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Wednesday, March 31, 2010

Alpha - The relative performance

Alpha, the net performance of a component against the benchmark is an overlooked tool


Absolutely speaking, any bounce back now on markets should be the last for the year. We offcourse can be wrong and prefer to be judged on alpha (relative performance) as relative accountability is fine with us. According to Alpha India, the top outperformers in the weeks ahead should be Reliance Communications, Reliance Infrastructure, SBI, HDFC, ONGC, Larsen, Jaiprakash Associates, Maruti, Bharti and DLF. On the short side (reduce side), we have Ranbaxy, ACC, Sail, Tata Steel, Wipro, Tata Motors, Sun Pharma, TCS, M&M and Infosys.


Performance like everything follows the 80-20 rule, 80 per cent of your gains are going to come from 20 per cent of your portfolio. So why not give it a thought?

The importance of alpha

If alpha was so important, then why don't newspapers and websites publish it? Why alpha gets featured annually but not as intraday or daily event? Why don't we carry alpha trackers every day along with the top movers, top losers and top volume picks? What stops us from doing it? Even as a derivative trader, don't you need to know which one of your futures will deliver more returns than the other? Which short will make more money, Tata Motors or Maruti? Which long will make more money TCS or Infosys?

Outdoing markets

Now the trader may say, "Who knows?" Nobody knows what is going to happen, then why do we claim to get excited about gains early part of the year, unaware of what lies ahead in the year. The good thing about being in performers whether on the long or the short side is that we burn less and we deliver more. Orpheus is in no way trying to dissuade you from doing what you are already doing profitably and consistently, what we are telling you is about confluence, combining ideas. Shorting something that gives 10 per cent more than the Nifty is worth the effort.

ICICI Lombard launches add-on motor insurance

PRIVATE non-life insurer ICICI Lombard General Insurance has introduced two add-on covers — Zero Depreciation and Consumable items — in its motor insurance portfolio. In case of the former, depreciation in auto parts will not be deducted from the claim amount payable to the insured. Other general insurers including Tata-AIG General and Bharti-AXA General Insurance also offer a similar cover. The other add-on promises to ensure that the claim amount is not reduced by the value of consumable items, which would be the case otherwise. This cover includes items such as nut & bolt, screw, grease, lubricant, air-conditioner gas, bearings, engine oil, oil filter, fuel filter and brake oil.

Tuesday, March 30, 2010

Portfolio management and strategies

   Portfolio management strategies could be aggressive or defensive. The balanced approach of having a good mix of both works well in all times. In order to strategically align portfolios to the market cycles, investors must link portfolio management with both the returns.

   Another key parameter of a balanced portfolio management strategy is the diversification of the portfolio. A well-diversified portfolio comprises both low risk low-return fixed income securities like government bonds and bank deposits, and high-risk high-return securities like equity and mutual fund investments. Some hedging instruments like derivatives and insurances may also be held.


A diversified portfolio will also typically include a good mix of investments in and development of capital markets by adopting hybrid approaches that mix elements of active portfolio management strategy of the top-down and bottom-up models.


A) Top down approach - The top down approach looks at the market as a whole first, and then determines which industries and sectors are likely to do well given the current economic cycle. Once the sector choices are made, then specific stocks are selected based on which companies are likely to do best within a particular industry.


B) Bottom up approach - In the bottom up approach, the investor ignores market conditions and expected trends. Instead, companies are evaluated based on the strength of their financial statements, product pipeline, or some other criteria. The idea is that strong companies with achievable growth charts are likely to do well no matter what market or economic conditions prevail.


Alternately, investors may choose to follow the passive strategy of investment. Passive asset management is based on the concept that markets are efficient and therefore there is no way one can consistently outperform the market. One should move with the indexes, minimize the cost of investment and hold the investment for the long term to procure the best investments in precious metals, real-estate, money market investments, cash etc.


Diversified portfolio management strategy allows investors to actively control one portion of their portfolio by adopting different investment strategies; and allow the other portion to grow naturally. However, the portfolio size must be fairly large for adequate diversification. So in a volatile and uncertain market, investors may play defensive and stay invested in low risk low return portfolios till the economic cycle reverses itself. Or if they have the risk appetite and the courage to do, may make the most of the situation of uncertainty, identify opportunities to exploit fully, take calculated risks and come out winners through adversity. The best investment strategy is finally to understand the cost and risks of each investment program and have your own portfolio driven by your decision hierarchy and risk appetite.

Mutual Funds Review: ICICI Pru Banking and Financial Services Fund

The ICICI Pru Banking & Financial Services Fund has yet to make a mark. If you look at its year-to-date or 1-year return (as on November 30, 2009), the fund underperforms its benchmark. On the other hand, it’s fairly good in a peer comparison.

Benchmarked against the BSE Bankex, the majority of the fund’s investments are not components of this index. Currently the fund has 64 per cent of its assets in such stocks while the average allocation since launch is 61 per cent. That would explain the underperformance in comparison to the benchmark. It would also explain why the fund fell by a lesser amount in the December 2008 and March 2009 quarter.

HDFC, IDFC, Srei Infrastructure Finance, Sundaram Finance, Max India, Aditya Birla Nuvo and Reliance Capital are some other stocks that have made an appearance. While he refused to comment on individual stocks

Launched in August 2008, it seemed natural that the fund manager would hold onto cash till the crisis tided over. But surprisingly, the fund manager did not shirk equity and the equity allocation in the last quarter of 2008 averaged a fairly high 76 per cent. As a result, there was no dramatic benchmark outperformance in the very first quarter. But he held a high cash allocation more recently when the market began to rally. Between March and May 2009, the fund averaged 24 per cent in cash which got lowered to 17 per cent by June.

The result: The fund showed a marked underperformance in the June 2009 quarter. India, along with the world, was seeing some signs of a turnaround but they were not certain. Banks were restructuring assets at a high pace which was discomforting. And therefore, we were utilizing cash in a very measured way.

Though the mid-cap allocation has risen, the fund has historically had a large-cap bias. However, Poddar disagrees as to the market cap bias. It is entirely dependent on the opportunitie. Fund has no bias as long as it meets our critical size for investment, qualitative parameters defined for stock selection and is rightly valued. Large caps provide liquidity and relative stability while mid cap names provide higher potential returns.

Monday, March 29, 2010

DWS Global Agrobusiness Fund



Deutsche Mutual Fund will launch DWS Global Agrobusiness Offshore Fund (DGAOF), an open-end foreign fund of fund (FOF). The fund will largely invest in DWS Invest Global Agrobusiness Fund based in Luxembourg and similar mutual funds. The fund can also have a maximum 20% allocation to debt.


DWS Invest Global Agribusiness Fund invests all the way from agricultural commodities to consumer products. The fund invests into companies in land and plantation seed and fertilizer, planting, harvesting, protecting and irrigation, food processing and manufacturing companies, offering investors the opportunity to capture value at various points along the "food chain". DGAOF will be benchmarked against MSCI World Index.


There are two other funds on roughly similar theme – JM Agri & Infra, a close-ended fund and Birla Sun Life Global Agri fund, an open ended fund which also invests in global agri companies besides Indian stocks.


The fund offers both dividend and growth options. The fund will charge 1% exit load for redemption within one year. The minimum application amount will be Rs 5,000. The New Fund Offer (NFO) period opens on April 6, 2010 and closes on April 30, 2010.


Deutsche Mutual Fund has another FoF, DWS Global Thematic Offshore fund which invests to capitalise on changing global social, economic and political dynamics. Deutsche Mutual currently manages assets worth Rs 12,525 crore as on February 28, 2010.

The realityof highest NAV return insurance

In a growing economy like India, it's extremely hard to lose money over a long period

OVER the past few months, one after another, a number of insurance companies have launched Ulips, which promise to repay investors on the basis of the highest NAV that the fund has achieved. The pitch is that these funds' NAVs effectively do not drop. Once a level is achieved, then the investor is assured of getting at least as much, no matter what happens to the market.

It's certainly a very attractive idea. From the way insurance companies are stampeding into launching such products, I'm sure investors must be putting in their money in good numbers. Within a couple of months, six insurance companies have launched such products. Any investor who is told of this concept will immediately start salivating at the thought. Imagine how rich you could have been had you been invested over the past 10 years and had been able to lock your investments at the magical value that the markets achieved on the day when the Sensex touched 20,873!

Any investor thinking about this product would say, "What a wonderful idea!" Why don't all investment schemes --whether mutual funds or Ulips or even portfolio management schemes offer this kind of a protection on all their products anyway.

The answer to this obvious question is simple.
There is no free lunch.
These products don't actually offer what you think they are offering. That is, they do not offer equity returns that never fall. Instead, they offer an investment system with a very long lock-in (seven to 10 years) in which protection is achieved by progressively putting your gains in fixed income assets, which will give returns far more slowly than a pure equity option.

The lock-in and the nonequity assets make this a very different kind of investment than the equity-gainswithout-losses dream that these funds' advertising seems to imply.

However, even that is not the real reason that these funds are useless. The real reason is that if you are willing to lock in for seven to 10 years, then practically any equity mutual fund will deliver this dream of equitygains-without-losses.

Seven years is a very long time. Over such a period practically any equity portfolio into which any kind of thought has gone would capture substantial gains.
This is not a mere conjecture. Since at least 1997, the minimum total return that the Sensex has generated over its worst seven years is 12 per cent, which was over the seven-year period from July 6, 1997 to July 5, 2004.

The truth is that in a growing economy like India, it's extremely hard to lose money over a long period like seven years. If you are willing to lock in your money for seven years, then for all practical purposes, you have a guarantee of making a profit.

Of course, this is not a guarantee that is signed in a contract and legally enforceable, but it's the kind of guarantee that any thoughtful investor would be willing to believe in. Mind you, this is also not a guarantee that you will get the highest NAV achieved. But again, that's the kind of thing that can't be attained if you want the gains of pure equity anyway.

The most instructive thing in this whole business of guaranteed highest NAV products is the contrast between the illusions spun by those peddling complex financial products and the reality of simple, straightforward investing. It just reinforces one's belief that financial products are being designed whose goal is nothing more than to create a marketing hype, which can manipulate the psychology of the ordinary saver.

Investors can now buy foreign ETF listed on NSE

Indian investors will soon be able to buy a foreign exchange-traded fund (ETF) listed on the National Stock Exchange (NSE). The coming Monday will see NSE list the Hang Seng BeES, an open-ended index scheme, which tracks the Hang Seng on a real-time basis.

Promoted by Benchmark Mutual Fund, this will be the first foreign ETF which will enable investors to take exposure to a hitherto closed market like China.

"All the regulatory approvals are in place and we will go live from February 15," Sanjiv Shah, ED, Benchmark Mutual Fund, told ET confirming the development. "Hang Seng BeEs will enable an Indian investor to buy into the largest manufacturing economy in the world (China)," he added.

ETFs are just what their name implies: baskets of securities that are traded, like individual stocks, on an exchange. Unlike regular open-ended mutual funds, ETFs can be bought and sold throughout the trading day like any stock.

Most ETFs charge lower annual expenses than index mutual funds. However, as with stocks, one must pay a brokerage to buy and sell ETF units, which can be a significant drawback for those who trade frequently or invest regular sums of money.

Fund managers at foreign brokerages who track ETFs globally believe that this is one more diversification opportunity for the Indian investor, but more specifically for high networth individuals (HNIs).

"China is a market everyone wants to be a part of. But how many Indian investors track it on a real-time basis or keep up with market trends there? This ETF will be a quick and easy way of accessing Chinese markets," said the head-equity products at a foreign brokerage on condition of anonymity.

Significantly, India ETFs have been gaining ground overseas, as a low-cost option to get exposure to the Indian stock market in a diversified, low-cost portfolio. A query as to the timing of such a product elicited the response that this is a structural trend and not a cyclical one. "It is better to launch a product in volatile market conditions and take it slow and easy," a fund manager added.

Interestingly, last Friday when the market witnessed an unusually high degree of volatility, Rs 50 crore worth of Nifty BeEs were traded. Benchmark Mutual Fund currently has five equity ETFs being traded on the NSE, Nifty BeEs, Junior Nifty, Bank BeEs, Shariah and PSU BeEs.

Officials said that there is no entry or exit load on Hang Seng BeES purchased and sold on the NSE. However, an investor will have to pay a fee in the form of a bid and ask spread and brokerage and other charges as may be levied by his broker.

The asset allocation of Hang Seng BeES will be 90-100% into securities constituting the Hang Seng Index and 0%-10% into money market instruments, low G-Secs, bonds, debt instruments, cash at call and mutual fund schemes/overseas exchange-traded funds based on the Hang Seng index.

Mutual Fund Review: HSBC Equity

HSBC Equity has fallen short of expectations when its peers are rewarding their investors with much higher returns

THE largest scheme from the HSBC basket, HSBC Equity Fund manages an average asset base of about Rs 1,377 crore. Launched in December 2002, the scheme is not only the oldest but also one of the most popular schemes from HSBC. Having run high on the popularity charts of the overall mutual fund (MF) industry during the few initial years of its launch, HSBC Equity has, however, failed to keep pace with the markets for quite some time now.


HSBC Equity started its innings in 2003 on a high not. In its first year, it beat its benchmark index the BSE 200 by extremely generous margins as it net asset value (NAV) jumped by 160% much higher than 95% rise in BSE 200 and a 72% return each by the Sensex and the Nifty that year. It maintained its winning streak in the following two years to emerge as one of the top performing funds of its time.

But having said that, the fund’s performance slipped in the most happening years of the bullrun. In 2006, it returned just about 37% against 40% returns each by the BSE 200 and the Nifty and 47% returns by the Sensex. In 2007, while it did manage to outsmart the Sensex and the Nifty, it marginally fell short of BSE 200’s over 60% returns by returning about 59% in that year. Though aligned to the indices, HSBC Equity returns fell short of the investor expectations since most popular diversified equity funds has rewarded their investors with much higher returns.

If one were to assume that it was probably the fund’s conservative investment strategy and large cap approach that restricted its returns in 2007, then the same strategy helped the fund during the financial crisis of 2008. The fund’s returns fell by about 48% and BSE 200’s fall by more than 56%. The Sensex and the Nifty gave a negative of about 52% each in that year.

But having impressed in the downturn, the fund once again failed to meet the expectations when the markets recovered last year. HSBC Equity’s 59% returns in 2009 were dwarfed by the spectacular performance by most major indices and diversified equity schemes in 2009, with its benchmark, BSE 200 in particular returning about 89% last year.


Being a large-cap fund, HSBC Equity has most of the BSE Group ‘A’ stocks in the portfolio incorporating an average of about 40 scrips at any given point in time. Most of these blue-chip stocks, however, date back to 2005-2006, which the fund has been holding since them. Ideally portraying the benefits of long-term holdings, stocks like Bhel, Bharti Airtel, HDFC Bank, HDFC, Infosys, L&T and Reliance Industries have more than doubled in valuation since they were acquired more than three years back.

It is also interesting to see the fund make some good picks during the meltdown at extremely reasonable valuations, including BPCL, Cipla, Hero Honda, Indian Oil, Jaiprakash Associates and State Bank of India among others. Some of the fund’s recent picks include Bombay Dyeing, Container Corp and Grasim Industries.

As far as the sectoral preferences are concerned, just like most other equity funds of the industry today, it is energy and finance that rule HSBC Equity portfolio. These two sectors together account for about 45% of the fund’s holdings. Of late, the fund has been gradually increasing its exposure in technology with Infosys alone commanding a 6% share in the portfolio.


HSBC Equity is a largecap fund, which are considered to be the least riskiest of all diversified equity funds. The fund’s low risk quotient is also evident from its low beta of 0.81. Beta is a measure of volatility of the portfolio vis-à-vis the market. Thus a beta less than 1 indicates that the portfolio will be less volatile than the markets. This makes this fund an ideal investment for the risk-averse investors. It is, however, the fund’s performance, which though commendable in the downturn, has disappointed in rising markets. Given the fund’s current pace, investors can expect just about average returns from this fund.

Sunday, March 28, 2010

Tax Planning: How to reduce your capital gains tax burden

This article explains how capital gains tax can be saved by depositing the amount in specified bank accounts

Capital gains tax is levied on sale or transfer of a house. The capital gains tax is computed on the indexed cost of the house purchased, which is deducted from the consideration received. The indexed cost is computed according to the indexation rates notified by the Income Tax Department for each year.

You can reduce the capital gains tax payable by complying with the provisions specified under the Act. The benefit is available only to individuals and a Hindu Undivided Family (HUF). No other category of assessees are eligible for this concession.

The house may be self-occupied or rented out. It must be held for a period of more than 36 months before the date of sale or transfer. The asset transferred should include a building, or land appurtenant to it and a house. The income of the house should be chargeable to tax under the head 'Income from House Property'. Other immovable properties, although owned by an individual, are not eligible for this exemption.

In order to avoid being liable to pay capital gains tax, an assessee can either purchase a house within a period of one year before or two years after the date on which the transfer took place, or construct a house within a period of three years after the date of transfer.

The amount of capital gains not appropriated by an assessee towards the purchase of a new house within one year before the date of transfer of the original house, or which is not used by him for purchase or construction of a new house before the date of furnishing the returns of income, should be deposited by him in a specified bank. The amount should be deposited in the 'Capital Gains Account Scheme'. This account can be opened with any nationalised bank.

The scheme is called 'Capital Gains Account Scheme, 1988' and is applicable to all assessees having capital gains .The deposits may be made in one lump sum or in instalments at any time. The amount should be deposited before filing the income tax returns.

Under the scheme, there are two types of accounts. You can go in for 'Deposit Account A. This account is like a savings deposit account. Withdrawals may be made from the account from time to time subject to some conditions of the scheme. This account is suitable for assessees who are planning to construct a house over a period of time.

Alternatively, you can open Deposit Account B. This account is like a term deposit, which is payable after a fixed period of time. The interest earned on the deposit may either be withdrawn periodically or reinvested.

In order to open the account, an assessee must fill up the prescribed application form in duplicate and specify the type of account - A or B. The withdrawals from Deposit Account A can be made through a prescribed form. In case of Deposit account B, the depositor should first transfer the amount to Deposit Account A, and then make the withdrawals. The deposit can be transferred from one branch of a bank to another branch of the same bank. A depositor may close the account with the approval of the assessing officer.

In case of a Deposit Account B, it has to be specified whether the account should be cumulative or noncumulative. The proof of such deposit should be attached with the income tax returns. Both the accounts are eligible for interest as per the guidelines of the Reserve Bank of India.

A depositor can have nominees to the account by filling the relevant forms. The amount can be used in accordance with schemes the Central Government frames. The amount withdrawn can be used for the purchase or construction of a house. The amount withdrawn should be used for this purpose within 60 days of such withdrawal. Any unused amount should be redeposited in the Deposit Account A.

The amount already used by an assessee for the purpose of purchase or construction of a new house together with the amount deposited is deemed to be the cost of the new house. In case the amount deposited is not used wholly or partly for the purchase or construction of a new house within the period specified, the unused amount will be charged as income of the previous year in which the period of three years from the date of the transfer of the original house expires. The assessee is entitled to withdraw such amount in accordance with the provisions of the scheme.

Saturday, March 27, 2010

HDFC Bank revises AQB requirements

HDFC Bank has revised the average quarterly balance (AQB) requirements of various deposit accounts. In case of regular savings account, the minimum AQB to be maintained will be Rs 10,000 and Rs 5,000 for urban and rural branches, respectively. For kid’s advantage accounts and senior citizen accounts, this figure stands at Rs 5,000 across branches. These changes will come into effect from April 1, 2010, for its existing accountholders. Earlier, the bank had revised rates for its new customers as well.

Friday, March 26, 2010

Insure uncertainties of life, but intricacies of the insurance policies

Owing to the uncertainties of life, getting insurance cover is an utmost important exercise to ensure a secured future. However, few are aware of the intricacies of the insurance policies

   Most people have never sat down with an insurance broker. So they're not aware of the products that might benefit them. People hear negative instances from acquaintances and believe them to be true but the fact is they should go to experts who really know about insurance and can really guide them with good advice and to take better care of their money and future. Some may feel that the advisor is just there to push products, and many probably are, but the primary purpose of having a consultation with an insurance broker is to have an overview of your financial picture and determine what needs may be met, if any or what improvements on any existing coverage can be rendered.

   First, life insurance is ideal for people who are married, have children, own assets, need business protection, or have asset-planning needs. Term life insurance, can be for durations of 10, 15, 20, or 30 years. It's great for people who are looking for a low, affordable premium. Whole life insurance is a permanent life insurance that insures you until you reach age. The other premiums are more expensive compared to term life insurance, but it does build cash value.

   Second, health insurance is a necessity these days and can provide you with peace of mind in the event of an unforeseen illnesses or accident as the life is so uncertain these days. New diseases come every year which are difficult to cope up with. Any pre-existing conditions will leave you without health coverage on an individual plan, but you would be eligible for health coverage under a group plan. Health insurance should be a top priority. However, this is not always a possibility since premiums can be very expensive.

   On the contrary, health coverage for seniors is much more attainable compared to the rest of the population. Most seniors who turn 60, are eligible for Mediclaim, which is health insurance provided by the insurance companies. They are entitled to hospital expenses. Nonetheless, Medicare only covers 80% of these costs. By and large, obtaining complete health coverage for seniors is very important .Additionally, disability insurance is better suited for people who are self employed or are the sole earning member of their household. It provides extra protection in the event an accident or illness leaves you unable to work. Above all, alternative investment vehicles for retirement benefits should be considered in the case of low returns.

On the whole, possessing insufficient insurance coverage or retirement assets can leave many with sleepless nights. On the other hand, overpaying for insurance will burn through your pocket book. All and all, striking a balance with your immediate needs and available funds after assessing any vulnerabilities in your financial picture is crucial to the safeguard of your peace of mind and hard earned money. As one goes to a doctor for health purpose one should go to an insurance broker for seeking advice on one's hard earned money.

Have a covered tomorrow.


Get PAN or pay higher tax

The last date to apply for a PAN is March 31, after which you will have to pay higher TDS,

   From the new financial year, assessees will have to pay a higher income tax at source if they do not have a Permanent Account Number (PAN). Tax at higher of the prescribed rate or 20 percent will be deducted on all transactions liable to tax deduction at source (TDS), if the person liable to the tax does not possess a PAN. The new provisions related to TDS under the Income Tax Act will become applicable with effect from April 1, 2010.

   All those liable to pay the tax, including non-residents, need to obtain a PAN by March 31, 2010. This number has to be communicated to those liable to deduct tax before the tax is actually deducted on transactions after that date.

   As such, all financial transactions without PAN will attract tax from April 1, 2010. The Income Tax Department has already made it mandatory for employers to quote PAN of their employees and parties from whom tax is deducted while filing TDS returns. The move of imposing penalty for not quoting PAN is aimed at strengthening the database of the revenue department and increasing tax compliance.

   According to the new provisions, declaration by a taxpayer under Section 197A for non-deduction of TDS on payments will not be valid if it is given without quoting PAN. The certificate for deduction at a lower rate or no deduction will not be given by the assessing officer under Section 197 in the absence of PAN.

   To avoid disputes regarding quoting, non-quoting of PAN or accuracy, all eligible for the deduction and those liable to deduct will be required to quote PAN in all correspondence, bills, vouchers and other documents sent to each other. If a person eligible for deduction fails to do so, he will have to pay 20 percent TDS instead of two percent on rental payments for plant and machinery and 10 percent on land and building.

   PAN is a ten-digit alphanumeric number, issued in the form of a laminated card. It is mandatory to quote PAN on return of income, all correspondence with any income tax authority and challans for any payments due to Income Tax Department. It is also compulsory to quote PAN in all documents pertaining to economic or financial transactions notified from time-totime by the Central Board of Direct Taxes.

   The effort is also seen as a step by the government to increase revenue collections. The 20 percent rate on TDS will be a deterrent and compel many to obtain and furnish PAN. Otherwise, it will directly impact their cash flows in terms of higher tax payout at source.

   Those who still don't have a PAN should immediately apply for one before April 1, 2010.


Alternative Tax-Saving Routes

Given the rising expenses on healthcare, education and rental housing, individuals can go beyond Section 80C to avail tax exemptions

   THE Section 80C of the Income-Tax Act is one of the most popular avenues for the salaried individuals devising tax planning strategy. The section allows tax deduction of up to Rs 1 lakh by investing in approved instruments and hardly anyone misses this opportunity. However, given the rising expenses on healthcare, education and rental housing; individuals can go beyond the Section 80C and avail tax exemptions. Here is a sneak preview.


If there is an expenditure that can indeed burn a big hole in one's pocket, it is the medical expenditure. No wonder that the Income-Tax Act has more than one provisions to offer relief to those incurring these expenditures; notwithstanding that even these appear to be quite inadequate as compared to the actual medical costs one usually tends to incur these days.


The amount of premium paid by an individual is eligible for deduction from the total taxable income under this section. The maximum amount of deduction that can be availed under this section currently is Rs 15,000 if the policy covers self, spouse and/or dependant children and an additional Rs 15,000 for the policy purchased exclusively for dependant parents. Thus, an individual can claim a maximum of Rs 30,000 as deduction from the total taxable income. In case the dependant parents are senior citizens (having attained 65 years of age), then the deduction rises to Rs 20,000 for the medical premium paid for their policy alone.

   The individual can thus claim a total of Rs 35,000 as deduction from the taxable income. Interestingly, if the individual himself and/or his spouse are also senior citizens, they shall also be entitled to a maximum deduction of Rs 20,000 instead of Rs 15,000. If such an individual also pays medical premium for dependant parents, who are also senior citizens, the maximum allowable deduction for such an individual shall thus be Rs 40,000 per annum.


Expenditure incurred by an individual for treatment of dependant spouse, children, parents, brothers or sisters; suffering from following disabilities is eligible for deduction from the total taxable income under this section: Autism: A condition of uneven skill development primarily affecting the communication and social abilities of a person. Celebral Palsy: A medical condition that result in nonprogressive condition of a person and characterised by abnormal motor control posture resulting from brain insult or injuries occurring in the pre-natal, peri-natal or infant period of development. Mental retardation: Condition of arrested or incomplete development of mind, specially characterized by subnormality of intelligence can be claimed as a deduction under this section.

   The amount admissible as deduction under this section is Rs 50,000 per annum or the actual amount expended for the treatment of such a dependant, whichever is lower. If the disability is reckoned to be of a severe nature (80% or more) then the maximum permissible amount of deduction shall be Rs 75,000 per annum. (The same has been enhanced to Rs 1 lakh a year with effect from April 1 2010) This deduction will however not be available for a dependant who has claimed any deduction under section 80U of the I-T Act.


Where an individual tax payer himself has been certified by a medical authority to be suffering with any of the above disability, a deduction of Rs 50,000 per annum and if the disability is of a severe nature, a deduction of Rs 75,000 a year (Rs 1 lakh w.e.f April 1 2010) can be claimed from the total taxable income under section 80U of the I-T Act.


Expenditure incurred for medical treatment of self or dependant spouse, children, parents, brothers or sisters with respect to specified diseases being; Neurological diseases, such as dementia, dystonia musculorum deformans, motor neuron disease, ataxia, chorea, hemiballismus, aphasia and parkinsons, diseases where disability level has been certified to be 40% and above. Tax payers with dependents family members suffering from malignant cancers, AIDS, chronic renal failure and hematological disorders, such as hemophilia and thalassaemia are also eligible for deduction under this section. The maximum admissible deduction is, however, only Rs 40,000 per annum. In case of the dependant patient being a senior citizen, the maximum amount of deduction shall be Rs 60,000 a year.


As far as expenditure on education is concerned, deduction in tax is available only with respect to repayment of interest on loan taken for higher education under Section 80E of the I-T Act. Any individual who takes loan from a recognised financial institution to finance the higher education for self, spouse or children and with effect from April 1 2010 also a student for whom the individual is a legal guardian, shall be eligible to claim deduction for the amount of interest paid on such loan. This deduction is available for a maximum tenure of eight consecutive years starting from the year in which the individual begins to pay such interest. As the section does not specify any limit on the amount of deduction that can be claimed, the entire actual amount paid as interest on loan shall be admissible for deduction.

   Earlier this section was restricted to loan taken to finance full-time graduate or post graduate course in engineering, medicine, management or post graduate course in applied sciences or pure sciences including Mathematics and Statistics. However, from April 1 2010, the scope of this section has been extended to include any course of study pursued after passing senior secondary examination or equivalent.


With increasing property prices and rentals thereon, the cost of accommodation has gone up substantially in cities across the country. While those who have purchased a house financed by loan, can claim an exemption on the amount of interest paid on such loan (up to a maximum of Rs 1.5 lakh), others who stay in rental accommodations can seek tax relief in Section 80GG of the I-T Act.This section is applicable either to a self-employed individual or an employee who does not receive house rent allowance (HRA) from his employer. (All salaried employees in receipt of HRA can claim an exemption on the accommodation rentals under Section 10(13A) of the I-T Act.)The deduction under Section 80GG can be availed provided the individual, his spouse or minor children do not own any residential accommodation at the place where they reside and are employed or carry out their business or profession. The deduction admissible under this section shall be minimum of the following — Rs 2,000 per month or 25% of the total income or the actual rent paid in excess of 10% of the total income.


Gratuity cap raised to Rs 10 lakh

Cabinet also approves changes in Seeds Act for quality control

THE centre on Thursday hiked the existing gratuity limit to Rs 10 lakh from the existing Rs 3.5 lakh.

As per the Payment of Gratuity Act, 1972, on completion of five years service, employees in both private and public sector covered under the Labour Act are entitled to payment of gratuity subject to a maximum of Rs 3.5 lakh.

The gratuity is an in- come for an employee equivalent to half of the last monthly basic pay drawn multiplied by num- ber of service years. How- ever, an upper limit of Rs 3.5 lakh has been there on gratuity. This ceiling has been raised to Rs 10 lakh with immediate effect. The union cabinet cleared the proposal of personnel de- partment on Thursday.

The Cabinet also cleared proposed amend- ments in the Seeds Bill as per recommendations of parliamentary standing committee. Agriculture minister Sharad Pawar will move the amendments to Seeds Bill in both houses of Parliament. The pro- posed Seeds Bill, which was introduced in the Rajya Sabha in December 2004, seeks to repeal and replace existing seeds Act, 1966, that did not deal with the quality control of GM seeds as they are gen- erally not notified.
A standing committee headed by Ram Gopal Yadav in 2006 objected to the registration of genetically modified seeds on the pretext of its adverse im- pact on environment. Gu- jarat had successfully adopted the genetically modified seeds.

In addition, the Cabinet also cleared the changes in Foreign Contributions Regulation Act. Finance minister Pranab Mukher- jee will soon move the amendments to FRCA in Parliament.
Cabinet Committee on Economic Affairs (CCEA) has also decided to spend Rs 2,000 crore for setting up 188 nursing schools across the country. Meanwhile, a group of ministers headed by Pranab Mukherjee will now look into India- Malaysia ties. Following objections voiced by Law minister M Veerappa Moily raised on wording of tech- nical agreement vis-à-vis road projects between the two countries, Prime Min- ister Manmohan Singh di- rected referring the issuee to ministerial group head- ed by Mukherjee.

Malaysian Prime Minis- ter Datuk Seri Najib Tun Razak visited India in Jan- uary and discussed issues related to cooperation with his Indian counterpart ­ Manmohan Singh.

Razak had said that stalled Malaysia-India Comprehensive Economic Cooperation Agreement (MI-Ceca) would cover more areas than the Asean-India Free Trade Agreement.

Thursday, March 25, 2010

What investment can get house better value

There are certain features that make houses more appealing to buyers. Go for these and enhance your house's value. They won't cost you a bomb either

   HAVE you ever wondered why there is a large variation in prices between two houses? Why an apartment is often considered a cut above the rest and also commands better value and rental returns?

   The location of your home and other factors like the floor that you are in are a given, but there are some features that make homes more appealing to buyers. These features are within your control and can be introduced by investing a small fraction of the house's value. Here are some tips:


This is one improvement that costs next to nothing. But a house that is spanking clean and is not cluttered with furniture or other household stuff gives an impression of space and warms the buyer to the property.


These two rooms are the ones where you can make investments that have immense utility value. According to experts, if you are not going for anything extravagant, you can expect a 200% return on the investment that your make in upgrading these two rooms.


If you want to sell your house in the near future and have only one bathroom, then you may consider adding a second one. Homebuyers will want enough bathrooms to handle their family size. And you don't have to build an extension onto your house for this; simply use the space that isn't being used in your home. If you could add another room in the available space, there is nothing like that.


Today, a large component of the cost of the house is the cost of the land on which it is built. But buyers tend to focus on the cost per square feet of the built-up area. If you are having an independent house, you could look at creating more usable space. "Additional storage space, laundry space, multifunctional terraces are all great ideas to fetch better value and increase the total built-up area of the house.


Today's customers look for smart homes with innovative solutions, and anything short of their expectations won't be able to fetch a better price. Even if selling or renting is not your goal, then a thoughtfully-renovated house can always be your prized possession.


With time, all buildings go through wear and tear and, therefore, there is a constant need for timely and proper upkeep. Similarly, reinvestment is sometimes required because of the need for upgradation. For instance, new materials are constantly being introduced in the market and replacing old finishes with better options may be the need for keeping up with the times.


While makeovers definitely boost the value of your abode, there are certain changes that will not only cost you a bomb, but run the risk of putting off potential buyers.

   This can be the gardens, overspending on paints or wallpapers, extravagant kitchens, bathrooms and hot tubs, and swimming pools, among others. The taste of colour and the theme of designs may vary from person to person. Also, gardens and pools are a token of status symbol, but most buyers don't opt for any additional maintenance cost.

   Financial advisors, the world over, suggest to budget 1-2% of the home's purchase price per annum for home repairs and upkeep. In case of remodelling, the budget can go up to 10 to 15% of the home's value, depending on the location of the property. Anything beyond that should be for the sake of your own pleasure and comfort!


PAY SPECIAL attention to kitchens and bathrooms

IF YOURS IS a single bathroom house, adding another one will increase appeal

SPREAD YOUR investment across the house

DO KEEP A check on time and cost overruns

ENSURE THAT renovations are in keeping with bye-laws of your local authority


DO NOT spend more than 1-2% of the value on repairs GET TO experimental and go for unusual colours & designs

DO NOT reduce the number of bedrooms DO NOT use wallpaper as it will look like a cover-up DO NOT make investment that are 'high maintenance'


Mutual Fund Review: HDFC PRUDENCE Fund

In the first 10 years of its existence, 1996 to 2006, this fund beat the category average every single year. However, doubts were raised when it performed averagely in 2007 and 2008. It then silenced every sceptic by the best performance in its category in 2009.

The fund manager has been at the helm of this scheme since its inception. He likes to stick to his beliefs, the current trends dont bother him. The funds mandate allows equity allocation to be between 40-75 per cent. The fund has stayed within its equity limit, averaging 70 per cent since mid-2006. The manager had a high equity allocation in 2008, most of it in lower caps. This was why the fund performed averagely in 2008, but also why it topped the category in 2009.
The manager keeps the portfolio well diversified with respect to both stocks and sectors. Over the past year, the average number of stocks have been around 60. Since 2006, the allocation to the top five stocks did not go beyond 20 per cent.

On the debt side, the fund manager takes small exposures in structured debt and G-Secs. However, on the whole, he prefers bonds and debentures of the financial services sector.
This fund is the biggest in its category, and also the best. It reaped benefits for its investors with the fiveyear returns of 24 per cent (as on March 3), against the categorys 16 per cent. These numbers make the fund a very good pick.

Wednesday, March 24, 2010

Government Borrowing And Its Effects On Economy

Fiscal Deficit

The government is taking a lot of flak these days for the 16-year high fiscal deficit in the current fiscal year. Here’s how it is: The government’s ‘non-borrowed receipts’ — revenue receipts plus loan repayments received by the government plus miscellaneous capital receipts, primarily divestment proceeds — fall short of its expenditure. The excess of total expenditure over total non-borrowed receipts is called ‘fiscal deficit’. The government then has to borrow money from the people to meet the shortfall.

Revenue Deficit

Revenue deficit is an important control indicator. All expenditure on revenue account should ideally be met from receipts on revenue account. Ideally revenue deficit should be zero, else the government will be in debt.

Primary Deficit

This is a key indicator. When it shrinks, it indicates we are not doing too badly on fiscal health. The primary deficit is fiscal deficit minus interest payments the government makes on its earlier borrowings.

Deficit And The GDP

It’s important to see where all this fit in the larger economic picture. The Budget document mentions deficit as a percentage of GDP. In absolute terms, the fiscal deficit may be large, but if it is small compared to the size of the economy, then it’s not such a bad thing. Prudent fiscal management requires that the government does not borrow to consume in the normal course.


Enacted in 2003, the Fiscal Responsibility and Budget Management Act sought the elimination of revenue deficit by 2008-09. This means that from 2008-09, the government was to meet all its revenue expenditure from its revenue receipts. Any borrowing was to be done to meet capital expenditure — that is, repayment of loans, lending and fresh investment. The Act also mandates a 3% limit on fiscal deficit after 2008-09. The financial crisis and the subsequent slowdown forced the government to abandon the path of fiscal consolidation.

Tuesday, March 23, 2010

Religare Banking Fund

Till date, Religare Banking, a large-cap oriented fund, has proved to be a safe, but not exciting player.

It started off well by beating its benchmark — CNX Bank Index, in the initial two quarters. But it faltered in the June 2009 quarter, when it underperformed its benchmark and the category average by a margin of around 20 per cent and 8 per cent, respectively.

A part of the reason could be the delayed move to lower cash. The cash allocation was pretty high in April (20%) which got lowered by June 2009 (5%). However, Kumar feels that it was a combination of the cash allocation as well as the type of stocks. "The initial part of the recovery was with stocks that had fallen hard last year," says Kumar. "They rose sharply just coming off the trough. These were the stocks we were underweight on."

Despite that lapse in performance, the fund has rallied in recent times. Its 1-year performance is pretty average but its 6-month return (as on November 30, 2009) places it in the No. 1 slot amongst its peers. "After the initial recovery, it was other more solid stocks with stronger business models and balance sheets that began to rally," explains Kumar. "That has helped in performance since these were the stocks we owned."

The mandate of this fund states that it will invest primarily (min. 65%) in the stocks of CNX Bank Index with some exposure to financial stocks which are not part of the index (max. 35%). This ensures that the fund tilts towards large caps and currently holds the second-highest market cap amongst its peers. Interestingly, it has never invested in Kotak Mahindra Bank and IDBI Bank. 

This fund has never really courted the popular broking stocks but instead holds stocks like ICRA, Power Finance Corporation and Rural Electrification Corporation. "We believe that project finance institutions are well placed to benefit from the infrastructure boom," says Kumar. "Where banks are concerned, there has not been much growth in credit. But in certain financial institutions, which lend to the power sector, there has been growth and their book is clean with lower NPAs." Its turnover ratio at 3.1 signifies a fair amount of churning. "The reason was due to the dividend activity in the year, for which one has to necessarily sell the stocks to realize profit. We don't churn much," says Kumar.

Size of the mutual fund shouldn’t matter on its performance

With 37 funds in play, what are the criteria that should guide investors while selecting a Mutual Fund

   ALL Asset Management Companies (AMCs) comprise eminent board of trustees and are well regulated. We would take a holistic view on the AMC and not merely look at its size before recommending it to clients.

   With a mere 5% of Indian household savings going to mutual funds, compared with more than 60% worldwide, there is a lot of headroom for mutual funds to grow.

   The potential, coupled with low-entry barriers, have resulted in as many as 37 AMCs doing business in India with a few more likely to join soon. The increased competition is putting pressure on the margins of AMCs. So what are the factors that an investor should keep in mind while choosing a fund?

Investment process

Disciplined approach in investments over a longer period of time plays a crucial role when we choose a fund. The AMC should have a well-defined investment process. The investment decisions of the fund house should not depend on an individual fund manager's whims and fancies. The investment universe of the stocks and securities should be a function of the pre-defined investment process. How much money they make or lose for you is not a function of their size but, rather, a function of how well a manager can select a portfolio of stocks for the long term, without taking any wild risks.

Management credentials

It is important to take a look at the past record of the promoter. Are they building business to sell it when a suitable opportunity arises or are they going to run the business? If they are building a business to sell it off, chances are they will look to grow the AUM at a very fast pace. It is important to look at fund managers' past track record. Fund managers are important when it comes to consistency in the fund management style. The experience and wealth of knowledge they bring helps to a great extent in the investment process. Analytical backbone offered by analysts is also important. There is nothing to worry if you come across a small fund house that has managed to retain fund managers for a long period of time. If you come across a change of guard rather often, beware.

Scale economics

Some small funds end up charging higher percentage of charges, typically nearing the maximum allowed limit of 2.5%. Put simply, if one invests Rs 100,000 in such a fund, you end up paying Rs 2,500 whereas in a fund with lower charges of say 2%, you will end up paying Rs 2,000 per year.

Small is volatile

Small funds may show spectacular returns as they can take meaningful exposure in small and mid-cap stocks. A Rs 50-crore fund can park Rs 2.5 crore or 5% of the fund assets in a Rs 200-crore market cap company. But a Rs 5,000-crore fund will not find it interesting, because even if it accumulates 10% shares in the company (Rs 20 crore), it may not form a meaningful part of the portfolio.

   Typically, small funds, when they perform well, tend to attract money and grow large. But when they grow big, their performance tapers off, as they have to change the asset mix in favour of large-cap well-researched stocks that may not offer super-normal gains. Here the returns may not be the same as offered in the past. Investors in many cases are not able to digest this.

Investment mandate

Many small-sized funds may bypass their investment mandate or the investment objective in the short term as they do not appear in most of the analysts' radar. So for an investor, it is crucial to take a close look at the investment portfolio in light of investment objective of the fund.

   If you invest in a small AMC and it is taken over, you are given an opportunity to exit at no exit loads. This opportunity should be exercised by investors in case they are not comfortable with the new management.

90% of closed-end funds do not trade

Absence of market maker that can ensure discount for investors hits fund schemes

TRADING in closed-end schemes of mutual funds, which are mandatorily listed on stock exchanges following the Securities and Exchange Board of India (Sebi) order in December 2008, remains virtually non-existent with barely a handful of funds witnessing any kind of trading volume.

According to Value Research data, only 13 out of 140 closed-end schemes have seen some or any kind of trading in the bourses ever since the Sebi order came into force. The average daily trading in these schemes have been just a meagre 25,000 units, according to figures available from January 2009. However, the daily trading figure swings between just one unit of a particular scheme on a particular day to over 300,000 units of some other scheme on a day.

Experts say the trading in these mutual fund schemes have failed to pick up because of lack of demand in absence of a market maker that could offer the schemes to buyers at substantial discount. Some experts also attributed the poor response to losing charm of closed-end schemes, especially fixed maturity plans (FMPs).

Alok Singh, head of fixed income, Fortis Mutual Fund, said most of the closed-end schemes are FMPs and because of strict Sebi norms, FMPs have lost the attractiveness they used to have earlier. Sebi has barred FMPs from giving indicative returns and also stopped investors from premature exit.
"In the past couple of months, many fund houses have again lined up a few fixed maturity plans and once more funds are there in the secondary market, trading could pick up," he said.

Dhirendra Kumar, CEO of Value Research, a mutual fund tracker, told FC that the basic idea behind listing of such funds was to stop the practice of premature exit from these closed-end funds and yet make them liquid. "The listing provided an emergency route to exit for investors, who are in urgent need of money, and hence can sell their units in the secondary market," he added. However, he said that in absence of enough buyers and sellers, the trading volume in these funds remains very low.

The CEO of a fund house said until financial intermediaries market the schemes aggressively and provide the funds at a substantial discount to buyers, volumes would be hard to come by.
"Although, the main purpose of the listing was to make these funds more liquid, the idea remains a non-starter in the absence of any incentive to market makers that could pitch these products in the market," he added.


Fund houses making a beeline for fund of funds (FoF)

Gold Fund Of Funds Seen In Demand Of Late

LATE in December, Benchmark Asset Management joined a couple of other mutual funds to file its offer documents with Sebi to launch gold fund of funds (FoF) in India. A FoF is an investment strategy of holding a portfolio of other investment funds.

A gold FoF, which invests in gold exchange-traded funds (ETFs) and reflects its returns, will help investors bet on the yellow metal without maintaining a demat account of a stock broker.

Currently, investors in India can take exposure to gold by buying the metal physically or investing in gold ETFs offered by local mutual funds. Gold ETFs are passively-managed funds, which are listed and traded on stock exchanges, and designed to mirror the returns from physical gold in the spot market. But many investors, who don’t have a demat account, haven’t been able to transact gold ETFs, as buying or selling them can be done only through stock brokers.

Gold FoF attempts to remove this obstacle for investors, who are reluctant to open a demat account. More significantly, investors can use the systematic investment plan (SIP) facility, which involves investing in mutual fund units in regular intervals, to invest in gold units. Mutual funds don’t offer the SIP facility for gold ETFs unlike for equity schemes.

Would recommend gold FoF to clients for its operational advantages more than anything, as not many will be interested in opening a demat just to trade gold ETFs.

Gold was the second most sought-after asset class after equity in 2009, as the metal was considered a hedge against the falling US dollar, sovereign downgrades and inflation. Though the US dollar has rebounded and may remain strong for a while, the popularity of gold is unlikely to decline in 2010, as investors see risks in withdrawal of stimulus by governments worldwide and monetary tightening by central banks.

In India, there are six gold ETFs currently offered by some mutual fund companies and a handful more are in the queue to launch one. For gold FoF, Reliance Mutual Fund and UTI Mutual Fund are the other asset management companies, which had applied to Sebi last year.

But gold FoF is not a product for the cost-conscious investor. Fees for FoF are typically higher than those on regular funds, because expenses include part of the fees charged by the underlying funds.

Any day, a gold ETF is a better product than an FoF, because of the cost advantage, as additional expenses eat into returns. Returns from gold in 2009 have been quite volatile.

Monday, March 22, 2010

Spread your bets on commodities

Investing in commodities can be hot and volatile. It is better you don't invest all your money at one go

   METALS were the best performing sector on Indian bourses in calendar year 2009. Compared to the BSE Sensex, which moved up by 81%, the BSE Metal index appreciated 234%.

   Such triple-digit gains may prompt some investors to think, If commodity stocks are such hot property, then commodities should be good investments in themselves.
   But returns in commodities can hardly be termed consistent.

   Consider this: In 2007, those who bought into commodities such as oil and ferrous metals saw their wealth evaporate. A year later, those who kept the faith on the ability of policymakers to review demand managed to generate profits.

   Data on commodities is very transparent. However, volatility is high in commodities and hence, investors must not put money in one go, but should average investments over a period of time


Commodity futures are simple basic tools, which allows an investor to build either a long or a short position in a specific commodity. However, given the leverage involved and the mark-to-marked nature of the contract, most retail investors find it difficult to go this route.


In India, barring commodity futures, there are few options for retail investors. Except for gold exchangetraded funds (ETF), there are no mutual fund schemes that buy metals or commodities directly due to regulatory reasons. Gold ETFs buy into gold and issue gold units of equivalent amount which can be bought by investors having a positive view on gold. There are seven such schemes available to investors. Investors have earned approximately 5% returns over the past one year from Gold ETFs.


This brings us back to the equity route. Direct exposure to commodity manufacturing companies is good for those who can study such companies and assess the investment options in greater details.

   But the flipside is that companies do not always manage to reflect the performance of commodities they deal in. "When prices of essential commodities shoot up, it is highly likely that the government will interfere. This may lead to restrictions and in some cases suspension of trading in commodities," says Vinod Ohri, president (equities) of Gupta Equities. However, he advocates buying into the companies that manufacture commodities as the volatility in equities are less compared to commodity futures.

   There are experts who think that it is unwise to go for commodity stocks. When an investor is bullish on a commodity and ends up buying into a commodity stock, he is exposed to risks associated with the company management, accounting policies and sentiments in the equity market


Retail investors could invest in Gold ETFs or commodity funds to meet their investment needs. Over the last few years, mutual funds launched various commodity thematic funds. SBI Comma fund is the oldest offering here. Besides this, there are funds that track only energy or agro-commodities. However, most of them are new and do not have a past track record. Another risk of investing in commodity thematic fund is exposure to concentration risk. The fund manager has limited options left with him to diversify the portfolio. A recession in the global economy can leave the fund manager with a Hobson's choice.



Risk warning in Mutual Fund TV ads must be shown for 5 seconds, says Sebi

Market watchdog Sebi on Thursday standardised the risk warning that mutual funds have to display in their audio-visual advertisements, with a view to help investors better understand the message. The new rule, which will be effective from May 1, stipulates that the warning in audio-visual ads should be displayed and both the visual and the voice-over of the standard warning should be run for at least 5 seconds. Sebi has also modified the standard warning to: "Mutual fund investments are subject to market risks, read all scheme-related documents carefully" from the earlier warning that read: "Mutual fund investments are subject to market risks, read the offer document carefully before investing." Under the existing guidelines, in ads through audiovisual media like television, the warning is required to be displayed on the screen for at least 5 seconds and be accompanied by a voice-over reiteration.
"However, it has been observed that in some cases the visual and voice-over were run for less than 5 seconds, or if the visual stayed for 5 seconds the voice-over either started late or ended early or both," Sebi said in the circular, adding, "In some cases, extra words are inserted in the visual and voice-over rendering the warning unintelligible to the viewer/listener." Announcing these measures, Sebi said that no addition or deletion of words should be made in the standard warning statement. All mutual funds firms should comply with the requirements "in letter and spirit", Sebi said.

Only a few takers for online Mutual Fund trading

Half Of AMCs Yet To List Schemes On Bourses; Brokers Too Less Enthusiastic

ABOUT two months after their launch, activity on mutual fund (MF) platforms of stock exchanges remains comatose, as investors continue to stick to the age-old system of buying and selling products through distributors. One reason for this is over half of the asset management companies (AMCs) are yet to list their products on stock exchanges. But more significantly, most stock brokers are less enthusiastic about providing services to transact mutual fund schemes through the new platform. 

   Though brokers publicly maintain that trading of mutual fund products is the next big thing for them, they are slowly realising the practical difficulties of scaling up the business. Brokers earn majority of their revenues from regular trading of stocks by clients, but mutual fund schemes can't be bought or sold in the same manner as shares. 

   Mutual funds are trying to project their products as long-term ones, while brokers will find it viable only if they are able to churn volumes. There is a clash in the business philosophy here 

   Due to lack of clarity about revenues from this business in the foreseeable future, most brokers are unwilling to invest in a big way to service mutual fund trades. 

   Stock exchanges launched the online mutual fund platforms after Securities and Exchange Board of India (SEBI) in August 2009 restricted commission payments by asset management companies to distributors. This resulted in distributors losing interest to sell mutual fund products, prompting Sebi to allow stock exchanges to introduce a platform through which schemes can be sold, with stock brokers being the intermediary. 

   NSE launched its platform on November 30, 2009 and BSE started on December 4, 2009. In December, BSE's platform recorded 739 contracts valued at about Rs 18.5 crore and NSE's platform recorded 1079 contracts of Rs 4.47 crore value. About Rs 13,060 crore was redeemed from the mutual fund industry in December. 

   In January, BSE's platform recorded 463 contracts valued at Rs 10.52 crore and NSE's recorded 253 contracts of Rs 3.14 crore value. About Rs 32,860 crore was redeemed from fund houses in January. Retail investors are also not finding much merit in choosing stock brokers over distributors at this juncture. 

   This is because buying or selling mutual funds through stock exchanges requires opening a demat account and a large section of mutual fund investors don't have one. Also, for investors, whose purchases are small in quantity, there is no cost advantage. 

   Many brokers are not comfortable about having clients that just transact mutual fund schemes. This is because brokers risk the possibility of their money being locked in for a few days, if client defaults. A broker is required to pay the stock exchange, after confirming with the client, before 10 a.m the day after the order is made by the client. Now, if the client defaults even after the confirmation, the broker gets to know it only after the cheque is cleared. 


Financial Planning for Elderly citizens

Elderly citizens can invest in the Senior Citizens Savings Scheme as it offers triple benefits of safety, liquidity and regular periodic income

THE search for safe investment avenues offering regular income begins as one approaches the retirement age. Schemes that offer capital appreciation coupled with security are the most desired. Being guided by such a principle, the Government of India had announced a special scheme known as Senior Citizen Savings Scheme or SCSS in 2004 to cater to such needs of the senior citizens. In a short span it became very popular with people, however, attractive rates on bank fixed deposits last year overshadowed the scheme. Now, with falling deposit rates, the scheme could make it to the limelight again.

However, the biggest shortcoming of the scheme is that the interest earned on it is taxable. If the interest income in a year is more than Rs 10,000, then the TDS (tax deducted at source) is cut. However, with the recent amendment an investment up to Rs 1,00,000 in this scheme in a year is exempted under Section 80C of the Income Tax Act. So, for our readers, we offer details of the scheme and help to find out if it is a better option among several other available options.

Only those who have completed 60 years or above are eligible for the SCSS. However, a person who has completed 55 years and opted for voluntary or any special retirement scheme, can avail this scheme subject to certain conditions.

Since it is tailor-made for the old people it has some special features.

First, it offers a fixed rate of return at 9% per annum, higher than the returns offered on other fixed income instruments like PPF and NSC.

Second: the interest income is paid out every quarter. Usually, it is the last working day of every quarter. There is no alternate option available like yearly interest payment or cumulative interest at the time of maturity.

Third: though the tenure is fixed for 5 years, premature withdrawal after a year is permissible which ensures better liquidity to meet unforeseen expenses. But it involves some cost. If the deposit account is closed after the first year, but before the second year, 1.5% of the principal amount is deducted, otherwise it is 1% of the principal amount once the scheme completes two years.

Bedsides this, one has the choice to extend the scheme for another three years on maturity at the interest rate prevailing then. The minimum amount to be invested is Rs 1,000 while the maximum investment could be Rs 15 lakh, however, the investment needs to be in multiples of Rs 1000. Also, one has the option to open more than one account, but has to maintain a gap of one month. The accounts could be opened in an individual’s name or he has the liberty to open an account jointly with spouse. Joint account with anyone else is not allowed. Thus, one can have more than one account but the cumulative investment has to be within a limit of Rs 15 lakh.

The scheme suffers from a perception that the scheme could be opened with the post office only. However, it is not true. Some designated branches of nationalised banks and the ICICI bank are authorised to receive deposits under the scheme.

Prima facie this scheme looks attractive. But is it really worth investing? To answer this question we need to compare the scheme with other available investment avenues with similar features. A bank FD has almost all these features. However, the current deposit rates offered on bank FDs are in the range of 7-7.5%. Few banks offer additional interest benefit to senior citizens in the form of 25-50 basis points higher. Thus, the interest rate offered for senior citizens could be in the range of 7.25-8%, less than 9% offered on SCSS. So, compared to bank deposits SCSS definitely looks attractive at this juncture. Now, how does SCSS compare against MIS (Monthly Income Scheme) offered by post offices in India, which has similar features? The MIS offers 8% fixed rate of return. However, the interest is paid monthly. The tenure is also six years. So, to compare the two schemes we have considered the returns under SCSS over six years. Let us suppose Mr A deposited Rs 1,00,000 under SCSS, while Mr B kept Rs 1,00,000 with the post office under MIS. Mr A will receive Rs 2,250 every quarter till the end of the sixth year and he will get principal amount of Rs 1,00,000 back on maturity. Thus the total interest payout over 6 years will be Rs 54,000.

On the other hand, Mr B will receive around Rs 660 every month, which comes to Rs 2,000 every quarter till the end of sixth year, which is Rs 250 less than the quarterly receipts under SCSS. But here is a catch. A bonus of 5% on principal amount is paid under MIS at the time of maturity. Thus Mr B will receive Rs 1,00,000 along with Rs 5,000 as bonus at the end of sixth year. Thus, the total proceeds over six years turn out to be Rs 53,000 for Mr B. It shows there is hardly any difference in the total proceeds received under MIS or under SCSS over the tenure. But if one is in need of more money to spend periodically then the SCSS is a better option as it leaves more money in the hand of investors every quarter.

To sum up we can say elderly citizens should invest a portion of their retirement corpus in the Senior Citizen Savings Scheme as it offers safety, liquidity and regular periodic income.

Sunday, March 21, 2010

Travel Insurance For As Low As Rs 99

While booking, he noticed an option of domestic travel insurance on the ticketing website. The policy, available for Rs 129, offered to pay Rs 1,500 for six hours of delay. Sharma bought the policy, though he reached his destination on time.

For fliers, it is difficult to ignore the domestic travel insurance policy due to its low cost. A policy is available for as low as Rs 99, and up to Rs 249. Coverage spans flight delays or cancellation to loss of baggage and personal accident.

Buying a policy is an individual decision and situation-specific. If the traveller feels that weather can create problems in the journey, like the Delhi fog or Mumbai rain, it will make sense to cover oneself against unforeseen circumstances,. A frequent traveller should buy a policy which is effective for the entire year.

Almost all ticketing websites and airlines offer the insurance with online bookings. Of the passengers booking domestic air tickets online, 15 per cent buy travel insurance policy.

Tata AIG offers this product for online booking through SpiceJet, Go Air,, and Hermes India. It has a standard policy for all partners with afixed premium of Rs 129.

ICICI Lombard General Insurance has tied up with Ezeego, Jet Airways and Kingfisher Airlines. ICICI's premium varies with respective partners. For instance, among the two policies the insurer offers to Kingfisher customers, one comes for Rs 99 and the other for Rs 149. Apollo DKV Health Insurance underwrites polices for The premium is Rs 111.

A basic policy offers personal accident cover; hospitalisation expenses in case of injury; loss of baggage and compensation for cancellations or delays. Just like any insurance product, conditions apply for each. Before taking the cover, a flier should understand the scope of the coverage.

Policy Commencement : Most of the covers come in effect the day the person boards the flight, with exception to cancellations. All the companies offer 30 days of cover or until the person returns to the destination of origin whichever is earlier. The insurance remains active even in case of multi-city travel.

Delays : For an individual to claim for flight delays, the carrier should make the person wait for at least six hours. This is a time-linked compensation. There is a sum assured for delay over six hours. For example, ICICI Lombard's policy for Jet Airways, called JetProtect Plan 149, pays Rs 2,000 if the airline has made the insured to wait for over six hours. This is essentially to provide for expenses incurred for food and lodging. "The person does not need to produce any bill. If the airline confirms the delay, we pay the sum insured. Apollo DKV assures Rs 1,000 for delays and Tata AIG pays Rs 1,500.

Trip Cancellation : The policy covers cancellation because of death of a close relative or the travel companion, or for cancellations due to weather. Here, the company compensates for the cancellation charges. Some policies cover expenses incurred to get back to the hometown in such a situation.

Loss of Baggage : This coverage has clauses depending on number of bags and items. Insurers reimburse only if the baggage is checked-in and is lost permanently. The customer needs a letter from the airline stating the above. Loss of handbag is not covered.

If there is more than one bag, each bag has a maximum coverage of 50 per cent of the sum insured. This means, if one loses one out of two bags, one could claim only half the sum insured.

The drawback here is that none of the insurers provides cover for valuables, cash and any kind of security or tickets. A customer can avail of only 10 per cent of the sum insured for every item in the baggage. In addition, to claim loss of baggage, the person needs to lose the entire bag. If an item is stolen, the insured cannot make a claim.

Medical Emergency & Accidental Death : Insurance for medical emergencies does not cover psychiatric or mental disorders and pregnancy. For personal accident, the reimbursement with some insurance companies may depend on the seriousness of the injury. Apollo DKV, for instance, pays 50 per cent of the sum insured if there is loss of a limb or eyesight.

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