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The road ahead

Larissa Fernand — Sun, 22 Nov 2009 17:33:00 GMT

In the bull run of 2007, this was one fund everybody was watching out for as the next big winner. But the shocking performance of JM Financial MF in 2008, in the wake of the economic slowdown, was a complete turn-off, leaving investors with the feeling that they had probably come down with a bad case of whiplash. Bhanu Katoch, CEO of the fund, lists his strategies to revive the asset management company’s fortunes and restore investors’ faith in it. Edited excerpts:

At this stage, what would your message be to investors?

Our equity funds will stay true to their respective mandates. So funds where the mandate is growth will continue to focus on growth even at the cost of short-term volatility. Most of our schemes have a mandate to chase growth and we will stay true to that even in future. We believe that the growth approach will provide maximum rewards to investors as India continues (on) its path to becoming an economic superpower.

We believe that in India, growth as a strategy will tend to do exceptionally well over a longer period of time. So a high beta/alpha strategy portfolio will always deliver. We believe that our investment style will offer substantial alpha as and when confidence starts to come back and money starts chasing growth countries and growth stocks. If you look at the recovery period between 5 March and 4 June, and even the period following, JM schemes have done much better than the indices and even their peers. JM Basic Fund delivered 154% during that period and JM Emerging Fund delivered 135%. Our other equity schemes gave returns in the 70-150% range. During this same period, the Nifty returned 77% and the Sensex, 83%.

What can your investors expect in future?

We feel that after a bit of consolidation, the market will move up and we may see 17,000 levels within the next six months. In the next two years, we expect the Sensex to rise above 25,000. Our schemes are well positioned to capture this kind of an up move.

Also See The highs and lows (Graphics)

What disappointed the investors in your opinion?

(The) majority of the money that we manage is in funds where the mandate is growth and the portfolio is more mid-cap oriented. So far, 2009 has been good for us and if our call on the market goes right, then our funds will deliver a very strong performance in the coming months and coming years. When the equity market was in a bullish phase in 2006-07, most of our mid-cap and large-cap schemes performed extremely well. They surpassed the indices by a huge margin. In 2007, the Sensex delivered 47% and the BSE Midcap index delivered 68%. Our flagship funds delivered returns in the 90-111% range. In fact, most of our schemes figured in the Top 50 Lipper world rankings.

In 2008, we witnessed the most severe fall in the history of the Indian stock market. The Sensex fell by 52% and the BSE Midcap index fell by 67%. Against that, our flagship funds fell by 65-75%.

What were the reasons for your dismal performance?

Had we taken a cash call, we would have performed better. But having said that, a 2008 kind of year comes only once in 50 years or so and, therefore, cannot become the basis for any change in our fund management style. We do not believe in taking aggressive cash calls and only in extreme conditions will we use cash as a strategy.

Are you taking steps to ensure there is no undue exposure to illiquid stocks?

All the liquid names in 2007 became illiquid in 2008. And what happened took the entire market by surprise. But several measures have been put in place. We have strengthened our parameters on stock and sector concentration, and stop-loss limits. Our risk parameters now have multiple “flag off” levels that are more stringent than the regulatory requirements. We also have a more pragmatic approach towards risk management, with multiple checks and balances.

Graphics by Ahmed Raza Khan / Mint

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5 top mutual fund houses

Sun, 22 Nov 2009 15:29:00 GMT

Leveraging the brand

BIRLA SUN LIFE MF (Graphics)

Despite having been around for about a decade, the variables in its favour—brand name, product range, performance and partnership with Sun Life—were not reflected in its scale of business. Hopefully, that is changing as this asset management company is now one of the fastest growing players.

Though it boasts of a distribution network of 120 branches across India, with 2.4 million customers, equity assets (which predominantly come from the retail base) still form a very small portion of overall assets. The retail component in the fixed-income basket is around 40%. Now the fund is working on increasing penetration across the country and brand-building.

Over the past 12 months, it has done well on the equity side. Exactly a year ago, of the 14 Birla Sun Life MF funds which boasted of five-star and four-star ratings, just one was an equity offering—Birla Sun Life Equity. This time, their list has five equity funds and two hybrids (a monthly income plan and an equity-oriented balanced fund).

Since: December 1994

TOTAL ASSETS: Rs63,075 cr

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Star performer

HDFC MF (Graphics)

One of the fund industry’s sturdiest shops, HDFC Mutual Fund has historically been a consistent outperformer. In fact, in 2008 all its four schemes—HDFC Equity, HDFC Growth, HDFC 200 and HDFC Taxsaver—fell much less than the category average.

This year, they have once again proved their merit.

This asset management company has witnessed some phenomenal growth in the past year. Its market share has actually gone up from 9.9% (August 2008) to 12.53% (August 2009). In the second half of 2008, HDFC Mutual Fund overtook ICICI Prudential Mutual Fund as the second largest fund house in the country in terms of assets under management.

When one looks at the composition of assets, it’s worth noting that the growth has come from money going into the liquid and liquid-plus segment. In September 2008, the fund house had 28% of its assets in equity and 39% in cash. A year later, the equity component has dropped to 21% while cash has zoomed to 70.32%.

Since: June 2000

TOTAL ASSETS : Rs90,427 cr

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Prolific player

ICICI PRUDENTIAL (Graphics)

Over the past decade, it has not limited itself to fixed maturity plans (FMPs). Though it does have a fairly good spread on the equity side, the fund house is known for its huge fixed-income business. The ICICI Prudential Flexible Income Plan, for instance, has assets of Rs32,858 crore and ICICI Prudential Liquid Fund had Rs20,825 crore of assets under management (as of September). Its gilt offerings are excellent. In the medium-term debt category, its best funds are ICICI Prudential Income Plan and ICICI Prudential Long Term Regular, though the latter hit a rough patch last year and underperformed the category average.

Its liquid funds now have almost 30% of the assets in instruments with very high liquidity.

ICICI Prudential Infrastructure and ICICI Prudential Dynamic are its best offerings. ICICI Prudential Tax Plan was a category underperformer over the past few years but has been doing very well recently. Ditto for ICICI Prudential Discovery, whose performance has impressed this year.

Since: August 1993

TOTAL ASSETS: Rs80,149 cr

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High roller

RELIANCE MUTUAL FUND (Graphics)

This fund has a history of sporting huge corpuses. In fact, the firm’s culture places a premium on running a big fund. Thanks to very aggressive distribution, marketing and brand management, it has managed to rope in the money. In all fairness, though, credit also needs to be given to performance and the wide asset mix.

Its first two equity funds, Reliance Vision and Reliance Growth, put it in the limelight in 2002 and 2003. Their performance was smartly leveraged, along with the Reliance brand, to gain investor attention. It worked and Reliance Mutual Fund became India’s largest private sector MF in 2006 and the largest fund the next year. The fund went on to create history by mopping up Rs2,700 crore for the new fund offering (NFO) of Reliance Equity Advantage NFO (2007) and Rs5,660 crore for Reliance Natural Resources Retail NFO (2008).

While some schemes may perform better than others, the fund has never really had a disaster with any of its offerings. A bone of contention has always been the huge size of the corpus.

Since: June 1995

TOTAL ASSETS: Rs118,251 cr

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Comeback kid

UNIT TRUST OF INDIA MF (Graphics)

In 2003, Unit Trust of India was split into two—UTI Mutual Fund and Special Undertaking of UTI, which housed all the assured return schemes. After the bifurcation, UTI MF was left with less than Rs14,500 crore of assets under management, but was still the largest fund in the country. Now it is down to the fourth position. Interestingly, this slippage in order is not due to the shrinking of UTI’s asset base, which has been robust. It’s simply that its growth has been slower than that of its peers.

Its best performing equity funds are UTI Infrastructure, UTI Opportunities and UTI Dividend Yield. The Transportation and Logistics Fund, which was the earlier auto sector fund, has been delivering fabulously this year. On the fixed income side, its best performers are UTI Money Market Mutual Fund and UTI Floating Rate ST Regular, and its debt-oriented hybrid fund.

UTI Mutual Fund has the largest investor base, a massive distribution network and is one of the most profitable fund companies in the country.

Since: February 1964

TOTAL ASSETS : Rs73,589 cr

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MF industry on recovery path

The MF industry seems to be on a recovery path after the losses in September. The industry registered an increase in assets as the money coming into funds increased substantially. Investors added to its coffers by as much as Rs1,41,291 crore, resulting in a percentage change, over September, of 22.50%. However, there is a flip side to this. Open-end income schemes and gold exchange-traded funds (ETFs) were the only two categories that registered inflows, while all other categories registered outflows. Open-end income schemes, which registered inflows of Rs1,49,957 crore, thus went up by 52.35%.

A comeback for Arbitrage funds

Arbitrage funds may just have made a comeback. At least that is the signal Kotak Asset Management Co. Ltd is sending by reopening the door to fresh investment in its arbitrage fund. The trend may well be set for their return as these funds thrive in a volatile stock market environment—the higher the volatility, the higher the chance of mis-pricing of stocks in the spot and derivatives markets. This works especially in a bull market. Arbitrage funds stop fresh inflows if they see opportunities dwindling or if the fund size becomes too large, which prevents the fund manager from optimizing returns.

Fidelity India Value Fund from Fidelity MF

Fidelity MF has launched Fidelity India Value Fund, an open-end diversified equity fund. It will invest in Indian and international equities, with special emphasis on undervalued securities. It has been benchmarked to the BSE 200. The fund allocation will be 80-100% of net assets in equity, and up to 20% in cash, debt and domestic exchange-traded funds (ETFs). The fund may invest up to 10% in foreign securities, including overseas ETFs. The exit load applicable will be 1% if redeemed within one year, while the minimum amount for lumpsum investments is Rs5,000. The new fund offer (NFO) is open till 15 December.

ICICI Prudential to launch ICICI Prudential Oil Fund

ICICI Prudential MF has filed an offer document with Securities and Exchange Board of India (Sebi) to launch ICICI Prudential Oil Fund. It will be an open-end debt fund that will invest in oil-linked debentures created by investment banks, where these debentures will provide coupons (returns) linked to oil prices. It would be the first oil fund available to domestic investors. The aim of the fund manager would be to invest 80% of the total assets in oil-price-linked foreign debt securities. The fund can hold 20% of the debentures till maturity.

Graphics by Ahmed Raza Khan / Mint

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Looking beyond the border

Kundan Kishore — Sun, 15 Nov 2009 19:45:00 GMT

Two years back, had we suggested that you invest in international funds, you might have jumped at the opportunity. And why not? The year 2007 saw the launch of 12 international funds, eight of which were launched between August and October, when global markets, including India, were touching new highs. In 2007, the Securities and Exchange Board of India (Sebi) raised the overall ceiling for investments in foreign securities by mutual funds to $5 billion (around Rs23,000 crore now).

It did not take long before the fundamental reasons for launching international funds were tossed out of the window. In 2008, markets collapsed in the US on the back of the credit crisis, and Indian markets followed suit. If you had invested in international funds to protect your portfolio from the vagaries of just one market (India), your strategy would not have paid off—almost all the markets tumbled in 2008.

So, does investing in international funds still make sense? Read on.

Graphics: Ahmed Raza Khan / Mint

Also See

What are they?

International funds are funds that invest in international markets. Broadly, there are two types. One, that invests in both Indian and foreign markets, such as Fidelity International Opportunities Fund and ICICI Prudential Indo Asia Equity Fund. This lot typically invests at least 65% in Indian securities and the rest in international equities, as income-tax rules mandate investments of at least 65% in Indian securities to retain the equity tax advantage.

Some funds invest in only one country apart from India, such as Fortis China India Fund and Mirae Asset China Advantage Fund.

The second category is of purely international funds that invest their entire corpus internationally, such as Birla Sun Life International Equity Fund and HSBC Emerging Markets Fund. They can invest either in international schemes run by their foreign parents, which would further invest in international markets, or they can directly buy and sell international stocks.

The potential pitfalls

Currency risks: While the fund’s success rests on the quality of fund management, much like any domestic mutual fund scheme, the biggest risk for international funds is currency risk. The movement of the rupee versus the US dollar—the currency most international funds solicit investments in—affects the performance of your fund.

For example, let’s suppose you invest Rs10,000 in an international fund in India. Assume that your fund invests in US dollars and the exchange rate at the time of investment is Rs50 to a dollar. You will get equities worth $200. Suppose that after a year, the rupee depreciates by Rs2 and stands at Rs52 to a dollar. If your fund redeems its money, assuming that foreign equities have not risen or fallen at all, your $200 would now be worth Rs10,400 (a 4% gain), purely on exchange rate play. Obviously, the exchange rate can also turn against you if the rupee appreciates.

Graphics: Ahmed Raza Khan / Mint

Most global mutual funds are denominated in the dollar. However, as these funds invest in countries around the world, these dollars are converted instantly into local currencies. At the time of redemption, they are converted into dollars and then to rupees.

The real currency risk comes when the rupee appreciates against the US dollar much more than other global currencies. If this happens, your international funds incur a loss. The trick for fund managers would be to anticipate not just the rupee-dollar equation, but also the equations of the US dollar with other currencies, especially the Asian ones, since a majority of international funds aim to invest in emerging markets.

Says Nilesh Shah, deputy managing director, ICICI Prudential Mutual Fund, “Investing in international funds helps to diversify the portfolio but investors should not forget to see the fund manager’s competency and his expertise in managing international funds.”

Country risk: Investing in just one foreign country is akin to investing in a sectoral fund that invests in just one sector rather than diversified equity funds that invest across sectors. There are several micro- and macro-economic and geopolitical factors that affect a country’s economic performance.

Investing in international funds could be rewarding when certain countries are doing better than Indian markets, and if your fund is invested in any of them. They offer another way to diversity your investment portfolio and a chance to own phenomenal stocks such as Microsoft, Google, Siemens and the like with a tidy sum.

The changing equation

On the face of it, international funds offer diversification. But is there enough merit in diversifying across countries? We ran two sets of numbers. If you look at the year-on-year returns of major stock market indices across the globe, international funds make sense. For instance, in the sample of emerging and developed economies we have considered, Mexico topped the charts in 2004 and Brazil scored in 2005. Look at China’s returns—while the Shanghai stock market outperformed the lot in 2006 and 2007, it was the worst performer in 2004, 2005 and 2008.

But those were annual returns. Typically, though, you invest in equity funds with a long-term horizon. So, had you invested in the Indian markets as against any of the international markets five years back, and held on to your investments, you would not have regretted your move. Between 1 January 2004 and September 2009, the Sensex returned 19.71%. Had you invested in Japan or, say, the Dow Jones of the US, you would have lost your money. Says Surajit Misra, national head, mutual fund, Bajaj Capital: “There should not be more than 15-20% of international fund exposure in your portfolio, and it should be more focused on Asian markets. Also, the time horizon should be longer than for domestic funds, as only then it will serve the purpose of diversification.”

Though the fall in 2008 was drastic globally, the recovery in some emerging markets, such as India, has been dramatic. So far, in 2009, the Sensex has returned 68%, followed by China (54%). Market experts say the main reason for India’s fast recovery is strong internal consumption and domestic demand, against China’s reliance on exports.

The US and many other countries in Europe, however, are still reeling under unemployment. This also affects consumption. Although the Indian economy received a big jolt in 2008, its resilience to the downturn compared with many global economies is well documented. Experts still believe India is a favourite destination for foreign inflows on reasonable valuations and sound fundamentals.

What you should do

While conventional investment wisdom calls for diversification, investing in international funds goes beyond the principles of diversification. Once you pass the first level of diversification (investments within India) across sectors and scrips, either directly or through the mutual fund route, you come across a whole set of complicated factors, which may or may not necessitate global diversification. As a thumb rule, avoid country-specific funds as their fortunes depend on the movement of a single country. If you must go for international funds, go for those that invest their entire corpus internationally.

Avoid international funds if you are bullish on the long-term India growth story and believe there is enough money to be made in the country. As Pune-based financial planner Veer Sardesai says, “Investing in international funds is more like owning an international brand car, when even an Indian car can serve the purpose.”

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Business loan customer? Now pay less interest

Business loan customers have reason to smile. In a bid to check defaults, Barclays Global Retail and Commercial Banking (GRCB) India has introduced a reducing rate of interest for customers who pay their instalments regularly over a period of 12 months. The interest rate would reduce by 1 percentage point after every 12 months of regular payment for the entire loan term. This new concept, called the Drop Down Feature, is one of its kind and has been launched in view of the rising number of defaults in a weak economy.

Ponder over

The difference between floating rate education loans and fixed rate ones is less than 1% per annum. So, unless you are sure about paying off the loan very quickly after finishing your course, it might be advantageous for you to plump for the relative safety of the fixed interest rate, especially since interest rates are widely expected to have bottomed out and are likely to rise over the next few quarters. In any case, this is not a one-time decision. You need to review it continuously based on changes in the marketplace, and switch if required.

Important to know

Ordinarily, a loan against property can be obtained against any property that you own. Therefore, you can obtain a loan against property even if you stay in a cooperative society. However, there are some differences in getting a loan against a house that is part of a cooperative society, any other apartment or independent house. In the case of a cooperative society, you will need to inform the bank that placing the house as collateral for the loan has the approval of the housing society.

Looking for vehicle insurance, just check the co-payment clause

If you are looking for vehicle insurance, look out for the co-payment clause. Also known as “excess” in the policy, it makes you bear a portion of the claim. A higher excess would mean a lower premium since you shift some of the risk from the insurer on to yourself. So, if you agreed on a voluntary deductible of Rs2,500 and there is a claim for Rs7,500, the insurer will pay Rs5,000. Though you cannot take a deductible of more than Rs15,000, the option still makes sense. But if you can’t afford to pay a higher portion of the claim, then don’t bump up your excess.

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Money matters

Sun, 15 Nov 2009 17:30:00 GMT

I have just opened a small shop and want adequate insurance for it. What kind of schemes are available for shopkeepers and what type of cover should I get?

Hemant Jain

Pack up: You must insure all your valuables under section 3 for All Risks.

Basically, the risks you need to cover will depend on the nature of your business. For example, if you deal in cash, you may need cover such as cash in safe or cash in transit. The nature of stock is another important consideration while opting for a cover.

The best approach would be to look at the shopkeeper’s package policy, and pick and choose the risks applicable to your business. Like a householder’s package policy, a shopkeeper’s policy offers to cover a host of perils to which a shop is exposed. Apart from covering the risks of fire and other calamities (such as loss due to flood, storms, lightning, earthquake, impact damage by a vehicle or an animal), burglary and housebreaking, the policy also covers cash (in the counter, in safe or in transit), liability towards employees, breakdown of equipment, plate glass fixed in the shop, loss caused by the employees, etc.

You would also have the option of choosing the limits of liability under each section, according to your specific requirements.

My cousin, who was working with a private company, died in an accident. His company had taken a personal accident policy for him for Rs4 lakh. In addition, he was holding a personal accident (PA) policy for Rs5 lakh. Under which policy should his family lodge the claim?

S.C. Choubey

The legal heirs to your cousin can make a claim under all the valid PA policies as on the date of accident leading to the death of the insured. The reason for this is that unlike most other general insurance products, PA insurance is not a contract of indemnity—human life is invaluable and no amount of money can compensate for the death or disablement of a human being.

Therefore, the family of your cousin is entitled to receive the sum insured under both policies.

I was going out of the station when two bags containing valuables were stolen from my car, which was parked there. All the contents were covered under my householder’s policy. Will my claim be entertained by the insurers even though the contents were stolen from outside the house?

Binita Tiwari

It depends on the coverage provided under the householder’s policy. If the contents are covered under section 2 of the policy against the risk of burglary and housebreaking, the coverage is limited to the premises. In that case, the underwriters will not entertain the claim. However, if the valuables are covered under section 3 for All Risks, the cover is valid anywhere within the geographical territory of India. Therefore, the claim will be payable provided, of course, there is no violation of the conditions stated in the policy document.

I gifted my flat to my sister and it was transferred in her name through a family transfer. The flat is insured in my name. Can I also transfer the fire policy in her name, or will she have to purchase a new one?

Kumud Biswas

Your sister will have to get the house insured again, under a fresh insurance policy in her own name. This is because there is no provision available in the fire tariff to transfer an insurance policy on an immovable property.

Since the property now belongs to your sister, in terms of insurance you no longer have an insurable interest in it. Therefore, the existing policy does not have any meaning. It is, therefore, best to get the policy cancelled, claim the refund, if any, and get a new policy issued in your sister’s name.

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Is your insurance basket adequate?

Dhruv Agarwala and Kartik Varma — Sun, 08 Nov 2009 18:24:00 GMT

Do you know your Human Life Value? Do you look at insurance merely as a tax-saving instrument that you buy at the end of a fiscal? If you draw a blank on the first question, you might not have the right amount, or the relevant life insurance coverage. And if you say yes to the second, it is one of the worst financial mistakes you can make.

Insurance is first and foremost a protection instrument. That it also helps you save tax is only an added advantage.

The bottom line: When you buy it for the wrong reasons, you end up paying too much premium for inadequate coverage.

How much would you need?

Illustration: Raajan / Mint

The amount of payment made by the insurance company to your dependents, called the sum assured, should be enough to cover all your liabilities so that they are able to fulfil their critical life goals. With the help of a simple mathematical calculation, you can quantify the sum total of all your obligations and your existing financial liabilities, and therefore the coverage you would need at a given point in time.

This amount is called the Human Life Value: the monetary value of all the future needs of your parents, spouse, children and other dependents, and all your current outstanding financial liabilities. Once you have this value, you can easily calculate whether you have enough life insurance or not. If you have no financial dependents, then most likely you do not need any life insurance coverage. Similarly, you don’t need to buy life insurance for your school-going children because they do not have any income and they are not supporting you.

Also See How to Calculate Your Human Life

The industry rule of thumb regarding the amount of insurance you should have is 5-10 times your current salary. Through the Human Life Value calculation, however, you can arrive at a more precise figure.

The insurance amount you buy must be proportional to your current, and potential, earnings capacity, and the financial commitments you might have.

Avoid underinsurance

Underinsurance is common in India because the insurance purchase decision has been driven by the need to save tax, not to financially protect the family.

For example, Amit Singh is a 31-year-old software engineer with a multinational company (MNC). He is married, has a four-year-old daughter and is the only breadwinner in the family, which includes his retired parents.

Singh has an annual income of Rs10 lakh. He has Rs1 lakh saved in a bank account and Rs4 lakh in other savings and investments. He has the following financial obligations and liabilities:

• Finance for his daughter’s education (school and college): Rs30 lakh

• Paying back a home loan: Rs25 lakh

• Paying back a car loan: Rs5 lakh

• Household and living expenses for the surviving family: Rs30 lakh

• Healthcare support for his parents: Rs10 lakh

Singh’s total financial obligations are Rs1 crore, and this is his Human Life Value. If something were to happen to him, his family would need Rs1 crore to settle outstanding dues and pay for future obligations.

After joining the workforce when he was 24, Singh bought an insurance policy every year to save taxes, i.e., he has seven policies. The sum assured from these policies is only Rs10 lakh. Singh is currently paying a cumulative premium of Rs1 lakh across all these policies. With seven policies, he believes he has enough insurance and is secure.

He isn’t. Despite having seven policies, he still does not have adequate coverage. If something happens to him, all he has planned for is Rs10 lakh in insurance, and Rs5 lakh in savings and investments. His family will face a shortfall of Rs85 lakh.

He bought insurance for the wrong reasons, i.e., to save taxes, without really analysing whether he was getting suitable and adequate coverage. If he were aware that he needed to protect his family by up to Rs1 crore, he could have achieved this by buying a term insurance policy with an approximate annual premium of Rs50,000 that would give him a coverage of Rs1 crore, rather than spending twice that amount for only a tenth of the coverage.

Revisit your coverage amount

You must evaluate your life insurance coverage annually or at least every time there is a change in your situation because your financial situation changes too (and so does your Human Life Value). For instance:

• Change in marital status—whether you get married or divorced

• Birth and death in the family that adds to or reduces the number of your financial dependents

• A move to a bigger house

• A home loan to purchase a house

• A change in job, which results in a higher level of income

• When your children become financially independent

The lesson: Buy insurance for the right reasons and get the right coverage. Insurance is a protection instrument more than anything else. Always keep in mind that you must identify the cheapest and most efficient option for you. Not all policies are suitable for everyone.

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Check | Loan against FDs

Most banks offer a loan against fixed deposits (FDs). By using an FD as collateral for the loan, you also get the loan at lower rates: The rates are usually pegged at a few percentage points higher than the fixed deposit interest rates. Usually, banks advance up to 90% of the FD being held in a loan. Before opening an account, choose the tenure and amount you are comfortable with so that you need not make a premature withdrawal. Also, don’t forget to ask the bank representative to explain the rate and the income you will be earning from the FD interest rates, both pre- and post-income tax.

Know | Insurance with investment

Some types of life insurance have an investment feature attached to them. Remember, you too can recreate such hybrid products by simply combining a pure life insurance product along with a mutual fund. What adds to its advantage is that you will pay less in fees if you do this on your own, because these hybrids have much higher fees. They have a purpose in your portfolio if you are looking for some capital appreciation along with life/risk cover. Ultimately, you need to decide what your needs are and whether the product you are looking at meets your needs or not.

Dhruv Agarwala and Kartik Varma graduated from Harvard Business School and are co-founders of New Delhi-based iTrust Financial Advisors. They can be reached at contact@itrust.in

All content on this page is provided by iTrust.in Financial Advisors

Write to us at businessoflife@livemint.com

Steer your finances, step by step

Dhruv Agarwala and Kartik Varma — Sun, 08 Nov 2009 14:24:00 GMT

The rule of thumb in financial planning is simple: Whether you are considering lump-sum investments, long-term planning or reviewing your holistic financial status, it is important to set your goals and then steer your finances in the right direction. The sooner you start, the better the chances of achieving your financial goals. Here is a general list of suggestions.

Between 20 and 30 years

Building blocks: Start early to meet your financial goals.

Budget: You are starting with life’s rigours and this is the time to start keeping a monthly budget to help you understand how your money is being spent. If you continue with this, it will stand you in good stead through life. Get into the habit of saving a part of your monthly income.

Tax: Get to know personal taxation issues and how they affect your salary. Figure out the efficient investments you can make annually to save on your taxes. For instance, check out equity-linked savings schemes (ELSS).

Investments: Start investing in mutual funds through a systematic investment plan (SIP). You can start with a very small amount. Take advantage of compounding of capital, and the ability to take financial risk.

Personal accident and disability insurance: While you are still single, you may not need life insurance, but it is worth getting protection through a personal accident policy.

Health insurance: Make sure you have a health policy. Buy something in addition to your company’s healthcare plan.

Auto loans: If you are taking a loan for a car or a two-wheeler, keep in mind that you are creating a liability to buy an asset that is losing its value daily.

Other debt: Avoid personal loans and credit card debt.

Between 30 and 40 years

Real estate and financing: If you aren’t already living in a house of your own, plan and buy one, and build an asset. Get household insurance as well. If you already own a home, consider a real estate investment to generate rental income to fund your retirement.

Long-term investments: Understand that you need long-term investments in place to fund your goals, such as your child’s education and marriage, upgrading your car, buying a bigger house. Consider stable and diversified large-cap mutual funds as the core of your investment portfolio.

Life insurance: It is likely that you have a family and dependents by now, so you need to ensure their financial security by having adequate life insurance. Continue your personal accident protection either as a rider on your life policy or as a separate policy.

Health insurance: Get a family floater plan. If your parents are below 65 years of age, get health coverage for them as well.

Retirement planning: Invest in a pension plan. Start thinking about your will and how you want your assets to be transferred.

Between 40 and 50 years

Liquidity: Understand when you will need capital to fund large expenses, such as the education and marriage of your children. It can take you a few years to exit your investments to meet these funding goals. Don’t lock your money into investments you cannot get out of.

Debt: If you have any outstanding liabilities, start thinking about reducing your debt burden as you start preparing for retirement. Use your peak earning years to start reducing your financial obligations so that you have no financial liabilities pending at retirement.

Life insurance: The number of financial dependents may have changed if your children have started working. Update your insurance coverage accordingly. If certain policies are about to mature, figure out what you will do with the proceeds. Renew your health insurance.

Retirement planning: Keep your retirement-related investments in secure instruments according to your risk profile. Update the analysis of your expenses during retirement, your retiral accounts such as PPF, PF, etc.

Investments: Harvest investment income from previous investments, such as MFs or rental income, and divert these proceeds towards secure long-term investments that will protect you against the rising cost of living. Adjust your portfolio allocation away from high-risk funds to more diversified, balanced equity funds and relevant fixed income instruments.

Will: Prepare a will and get it registered.

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20 smart money tips

Sun, 01 Nov 2009 16:01:00 GMT

Builders and brokers

1. You get a smaller space than you thought: The area mentioned in advertisements and for calculation purposes is the super built-up area, while the area that you really get is the carpet area, which would be less by up to 30% or more depending on the building’s design.

2. All-inclusive price is not always ‘all’ inclusive: In most cases, the price advertised will be the cost of the house. But there are other charges that you would need to pay—charges for car park, club membership, power and water connections, among others. These will add up to a substantial bit. Don’t be surprised if what you finally end up paying is more than the advertised price.

3. There is compensation for project delays: Usually, this is not mentioned upfront, but builders do mention it in the sale agreement. In most cases, the amount of compensation is very small (around Rs5 per sq. ft a month). However, the deadline and the mode of handing over the compensation are not mentioned.

4. The brokerage fee you pay is negotiable: In north India, the broker fee is typically one month’s rent for arranging rented accommodation and 1% of the sale price for apartments. During the boom period, this fee was non-negotiable in most cases. But with the real estate sector doing badly, especially since January 2008, brokers have been ready to take a cut in fees.

Photoimaging: Raajan / Mint

Credit card companies

5. Global credit card companies have hidden charges: When you use your card to pay in foreign currency, you need to factor in more than just the exchange rate. For instance, you pay 3.5% of the total amount as cross currency markup, a service tax of 10.35% on the chargeable amount and a further 3% education cess on the service tax. More than you thought, isn’t it?

6. There is an upper limit on cashback cards: It’s not as if the more you buy, the more money you get back. You only get a maximum of Rs500 a month. Some cards may even require you to have a minimum statement amount to avail the facility. The amount may also be subject to a maximum of Rs250 per eligible transaction (this excludes loans and cash advance).

7. The ‘due date’ is not the last date of payment: If you think that the “due date” is the latest you can pay, you are mistaken. Actually, the payment needs to be credited to your card account by that date. Otherwise it is treated as a default. Cheque payments need to be made at least four working days in advance to avoid a default.

8. Cash withdrawals attract a daily interest: You can use your credit card to withdraw cash from the bank or the ATM up to the card’s cash limits. There will be a one-time fee, which will be a percentage of the amount withdrawn, or it could be a minimum amount. On top of this, a daily interest is charged on the amount withdrawn, which starts accruing from that very day till the amount is paid back. Moreover, with many cards there is no interest-free period, unlike purchases made using the cards.

Online retailers

9. Free shipping isn’t always free: Shipping costs can trip you in online purchases. Hidden somewhere could be a condition that shipping is free only if the purchases are above a certain amount. This could also mean that the free shipping advertised “on all items” is actually for items purchased after your billed amount has crossed the minimum limit.

10.We’ll refund the price but you pay for the shipping: Clarify turf matters. Total refund might be a valid option, but do check if it is your responsibility or the company’s to ship back the defective product.

11.Fake buyers will push up auction prices: Who says rigging and manipulation can’t happen in cyberspace? It’s not difficult to fall for the number of online bids going for a product. Sellers often create fake buyer IDs to participate in the bidding process. The prices are made to go up and you are persuaded into bidding higher amounts.

Insurance agent

12. A Ulip, or unit-linked insurance plan, gives us a bigger commission than a term plan: Term plans are the cheapest life insurance product. They come at the lowest costs while providing the highest coverage. A lower premium means less agent commission. Term plans, especially pure plans, are more difficult to sell too. This is because they don’t return premiums or provide any returns at the end of the tenure, which makes it difficult for many to fathom them since most investors are used to getting money back in insurance-cum-investment products. So agents prefer to sell the high-premium Ulips.

13. Ulips can be costly if you pull out early: If you exit a Ulip any time before 10 years, the cost goes against you. Due to upfront charges, which are typically high in the initial years, a lesser part of the premium gets invested. If you have been investing in a growth option—that is, it has high equity exposure—an early exit, especially at a time when markets are down, only compounds your misery. You may be asked to buy a new Ulip after three or five years at a lower net asset value, or NAV, or a new Ulip with some additional features. Stay away. Run the existing Ulip using the top-up feature to maximize value over the long term.

14. Capital and return guarantees come at a cost: Ulips that guarantee the principal or returns have to make provisions to deliver the promise. For this, there’s an additional cost the customer has to bear. Also, with most guarantee plans, the insurer can invest up to 100% in equity markets. There is no choice of fund options for you since you can invest only in equities.

15.Entry cost is zero, but there are other monthly charges: Many Ulips do not have any front-end cost and each year’s entire premium is said to be invested. But all such plans have provisions to deduct charges from your fund rather than the premiums. Even though this may be a small percentage of the fund value, over time the effect is largely the same, as the fund value keeps increasing.

Supermarkets

16.The discounts are on jacked-up prices: If you are a sucker for sales, this is bad news for you. This is a common trend with unbranded products, especially clothes. Don’t fall for it, especially if you don’t know what the actual pre-discount price was. The more the discount percentage, the more suspicious you should be.

17.You can buy a product for less than the MRP: MRP is the maximum price a retailer is allowed to charge. But no rule stops him from charging less. So, don’t hesitate to ask for a discount on MRP. You might just get a lower price. This works particularly well for big-ticket purchases such as television sets and furniture, especially if you are paying in cash.

Tour operators

18. Our quoted price is before taxes: Taxes on airfare could be as high as 30-50% of the base fare and for international flights, that could burn a hole in your pocket. Clarify the inclusions and exclusions, especially for “supersaver” offers.

19. The part of the tour price in dollars remains flexible: The tour operator wants to pass on to you any unfavourable change in exchange rates. So if the rupee falls against the dollar, you pay more. But the opposite may not be true.

20.‘Optional’ tours are cheaper if you arrange them: Optional trips come at exorbitant prices. Combo tour packages to these destinations, if booked locally, could cost a lot less. Therefore, it might make sense to do them on your own because it may cost less even after factoring in food and travel expenses.

CONNECT

Track gold prices

The improving risk appetite in the global market has not affected demand for gold. In international markets, after crossing the psychological $1,000 per ounce (Rs47,500 per 28.6g) in the beginning of October, gold continues to move up. It touched an all-time high of $1,062 per ounce, a gain of around 28% from a year back. In India, too, it has gained around 20%. The primary reasons fanning the rally are said to be a weakening dollar, inflationary concerns and investor need for diversification. Says Tejas Seth, a senior research analyst at SMC Global Securities, “Gold prices at $1,100 per ounce is our first target and then $1,200 per ounce, most likely in 2010.”

Invest in corporate debt instruments

Senior citizens and pensioners need not worry about the recent fall in interest rates on bank term deposits. Instead, you can invest in corporate debt instruments that carry coupon rates that are 3-4% above bank rates. Many companies are expected to bring in debt issues, largely non-convertible debentures (NCDs), to raise around Rs20,000 crore from the markets within the next six months. Suresh Sadagopan, certified financial planner, Ladder 7 Financial Advisory, Mumbai, says: “As NCDs offer 3% higher interest than FDs, they are a good option. However, one must look for a good company with a good track record.”

Insurance cover for kidnap and ransom

Did you know that kidnap and ransom policies offer financial protection to individuals from kidnapping, extortion, wrongful detention and hijacking? The standard cover includes death or dismemberment benefits, ransom/extortion payment, loss of payment in transit, settlements and defence costs, recall costs, business interruptions and 24-hour emergency response helpline and related expenses. Any individual who believes he needs the cover can go for it.

Tax refund

If your employer has already deducted tax and deposited it, he cannot refund the amount to you. The employer will give you a certificate of tax deduction at source. If the overall amount of tax paid on your behalf works out to be more than the tax due after accounting for your income under all heads, you will be eligible for a refund. While filing your return of income, you must mention your bank account details so that the income-tax department can send it directly to your bank through the electronic clearing system.

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Money Matters

Sun, 01 Nov 2009 14:26:00 GMT

MUTUAL FUNDS

What is cost averaging? How does it provide higher returns compared with lump-sum investing?

Birju Singh

Cost averaging is a technique that forms the backdrop of a systematic investment plan (SIP). In an SIP, you invest a fixed sum of money every month or quarter in an equity scheme. When the scheme’s net asset value (NAV) goes up, you end up buying fewer units. When it drops, you buy more units. As a result, the cost price of units is balanced out. In a rising market, lump-sum investments score over SIPs as your entire corpus starts to grow from Day 1, as against SIPs, where your money starts to work as and when it gets invested. SIPs generally work best in volatile markets when timing the market becomes difficult.

Are sector funds risky in the current investment climate? If I do opt for them, which funds should I look at?

Abhishek Jha

Sectoral funds are one of the riskiest funds, and you should not to go for them unless you already have a well-diversified portfolio. What is important is that you must have the appetite to stomach the risks that sectoral funds are fraught with. As these funds invest their entire corpuses in one or two sectors, their fortunes depend on these sectors alone.

Typically, mutual funds avoid launching too many sectoral funds and instead play safe by launching thematic funds that diversify across sectors and scrips bound by a common theme. It is also safer to invest in these funds once you are sufficiently diversified in large-cap and mid-cap funds. Opt for infrastructure funds if you are already well-diversified, and look at an investment horizon of at least three years.

BANKING

I haven’t operated my savings bank account for five years. How do I reactivate it?

Rahat Sinha

If no transactions have taken place in a savings account for a considerable period (12-24 months), or 6-12 months in the case of a current account the bank declares the account dormant or inoperative. To reactivate your account you will have to give an application in writing, addressed to the branch manager of the bank and provide a photo-identity proof. The bank will verify your signature and, in some cases, may also charge a small fee for reactivating your account.

How do I connect my savings bank account with my fixed deposit account? What is the process and what are the benefits?

Anil Reghunathan

This is a good way of earning higher interest on your money. You can link your savings account with your fixed deposit (FD) in the same bank by opting for a sweep-in facility. You can link your savings bank account with multiple FDs in the same bank. Any deficit in your savings or current account will be met by the withdrawal of an exact value from your FD. Since deposits are broken down in units of Re1, you will lose interest only on the actual amount withdrawn from the FD. You will have to give a request in writing to the bank.

How important is it to have a clean credit history? How can I ensure that my credit history is clean?

Chirag

It is very important to have a clean credit history. Otherwise it is difficult to get a new line of credit. It’s fairly easy to maintain a clean credit history. First, you will need to pay all your credit card bills on time. Further, ensure that you do not default on any of the loans that you are currently servicing. Once you have paid a loan in full, insist on a letter from the institution stating that you have paid the loan in full and there is no amount outstanding.

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Will monetization help curb inflation?

Larissa Fernand — Tue, 27 Oct 2009 17:19:00 GMT

Is monetization the only solution right now?

In my opinion, interest rates will rise and a large fiscal deficit will crowd out private borrowing if it is not monetized by the government. But it will benefit the economy only in the initial stages. It sounds easy to implement—money is needed, so print it and the rates will not rise. But then, if monetization is the only panacea, then why does the government not wipe out the entire fiscal deficit by printing more money? That’s what Germany did in the 1940s and it had to deal with soaring inflation. There is no free lunch. All monetization does is prolong the pain. In the initial stages of inflation, there is only gain. In the later stages, there is only pain. Printing money initially comes at no cost, but will result in higher taxes for the next generation.

Ultimately, the monetized money has to go someplace. It will find its way to the sectors where the return on capital is very high. It will fuel a stock market rally or create a bubble in the real estate market. The government can decide to print more money, but can’t decide on the flow of that money. Money has a life of its own and creates one too.

What is the solution then?

All I can say is that we have pushed ourselves into a corner. If we do not resort to this sort of deficit financing, there would be a social revolution in this country.

The government will print more money. It will go towards drought relief. It will be given for the higher salaries recommended by the Sixth Pay Commission. If the government stops providing NREGS (national rural employment guarantee schemes) money, it will force the unemployed to migrate to cities. At least you are providing them with work for 100 days. When people are meaningfully employed, there will not be a social revolution. It’s when people lose their jobs, or are unemployed, that unrest sets in.

But we are not creating capital. Create infrastructure. Link the faraway village which is producing for the city. These farmers deal with perishable commodities, so create infrastructure for them. When the times are good, the government should have built up enough to combat situations such as the one we are facing today. Over the last four years, we have not had fiscal prudence. The government gave more importance to building revenue expenditure than capital expenditure.

Where do you see inflation heading?

I see inflation—in terms of WPI (Wholesale Price Index)—touching 8-10% by March. This is way beyond the Reserve Bank of India’s (RBI’s) target of 4%. Inflation is on the rise. The prices of soft and hard commodities are going up. Some of this rise could be attributed to speculative activity. But when you put too much money into the economy, you will have to deal with inflation.

With RBI supporting the government’s borrowing programme, won’t there be a pressure on interest rates?

Definitely. This year, the banking system will have Rs7 trillion of fixed deposits. Now, the government is going to corner Rs5 trillion. That leaves barely anything for the private sector. Sure, the latter can borrow from abroad, but the rates are higher. This private demand for capital is going to result in interest rates rising. Let’s say there are some power companies borrowing 10-year money. We have a fixed amount of money available—remember, this country is short of capital. And from what is available, the government is taking a chunk. If it takes much more, the interest rates will shoot through the roof.

That is why the government is printing money. I do see the cash reserve ratio (CRR) rate rising in the next five months. Either interest rates will rise or the currency will take a beating. The government will have to do a fine balancing act between keeping the currency stable and the interest rate low. You get foreign money coming in because they believe that your currency is stable or will appreciate. But when currency begins to depreciate, this money will make an exit. Then what would be the incentive? Why would they (foreign companies) come to India and buy debt if the currency is going to depreciate?

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Make the most of the home run

Dhruv Agarwala and Kartik Varma — Sun, 25 Oct 2009 16:23:00 GMT

Should you buy a house only so you can move into it, or is real estate a good alternative investment to stocks and fixed deposits (FDs)? Either way, considering the course correction in real estate in India at present, investing in a property is a sure path to wealth creation.

Moving in vs investment

If you are looking to buy a house into which you can move in straightaway, there is never a wrong time. The bottom line is: You can never time the market. If you have zeroed in on a property that fits your budget, don’t delay signing on the dotted line. This is about as good a time as the interest rates are relatively low and home prices are 20-25% lower than what they were a year and a half ago.

If you are considering buying real estate as an alternative investment, be aware that this is a long-term asset. Don’t be unrealistic about your assumptions on being able to flip this asset at a profit over the next 12-18 months. It is unlikely that you would make any profit after taking into account all transaction costs, such as stamp duty and brokerage, that are typically associated with a real estate deal. While it is tempting, you should weigh other investment alternatives and factor in a realistic time horizon for a property as an investment buy before taking the plunge.

A unique asset class

Concrete dreams: Don’t be unrealistic about your assumptions.

No other asset class offers as many advantages. Like gold, it shields you against inflation because it retains its intrinsic value. Tax benefits are its other big advantage. Some countries even offer tax subsidies for a property purchased for residential use (by self or let out). Some others, such as Malaysia, offer real estate investment trusts (Reits) that can add to your financial portfolio, which is expected to come to India soon. Remember, depending on the existing price level, the rental income from your property, too, can appreciate.

Be cautious

Nevertheless, always play safe and be wary of the pitfalls. Keep the following issues in mind:

• Transaction costs: For instance, the brokerage fee to the intermediary. If you have made a gain on the sale, it is likely that there will also be a resulting capital gains tax liability. You will also incur expenses related to stamp duty at the time of the transfer and registration costs of the property.

• Liquidity: Unlike stocks that you can sell readily and convert into money within a couple of days, buying and selling property takes time. It’s not always easy to offload property on your terms.

• Cash: Property investments are not always the cleanest when it comes to the cash versus cheque component for deals. Unlike mutual funds where Know Your Customer (KYC) norms require that the investment be made in cheque and the PAN (Permanent Account Number) card details be shared, real estate investments can have a huge cash component to them. This might not suit everyone.

Cross-check

Before you sign on the dotted line, examine:

• The desirability of the location: This is the single most important criterion for valuing real estate.

• The reputation of the builder and quality of construction: Properties by some developers are worth a lot more than others because of the quality. Don’t always go for the lower price because there could be huge execution risk.

• The payment terms: Time-linked or construction-linked payment plans, and cash versus cheque components. This will have an impact on your cash flow.

• Project approvals and licences: If project approvals have not come through, it might affect your ability to get a home loan.

• Contractual guarantees: For assured return schemes, get a written guarantee from the builder and post-dated cheques in your name. Understand the delivery date of your project.

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The returns are in the timetable

Dhruv Agarwala and Kartik Varma — Sun, 25 Oct 2009 16:20:00 GMT

One of the most fundamental questions of investing is actually a no-brainer. Would you want to spend (invest, in other words) your money today, in a year’s time or even later? The answer is today, now, because the first principle of finance and investment says that every rupee you receive today is worth more than the rupee you will receive in the future.

Start planning now

To accumulate wealth in the long term, start working on your investment plan now. Of course, there are risks attached to most plans, but take only those risks that are suitable at your age and for your eventual financial goals.

Photoimaging: Raajan/Mint

If you remember your class V math lessons, compounding is the ability to earn a return in the current year on not only your principal amount, but also on returns earned in the previous year. Put simply, it’s a process through which your money multiplies and you can earn returns that can go towards meeting your financial goals.

Also, it is only through investing that you can offset the damage inflation wreaks on your personal finances. The experience of other countries has shown that relying on your salary alone isn’t enough.

For instance, let’s say, you earn a salary of Rs10,000 and deposit it in your bank savings account, earning a measly 3.5% return (which could be as low as 2% after tax). This is a pittance when you consider the rising cost of living. In fact, long-term inflation in India has been around 5%. So, you are essentially earning only 2% after tax returns, but your costs are likely up by at least 5% per annum.

Investing allows you to earn returns higher than the rate of inflation, offsetting the reduction in purchasing power caused by inflation.

Don’t speculate

Investing is the activity of putting your money into securities or assets using an investment framework, backed by adequate risk management and supported by insight and research into the prospects of the company or the different assets you want to invest in. It requires an investment philosophy—a set of guiding principles that provide you with direction and discipline, irrespective of whether the markets are racing high (the bull phase) or are falling towards rock bottom (the bear phase).

Newcomers often make the mistake of putting their money on things they don’t understand. This isn’t investing, it’s speculation which is more like gambling—with you relying on chance and luck.

Investing, however, can’t be left to chance. It requires patience, especially for your investment thesis to mature, something speculators have little time or interest in.

Customize

Before investing, base your decision on the following criteria:

• Your unique situation, your risk-taking capacity.

• Why you need to generate returns for: your financial goals.

• By when you want to exit the investment: a timeline.

• How quickly you want to convert your investment into ready cash: liquidity.

• Whether the investment provides you adequate protection against inflation: capital growth or regular income.

• What kind of tax liability do you create? Taxability.

You need a thorough analysis before you, or any adviser, can choose the “best investment” plan. That’s why an investment made by those around you might not be the right investment for you—you might be at a different stage of your life with a different risk profile and financial assets and liabilities.

Understand the categories

Different investment assets offer differing returns characteristics and fulfil different purposes in portfolio. Cash, bonds, equities, real estate and commodities such as gold are some of the popular categories.

The instrument you use to invest in any of these is at your discretion. For instance, you might have a demat account through which you can buy and sell shares. Or you might not have the time or skill to do this yourself, but rather invest in an equity mutual fund. Your retirement accounts at work (such as provident fund) or pension plan, or even your unit-linked insurance policy (Ulip) might invest in a different mix of the above asset classes, depending upon the returns that have been indicated to you and the investment criteria.

Strategize

• Start early: This will help you take advantage of the compounding of capital. You can even start with a small amount. Investing is not just for the wealthy.

• Invest long term: Don’t churn (frequently get in and out of investments) as this will needlessly create a tax issue and lead to high transaction costs and fees.

• Don’t borrow money to invest: If the investment falls in value, you will still have to pay the money back to the lender.

• Take measured risks: Understand that you can’t earn high returns without taking risks. Not all investments are suitable for everyone, so recognize the obvious and the hidden risks that you may be entering into.

• Be realistic: Always keep in mind that your investments can go up and down in value depending on market conditions.

Keep the long-term average as your reference point and hedge your money according to that figure. Don’t expect markets to go up 30% every year when the long-term average is more like 10-12%.

• Investing is not the same as speculating: It requires skill, discipline and patience. When you buy or sell, your counterparty might be a professional who does this for a living. Understand who has the edge—you or they.

*********

CONNECT

Opt for personal accident coverage

The next time you shop for an insurance policy, don’t forget to protect yourself against the financial consequences of an accident. Opt for personal accident coverage (PA). It covers the financial losses resulting from an accident or a disability that affects your earning capacity or even loss of work arising from the mishap. Additionally, almost all such policies cover death by accident. You will pay around Rs100 per Rs1 lakh of coverage. You can buy this cover either as a rider on an existing life insurance plan or as a stand-alone policy from any general insurance company.

Pay your advance tax

If you get an income other than, or in addition to, your salary (for example, interest income from a savings account or a fixed deposit), you can pay your advance tax in three instalments: 30% of tax liability on, or before, 15 September; 60% on, or before, 15 December and 100% on, or before, 15 March of a financial year. If you fail to do so, you will have to pay penal interest on your tax liability. You can pay advance tax at any bank branch that is eligible to collect tax dues on behalf of the income-tax department or use the online gateway of the department ( https://onlineservices.tin.nsdl.com/etaxnew/Index.html ).

Negotiate for a home loan

If you are looking for a home loan, don’t just settle for the headline rate quoted by your bank or lender. If you negotiate, you can get a lower rate of interest. All lenders have discretion on the interest rate and other terms they offer. While evaluating your application, the lender might attach greater weight to your creditworthiness if you supply the additional information required for the application. Therefore, it always helps to consult others about their experience in taking home loans and the extra documents they furnished. Also, ask your adviser to negotiate on your behalf.

Opt for a construction-linked plan

If you book a property with a real estate developer, you would be paying your instalments in either a time-linked plan or a construction-linked plan. Always opt for the construction-linked plan. In this, you effectively end up paying for the progress and you are not funding the developer when no construction is taking place. In the past year, during the slowdown in the real estate sector, many developers changed their payment plans to construction-linked ones. If your developer hasn’t already done so, negotiate for these improved terms.

Dhruv Agarwala and Kartik Varma graduated from Harvard Business School and are co-founders of the New Delhi-based iTrust Financial Advisors. They can be reached at contact@iTrust.in

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Money Matters

Sun, 18 Oct 2009 13:14:00 GMT

Banking

I am going to buy a property soon. But I don’t want to wait for loan approval. Should I opt for a pre-approved loan? What are the pros and cons?

—Tanya Kapoor

The bank can offer a pre-approved home loan based on your income details. This has various advantages and disadvantages. The biggest disadvantage is that if the bank is not willing to fund the property, you may not be able to buy it. Second, the best interest rates and other terms are provided for ready disbursement cases. For details, refer to pre-approved property loan calculators at loan advisory websites.

I work with a cruise company on a contract basis. My contract is of 8-10 months. My salary is tax free and the only source of income in India. Can I get a home loan? If yes, then on what status: as a non-resident Indian (NRI) or an Indian citizen?

—Nilesh B.

If you have spent 8-10 months on a ship every year outside India for the last four years, then, as per the Income-tax Act, you need to apply for a home loan as an NRI. The only special requirement is that you will need to convince the lender that the income is likely to continue year after year despite your working on a contract. There are no other special NRI requirements as such for you to fulfil.

Life Insurance

I have just taken a life insurance policy. When will the risk cover commence?

—Abhishek Bharadwaj

Normally, a life insurance policy becomes valid on the date of acceptance of the policy or the date of receipt of the first premium in full, whichever is earlier. But if the acceptance of the proposal is conditional upon the proposer’s (person whose life is insured) compliance with any requirements, the cover will commence on the date on which all requirements are satisfactorily complied with after the receipt of the first premium in full.

This means that even if you have made the payment for the first premium, the policy shall commence covering risk only after you have complied with the requirements to the satisfaction of the insurance company.

I am a 50-year-old salaried employee and want a life insurance for Rs7-8 lakh for 10 years. What’s the cheapest and best option for me?

—Vandana Gosain

If life insurance is the main consideration, you should go for a term insurance plan. The premium for these policies is equal to the mortality premium, which is quite cheap. For a sum assured of Rs8 lakh, if you don’t want the premium amount back, you will pay an annual premium of about Rs6,500.

If you opt for a policy for the same sum assured with return of premium at the end of the term, you pay around Rs10,000 or so, depending on the insurer you chose.

What potential factors should I bear in mind while investing in the growth options of units of a unit-linked insurance plan (Ulip)?

—Prashant Wadhwa

While choosing a growth plan, you must be aware that the investment in units is subject to market and other risks, and there is no assurance that the plans will achieve the objectives.

The scheme’s performance depends on equity and debt markets from time to time, and may be affected by changes in the interest rate levels. You must also note that past performance of the company’s other plans is not necessarily indicative of their future performance.

Normally, such plans don’t offer a guaranteed or assured return. All benefits payable under these are subject to tax laws and other financial enactments as they exist from time to time.

In case the unit value is inadequate for covering the insurers’ charges, the life cover under the policy terminates automatically.

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Living life in instalments

Sunil Dhawan — Sun, 18 Oct 2009 13:13:00 GMT

Going through advertisements, making a list, comparing deals and offers. With the festive season on, the retail pull is strong. The best and simplest way to buy a product is to pay cash. It could even get you a discount, meaning you buy at the lowest cost possible. But if you find your cash stretched, there’s plastic to the rescue. Now, you have the option of paying back in equated monthly instalments (EMIs). But does it make sense to do so?

Four options

Illustration: Raajan / Mint

A credit card purchase may be cleared in four ways. One may pay off the entire outstanding amount by the due date without revolving any credit and thus avoid paying any interest. This also gets you an interest-free period of up to 45-51 days. Another way is to pay off the mandatory 5% of the outstanding amount each month or the minimum amount due and keep rolling over the balance. But this could be expensive—you would have to pay an interest of about 3% each month and the new purchases made during the subsequent months wouldn’t get any interest-free period.

The third option is to opt for “balance transfer” of the outstanding amount and save on interest charges. The fourth option is to convert the entire purchase into EMIs. If used well, this can work in your favour.

EMI facility

This allows you to pay back in instalments. The advantage is that you pay an interest rate of about 1.5-2% each month, against the normal interest rate of about 3%. In addition, even if all the dues are not cleared, one still gets the interest-free period on new purchases.

The facility is similar to a personal loan. The difference is that the rules for personal loans are stringent and there is a documentation process. The EMI route avoids paperwork and the waiting for approvals. Your existing card gets you the loan and you simply start paying the EMIs.

Moreover, you know exactly how much you would need to pay each month. If the amount is not huge, it works better than a personal loan.

Different arrangements

Not all credit card-issuing banks offer separate EMI cards. But most banks do offer the option even on an existing non-EMI card. Check with the bank if your card has this facility. For example, HDFC Bank credit card holders have to call the bank to check if the EMI conversion offer exists on their cards. Certain merchant establishments have a tie-up with HDFC Bank and you can convert purchases from these places into EMIs if you buy using your HDFC Bank credit card. On the other hand, Axis Bank’s Gold Plus card allows you to convert any amount above Rs5,000 into six, 12 or 24 instalments.

The pay-back tenure varies across banks and types of cards, as do the minimum transaction amounts that can be converted (see Cost of instalments).

The cost

Each instalment, or EMI, will be equal to the principal amount of repayment plus the applicable interest amount. In most cases, you have to pay a one-time processing fee.

Some banks also offer interest-free EMI schemes (by asking only for the processing fee), while others levy interest in addition to the processing fee. The latter works out cheaper than the roll-over facility in credit cards. For a transaction of, say, Rs5,000 on a credit card, if you roll over the credit and pay only the minimum 5% every month, it would be five years before you can completely clear the dues. However, before you swipe your card and convert the payment into EMIs, it’s important to understand what you are paying and how it works to make sure you don’t end up paying too much.

Let’s take an example to see how interest rates on credit cards work. Say the purchase is of Rs1,000 and the EMIs are supposed to be paid for 12 months. The EMI works out to Rs91.68 each month at 1.5% interest on monthly reducing balance. This means 18% (1.5%x12 months) on reducing balance and a flat interest rate of about 10%. So at the end of 12 months, you have paid 10% more than the product’s MRP. Not to forget the additional processing fee that may be levied.

In addition, if you wish to prepay the pending amount, there would be prepayment charges. All these charges could make the final cost much higher. However, this amount is likely to be lower than if you had taken a personal loan.

Questions to ask

These days, banks are quick to call and offer to convert a purchase into EMIs. Paying through EMIs may sound simple, but it could land you into trouble by piling up the debt. It is always better to pay-to-live than live-to-pay. So, before you agree, ask about the processing fee, interest rate, prepayment charge and flexibility in time periods.

Do the math and see if the deal is worth it. Also, if you are ready to pay the entire amount on the due date, avoid splitting into EMIs.

Apart from looking at the various charges, make sure you understand how the specific scheme works for you. Check the repayment schedule. Ask about penalties and take care to avoid paying any.

Above all, keep your spending under strict control.

CONNECT

Locate Plus

From now, even if you don’t inform your bank about your change of address, it will have your latest contact details. “Locate Plus”, a product launched by Credit Information Bureau (India) Ltd (Cibil), will help banks locate customers even if their contact details have changed. Locate Plus will locate you by your name, PAN card number and voter ID. So if you have an overdue on your credit card in Mumbai and you relocate to Delhi and open a bank account in a different bank, the credit card lender will get your contact details through Cibil.

Beware of making untrue statements in your life insurance policy

A life insurance policy becomes valid on the date of acceptance of the policy or the date of receipt of the first premium in full. Did you know that if the insurer finds that you made any untrue statements or that you did not disclose any material information in the proposal form or personal statement, the policy contract becomes null and void? In such circumstances, insurers have the option of stopping all benefits under the policy. Moreover, premiums paid under the policy can be forfeited. However, to protect the policyholder’s and claimant’s interests, section 45 of the Insurance Act, 1938, provides that insurers can’t exercise this option two years after the commencement of the policy unless the incorrect statement is in respect of a material fact and was made deliberately with an intent to defraud.

Reduced margin requirements for home loans

Now, you don’t need to worry if you don’t have enough margin money to avail a home loan, even when you can afford a higher loan. Thanks to the availability of funds and better economic prospects, banks are reducing margin requirements for home loans. Margin requirement is the percentage of the down payment a customer has to make on a home loan. Once this percentage is reduced, borrowers will be able to get a bigger slice of the total cost of the house as home loan. The initiative has been taken up mostly by public sector banks such as State Bank of India and Punjab National Bank. There has been a 5-10% reduction in margin requirements.

What all does you car’s extended warranty cover

If you are planning to buy a new car, don’t dismiss the extended warranty your purchase comes with. Check what it covers. Some cover only the engine and transmission in, maybe, the third and fourth years after the end of the new car warranty. If nothing has gone wrong in years 1 and 2, it is unlikely to stand you up in years 3 or 4. Even if it does, you will be hard put to pin it down as the “manufacturing defect” covered by the extended warranty. So ask for printed terms and conditions and don’t go by word of mouth alone.

All content on this page is provided by Outlook Money

The views expressed on this page are not the newspaper’s opinion and are provided for information purposes only by Outlook Money. Readers are requested to do their own research. Neither Mint nor Outlook Money will be responsible for any actions and outcomes based on information provided here.

Write to us at outlookmoney@livemint.com

Size(able) benefits

Sun, 11 Oct 2009 16:17:00 GMT

If you have been investing in the stock market, you know that there are only two ways of looking at mid-cap funds: Either you are attracted by their phenomenal growth opportunities and don’t mind the risks that come bundled, or you would rather steer clear of any adventurous ride with these funds.

The truth is that no serious investor wants to overlook these because the growth offered can be phenomenal, and you can’t expect the same performance from staid large-cap funds—these can’t turn in the returns that mid-cap funds can.

If you are not looking at pure mid- or large-cap offerings, you could consider a new category: mid-plus large-cap funds.

These funds have some exposure to mid-cap funds, which is balanced with an even bigger exposure to large-cap funds.

On an average, mid-plus large-cap funds have invested 40-70% of their portfolio in large-cap stocks over the past year. These don’t include sector, thematic or speciality funds.

The five schemes analysed here are toppers in terms of their ability to generate extra returns, protect the downside and deliver consistently.

DSPBR Equity

Since 2003, this fund has beaten the category average every year. It has also impressed during both favourable and unfavourable market conditions.

The fund’s performance in 2007 was impressive at 70% (category average: 59%). A high mid- and small-cap exposure along with considerable allocation to energy helped it. In the stock market crash that followed, the fund resorted to defensives and cash. In the bear phase between 8 January 2008 and 9 March, it shed 49.5% (category average: 55%). But when the market began to rise in March, the manager wasn’t very quick in lowering his cash allocation—and did so mainly in May. Neither did he go heavy on the booming sectors. As a result, the fund delivered 95% (category average: 104%) between 9 March and 30 September.

If erring on the side of caution is typical of the fund manager’s style, so is his rigorous diversification. Exposure to the top 10 holdings is generally capped at 35% and single-stock allocation has not crossed 5%, barring a few large caps. The fund does take short-term bets, and in the long-term holdings, intermittent profit booking does take place.

Franklin India Prima Plus

This fund has evolved from a brash and undisciplined offering to a well-diversified player with excellent downside protection abilities and decent returns.

Its big bets in technology helped it beat the competition in 1998 and 1999, but led to a dramatic fall in 2000. Since 2001, the fund has maintained a relatively higher bias to large caps to provide stability, but has consistently beaten the Sensex. And since then in each quarter that the category average has been in red, Prima Plus has contained its fall to a lower level.

In 2007, the fund manager largely stayed away from metals, power and real estate. This led to a tepid performance, though he beat the Sensex. In 2008, he preferred to be almost fully invested (average equity exposure of 95%), despite the leeway to invest up to 40% in debt and 20% in cash. Still, it shed a relatively lesser 47.71% (category average: 53.35%). The large-cap bias and increased exposure to defensives came to its aid. What you can expect from this fund is stable and consistent, though not chart-topping, returns.

HDFC Top 200

We like this fund for its solid long-term record and skilled management. Its historical performance has been impressive, but in recent years its performance has got investors worried. In 2006, it was an average performer due to a high exposure to defensives. In 2007, its category underperformance was a result of wrong sector moves.

But ever since a new fund manager took over in early 2002, it has shed less than the category average in all declining quarters, barring June 2004 when the fall was in line with the average. The fund’s success in standing upright in a bear market such as 2008, without resorting to debt or high-cash levels, is a testimony to the fund manager’s proficiency and skill. Here, it was the large-cap bias and exposure to fast moving consumer goods and healthcare that came to the fund manager’s aid and restricted the fall to 45% (category average: -53%). In the recent rally (9 March-30 September), the fund gained a striking 119% (category average: 104%).

It sports a predominantly large-cap portfolio. Those comfortable with a well-diversified, large-cap-oriented portfolio should consider this fund.

Reliance Growth

In the 13 years of its existence, this fund has underperformed the annual category average just twice (1998 and 2000).

One would expect a fund with a preference for smaller companies to crash in the carnage of 2008. Not so. Its fall of 54% was not too harsh compared with other funds, and was in line with the specific category average. What came to its rescue were the aggressive cash calls, exposure to derivatives and a highly diversified portfolio.

The fund manager chases growth but does not adhere to a quick entry-exit policy, sticking to a buy-and-hold philosophy. As per the August portfolio, the fund manager was most concentrated on financials, with a 14% exposure to the sector, up from 7% in March. Software followed at 6.33% with picks such as HCL Technologies, Infosys Technologies and Financial Technologies (India). In August, the manager claimed to be bullish on the pipes industry.

Over the past year, the average allocation to large-caps has been 42%. Investors looking for a mid-cap offering that delivers but does not compromise on risk should consider this option.

Reliance Regular Savings Equity

Launched in 2005, it impressed the very next year. Though it was on a high in 2007 with a return of 93%, it did not fall off the cliff when the markets plummeted in 2008. The great return of 2007 was mainly due to the last quarter performance. A new fund manager took over in November 2008 and in the next two months, exposure to large-caps stood at around 20%. This enabled the fund to deliver 54.66% (category average: 25.70%) in that quarter.

And when the bears took control in 2008, the manager stayed grounded by resorting to cash (average: 20%), diversifying his equity portfolio (average: 32 stocks) and raising the large-cap exposure (average: 37%).

Between 9 March and 30 September, this fund rallied with a return of 126%. As per the August portfolio, the fund manager bet heavily on energy (19.67%) and financials (10.29%). But he was well diversified at the stock level as the largest holding was not even 5%. With the highest risk premium in its category, investors here are a satisfied lot.

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Know | Cash levels

The net asset values (NAVs) of 379 equity schemes registered a 52-week high last week, and fund managers expect the shares to appreciate even further. Predictably, they have reduced their cash-heavy position, which they feel has helped reach the mark. In March, managers were not sure of the direction of the markets, which led to the building up of average cash levels in equity schemes. This hovered at 15-20%. Currently, cash levels in equity schemes have dropped to about 8% of total assets. Analysts also believe there is enough liquidity still left to drive the markets.

Invest | Technology stocks

Technology stocks delivered an average return of 113.12% between 9 March and 31 August. Given their impressive performance, as many as 25 fund houses have increased their exposure to the information technology (IT) space. One of the most notable big performers has been Satyam. Between April and July, the number of Satyam shares in the portfolios of mutual funds went up from 808,000 to 20 million, a whopping 2,471% jump. The number of funds buying the stock went up from four to 18 (in July). MphasiS and Wipro are the other tech favourites.

Buy | Large-caps

This year, fund managers seem to be playing safe by sticking to large-caps. In February, open-ended diversified equity funds collectively allocated 37.39% of their assets to Sensex stocks. By July, the number didn’t fall, it went up marginally to 40.37%. This has been the highest in 36 months from August 2006 to July. The change in the preferences of stocks, too, is interesting. HDFC and ICICI Bank witnessed an increase of 633% and 326%, respectively, in the number of shares held. State Bank of India showed an insignificant rise of 0.63%. Wipro and Tata Consultancy Services saw an increase of 125% and 103%, respectively. Surprisingly, Infosys Technologies saw a fall of 2.5% during the same period. Reliance Communications fell out of favour with a drop of 32.29%. Bharti Airtel saw a rise of 46.82%.

Track | Stocks that rallied most

One look at the portfolios of diversified equity- and tax-planning funds between 9 March and 31 August, and you will see that the stocks that rallied the most were not among fund manager favourites. Though the BSE 500, as a whole, went up by 102.63% during this period, its top 10 stocks were up by an average of 496%. Hindustan Oil Exploration was the best performer with a return of 736%. Yet, it almost got overlooked by the diversified equity- and tax-planning funds. It was only in August that HSBC Progressive Themes bought 270,000 shares of the stock.

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All content on this page provided by Value Research

Graphics by Ahmed Raza Khan/Mint

Write to us at businessoflife@livemint.com

Money matters

Sun, 04 Oct 2009 17:18:00 GMT

LIFE INSURANCE

My son is a non-resident Indian (NRI). I wish to buy a life insurance policy for him from Life Insurance Corp. of India (LIC). Can I buy it in his absence, or do I have to wait till he visits India?

—Prateek Rastogi

You can take the policy for your son while he is abroad or during his visit to India. NRIs are allowed to avail insurance policies in these situations in the following ways:

• They can take an insurance policy during a visit to India. All the formalities of proposal completion, medical examination reports, special reports and moral hazard reports are required to be completed during their stay.

• Alternatively, they can take an insurance policy from their country of residence through mail order. All the formalities mentioned above, medical and special reports have to be completed from the country of residence.

Once the papers are in place, you can propose a policy in your son’s name.

Are there any life insurance policies with term plans for short durations like, say, one or two years?

—Mridula Garg

Most life insurance contracts are available for the long term (10, 15, 20 or 25 years). Term plan is also a type of long-term contract. But at times the insurer restricts the term to a shorter duration such as one-two years. This generally happens when lending institutions insist that the borrower must have insurance equal to the amount advanced for a short period.

In some cases, term plans are also available for three, five or six years with a fixed (level) premium payable each year. These can be renewed for equal periods till the life assured reaches a certain age, as stipulated in the policy conditions.

What does ‘double accident benefit’ mean?

—Prem Kumar Sinha

On payment of some extra premium, most insurance companies offer to pay double the sum insured if the death of the person insured is caused by an accident. This increased cover is popularly known as “double accident benefit”. For this benefit, the death of the person insured must be caused directly and independently of all other causes, and should have resulted from an accidental injury.

Further, the death of the insured must follow within a specified period of injury, which is typically 90-180 days. Usually, the compensation is subject to an upper limit stated in the policy.

BANKING

My husband and I have separate bank accounts. Can we merge these into a single joint account?

—Prakash

Merging is not possible. You may close an account and become the second holder in another account. Alternatively, both of you can become joint holders in each other’s account. You will have to make this request to the respective banks in writing. If you are banking with public sector banks and have accounts in different branches or different banks, the process should take a while. As the tax liability vests with the first account holder, it would be better to become joint holders in each other’s accounts.

Do private banks also offer Public Provident Fund (PPF) schemes?

—ROMILLA

No, private banks do not offer PPF account schemes. However, you can open a PPF account with a minimum of Rs5,000 at any head post office or general post office. Alternatively, you can open a PPF account with any designated State Bank of India (SBI) branch. You may also open a PPF account in select branches of certain nationalized banks.

Write to us at moneymatters@livemint.com

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Minimize mistakes, maximize returns

Kundan Kishore — Sun, 04 Oct 2009 17:14:00 GMT

In December 2007, when the Indian economy was booming, Delhi-based businessman Binod Kumar, 38, wanted to expand his business of kulfi parlours. He wanted to go beyond Delhi to nearby cities such as Chandigarh. After negotiating with a Chandigarh mall, Kumar had a year’s time to set up the new shop. As equity markets were at an all-time high, a friend suggested he invest in equity mutual funds (MFs) for a year and use the returns as capital for his business. Kumar invested Rs4.23 lakh. What followed was unprecedented.

Global markets started to fall, taking Indian equity markets with them. The year eventually turned out to be one of the worst ever for equity markets all over the world. For Kumar, his portfolio of seven MFs was massacred by the end of 2008. He lost Rs2.16 lakh—half of his portfolio.

Everyone makes mistakes. Not just rookie investors such as Kumar, but also seasoned, informed ones. The biggest mistake we make, though, is to throw caution and fundamentals to the wind when the going is good because the value of our equity investments is soaring. It’s only when the markets tumble that we realize our follies, but by then it is too late.

No market instrument, be it stocks or MFs, is immune to volatility. Let’s take a look at some pitfalls and how to avoid these:

‘I wanted quick returns, so I invested in equity funds’

Kumar’s friend suggested he invest in equity funds on the premise that MFs would be safer than going in directly. What he didn’t realize is that even equity MFs invest in equity markets. So when equity markets fall, equity funds suffer too. It could be that they may suffer less than if you had invested directly, because fund managers may be better placed to pick and choose stocks. MFs, however, fall too.

Also, Kumar had invested 35% of his corpus in mid-cap and infrastructure funds, including JM Basic, where he lost 70% of his investments. We recommend: As clichéd as this may sound, if you wish to make money from equity funds, give yourself at least three years. Be flexible and prepared to hold on to them for a longer time if the markets aren’t looking very good after three years. But avoid equity funds if you will need the money within three years.

‘If I buy all best-performing schemes, my returns will be higher’

Nalini Chandrashekar, 28, manages her household finances and investments. Her tryst with investing began as a 17-year-old when she used to help her father arrange share certificates on weekends. By that time, she too started investing in equity shares. Over time, her circle of friends grew to include share brokers who kept giving her tips.

However, she mistook investing in MFs to be the same as investing in stocks. Just as benchmark stock market indices such as the Sensex and the Nifty have 30 and 50 stocks each, Chandrashekar thought a similar number of funds were required to have a well-diversified MF portfolio.

“I had 35 stocks in my portfolio and I thought I needed to have a large number of MFs too to make a decent sum,” she says. Chandrashekar invested in 26 schemes—she eventually sold five, but is still saddled with 21. We recommend: Somehow, the fact that an MF scheme itself invests across 30-60 scrips, or even more, got overlooked. Investing in stocks and MFs is not the same even though both are equity-related. When you invest in an equity share of a company, you are investing in that company’s future prospects.

But when you invest in an MF, you are investing in the capabilities of the fund manager who manages the fund and will then diversify across various stocks and sectors. If you invest in too many schemes with the similar style, you could end up investing in the same scrips through multiple funds.

In an industry whose total corpus size is Rs7,21,886 crore, with at least 800 schemes across categories, you can easily find dozens of well-performing, long-term-oriented schemes. However, for effective diversification, we suggest an MF portfolio of 7-10 schemes.

‘What’s the fund’s net asset value? The lower, the better’

Most new fund offers (NFOs) are launched at Rs10. Some agents and MFs are only too happy to hawk the Rs10 net asset value (NAV) at which these NFOs are initially available, compared with the NAVs of existing funds, some of which may even be in the hundreds. Many investors fall into this trap.

Usha Gupta, a Patna-based businesswoman in her mid-30s, bought almost all the NFOs that hit the market in the past two years. When the equity markets crashed and her portfolio fell dramatically, she realized the value of existing funds that came with a track record.

We recommend: All things equal—there is no difference between a fund with an NAV of Rs10 and another, say, of Rs20. You invest Rs1,000 each in scheme A (a new scheme with an NAV of Rs10) and scheme B (an old scheme with an NAV of Rs20). In other words, you hold 100 units of scheme A and 50 units of scheme B.

Further, assume both schemes have invested their entire corpus in just one stock, which is currently quoting at Rs100. If the stock appreciates 10%, the NAV of the two schemes should also rise 10% to Rs11 and Rs22, respectively. In both cases, the value of your investment increases to Rs1,100—a gain of 10% in both.

The reason why scheme B’s NAV is more than scheme A’s is because it has been around for some time—it has bought and sold since its inception.

In any case, it’s always better to opt for existing and experienced schemes that come with a track record, instead of opting for new funds with no track record.

‘Infrastructure funds are currently hot. I should buy’

A sound MF portfolio is one that is diversified as per your risk profile. But if your portfolio is skewed towards a particular class for no reason, there’s a problem.

Sujoy Mukherjee, a Pune-based IT professional in his mid-30s, invested in the infrastructure funds of almost all fund houses on a friend’s advice. On the back of aggressive advertising of the economy’s prospects in the next five years and benefits that many feel will accrue to the infrastructure sector, Mukherjee bought as many infrastructure funds as he could.

We recommend: You need to have a risk appetite for infrastructure and other such thematic funds because these can be risky on account of their sectoral and scrip concentration. Sectoral funds are most concentrated. These invest in just two-three sectors. In 2008, when the equity markets crashed, infrastructure funds fell by 57%, compared with a 53% fall in diversified funds.

It is good to invest in infrastructure funds selectively. For instance, if you have a small amount to invest, but would like a decent-sized presence in the sector, going through the MF route, albeit an infrastructure fund, would be a better option than investing directly into infra stocks. As a general rule, though, it’s best to have thematic or sectoral funds as a satellite portion of your portfolio. The core allocation of your portfolio should be towards diversified equity funds.

It’s easy to lose sight of plain fundamentals when there is market revelry all around. But, as seen recently, the hangover can be very painful.

The Myths

• Equity mutual funds (MFs) are risk-free and will do well in any kind of market scenario

• A quick entry and a quick exit is the way to go

• One should have many well-performing funds. The returns will multiply

• The lower the net asset value (NAV), the cheaper and better the fund

• One should quickly buy into a sector which is hot at the moment. For example, the infrastructure sector will do well in the future, so one should get into it in a big way

The Facts

• All market-related instruments, including MFs, carry a risk. The only advantage that equity MFs have over direct investing is that fund houses are experts in the field

• Have at least a three-year horizon, even more if need be. Avoid equity MFs if your span is less than this

• Keep it simple. Don’t forget that MFs invest in scrips. Too many schemes of the same type may mean duplication of sectors and scrips

• It is the increase and decrease in an NAV that counts, not the NAV itself So whether the NAV is Rs10 or Rs1,000, doesn’t really matter. What matters is how much gain or loss the scheme makes

• Various sectors behave differently. Some are less volatile and give stable, if not high, returns, while others can go up and down a lot. Go by your risk endurance

• Invest in sectors or thematic funds if you understand how they work and what their returns can be. Ideally, these should be peripheral schemes, and not at the core of your portfolio

CONNECT

Know your guidelines

In a bid to keep pace with the changing market structure and bring more clarity in the guidelines for companies issuing shares, the Securities and Exchange Board of India has replaced the Disclosure and Investor Protection Guidelines 2000 with the more relevant and stricter Issue of Capital and Disclosure Requirements Regulations 2009. It has reduced the refund period for the amount, against which shares are not allotted in a fixed price public issue, from 30 to 10 days. The refund period in public issues through the book-building process is also 10 days.

Track your agent

In an effort to rescue “orphan policies”, the Insurance Regulatory and Development Authority has asked insurance companies to enter into agreements with agents for terms of not less than three years. A policy is called an “orphan policy” when a customer can’t track the agent because the latter changed his employer or city. Every insurer has to make adequate arrangements for servicing all policies under outgoing agents. Before the agent leaves, the insurance company needs to ensure that the agent furnishes a list of the serviced policyholders along with their policy and contact details. These details have to be verified by the insurer, confirmed in writing by the outgoing agent and recorded with the insurer. The insurer then needs to allocate these policies to other officials.

Choose your term

If your term deposit with a bank is frozen by an enforcement authority and remains so even after the original term ends, you now have the option of extending the term. The Reserve Bank of India (RBI) has advised banks to give customers the option of choosing the term for renewing the deposit. Earlier, after a frozen term deposit account’s term ended, it could be renewed only till the period equal to the original term. RBI has now said that the depositor should be given an option to choose the term for renewal. If the depositor doesn’t choose a term on his own, banks may renew it for a term equal to the original term.

Plastic currency

Soon you won’t have to worry about currency notes getting soiled or soggy. RBI plans to introduce plastic Rs10 notes worth Rs100 crore. The polymer bank notes, with a life cycle four times that of the usual paper currency notes, would be complicated to replicate. A senior official at RBI said: “Plastic notes would last longer. They would be waterproof and, most importantly, they would be very difficult to replicate. Work on plastic notes is still on and details will be announced soon.”

Write to us at businessoflife@livemint.com

All content brought to you by Outlook Money

Minimize mistakes, maximize returns

Kundan Kishore — Sun, 04 Oct 2009 16:45:00 GMT

No market instrument, be it stocks or MFs, is immune to volatility. Let’s take a look at some pitfalls and how to avoid these:

‘I wanted quick returns, so I invested in equity funds’

‘If I buy all best-performing schemes, my returns will be higher’

‘What’s the fund’s net asset value? The lower, the better’

The reason why scheme B’s NAV is more than scheme A’s is because it has been around for some time—it has bought and sold since its inception.

In any case, it’s always better to opt for existing and experienced schemes that come with a track record, instead of opting for new funds with no track record.

‘Infrastructure funds are currently hot. I should buy’

A sound MF portfolio is one that is diversified as per your risk profile. But if your portfolio is skewed towards a particular class for no reason, there’s a problem.

It’s easy to lose sight of plain fundamentals when there is market revelry all around. But, as seen recently, the hangover can be very painful.

The Myths

• Equity mutual funds (MFs) are risk-free and will do well in any kind of market scenario

• A quick entry and a quick exit is the way to go

• One should have many well-performing funds. The returns will multiply

• The lower the net asset value (NAV), the cheaper and better the fund

• One should quickly buy into a sector which is hot at the moment. For example, the infrastructure sector will do well in the future, so one should get into it in a big way

The Facts

• All market-related instruments, including MFs, carry a risk. The only advantage that equity MFs have over direct investing is that fund houses are experts in the field

• Have at least a three-year horizon, even more if need be. Avoid equity MFs if your span is less than this

• Keep it simple. Don’t forget that MFs invest in scrips. Too many schemes of the same type may mean duplication of sectors and scrips

• It is the increase and decrease in an NAV that counts, not the NAV itself So whether the NAV is Rs10 or Rs1,000, doesn’t really matter. What matters is how much gain or loss the scheme makes

• Various sectors behave differently. Some are less volatile and give stable, if not high, returns, while others can go up and down a lot. Go by your risk endurance

• Invest in sectors or thematic funds if you understand how they work and what their returns can be. Ideally, these should be peripheral schemes, and not at the core of your portfolio

CONNECT

Know your guidelines

Track your agent

Choose your term

Plastic currency

Write to us at businessoflife@livemint.com

All content brought to you by Outlook Money

Home truths rupee wise

Kartik Varma and Dhruv Agarwala — Tue, 29 Sep 2009 19:45:00 GMT

So you think cheap home loans are always best? Stop. Think again. This is only partially true because the advertised interest rate is just one of many criteria that must be looked at when taking a loan. And, in the context of a home loan price war in the market, take time out to understand what these low rates could mean for you and what other factors must be looked at.

Before you zero in on a loan, keep in mind two major factors:

1. Quantitative factors: This relates to the loan amount, the interest rate, the tenure of the loan and the EMI you will be bound to pay contractually.

2.Qualitative factors: This relates to the flexibility your lender can give you under the terms you have signed up for, as well as its service commitment to you as a client.

Taking a home loan is a big decision, and one you could be stuck with for a long time—you are taking on a contractual obligation to repay the loan over a period that could last for 10-20 years. A lot can change during this time—the prevailing economic conditions and market interest rates might change, you might want to move to a bigger home, or prepay your loan if you end up having the means to do so. So, let’s understand how these loans work.

How do cheap home loan rates work?

When a bank or lender announces that it is offering a home loan with a starting rate of 8%, this is the rate that sticks in our minds. However, the first thing that you need to understand is that the headline rate of 8% being offered is just a teaser rate. This rate only exists for a starting period, and after this predetermined time, it resets to a higher rate. The starting period could be anything from one–three years. After this period, the loan adjusts to something higher that you have contractually agreed to at the time of signing or is calculated based on the lender’s internal rate (the lending bank’s prime lending rate or PLR).

So, by the fourth or fifth year, after the initial reset, the rate could be above 10%, and your EMI (equated monthly instalment) might turn out to be higher than what you might be comfortable with.

Past experience from other countries has shown—particularly during the sub-prime crisis in the US—that those who took low teaser rates to buy homes, tempted by cheap rates, were often the ones who ended up in financial trouble a few years later. This is because when the rates adjusted upwards, they did not have sufficient income to pay the higher EMI.

We are not for a moment suggesting that the recent price war using cheap home loan rates will result in an economic crisis in India, or that the banks offering these rates are doing the wrong thing. All we are highlighting is that that there is more to it than meets the eye, and that one shouldn’t make the impulsive decision of going with the cheapest rate.

But isn’t cheap good?

As we mentioned earlier, there are several qualitative factors that need to be looked at.

1. Understand long-term implications: Home loans are long-term borrowings, often with a tenure of 10–20 years. So what you should really be thinking about is if you going to be better off in the long term or not, not just in the first year.

Don’t fall for low teaser rates and get locked in an inflexible arrangement. Has your lender explained to you the long-term implications that taking a loan with a low teaser rate that resets in a few years can have on your finances? What you need to ask yourself is whether the average long-term rate is lower or if it is just the initial teaser rate that is lower. Finally, understand if you can still afford the EMI after the loan has been reset to a higher rate.

2. Understanding PLR: Every bank has an internal interest rate according to which all its other loan rates are priced. The bank has full discretion to set this as it pleases. The details of how the PLR is arrived at are confusing to most of us, and the bank can exploit this ambiguity to its advantage.

Ask your lender to explain to you how the bank’s PLR might fluctuate and how these changes might affect you in the long run. At the very least, ask the bank to share its history of how the PLR has fluctuated in the past and how it affected the home loans they had offered. Ask your friends for their experiences if they have taken home loans in the past.

3. Penalty for balance transfer: Find out if there will be a penalty for a balance transfer. You might realize a few years into your loan that another bank is offering you better overall terms, but that you will not be able to transfer your loan balance to that bank because your current bank will charge a high penalty for transferring the loan.

Lenders waive the prepayment fees if you pay out of your own funds, but not everyone might have such a large pool of funds. Could the penalty fee be so high that it offsets the benefit of taking a home loan with a cheap teaser rate? Understand how flexible your lender is going to be and has been with other clients in the past.

4. Processing headaches and customer service: Most critically, understand the customer service aspect of your loan. We have seen enough clients go for cheap teaser rates from banks, only to suffer because the disbursement is not made on time or is not made at all. Don’t fall for a low rate only to be hit with the risk that your property purchase might be delayed because the lender is not processing your file in time. Often, the bank will publicize the low rate to tempt you, but then sit on your application for a while and could choose to not lend to you at that lower rate because you don’t meet the bank’s loan underwriting criteria.

A good deal is not just one where the initial rate is attractive but rather one that is accompanied by the right level of flexibility, responsive service and cheap lifetime cost of ownership. Don’t just blindly go in for a cheap headline rate—you might end up paying for it!

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Insure your home loan

If you are planning to take a home loan, it is advisable to take a home loan protection plan along with it. Your housing loan is a liability you will have to bear for anywhere between 10 and 20 years. What if something adverse happens to you and you are no longer capable of fulfilling your loan obligation? With a home loan protection plan, you can rest assured that in the event of any mishap, your family’s basic living conditions will not be disrupted. Rather than your home being repossessed for non-payment of liability, the insurance company will step in and take over your liability towards the lender.

--Kartik Varma

NRI or PIO? Invest in mutual funds

If you are a non-resident Indian (NRI) or a person of Indian origin (PIO) and want to invest in the country, consider investing in mutual funds directly for the following reasons:

Diversification: The basket of stocks available to India-dedicated ETFs (exchange-traded funds) is limited.

Performance: Since mid-2006, Indian mutual funds have outperformed India-dedicated ETFs by a significant margin.

Taxation: There is no tax on dividend income and long-term capital gains tax is zero in India when investing in Indian equity mutual funds.

--Kartik Varma

Make sure your shares are credited to your demat account

Always make sure your shares are credited to your demat account. If they are not transferred to this account, your broker can operate them without any authorization from you. Remember, if your broker sells your shares without your permission, you are exposing yourself to the danger of losing money when the price appreciates. Written consent is required every time a broker wants to sell your shares after they have been transferred to a demat account. Every broker provides a debit instruction slip booklet, which has to be filled every time the investor sells the shares. You can also give a power of attorney to your broker that can empower him to issue instructions from your account.

--Teena Jain

Financial transactions via cellphones

Nokia is planning to launch a service enabling people to make financial transactions via their cellphones. The “Nokia Money” service will make it possible “to send money to another person just by using the person’s mobile phone number, as well as to pay merchants for goods and services, pay their utility bills, or recharge their prepaid SIM cards”. The service, available 24 hours a day, will be rolled out from early 2010. Nokia said it was building up a large network of Nokia Money agents where consumers can deposit money or withdraw cash from their mobile accounts.

AFP

(Dhruv Agarwala and Kartik Varma graduated from Harvard Business School and are co-founders of New Delhi-based iTrust Financial Advisors)

Content provided by iTrust Financial Advisors

Write to us at businessoflife@livemint.com

Let’s talk about money, Sonny

Dhruv Agarwala and Kartik Varma — Sun, 27 Sep 2009 16:19:00 GMT

From a very early age right through their teenage years, we teach our children both hard and soft skills such as language, math and grammar. But when was the last time you used a quadratic equation to explain a monetary issue to your child? When was the last time you involved your child while planning for taxes, using your credit card or making a banking transaction?

Most parents think their children are too young for a discussion on money. Herein lies the problem. It’s obvious that you need to make decisions about money almost daily. Personal finance is a core life skill, and the best time to teach children about it is when they can develop their own intuition and define what it stands for.

Research has also indicated that children who were taught about money from a young age ended up being more decisive about their monetary decisions later in life.

If you want your child to grow up smart about money issues, we recommend you ask yourself the following questions and take action accordingly:

• What is your child’s attitude towards money?

• What message is your child getting about the reality of money (for example, is it a bottomless pit, does it grow on trees, “parents are my ATM”, among others)?

• What are your family’s financial values—do your children understand them?

• Do you take time out to talk to children about money matters?

• Do you and your spouse agree on how to raise your children financially, or do you have arguments over this?

• Are your children “set for life” because you happen to be very rich? Do you know how to instil financial discipline in your children?

• Do your children know how to make money and keep it? Do they know how to make investments and how to make their money grow?

• Do you know who your children’s role models are, and what influence they have on their perception about money?

• What financial habits do you want to pass on to your children? Does the affection of the grandparents dilute the discipline you have instilled in the children?

• What have you taught your children to start them on a journey of financial literacy that will last a lifetime?

Once you have done some introspection and dealt with these questions, sit down and figure out how and when you will talk to your children about personal finance. Don’t do this in a casual way, while, say, watching television. Set aside a special time when they are free from school or homework.

Teach them five basic financial skills

• How to operate a bank account—depositing money, using cheques

• Distinction between consumption and saving—how they use their pocket money

• How to spend wisely and stay within budget—discuss choices regarding the best use of money and prioritization of expenses

• What credit is—liability that has to be paid back

• Value of investing—compounding of capital to increase wealth.

Not all of these are relevant for, say, a three-year-old, but there are ways in which a parent can contextualize these lessons for children independent of their age. For instance, for a child in nursery, you could start with talking about putting savings in a piggy bank. But for teens familiar with the math of compounding, you could open a bank account and have them see how interest is earned and how a small account can grow into something big by the time they finish school.

Remember, in today’s competitive world, it can be very tough on your children if they end up learning basic personal finance skills the hard way—once they have grown up.

All content on this page is provided by iTrust Financial Advisors

Write to us at businessoflife@livemint.com

The other savings

Dhruv Agarwala and Kartik Varma — Sun, 27 Sep 2009 16:16:00 GMT

For most conventional investors in India, the contours of a perfect portfolio are shaped solely by a healthy mix of stocks and mutual funds. After all, in a bullish market, it is these that promise to rake in the highest returns. But these aren’t the only two asset classes we have access to or can invest in.

Have you considered investing in alternative assets such as gold, art, stamps, coins? Any good financial manager will tell you how these help diversify your portfolio, and most importantly, shield you from turbulence in the market.

The idea is that once your base portfolio is built using traditional assets, you need to diversify it to provide some alternative exposure so that fluctuations in the equity or bond markets are partially offset by their performance.

Alternative options

When we talk of typical investment options, stocks, fixed income instruments, industrial or agri-commodities and currencies are some of the few that immediately come to mind. However, non-traditional assets such as real estate, precious metals and stones, art, antiques and collectibles such as carpets, shawls, coins, stamps and fine wines, among others, are a few investment options you can consider. These have a very low correlation to traditional assets, but promise handsome returns with prudent investment. Let’s look at it this way: Just like a house needs a good foundation, your portfolio, too, must have a healthy mix of large cap stocks, or diversified mutual funds, and a high-quality fixed income exposure.

The cost-benefit factor

Be aware that alternative assets can’t replace traditional investments. Instead, they are suitable only for those who want to diversify the risk in their portfolio once they already have a solid foundation in place. This is so because such vehicles are usually not related to traditional asset classes. For instance, in the event of a market crash, the price of a rare painting you own is unlikely to go down. This is so because it is expected to retain or appreciate in value over time because of its scarcity value.

Also, alternative investments in hard assets protect your portfolio against inflation when the purchasing power of paper money gets reduced. In times of high inflation, investments in gold and real estate can be good options to protect some part of a retail investor’s wealth against inflation.

Unlike pure financial assets such as share certificates or debentures, you can touch and enjoy a work of art or an antique carpet or tapestry. You can derive psychological income apart from just the prospect of capital appreciation.

The disadvantages

First, some alternative assets such as art, jewellery and antiques usually don’t generate any regular income, unlike, say, receiving dividends from stocks or interest from bonds. You can, of course, benefit from the appreciation of the value of your asset, but unless you actually cash out of it, this value exists only on paper.

Second, alternative assets can often be very illiquid, that is, it’s hard to immediately convert a sculpture or painting into cash. However, if you owned a mutual fund, you could sell it and get cash in hand within 24-48 hours.

Third, assets such as jewellery, antiques, art, among others, have handling costs too. You need to store them in a safe and secure place, as well as get them insured to protect theft or damage.

Finally, unlike the capital markets, where there is a regulator, the art market, the real estate sector or the jewellers are not regulated and offer very little investor protection. You could be defrauded or even be sold an impure precious metal.

We list some of the non-traditional assets:

Gold and Jewellery

For many investors, in the Indian context, gold and jewellery are probably more traditional asset classes. Gold is currently trading close to an all-time high (in nominal rupee terms). Today, one can buy gold ornaments from a jeweller or invest in gold exchange traded funds or buy gold bars from a bank. The last two options are probably safer in terms of guaranteeing purity.

Gold is considered one of the best hedges against inflation. Given the sociocultural association of gold and jewellery in India, this is one asset class that families start accumulating early. However, one thing to keep in mind about jewellery is that because of huge variations in design and quality of workmanship, among other things, it is difficult to establish the right price when you want to sell it. You might even end up not getting a fair deal.

Shawls, Carpets and Antiques

These are daily-use items that go through wear and tear, and so one does not usually think of them as assets that can sustain value over time. However, fine pieces of craftsmanship in a shawl handed down to you from elders or a fine rug do have value associated with them, especially if they have aged well. A secondary market for them is probably not that vibrant in India yet, and you will likely have a problem readily converting these assets into cash. It will also be difficult to arrive at an objective valuation for such assets, with lots of differing opinions. But it is worthwhile to identify some of these valuables and treat them as you would any other investment.

Coins and Stamps

Dust off the cobwebs on that box of coins or stamps you so avidly collected while in school. You never knew how much your possession was worth. It’s a popular hobby in the West, and antique dealers trade in coins and stamps based on the collection’s rarity or its intrinsic value.

Old Indian coins, especially those from the pre-independence era made of, for instance, silver, are very popular with dealers. If you have such a collection, be assured your hobby may pay you handsome rewards in the future. Old stamps, too, are very popular with dealers.

Art

The past 15 years have seen a vibrant primary art market develop domestically in India. One might, however, say that it’s still only the preserve of high net worth individuals. The India Art Summit, which concluded in New Delhi in August, was an indication of the new respect with which the world has started looking at Indian artists.

Art is an illiquid asset class, that is, you cannot readily convert it into cash. Also, there will be storage and insurance costs. Additionally, there might be a need for authentication of the work as well (as seen in recent cases of fakes flooding the market), unless you are buying directly from the artist.

However, art is one asset that you can see, feel and touch, and so it’s important that you like what you buy. The Indian art market is not very deep and the secondary market is yet to develop. But in the coming decade, it’s likely that art will become a popular asset class even with main street investors.

Real estate and Land

Many families in India have ancestral properties that range from acres of farmland to family homes. Through the passage of time, these might have been divided among different members of the family. Chances are you could be sitting on a decent amount of value without even knowing it. We are in the midst of a real estate boom in the country and despite its cyclical ups and downs, we are likely to see this boom in real estate continue in the coming decades.

With rising incomes, many families have tapped the loan market to purchase homes. If you are in the market for a primary home, you might want to give that priority over building a stock portfolio. However, if you are punting on the real estate market, you must ensure that your foundation goals and portfolio needs have been met before you take a bet on the direction of the property market. Buying and selling property or land can be a very time-consuming and emotionally draining exercise.

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Postpone your shopping until October to get some great deals

With Diwali and Christmas around the corner, we will soon be in the middle of the peak domestic holiday season. This is also a time when retailers try to woo customers with the best deals. If you are planning to shop for, say, a vehicle, household appliance or electronic items, it would be prudent to postpone your purchase till next month. Once the discount season starts, you may get multiple offers on the same product. It is worth waiting, especially if you are shopping for an expensive item.

Negotiate with your home loan lender

Like many activities, your home loan lender also has monthly sales targets to meet. So if you have a tough case, where you might be under the risk of rejection or tougher terms, time your application around the middle of the month. With their internal sales deadline approaching, the lender might look at your case more favourably. Don’t expect any major changes in their loan underwriting process, but nevertheless, the lender might be less strict about a few items, where they might have some flexibility.

Avoid personal loans for car and education

Personal loans are very expensive, and in the current credit climate, could be as high as 18% per annum because these are unsecured loans, that is, loans where you do not provide any security. Don’t take a personal loan to buy a car or to fund education. You will find specialist auto loans or education loans will be cheaper than a personal loan, and will also likely offer you more overall flexibility.

Avail tax deduction

The new term for colleges has just begun, and you may be one of those who has taken a loan to fund your education or that of one of your family. Under section 80E, you can get a tax deduction of unlimited amount on the interest that you pay on the education loan taken for the higher education of any immediate member of your family (yourself, your spouse or your children). Diligently maintain all documentation so that you can factor this in at the time of thinking about your return later in the financial year.

Dhruv Agarwala and Kartik Varma graduated from Harvard Business School and are co-founders of New Delhi-based iTrust Financial Advisors.

Write to us at businessoflife@livemint.com