Of this and that

1. Mutual funds: a). UTI has come out with a new scheme: UTI Credit opportunities fund.

The New Fund Offer(NFO) will be open for subscription from October 25, 2012 to November 8, 2012. The fund seeks to a minimum subscription amount of Rs 20 crore during the NFO period. It will be available in two options viz. growth and dividend
Entry load charge will be nil for the scheme. The scheme charge an exit load of 1.25% if redeemed on or before 365 days, if redeemed after 365 days and on or before 548 days the exit load charge will be 0.75%. No exit load will be charged if redeemed after 548 days. It is benchmarked against CRISIL Composite Bond fund Index.
                        b). Goldman Sachs MF launched Goldman Sachs India Equity Fund, an open ended fund with an investment objective to generate long-term capital growth from an actively managed portfolio primarily of equity and Equity Related Securities.

The New Fund Offer (NFO) will remain open from October 17, 2012 to October 31, 2012.


2. Signals from the market: Kingfisher Airlines grappling with troubles and Richard Branson making a comment about one or two indian aviation companies disappearing has some rat smelling?

3. Indian banks have started feeling the pinh: Haircut on larger loans are expected by SBI 50% of indian banks are in Govt Sector. More capitalisation could be on way.

 4. Scams of all dimensions





Investor should be  not worrying about short term happenings. Maintain clear plans for individual needs separated from each other. Horses for Courses...
happy investing.

Easing of Interest Rates...whose Interest?

Tight monetary policy alone is not responsible for the slowing of economic growth, though it might be a contributing factor.

Interest rates affect growth because inflation affects growth. If inflation comes down, interest rates will come down. But to say that growth is going down only because of interest rates is a little bit of exaggeration.

India’s GDP growth for 2011-12 grew 6.5 per cent, lowest in the past nine years. This slowdown is being partly attributed to the central bank’s tight monetary policy. RBI had raised interest rates regularly between March 2010 and October 2011 to clamp on inflation.

1. Home Loans February 2012

Home buyers would have to arrange for more funds on their own, as banks will not lend for these charges any more. …Property prices are high, interest rates have peaked , stamp duty and registrations are high in many states and job markets are also not that great. Buyers of homes in the Rs 20-70 lakh bracket would get hit further and sales in this segment could fall by a further 5 to 10 per cent

2. Gold Loan by NBFC curbs March 2012


 RBI capped the amount such NBFCs can lend against gold at 60% of the value and raised the capital requirement from 10% to 12% by April 2014.


3.  Banking Gold .June 2012

Banks sold 16 tonnes of gold coins in 2011. As per RBI’s Financial Stability Report, import of gold coins by banks for retail sale to households has been a matter of concern. It has risen from just 1 per cent of their total imports in 2009-10 to 3.8 per cent in 2011-12.


 4. The Monetary Policy & Fiscal Policy September 2012

 The Reserve Bank of India (RBI), on Monday 17 September 2012, retained the indicative policy rates at the current level while cutting the Cash Reserve Ratio (CRR) by 25 basis points to 4.50 per cent.


Holding down subsidies to below two per cent of gross domestic product (GDP) as indicated in the Union Budget for 2012-13  is crucial to manage demand-side pressures on inflation. Containing inflationary pressures and lowering inflation expectations warrant maintaining the momentum of recent policy actions to step up investment, alleviate supply constraints, and improve productivity;

And we had all of them together Diesel Prices up, Gas Cylinder subsdised supply reduced to 6 per year, ...

Have a look at your portfolio to steer ahead...

Managing Investments  and Expenses are ever important in these vulnerable times.

Some Golden Moments again

“Correlation” is a measure of how closely two assets track each other. A reading of 1.0 means they trade in lock-step, while zero means they are independent and a reading of minus-1.0 means they act like opposites.

There are conflicting evidences about correlation of price movements of Gold and Stocks; Also between Gold & Bonds .So the correlation turns out to be contextual in meaning.

A study conducted by FactSet Research Systems to analyze the metal’s short-term correlation with two other investments: the 10-year Treasury note, representing safe havens, and the Standard & Poor’s 500 stock index(US:SPX) , representing risk has interesting revelations.

 The correlation between gold and the 10-year Treasury has jumped above 0.6 at some points over the past five years and has fallen below minus-0.8 during others, changing direction several times. The one between gold and stocks has had similar spasms, with the highs topping 0.9.

Jeremy Siegel, Professor of finance at the Wharton School of the University of Pennsylvania, writes that stocks have outperformed gold over the past two centuries. Siegel claims that while stocks appear to be most volatile in the short term, gold is most volatile over the long term

This leads us to believe that 100% allocation to Gold is dangerous. Here the old  adage come handy 'do not put all your eggs in the same basket'.

Gold represents about 1.55% of the global portfolio. Now filter geographic/cultural  dimensions and a feel of your own. Take a view on how gold behaves in your opinion in relation to other assets. Put a number between 1-100 on to that thought. How much did you get ? Look at plus or minus 10% and fix it..Yes you got your number.

While gold prices undergo fluctuations, one has to make some returns or even create a downside protection at times.Now look how much gold great investors are keeping.

Happy investing

Those who read this also read
1. Did gold get enough
2. Uncertainties galore
3. A Pinge of gold in your portfolio
4. Gold as an Investment

Retirement Planning: NPS Vs. Mutual Funds

Choices are plenty when it comes to Retirement Planning using equity.


The New Pension Scheme comes with a cap of maximum 50% in equities.  The management expenses for equity schemes are high compared to debt schemes.NPS being a huge kitty comes with approximately 1/6 of charges compared to normal equity schemes.


There are specified pension plans like UTI Retirement Benefit Plan and  Templeton India Pension Plan  which are dedicated pension plans.

Beyond these there are a plethora of equity schemes that allows long term investment like the NPS. But what makes NPS superior is the tax saving aspects and its cost advantage.Balanced schemes are suitable in the long run when you plan for a lifetime accumulation.

The NPS offered by the employer is Tier-I Account where premature closing is not allowed. Given the socio-economic background of the working class, this is a good choice.

Equity gives better returns in the long term compared to debt; But the higher management cost takes away the gains and the external environment could be unfavorable when you want to exit. So one needs to be a little alert to switch to safer alternatives when the Retirement approaches closer.

PFRDA regulates the Pension products market where as the SEBI regulates the Mutual Fund market and the insurance segment is regulated by the IRDA. The complex web of regulations and regulatory bodies strive to keep up best standards.

Happy Investing,


Those who read this also read
1.  NPS Attractive after 2012

Home Financing: Fixed Vs. Floating

The Housing Loans always surprises you with Fixed Rate for a minimum period and then floating subsequently. Industry parlance they call it teaser rates. It is good strategy for amassing assets for the Home Loan company/bank. but what is it for you?

Teaser loans are offered as adjustable-rate loans, in which the borrower pays low initial interest, which increases after a few years. They try to entice borrowers by offering an artificially low rate and small EMIs (Equated Monthly Instalments) for initial 2-3 years; for the balance tenure, prevailing interest rates at that time would be applicable. SBI brought it during 2009.It was withdrawn in April 2011and added a feature of refinance or re-pay without charges any time.






Dual rate loans charge a fixed rate of interest for the initial period and then floating rate.According to NHB guidelines, there is no prepayment penalty on floating rate loans, irrespective of the source of funds used for prepayment. But for fixed rate loans, there is a penalty if the funds are borrowed from some other source, that is, if it is refinanced. For teaser loans, lenders can charge a penalty for prepayment if it is refinanced, similar to fixed rate loans. Reason: The loan was charged at a fixed rate of interest at the time of approval, the NHB circular said. HFCs are required to make an additional provision of two per cent for these loans as they carry interest rate risk as well as some credit risk.

This additional provision has to continue for at least one year from the change to floating rate. That is why once the loan moves to floating rates, there has to be some balance to ensure the viability of the loan (both on individual as well as aggregate level) and the system. Besides the interest rate risk, there are other inherent risks in the teaser loan products, such as the asset-liability mismatch, and even potential default risk. These have to be factored into the business model, in the larger interest of viability and sustainability.

When the rate changes from the fixed rate to the floating rate and the monthly repayment remains unchanged then, the tenure goes up substantially. As the difference between floating and fixed rate is 1-1.50 per cent (current floating rates is 10.5-11 per cent and fixed rate 12.5 per cent), it is natural teaser loan borrowers would want to move to another institution for a near market rate. If the rate goes up by two per cent in 24 months, the tenure can go up from 20 to 40-42 years.

If the lender allows conversion (reset rate), then it makes sense for the customer to opt for it rather than refinance it. Those who move to a new lender will require to pay a processing fee. So, customers must also look at the benefits they get from their own lender before going in for refinance.

Happy investing

Financial Planning in Slow Down/Recession

When rains forecast is bad, When economic growth forecast is for a lower number, thoughts about a slow down or recession lingers around.
Knowledge about Interinkages with IIP, Rain fall forecast, GDP forecast help us to plan ahead.
Here are some tips about how to tackle the fears.


Step 1. Separate your expenses as essential  and not so essential
Step 2. Look at expenses that can be avoided/postponed/reduced 
Step 3. Huge outlays could be checked for prudential pruning like House Construction or Buying a premium vehicle
Step 4. Keep an eye on health matters
Step 5. Consciously encourage harmonious relationship with family and business; family will save you costs attended to divorce and attended disruption in personal life; Business will improve your credit worthiness easing financial crunch- a delayed check payment may be overlooked or a prompt cash payment may attract discount in your favour-So manage your dealings with family, friends and business as well
Step 6. Plan your expenses by including allowance for increased inflation


In a nutshell Save Time, Money and Energy.

Happy Investing,

To Churn or Not To

When get stuck with a falling Portfolio Value, either in Mutual Fund or direct equity, one has a tendency to churn the portfolio. Sell off and start again.

How should one approach the portfolio in such cases?

Here I am giving Case A where Buy&Hold is followed; Then Case B where Churning is followed over the same period of 5 years with an annual 15% growth.

Obviously the churn has eaten up Rs 7846.29 in the process.

Now I relax my assumptions.

Market fluctuates and rates go further down. What will happen? every time the churn will certainly take 1% exit load irrespective of market conditions.

So churn is beneficial only when the market growth rate is more than 1% and adequate to cover the bank expenses and attendant disturbances.

Happy investing

FMPs in the Portfolio

Fixed Maturity Plans(FMPs)

These products from Mutual Funds allow you to lock-in lumpsum amounts for a definite term. Although you do not know for sure how much you will be earning, one can be rest assured that a slice of bond market with certain maturities would normally generate a particular rate of return. one can make out the expected yield curve by studying the prior period yield curve allowing for changes expected. Even if you are not knowledgable investor, it is made easier by govt freeing small savings rate and the rate on post office savings deposits.
You get FMPs for any period, be it 1 month, 2 month, etc.. to 370 days, 390 days and even more.


LTCG Tax and FMPs

The CII is used to calculate what’s called the indexed cost of acquisition and this number bumps up the original price to match inflation.
The way you calculate the indexed cost of acquisition is by using the following formula:

Original purchase price x ( Index value in the current year / Index value in the original year)

In the case of FMPs, the original purchase price is nothing but the money you invested.
Let’s say you bought a FMP of a maturity of  370 days with Rs. 1 lakh in FY 2010 – 11 and sold it in FY 2011 – 12. To calculate the indexed cost of acquisition you will input the numbers in the above formula and get the new indexed value.
1,00,000 x (711 / 632) = 1,12,500
Let’s say after 370 days – the FMP rose to Rs. 1,12,500 which means it gained 12.5% in just over a year. To calculate the capital gains – you will need to subtract the indexed cost of acquisition with the selling price.
In this example both are the same so you won’t end up paying any tax.
There are a couple of things to keep in mind about this  – indexation only works for long term capital gains which accrue after you have held the FMP for a year, so that’s why you see a lot of FMPs that have a maturity period of slightly over 365 days.
Secondly, what Direct Tax Code eliminates is the double indexation benefit of FMPs which meant that you could buy something in March 2010 and sell it in April 2012 and make it span across two financial years. The DTC won’t allow this, but as far as I know FMPs will still be tax efficient when compared with fixed deposits because of the way indexation works.

FMPs and FDs

Both are fixed income alternatives but FDs come with pre-determined rate of return while the FMPs come with market based rate of return that is revealed at the end of the term.

The interest is taxed according to your tax slab in the FDs but LTCG advantages are available to your FMPs

ULIP Vs. Mutual Funds

How to understand these look alikes?

	ULIPs	Mutual Funds
Investment amounts	Determined by the investor and can be modified as well	Minimum investment amounts are determined by the fund house
Expenses	No upper limits, expenses determined by the insurance company	Upper limits for expenses chargeable to investors have been set by the regulator
Portfolio disclosure	Not mandatory*	Quarterly disclosures are mandatory
Modifying asset allocation	Generally permitted for free or at a nominal cost	Entry/exit loads have to be borne by the investor
Tax benefits	Section 80C benefits are available on all ULIP investments	Section 80C benefits are available only on investments in tax-saving funds

* There is lack of consensus on whether ULIPs are required to disclose their portfolios. While some insurers claim that disclosing portfolios on a quarterly basis is mandatory, others state that there is no legal obligation to do so.

 May be days will come with 100% portfolio disclosure for all the ULIPs as well. But does it affect the choice? As long as the investor is not having any say in portfolio management, all these standardised portfolios make no difference for the investor's choice.

Consider a person investing in a Mutual Fund scheme and another in an Insurance plan and watch the final outcome over a nine year period.


Look at the table:

Particulars	ULIP Invesor	Mutual Fund Investor
Plan	Invest 50,000 per year for retirement
Option	ULIP	Mutual Fund + Term plan for insurance cover
Insurance	5 lakhs	10 lakhs
Premium	Part of the money paid Ceases when fund>5lakhs.	Separately, Rs. 3,000 per year. 47,000 left for investment
Investment choice	ICICI Pru LifeTime	HDFC Equity Fund

Now look at what happens over the holding period?

For ULIP Investor
		Costs		Amount
Year	Invested	Upfront	Mortality	Left	NAV	Units	Total Units	Value
1	50,000	9,000	900	40,100	10.47	3,829.99	3,829.99	40,100
2	50,000	3,750	800	45,450	11.38	3,993.85	7,823.84	89,035
3	50,000	2,000	700	47,300	21.79	2,170.72	9,994.56	217,781
4	50,000	2,000	500	47,500	25.17	1,887.17	11,881.73	299,063
5	50,000	2,000	400	47,600	33.83	1,407.04	13,288.76	449,559
6	50,000	2,000	200	47,800	46.74	1,022.68	14,311.44	668,917
7	50,000	2,000	0	48,000	68.76	698.08	15,009.52	1,032,055
8	50,000	2,000	0	48,000	37.39	1,283.77	16,293.29	609,206
9	50,000	2,000	0	48,000	63.07	761.06	17,054.35	1,075,618
Total Invested		450,000
Total Commissions		26,750
Current Value		1,075,618
Mutual fund Investor :Term Plan + Mutual Fund
		Costs		Amount
Year	Invested	Upfront	Mortality	Left	NAV	Units	Total Units	Value
1	50,000	1,125	3,000	45,875	18.44	2,487.80	2,487.80	45,875
2	50,000	1,125	3,000	45,875	22.61	2,028.97	4,516.77	102,124
3	50,000	1,125	3,000	45,875	52.91	867.04	5,383.81	284,857
4	50,000	1,125	3,000	45,875	66.39	690.99	6,074.80	403,306
5	50,000	1,125	3,000	45,875	107.19	427.98	6,502.78	697,033
6	50,000	1,125	3,000	45,875	147.29	311.46	6,814.24	1,003,669
7	50,000	1,125	3,000	45,875	224.59	204.26	7,018.50	1,576,285
8	50,000	1,125	3,000	45,875	114.52	400.58	7,419.08	849,647
9	50,000	0	3,000	47,000	232.55	202.11	7,621.18	1,772,306
Total Invested		450,000
Total Commissions		9,000
Current Value		1,772,306

A combination of mutual fund/s and a term planworks out cheaper as the charges involved are only those for fund management and mortality. In an ULIP, however, there are charges on allocation, policy administration, mortality and fund management.
The new guidelines will stop ULIPs being positioned as short term investments products, and they will look less like mutual funds and more like insurance policies
Insights:

1) Do not bother about tax saving. So much has changed since I bought a product 9 years ago, and so much more will change going forward, all towards taxing of potential gains. The only thing one should care about is that investment mustn't be taxed while "accumulating" the growth - only when he/she exit. In that regard, fixed deposits are out.
2) Costs matter. The more one pay for a product, the more it hurts  later. In fact, a product that costs higher in the initial days seems to destroy your compounding potential.
3) Performance matters. While one might have chosen a badly performing fund and another person  a great one, in the end the fund that does better will win. But fund performance cannot be taken for granted or assumed, the only thing one must have is the ability to shift out of a badly performing product. With a ULIP you really don't have that freedom - you can't just shift to another ULIP without paying huge upfront costs.
4) Insurance and Investment are two different needs. The advantage of "insurance" was cursory - it was terribly inadequate with the ULIP in any case.

Decide for yourself. 

ULIPs are useful for small ticket insurance purposes. For those having insurance needs upto Rs15 lakhs appx. But for those need higher insurance cover,  should go for better options.

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Saving Through Protection Plan

Liquid MF investment Vs.Savings Account in a Bank

A tax deduction of Rs. 10,000 is available for interest earned on savings bank account in the current year’s budget. Taking into consideration the fact that the interest rates as high as 7% are being offered by certain banks, keeping a lot of cash in your bank accounts is now no longer considered to be foolish:

	Interest after tax (including deduction)
Investment / Tax Slab	30%		20%		10%
	Liquid Fund	Savings A/c	Liquid Fund	Savings A/c	Liquid Fund	Savings A/c
50,000	3,337.33	3,068.18	3,337.33	3,068.18	3,337.33	3,068.18
1,50,000	10,011.99	9,729.31	10,011.99	9,729.31	10,011.99	9,729.31
3,00,000	20,023.97	17,261.14	20,023.97	18,343.48	20,023.97	19,425.82
3,50,000	23,361.30	19,743.87	23,361.30	21,196.28	23,361.30	22,648.70
5,00,000	33,373.29	27,192.06	33,373.29	29,754.69	33,373.29	32,317.33
8,00,000	53,397.26	42,088.43	53,397.26	46,871.52	53,397.26	51,654.60

Look at some additional points :

1) The average returns of liquid funds over the past 1 year has been close to 9% vis-à-vis 6-7% provided by savings accounts.
2) Dividend Distribution Tax (DDT) on liquid funds is currently at 27.0375% while interest on savings accounts is taxed as per tax slab i.e. 30.9%/20.6%/10.3%.

 Remember Liquid funds give you daily NAV, meaning daily market returns are passed on ; RBI has asked banks to calculate daily rates on SB account balances.

When you you prioritize convenience over extra returns, savings bank accounts should be your choice. In case you are having a hefty balance in savings accounts, you may be offered a premier account with fringe benefits like dedicated relationship manager and other personalized services which you’ll not find in liquid funds.

No ATM withdrawal for Liquid funds and they take some time to process and credit money to your account.

Mind it when the interest rates go down.Party may not continue at that time.

Those who read this also read:
1. Freeing of Savings Bank Rates 
2.Small Savings are not so Small..

 

On the ladder of Wealth

A completed need is no more a need.

And your Savings need does it behave like that?

May be there is a relationship between your level of standard of living and your heirarchy of savings Needs.

Abraham Maslow  classified  levels of needs that human beings have. Starting from the most basic level, these roughly correspond to Physiological needs, Safety, Social needs and, at the top of the hierarchy, what he called, Self-actualisation. And  needs at a higher level become important only when those at the lower level are met.


‘Hierarchy of Savings’ could be thought as:

Level 1: Basic contingency funds. This should be the money that you may need to handle a personal emergency. Should be available instantly, partly as physical cash and partly as funds that can be immediately withdrawn from a bank.

Level 2: Term Insurance. A realistic amount that should be calculated to allow your dependents to finance at least short- and medium-term life goals if you were to drop dead, be struck with a debilitating injury or disease.

Level 3: Savings for Foreseeable Short-Term Goals: Money that is needed for expenses that are planned to be made within the next two to three years. Almost all of this should be in minimal risk deposit-type savings avenues.

Level 4: Savings for long-term foreseeable goals. Same as level 3, except the planned expenses are more than three to five years away. This level should be invested in equity and equity-backed investments like equity mutual funds.

Level 5: Savings for Self Actualisation Planning to set up an enterprise social or commercial that will continue to do the activities even after you are not there physically.

Which level are you in?

NPS - Attractive after April 2012

The New Pension Scheme(NPS) has become even more attractive after 1st April, as 10 per cent of your basic annual salary that goes into the NPS can be deducted from your taxable income.

This deduction comes over and above the 80C benefit that you already get. This is a significant benefit added to the NPS, which makes it even more advantageous.

Readers who read this also read:

1. New Pension scheme - A Retirement Option

2. Retirement Planning

Small Savings are not so small...

The Savings Bank Account Rates were freed by RBI some time back.

Alongside, the Small Savings Rates are also revised and benchmarked to G-Sec.
This has initiated volatility in the rates on an annual basis.

NEW RATES Instrument  Old Rates (%)  New Rates (%) Post Office Savings Deposit 4.00 4.00 1-year term deposit 7.70 8.20 2-year term deposit 7.80 8.30 3-year term deposit 8.00 8.40 5-year term deposit 8.30 8.50 5-year recurring deposit 8.00 8.40 5-year SCSS 9.00 9.30 5-year MIS 8.20 8.50 5-year NSC 8.40 8.60 10-year NSC 8.70 8.90 PPF 8.60 8.80 Rate change applicable from April 1, 2012

So gone are the days when you bought some certificate and kept it till the child reach school age/marriage age!! Financial Planning become centre-stage.


Are you reday?

Budget 2012-13 and My Investment Plan

Does the budget matter really?

It is a Yes and a No

Yes because it affects my earning capacity, and impacts my Investment decisions.

No if i do not fall in these spaces.


But what makes Budget 2012-13 important for me?

STT reduced from 0.125% to 0.1% No tax return upto Rs 5 lakh
Tax exemption on individual share investments below Rs 10 lakh

Rs 50,000 tax exemption for retail investors under Rajiv Gandhi Equity Savings Scheme.

The scheme would allow for income tax deduction of 50 per cent to new retail investors, with annual income of below Rs 10 lakh, putting in up to Rs 50,000 directly in equities. The scheme will have a lock-in period of 3 years.
Proposed IT- slabs Budget 2012-13

• Upto Rs 2 lakh - Nil
• Rs 2-5 lakh - 10%
• Rs 5–10 lakh – 20%
• Above Rs 10 lakh – 30%

Interest from savings account up to Rs 10,000 to be exempt from tax

In addition to medical insurance, an additional Rs 5000 to be exempted for preventive health check-ups

Senior Citizens exempted from filing advance tax

Compulsory reporting of assets sold abroad

A provision of the Finance Bill has proposed an increased
dividend distribution tax for Liquid and Non Liquid schemes effective June 01,
2011. The proposed DDT is at 30% for recipient other than an individual or
HUF for all Liquid and Non Liquid schemes of Mutual Funds.


Propose to hike service tax rate from 10% to 12%

• Government services, education, entertainment, public transport exempted from service tax

Hope all these hold good and get passed in the parliament.....

Fixed Income Portfolio

When you want to plan your Fixed Income portfolio you must study the available option keenly.

You have Post Office Savings Schemes, MIPs, NSCs, Bank deposits, Company Fixed deposits, Infrastructure Bonds, Bond Mutual Funds, Corporate Bonds, etc..

Your options are wide and each one vary in risk and return

The rising inflation over the past year saw the Reserve Bank of India (RBI) raising key interest rates 13 times between March 2010 and October 2011. The repo rate (the rate at which the RBI lends to banks) was raised to 8.50% in October 2011 from 4.75% in March 2010. During the corresponding period, the benchmark 10-year government bond yield also rose from 7.85% to 8.82%.

With inflation now showing some signs of easing, down to 6.55% in January 2012 from 10.88% in April 2010, there is an expectation that interest rates will decline too. CRISIL Centre for Economic Research (CCER) expects the RBI will start cutting the repo rate in Q1FY 13, and the 10-year government bond yield will be around 7.3% to 7.5% by March 2013 from level of 8.3% at the end of January 2012. This decline in interest rates would benefit Long Term Debt Funds which typically generate superior returns in a falling interest rate environment.

What is the relevance of Fixed Income Portfolio when the equity has started moving up?

You have to look at what asset combination is good for you depending on your risk appetite.




happy investing