument in writing empowering a specified person to act for and in the name of a person executing it. In other words, a power of attorney is an authorisation to act on someone else's behalf in a legal or business matter. The person authorising the other to act is the grantor/principal of the power and the one authorised to act is the attorney/agent. It is a unilateral document signed and executed only by the grantor or principal. A PoA may be revoked at the instance of the grantor or due to his death or incapacity. A PoA is usually construed very strictly. The PoA is frequently used in the event of a principal's illness or disability, or when the principal is out of the country and can't be present to sign necessary legal documents for financial transactions.

Why should one make a PoA? Who should one choose?

There are many reasons to make a PoA, as it ensures that someone will look after your financial affairs in case you are not available. You should choose a trusted family member, a proven friend or a honest professional with past reputation. However, one must remember that signing a power of attorney that grants broad authority to an agent is very much like signing a blank check — so make sure you choose wisely and understand the laws that apply to the document.

What are the types of PoA?

General purpose PoA: The PoA holder can perform all activities on behalf of the original holder(s)

   Specific purpose PoA: The PoA holder can perform only certain operations. A power of attorney conferring on the agent the authority to act in a single transaction in the name of the principal is a Special Power of Attorney. If the power of attorney authorises the agent to act generally or in more than one transaction in the name of a principal, it is a General Power of Attorney. A single act or transaction is meant to imply either a single act or acts so related to each other as to form one judicial transaction. For example power of attorney for sale of a particular property.

How do you execute your PoA if you are within India/outside India?

The PoA should be signed and duly executed on a non-judicial stamp paper per prescribed stamp duty, if executed within India. The power of attorney should be duly signed by the person executing the same. It may be accepted by the person in whose favour it is drawn and should be duly attested by two witnesses. The power of attorney should be duly executed before and authenticated by a Notary Public, or any court, Judge, Magistrate, Indian Consul or Vice Consul or representative of the Central government. In case it is executed outside India, it should be on a plain paper without any stamp. The same is required to be stamped within three months after it is received in India by the Collector of Stamps.


Mutual Fund Review: MAGNUM CONTRA


The funds objective is to invest in undervalued scrips, which could be out of favour at the time of investing, but may show attractive growth over long-term.

But, Magnum Contra has underperformed the category average in just 2 years out of the 10. Reason: It had transformed into a equity diversified fund sticking to consensus sectors.

The funds higher allocation to auto in 2007 and lower to financials is a case in point. Currently, it is betting on oil & marketing companies (OMCs) and petrochemicals because there is a lot of pessimism and under-ownership built due to concerns on the near-term outlook.

While underweight on information technology, this scheme is overweight on telecommunication and is more bullish on utilities, cement and hotels, as compared to it's peers.

What you will find here is a diversified, multi-cap portfolio with a cautious view on contra bets. Its impressive returns of 2004 and 2005 may no longer be replicated, but it's long-term track record is good.

Thursday, May 27, 2010

How to read stock price against company earnings?



The PE and the PEG ratio, if used properly, are powerful tools for evaluating whether a stock deserves your investment

Should I invest in this stock? The pursuit of an answer to this question is what keeps investors occupied round the year. One can use a host of quantitative and qualitative parameters to arrive at an answer. Two that most savvy investors employ are PE and PEG ratio. Here is a detailed look at both these ratios and how they can help you choose a stock.


PE Ratio

The Price to Earnings (PE) ratio is among the most frequently used metrics. In essence, it is the company's current stock price divided by its earnings per share (EPS). In other words, the PE ratio tells you how much you are paying for every rupee of the company's earnings.


In the above equation, the numerator is the current price of a single share. But depending on what the annual earnings per share (denominator) is, you can have two types of PE ratios.


Historical PE. When in the denominator you use the preceding 12 months' earnings per share, the PE ratio that you get is the historical PE. The advantage of using historical PE is that both the numerator and the denominator are actual figures (and not estimates). So you are on solid ground when you use this figure.


Forward PE. A stock's valuation, however, depends not just on its past performance but also (in fact, more so) on its prospects. Hence, analysts also use a figure called the forward PE. Here, while the numerator employed is the current price of the stock, the denominator used is an analyst's estimate of what the EPS will be one year down the line.

The disadvantage of this number, of course, is that it is based on an estimate, and that estimate may or may not turn out to be right.


Now, why is the PE ratio important? A high PE ratio indicates that the market has very high growth expectations from the company and has hence priced its stock expensively. A lower PE, on the other hand, signifies that the market has a poor opinion of the company's growth prospects.


There is no blanket strategy that succeeds in the market. If you invest blindly in low PE stocks, you may find that many of them do indeed have poor prospects and hence deserve their low valuations.


Investing in high PE stocks is not a sure-fire road to riches either. If you invest in a very high PE stock and a couple of years down the line its earnings growth falters, you will rue the day you paid such a high price for it.


If you are a value investor, do compare a company's current PE ratio with its own historic PE ratios. That will give you a sense of whether the stock is trading below or above its past valuation levels. Also compare the PE ratio of the stock with that of its industry peers. This too will give you a sense of whether the stock is currently priced high or low.

Some of the factors that have a bearing on PE ratio are:


Growth prospects. Better growth prospects usually lead to investors valuing a company highly, thereby leading to a high PE.


Risk. Higher the perceived risk in a stock, lesser is the inclination to invest in it, leading to a lower PE.


Past record. A company with a good historical performance is trusted by investors and is hence assigned a higher PE by them.


Economic environment. In favourable economic conditions companies tend to have a higher PE ratio. In depressed economic conditions, on the other hand, the entire market's PE tends to be low.


All other things remaining constant, investors should avoid investing in stocks with very high PE ratios.


PEG Ratio

The PE ratio tells you how much you are paying vis-à-vis the stock's earnings. But this is not sufficient. One also needs to get a sense of whether the valuation of the stock is high or low vis-à-vis its growth prospects. The Price Earnings to Growth (PEG) ratio enables you to evaluate this.

The PEG compares the company's PE ratio with the growth rate in its earnings (EPS).


Here again you could calculate historical PEG (historical PE divided by the compounded annual growth rate in earnings over the last three or five years) or forward PEG (forward PE divided by the expected growth rate in earnings over the next one year).

A PEG ratio of one means that the company's stock price is in line with its anticipated earnings growth rate, i.e., it is correctly valued. A PEG ratio of more than one implies that the stock is expensively priced.

A PEG lower than one, on the other hand, indicates that the stock is undervalued - a value investment.


As an investor, your job is to look for discrepancies in the market. Through superior research, you should attempt to dig out stocks that have a low PE ratio currently but have high growth prospects.


When PEG doesn't work

Larger, more mature companies will tend to have a high PEG ratio. A mature company wouldn't have a high earnings growth rate, but it would be stable and would generate a lot of cash, resulting in high dividend income for investors. The PEG ratio would not help you discover such stocks. For this reason, the PE and PEG ratio alone shouldn't be your criteria for selecting stocks. Undertake a comprehensive study of a stock before deciding to invest in it.


Stock views on Patel Engineering, L&T

Angel Sec on L&T - Target Rs 1809


Angel Securities has recommended accumulate rating on Larsen & Toubro, L&T with a target of Rs 1809, in its research report.

"L&T has always traded at a premium to Sensex valuations, and has outperformed the Sensex on a consistent basis, given its  strong operating cash flows, superior return ratios (in excess of 20%) and  excellent capital efficiency. In recent times (over the last 6 months), the stock's  performance has been subdued, given poor quarterly performances and rich  valuations that provided limited scope for disappointment. However, going ahead, we believe that L&T would outperform on the back of: 1) Strong  quarterly numbers, resulting in the fading away of market concerns over  execution, 2) Robust order book, 3) Recent underperformance giving an entry  opportunity for long-term investors, and 4) 18% Earnings CAGR expected over  FY2010-12E. Hence, we maintain an Accumulate on the stock, with a revised target price of Rs 1809 (Rs1,761 earlier). We have used the SOTP methodology and have valued L&T's Parent business at 20x FY2012E Earnings  and its subsidiaries/investments at Rs 383 per share," says Angel Securities research report.



PINC  on Patel Engineering - Target Rs 544: PINC


PINC Research is bullish on Patel Engineering and has recommended buy rating on the stock with a target of Rs 544, in its research report.

"Patel Engineering's (PEL) consolidated Q4FY10 results were a mixed bag with above-than-expected sales growth at 24.1% while EBITDA margin was lower-than-expected at 12.6%. A lower than expected depreciation and higher than expected interest cost netted PAT inline with expectation at Rs719mn. Given the better topline performance of 25.3% growth for FY10 and a healthy order book of Rs 100 billion (up 38% YoY), we upgrade our topline by 5.5% for FY11 and by 6% for FY12, leading to 3.8% upgrade in PAT for FY11 and 7.9% for FY12 respectively. We value the core business at 13x FY11E EPS of Rs 28.7; Road BOT at Rs 12.4; Real estate projects at Rs 55.4; land bank at Rs 67.1; and the power venture at Rs 35.7. We reiterate our 'BUY' recommendation on the stock with a target price of Rs 544," says PINC Research report.

The Canara Robeco InDiGo



A very innovative debt scheme. The Canara Robeco InDiGo Fund will invest in debt and money market instruments (65-90%) and gold (10-35%). InDiGo is a sort of abbreviation for Income from Debt Instruments and Gold.


The debt portfolio will comprise high quality paper (to minimise credit risk), short-term (to avoid duration risk) paper with the focus on generating a steady stream of interest income with a low level of risk. The gold portion will find its way into a gold exchange traded fund (Gold ETF).


The portfolio will be rebalanced every 10 days and the final call on the actual allocation between the two asset classes will be made by the fund manager. The latter will take his cue from seasonal patterns of gold, global and domestic macro economic events, and government policy and Reserve Bank of India (RBI) actions to decide on the actual allocation.


The fund management team has looked at data since 2000 and has narrowed down on periods during the year when India witnesses a heightened demand for gold resulting in an increase in price. These seasonal occasions will be the wedding season, Diwali and Akshay Tritiya. Based on data and performance simulation measures, the product was back tested to arrive at parameters on the change in gold allocation. Higher the potential for monthly change in price, higher the gold allocation. For example, if the monthly change in price is more than or equal to 2 per cent, the gold allocation will be 35 per cent. If the change is less than 0 per cent, the gold allocation would be at its minimum.


This is an interesting offering, to say the least. Investors will not need a demat account, as would be the case if they wanted to buy a Gold ETF. UTI Wealth Builder Fund – Series II is somewhat similar in that it combines gold with another asset (equity). But this one is safer since the other asset in question is debt.


The fund will be managed by Ritesh Jain – Head – Fixed Income. Jain holds a masters degree in Business Economics and has over 11 years of experience in the fixed income markets and asset management. The fund will be benchmarked against CRISIL Short Term Bond Fund Index and price of gold.

The minimum application amount will be Rs 5,000. One per cent exit load will be applicable if redeemed within one year and none if redeemed after that. The new fund offer (NFO) opened on May 19, 2010 and closes on June 10, 2010.


Investing in foreign stocks will become easier through Indian depository receipts (IDRs)


Indian investors have had the option to buy shares listed on foreign stock exchanges for a few years. The process is set to get much easier, with the introduction of Indian Depository Receipts (IDRs).

Just as investors abroad can participate in Indian companies' issues through the American Depository Receipt (ADR) and Global Depository Receipt (GDR) route, Indian investors can now invest in foreign companies through the IDR. Standard Chartered Bank will be the first IDR issue, opening May 25.

IDRs are depository receipts that represent ownership interest in shares of an overseas company. The subscribers will receive depository receipts in dematerialised form. A particular receipt would represent a number of shares; for example, one receipt could represent four shares of the company.

These receipts act as shares and convey the same rights as a normal shareholder, such as access to dividends and voting. The underlying shares would be held by another depository in the country of the issuing company. So, for StanChart, the underlying shares would be held at a Londonbased custodian.


Participating in this issue will be like investing in any Indian initial public offer (IPO). Overseas companies wanting to issue IDRs have to get the draft red herring prospectus accepted by the stock market regulator, the Securities & Exchange Board of India (Sebi) and then file it with the Registrar of Companies (RoC).

The price band for the issuance would be decided before the issue is open and the usual book building process would be used. Once the price is finalised and allotment confirmed, the receipts would be with the depository.

The guidelines are stricter for overseas issuers as compared to Indian IPOs. Among other things, the companies need to have a strong track record and a history of having recorded three years of distributable profits, of the last five years before the issue.

Investors can apply for these receipts just like an Indian IPO in Indian currency, the minimum amount being Rs 20,000 for retail investors. Qualified Institutional Buyers and non-institutional investors are also allowed. After the issuance, these receipts will be listed on stock exchanges and traded like other securities.

The IDR holder can withdraw shares from the IDR facility, but the reverse is not allowed. However, under the current regulations, the IDR holder will have to wait for one year from the issue date and get RBI's approval to convert IDRs into shares.

Moreover, resident Indians are allowed to hold the shares only for a period of 30 days. Thus, for an Indian investor, selling the IDR on the Indian stock market will be an easier option. Otherwise, the holder will have to sell the shares on a foreign exchange where the stock is listed.


With IDRs, investors need not use the $200,000 facility (allowed by RBI) to invest in overseas shares. The foreign currency conversion risk gets somewhat limited. The ease of transaction through a known broker and stock exchange would also help. Investors could also bypass the cumbersome Know Your Client norms while trading with a brokerage abroad. Importantly, the opportunity to invest in a multinational company is the overriding benefit for investors.

IDRs would not be subjected to securities transaction tax, but capital gains tax would be applicable to the holder. And, since dividend distribution tax is not paid by the issuing company, dividends would be taxed in the hands of the IDR holder.

The IDR bears all risks that a normal stock carries. An investor will have to study the company's fundamentals before investing in the IDR.

The IDR will tend to reflect the share price movement in the underlying shares of the company that is listed on the overseas exchange. Also, any adverse change in the overseas currency rate would have a bearing on the share price and dividends. The IDR may also trade at a discount to the underlying shares.

With all this, the overall advantage of investing in quality overseas companies, offers a great opportunity for investors willing to take these risks. The IDR is a stepping stone to global diversification of an investor's portfolio.


Ø       Global diversification of portfolio

Ø       Opportunity to diversify and invest in multinational companies

Ø       No need to use the $200,000 limit to invest in overseas stocks

Ø       Easy investing process (similar to buying Indian IPOs or stocks)

Ø       No STT applicable for trading in IDRs


Ø       Limited knowledge of overseas companies

Ø       Dynamics attached with share price movement increase

Ø       Besides the companys fundamentals, adverse currency movements could also have a bearing on investments

Ø       Tax on dividend to be paid by the IDR holder

Wednesday, May 26, 2010

SBI Mutual Fund has announced the launch of its SBI PSU Fund



It is an open-ended equity fund.


The fund will mainly invest in a basket of stocks of Public Sector Undertakings (PSUs) and a small portion in debt instruments issued by PSUs. While it will invest up to 100 per cent in equities of PSU, it may also allocate up to 35 per cent in debt.


Through this fund, the fund house aims at capitalising on stored value through disinvestment. Disinvestment tends to improve price discovery, valuation and liquidity of such stocks.


The fund will cherry pick PSUs that are likely to emerge as more robust and vibrant players in different industries of the economy as the disinvestment process takes place.


The industries where PSUs have a strong presence are infrastructure, exploration and exploitation of oil and natural resources, technology development and capital goods.


Currently there are two other funds falling under the equity category which follow a similar investment strategy - Sundaram BNP Paribas PSU Opportunities Fund (launched in December 2009) and Religare PSU Equity (launched in October -2009). Others are ETFs -- Kotak PSU Bank ETF and PSU Bank BeES.


The reasons why one could look at an NFO based on PSUs are as follows: PSUs have strong fundamentals, are generally a leading players in their industries and in many cases are near monopolies. These companies also showed greater resilience than their private sector counterparts during the economic downturn. Hence the PSU investment theme looks promising.
However, the fund's true potential lies in eventual privatisation which leads to significant value unlocking. This looks unlikely in the foreseeable future. What the government is doing currently is merely dilution of its stakes. Also, nothing prevents a diversified equity fund from investing in PSUs when opportune, while a PSU Fund will be constrained to invest in PSUs only.

SBI PSU Fund will be managed by Rama Iyer Srinivasan, who holds 16 years of experience in the area of financial services, apart from holding an M.Com and MFM degree. Presently Srinivasan is also the fund manager of Magnum Equity Fund , Magnum Global Fund Magnum Sector Funds Umbrella - Emerging Business Fund and SBI Infrastructure Fund - Series I.


The fund will be benchmarked against BSE PSU Index. The fund offers both growth and dividend options. One per cent exit load is applicable if you redeem within three years and none thereafter. The minimum application amount will be Rs 5,000. The new fund offer (NFO) opens on May 17, 2010 and closes on June 14, 2010.


Sebi panel may bar MFs from selling equity options


A COMMITTEE of market regulator Sebi will consider the issue of restricting mutual funds from selling an equity product that involves betting on future prices.

   The Sebi Mutual Fund Advisory Committee is concerned that this is not mutual funds' core activity and may take a decision on May 31. Equity options is a derivative product where investors bet on future value of stocks or their indices and Sebi is against mutual funds getting into the hedging business, as it could suffer losses.

   In a letter sent to all fund houses recently, Sebi had sought proposals from asset management companies (AMCs), regarding selling of equity options and an increased disclosure of their investment in this segment, sources in fund houses said. Mutual funds have already submitted their view to Sebi and they may be reviewed at the Sebi's Mutual Fund Advisory Committee meeting scheduled on May 31. "MF industry body Association of Mutual Funds of India (Amfi) has already submitted its views in consultation with industry players. The proposal would be discussed on May 31," a Sebi source said on condition of anonymity.

   The market regulator on its part wants the fund houses to control the risk exposure and clearly demarcate their risky exposure, he added. Industry players said, Sebi has been looking at ways and means of regulating distribution of MF products and also MFs investment in derivatives..

   Selling an option usually involve huge losses as the underwriter gets exposed to unlimited risks when market becomes volatile or collapses or hits the upper circuit. The objective of Sebi could be to ensure that MFs can hedge by buying options, but they should not underwrite the option as it is not the core business of MFs to take risk this way.

Tuesday, May 25, 2010

Now breath easy with New Saral form to file tax returns



   The Central Board of Direct Taxes (CBDT) has come out with a new income tax Form - Saral-II. The new form aims at making the process of filing tax returns easier for individual taxpayers. The form is to be used to file the income tax returns for the financial year 2009-10 (assessment year 2010-11).

   The Saral-II is a two-page form. It was mentioned by the Finance Minister in his budget speech for 2010-11. This form will enable individuals to enter relevant details in a simple format in only two pages. The form can be downloaded from the Income Tax Department's website (

It has to be noted that:

• ITR-1 has been renamed Saral - II

• E-filing will be also available along the lines of last year ITR-1

• New addition to the format of ITR-1 is that an assessee can show 'Income from House Property'. The house property income can be from one property only. If more, use ITR-2. An assessee can show loss from house property (interest paid) as a negative figure here. This should be deducted to obtain 'total income'.
The distinct features of Saral-II are that it is to be used by individual taxpayers having salary or pension income, income from one house (excluding brought forward loss from previous years) as well as income from other sources (excluding winnings from lottery). The introduction of the Form Saral-II aims at making filing of income tax returns easier for individual taxpayers, primarily having salary income and one house property.

'Income from House Property' has now been included in the new form, which was not the case earlier. Also, all incomes under the head 'Other Sources' have been covered vis-a-vis only interest income and family pension covered in the previous form.

   The new income tax returns form also seeks to gather information on TDS paid on salary and interest. Besides the usual columns to elicit details of income chargeable under the head salaries and pension, house property and other sources for calculating gross income, the form also includes columns to furnish details of advance tax and self-assessment tax payments, and transactions reported through the Annual Information Return.

   As the process has been centralised, filing of IT returns can be done anywhere in the country, at IT offices and even post offices. If a person has relocated, just the change of address needs to be intimated and the filing can be done at the new location. You can also file returns electronically. Individuals can file returns through authorised intermediaries who digitise the data and send it to the IT Department. It is, however, mandatory, for all those filing income tax returns, to apply and get a PAN.

   The last date for filing returns is July 31.

   The simplified form will make tax compliance easy for individual taxpayers. It is easy to comprehend and submit the requisite information, without sending too much time on collecting the information. The coverage and compliance are expected to increase with this move.




Birla Sunlife's New Fund To Focus On Policy Change, Divestment And Government's Increased Spending On Core Sectors

   THE communication revolution has not just made telephone services cheaper, it has also created enormous wealth for shareholders in telecom companies over the decade. This win-win situation will not have happened without sweeping reforms.

   There has been better utilisation of available resources and increased participation by the private sector in all sectors that have seen reforms. Reforms, be it the green revolution or the white revolution, have changed lives and opened up vast opportunities. As the government continues its journey on the reforms path in many sectors, investors are being offered an opportunity to participate in the process. A dedicated approach to this opportunity can be found in the new fund on offer from Birla Sunlife Mutual Fund – Birla Sunlife India Reforms Fund.


The investment objective of the fund is to generate growth and capital appreciation by building a portfolio of companies that are expected to benefit from economic reforms, PSU divestment and increased government spending. The fund manager will invest 65-100% of the money in equities and equity-related instruments. Up to 35% of the money can be invested in fixed-income securities and moneymarket instruments. The fund has chosen Ankit Sancheti as fund manager. S&P CNX 500 will be the benchmark for the scheme.


The fund will focus on investment opportunities arising out of three contexts. First is the policy change. The fund manager will identify the sectors where policy change is underway. Companies that will benefit from the change in policy will be identified and bought at the right valuations. Second is the popular theme of PSU divestment. In the past, divestment has acted as a key trigger for value unlocking in stocks. Companies that stand to benefit from divestment or new listings at right valuations are the targets for the fund manager here. The third factor is focused government spending in certain areas. This makes the fund manager invest in companies primarily from engineering, real estate & construction, power, telecom, infrastructure, financial services, fertilisers, agro-chemical, irrigation, education and select commodity sectors. The scheme will invest across sectors and without any market capitalisation bias.

   A point to note is that the offering is based on the reforms process in India. In other words, the success of the scheme depends on two factors, first the reforms should continue and second the fund manager should get the calls right about the companies that will benefit from the reforms. In India, we have seen the reforms story unfold rather slowly. Though it is an irreversible process, a stable government at the Centre is a must to create a conducive environment for the reform process to go on. Being a slow process, the beneficiaries may take more time to reward shareholders making it a case of patient investing.


To buy into the opportunity you need at least Rs 5,000. The fund does not charge any entry load, though there is an exit load of 1%. Investors have the options of growth, dividend payout and dividend reinvestment in this fund. The new fund offer closes on June 9, 2010.


The fund works the best for those who intend to own a portfolio of shares of companies that stands to benefit from the reforms process in India.


Reforms process — core of this fund — may not unfold as desired, which may in turn lead to sub-optimal performance.


Mutual Fund Review: Magnum IT



Magnum IT has left its peers way behind in the returns game but is still is a risky bet for any investor


If you look at the 1-year return of Magnum IT, it is nothing short of impressive. At around 147.74 per cent (March 31, 2010), it ranks amongst the top 10 in the entire category of equity funds. That was the good news.


The bad news is that its track record, as far as performance goes, is pretty spotty. Moreover, it has witnessed a fair amount of turnover where fund managers are concerned.

Launched mid-1999, the fund got off to a really pathetic start. From 2000 to 2002, it managed to be consistent by maintaining its second worst performer spot all through those three years. Not that it was particularly impressive in 2003 and 2004 either. However, Magnum IT enjoyed a banner year in 2005. The reason? Sandip Sabharwal took over the fund that year and the result was that it catapulted to the No. 1 slot and changed its fortunes for the better. But that victory was short-lived. It began to gradually slip from that coveted position to underperform the category average in 2007. In 2008, it held the title as the worst performer in its category.

Jayesh Shroff took over the fund in October 2008. Due to high mid- and small-cap allocations and low cash calls, it was the worst performer that quarter (December 2008) amongst its peers.


Shroff attempted to rectify that situation by raising the cash exposure. From 14 per cent in November 2008, it went up to 32.59 per cent by January 2009. Simultaneously, the large cap exposure also began to get upped. "The situation was extreme. There were signs of the macro-economic environment turning bleak, especially in the West where the client profile of infotech companies lie. So we felt it wiser to take a cash call at that time because the revenue stream would be directly affected," he says. Unfortunately, that did not help. The fund suffered (relatively harder than its peers) even in the quarter of March 2009.


But Shroff got really lucky with timing. In February itself he began to lower cash holdings and once the market began to pick up in March 2009, he moved rapidly. He plunged into the market and since then has not looked back. The cash allocation dipped by 18 per cent in just a month. He believes that that move contributed significantly to his fund galloping ahead in 2009. "We deployed cash at the right time," he admits. "The moment the market began to pick up in March, we lowered our cash holdings substantially."


The fund's mid cap bets also played out well with stocks like KPIT Cummins Infosystems and Infotech Enterprises, which were there in the portfolio for a while, proving to be extremely lucrative.


"The stocks we owned, especially in the mid cap space, worked out well. We also did some churning between large caps which delivered," adds Shroff. Weightage to Infosys and TCS rose during 2009 while he played the Wipro card for just a few months.


Coming down to the essential issue, is this fund for you? Yes, but only if you want to live dangerously. To begin with, there is a generic viewpoint that we hold. Taking an exposure to a sector fund is by itself risky, whatever be the sector in question. If you choose to own such funds, total exposure must be limited to a maximum 20 per cent of your equity portfolio. To add to it is the portfolio risk. Magnum IT has been known to take extremely high single stock exposures of 35 per cent (Infosys), 22 per cent (TCS) and 20 per cent (Wipro). But Shroff feels that this comes with the territory. "In any given sector, there are not innumerable opportunities available, so concentration is a natural outcome of the investment mandate," he says.

Nevertheless, we feel that this one is way too concentrated. The January 2010 portfolio comprised of just around 9 stocks, with the top three (Infosys, TCS, Infotech Enterprises) cornering 65 per cent of the portfolio, and that too one of them was a mid cap. In February it was eight stocks, with the top six at 67 per cent.


Most years won't be nearly as good as 2009, but can one expect Magnum IT to remain a notch above the competition over time? Frankly, there's no telling. This fund has alternated between being the best performer in its category and the worst. Going by the current fund manager's style, it could deliver admirably but collapse dismally when the fortunes of the sector change or one of the big bets fail to deliver.


Monday, May 24, 2010

Nominee Versus Legal Heir

A nominee is simply a custodian for most assets, except in case of equities

Last week, when the Supreme Court ruled that a nominee may not necessarily be the beneficiary of a deceased person's proceeds, it opened a debate regarding the status of a nominee vis-à-vis a legal heir.

The well known theory is that a nominee is merely a trustee, not the owner. He/she may temporarily possess the money, but will have to hand it over to the heir when the situation arises. For most investments, the legal heir is entitled to the deceased's assets. For instance, Section 39 of the Insurance Act says the appointed nominee will be paid, though he/she may not be the legal heir. The nominee, in turn, is supposed to hold the proceeds in trust and the legal heir can claim the money.

Similarly, Reserve Bank of India (RBI) guidelines specifies that the deceased's nominee would receive the money in the capacity of a trustee of legal heirs. The same applies for all other financial transactions such as public provident fund, mutual funds and others where the nominee plays the role of a trustee rather than the owner.

But, it is different in case of stocks. Recently, the Bombay High Court ruled that a nominee shall be eligible to acquire the shares of a deceased shareholder instead of legal heirs. Commenting on the ruling, This judgment highlights a clear distinction between nominations made under the Companies Act vis-à-vis the Insurance Act and the Maharashtra Co-operative Societies (MCS) Act. Under Section 109A of the Companies Act, if the nomination is made under procedure prescribed by law, the nominee will be entitled to become the rightful owner of shares. And, such right shall exclusively favour the nominee and exclude all other persons.

In case of property, the MCS Act (under Section 30) says in event of the death of a member of a society, the shares of the deceased will be transferred to the nominee. But, this transfer cannot result in vesting of the flat with the nominee. He/she is merely a trustee for the deceased's estate. Some twists to the tale include:

Case 1: Self acquired property: A will is the deciding factor. In its absence, the property will be classified as 'inherited property'. The property, consequently, will have to be shared equally between the successors,.

Case 2: Inherited property: All members of the immediate family will get an equal share of the pie. Say, a person inherits a flat from his father (by a will). However, he cannot will the property only to his son. The property has to be equally divided between the person, his wife and his children.

Case 3: Joint ownership of self-acquired property: The surviving owner becomes the sole owner. In case of a divorced couple, each owner will have an equal share of the property. However, if any one partner had purchased or built the property solely with his/her funds and opted for joint ownership, he/she can produce the details of investment in court and ask for sole ownership.

Besides these special situations, a will takes precedence over other nominations. The legal heir mentioned in the will is the only person entitled to the deceased's assets, except in case of equities, where the nominee gets the money.

Therefore, financial planners insist that making a will is a very important part of financial planning. It enables you to distribute your assets in the way you wish to and also reduces the risks of undue litigation or disputes.

Typically, a will can be either typed or hand-written (without even a stamp duty or registration). But, legal experts advise to register your will to avoid any future problems.

The well-known theory is that a nominee is merely a trustee, not the owner. He/she may temporarily possess the money, but will have to hand it over to the heir when the situation arises

Mutual Fund review: HDFC EQUITY


After putting an impressive show in 2005, it delivered a pretty muted performance in 2006 and 2007. Even if the fund suffered temporarily, it stuck to good quality businesses, diversification and is wary of richly valued investments. In 2007, low exposure metals or construction and energy helped the fund.

This fund fell 50 per cent in 2008, marginally lower than the category average (54 per cent)without plunging into large caps or aggressive cash calls. It was fully invested when the market picked up in March 2009 returning 106 per cent.

The large corpus has resulted the fund get more diversified. With less than 20 stocks in the portfolio till 2003, it now holds 60. The top 10 holdings have averaged at around 40 per cent in past one year.

All in all, despite hitting the occasional road block, its still one of the sturdiest shops around.

Retirement planning - Better late than never

While it is best to begin early, there are options for those starting on their retirement plans later in life too


   It is very important to think about and plan for life after retirement. Individuals should start planning for their retirement fund as early as possible. Investing early gives time to your investments to grow by way of compounding. Also, one can invest in instruments with a higher risk-return ratio.

   Considering factors such as increase in average lifespan, financial commitments, higher cost of living, higher cost of medication, competition, nuclear families etc, it becomes even more important to start early so that you become totally independent in your golden years.

   Although it is important that one should start retirement planning as early as possible, there is no hard and fast rule on when one should start. The point is that you should not delay it unnecessarily. Those who have not yet thought about retirement planning can start from today.

   Some feel that retirement planning is important after the middle age, say around 40 years. In fact, pension planning at a later age becomes difficult as there won't be much time to build and develop a good corpus to sustain a high standard of retired life. Nevertheless, it's better to plan now even if you could not start early enough.

Here are some tips for those who start late:

Finance planning    

It is very important to build a retirement fund. It's better to given some time to planning rather than just go after some available instruments haphazardly. There are some significant points that one should consider while planning for retirement.

   The needs of every individual are different and therefore one formula cannot be applied to everyone. Therefore, it is important to determine various objectives like regular income, corpus building etc. You should determine your risk appetite while zeroing in on the investment instruments.

   Healthcare is one of the necessities during the later years. With medical treatment being expensive it is important to think about taking appropriate insurance cover keeping the retirement years in mind.

   One can also plan to use the free time after retirement and hence open a means to generate some cash flows.

Instruments and options    

These are some of the investment instruments that can form part of a retirement plan:

Pension plan policy    

This is one of the simplest ways for retirement planning. Under the pension plan, an individual decides his retirement age at the time of subscribing to the policy. The investor pays a regular premium to the insurance company and the insurance company invests this money in various instruments to earn returns and build a corpus over the term of the policy. At the time of retirement, the corpus amount is converted into a monthly income (annuity) payable to the investor. The premium paid for pension policies qualifies for income tax rebate under Section 80C of the Income Tax Act.

Market instruments    

Investments in equity based instruments give good returns. However, one should be careful as the returns are subject to market volatility. It is a good idea to invest partially in equity based instruments to build a corpus even for late starters. However, one should invest from a long-term perspective and have realistic returns expectations from the equity instruments.

Healthcare policy    

In addition to regular cash flows, another major postretirement concern is the expenditure on healthcare. Medical expenditure can be constant or variable in nature. Usually, healthcare policies do not cover expenses related to pre-existing ailments. Therefore, it is important to subscribe to adequate healthcare policies at the earliest to get proper coverage at a lower premium.


Friday, May 21, 2010

Home-loan swaps - Prepayment Rules May Be Changed To Help Borrowers Escape Rate Hike By Banks


THE government may seek changes in the pre-payment rules to enable a home loan borrower to shift to cheaper lenders if his bank raises interest rates soon after disbursing the loan. The government wants banks to provide a two-month window to their new borrowers to shift to some other bank without prepayment penalty if they have raised interest rates too quickly after disbursement. The finance ministry is likely to take up the matter with the central bank to seek these changes.

   "If a bank hike interest rates within a month of the loan taken by a customer, the borrower should also be allowed to look for cheaper options without paying any charges," said a senior finance ministry official adding that levying a pre-payment charge in such cases was like a double penalty.

   The government is not convinced with banks' argument that allowing easy foreclosure without any penal charges may lead to asset-liability mismatch. "The average maturity of deposits a bank holds is for a period of one and half years. If a loan is pre-paid within two months, it will not put any strain," the official said.

   It is expected that the banking regulator will discuss the issue with the Indian Banking Association (IBA), a body of all commercial banks, and may come up with new pre-payment norms including fixing the maximum and the minimum amount that a bank may charge. "We're open to discussion. One should understand that less than 5% borrowers switch loans," an IBA official said.

   Pre-payment charges differ across the industry. While private sector banks charge the customer a steep 2% on the principal outstanding, some public sector banks charge as low as 1% when transferring loan from one bank to another. If any prepayment is made within three years of the first disbursement, HDFC Bank charges an early redemption fee of 2% on amount prepaid in excess of 25% of the opening balance.

   "No charges if the prepayment is made after three years of the loan if it is from your own savings," stated the bank in an e-mail reply to ET query. The bank charges 6% foreclosure fee on auto loans if the pre-payment is made within a year of disbursement. Private lender, ICICI did not respond to an e-mail send by ET. Its website says that pre payment charge levied is 2% of the principal outstanding at the time of foreclosure and amount paid excess of the monthly instalment in the last one year. The bank allows part pre-payment.

   The Competition Commission of India (CCI) had earlier sought replies from all banks after receiving complaints from loan borrowers, asking why prepayment penalty should not be held as anti-competitive practice.


Opting for Co-payment may suit both insurer and you


If you are a healthy person, it makes sense to opt for a co-payment policy as your premium outgo would be much less

   Faced with the challenge of trimming losses in their health portfolio, particularly in the group mediclaim segment, many non-life companies are exploring ways of keeping their costs in check. In line with the objective, several health insurers have introduced the co-payment clause, mainly in the group mediclaim policies offered by them, with a few companies having extended the same to individual policyholders as well. Going forward, the number of companies looking to bring individual health policies into this fold is likely to go up.

How Does It Work?

Co-payment refers to the portion of claim that a policyholder agrees to bear, while the insurance company undertakes to chip in with the rest. The co-payment ratio, though a function of pricing, is arrived based on market acceptance. Not many people would be interested in purchasing a health policy with a co-payment ratio of say, 50%. The ratio generally varies from 10% to 25. That is, if the co-payment ratio prescribed is 20%, 80% of the eligible amount — the approved claim — will be paid by the insurance company.

   This feature is primarily used by insurance companies to discourage policyholders from availing of treatments in plush rooms at high-end hospitals. Also, it deters policyholders from going in for treatment that would have otherwise not been necessary. From an insurance company's perspective, the overall cost of claims comes down. The insured are likely to start using the benefits available under the policy more judiciously, as they have to bear a part of the expenses.

   The clause could come into play only with respect to certain conditions or all the ailments covered by the policy. In case of some policies, the co-payment could be applicable only when the insured undergoes treatment in certain metropolitan cities — the logic being that the cost of healthcare in major cities is higher than the smaller towns. And then there are policies where the co-payment clause comes into the picture only if the insured undergoes treatment at hospitals that are not part of the designated network. In case of our individual health plan, there is a provision of waiving off the co-payment (applicable to treatment at non-network hospitals) by paying an additional premium, which can be made at the time of renewing the policy or buying a policy for the first time.

Policyholder's Perspective

While it helps health insurance companies curtail their losses, policyholders too stand to benefit. The main advantage for the policyholder who opts for a health cover with a co-payment feature is the lower premium payable.

   The co-payment ratio has a direct bearing on the product pricing — the higher the ratio, the lower will be the premium and vice-versa. By the rule of thumb, for policyholders opting for a 20% co-payment ratio, the premium could come down by 15-20%.

Assess Your Risk

While the prospect of paying lower premiums may seem attractive, such policies may not be suitable for all categories of policyholders. For instance, an individual maintaining good health, who believes that his/her risk of being hospitalized is minimal, can consider buying a health insurance policy with a co-payment clause. However, the same cannot be said of senior citizens, whose chances of being hospitalized or undergoing other treatments entailing huge costs are quite high.

Thursday, May 20, 2010



It reduces exposure to equities when the market is high and gets fully invested when valuations are low, as the risk-return trade-off is better and opportunity is greater. The fund can fully get into equity or liquidate the holdings to zero. Over the past few years, its equity holdings dropped to 76 per cent.

The fund has a defensive nature underweight on domestic consumption, interest rate cyclicals. But, it bets on energy for being more conservative than commodities. The fund has tremendous flexibility, to shift between asset classes and market caps. It started as a large-cap fund, moved to mid-caps in 2003 and was back to large-caps in 2006.

Its performance has not always been impressive. But, over a 5-year period, this fund has a better potential to outperform than other funds.

Fund review: Tata Balanced


THE fund is not for the faint-hearted investors but for those who can stay put for the long run.

What is impressive about the fund is its ability to compensate well in a rising market. And this has helped the fund build a competitive record over the long run. Over the five-year period ending April 30, 2010, the fund has delivered an annualised return of 22 per cent against its category's 18 per cent.

In the 2008 bear phase though, it shed 44.78 per cent, slightly higher than its category's fall of 42.70 per cent.

But in the subsequent bull run (09/03/ 2009 to 30/04/2010) it delivered 83 per cent against category's 70 per cent.

From 2003 till 2007, it has outperformed its category in every year except for 2005 when it delivered average performance. In 2007, it beat its category by an impressive margin of around 12 per cent.

The fund's equity allocation can move between 65 and 75 per cent.

Although historically, its equity allocation has gone below 65 per cent on a few occasions but not in recent years and it has ranged between its limit of 65-75 per cent.

The fund has no capitalisation bias and churns frequently between stocks of various market caps. It started as a large-cap fund but with the start of the bull run in 2003, it got heavy on mid and smallcap stocks by mid 2003, reducing it to 35 per cent (November 2003) in largecaps from 61 per cent (December 2002).

But again in 2006, it started moving up the large-cap exposure to around 70 per cent in November 2008, while in the present rally, it has been again reduced to 50 per cent in March 2010.


Wednesday, May 19, 2010

Tata Mutual Fund's PSU Equity Fund



Tata Mutual Fund has filed an offer document with the market regulator the Securities and Exchange Board of India (SEBI) seeking its approval for the launch of the Tata PSU Equity Fund, an open ended equity fund.

The scheme is looking to invest predominantly (at least 65% of the corpus) in equity/equity-related instruments of public sector undertakings (PSUs). This may even go up to 100 per cent.


The scheme has left it open to invest up to 35 per cent each in other equity/equity-related instruments, foreign securities and debt and money market instruments. Except for debt and money market instruments, the risk profile is high.


The Tata PSU Equity Fund will be a sector-specific fund and the fund house is at pains to explain to the market regulator that none of its  other funds matches this mandate.


The fund has been benchmarked against BSE PSU Index.

The fund would be managed by Venugopal M. He holds a MBA (Finance) degree and a BSC (Mathematics) degree. He has a total of 18 years of experience. He also manages other funds of Tata Mutual Fund.

Dinesh Da Costa who holds a B.Com degree, CFA and MBA (Finance) would manage the overseas portfolio.


The fund offers both growth and dividend options.

For non SIP transactions, one per cent exit load would be applicable if redeemed before 365 days.


On non-SIP transactions, one per cent exit load would be applicable if redeemed within 24 months. 


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