My Money Streets – Page 17 – Path to financial freedom

August 3, 2016

DHFL NCDs issue – should or shouldn’t buy – NCD review

View: Neutral NCD issue review

DHFL NCD Issue opens on Aug 3, 2016, closes on August 16, 2016

Should or should not buy? What to look at? Is it safe? Will it give high returns? What are the risk involved?

About the company – #DHFL, is a deposit-taking housing finance company registered with the NHB and focused on providing financing products for the #LMI (Lower Middle Income) segment in India primarily in Tier II and Tier III cities and towns since 1984. They are known for providing secured finance primarily to individuals, partnership firms and companies for the purchase, self-construction, improvement and extension of homes, new and resalable flats, commercial properties and land. They also provide certain categories of non-housing loans including loans for commercial property, medical equipment, and for plant and machinery.

About the issue

DHFL, NCD issue opens on August 3, 2016, a public issue of secured redeemable #Non-Convertible Debentures (“NCD”) of face value of Rs. 1,000 each aggregating up to Rs. 4,000 crore. The Issue is scheduled to close on August 16, 2016, with an option of early closure or extension as decided by the Board of Directors of our Company (“Board”) or the Finance Committee.

The NCDs received the highest credit rating ‘CARE AAA (Triple A)’ by Credit Analysis and Research Limited (“CARE”) BWR AAA (Pronounced as BWR Triple A) by Brickwork Ratings India Private Limited (“Brickwork”). The rating of CARE AAA by CARE and BWR AAA, Outlook: Stable by Brickwork indicates that instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations signifying the instrument carries lowest credit risk.

· The minimum application amount is Rs. 10,000 collectively across all options on NCDs and in multiples of One (1) NCD after the minimum application. Maximum limit of a retail investor is Rs. 10 lakh.

· Allotment is on a first-come-first-serve basis (except on the date of oversubscription, if any, when all the investors applying on the said date will get allotment on a proportionate basis).

· Investors have an option to apply for NCDs in dematerialized as well as physical form

· Category IV Investors (Retail Individual Investors) are defined as Resident Indian individuals and HUFs allowing investment upto 10 lakh

· Investors can apply through ASBA, the NCDs are available both in physical and Demat format

Issue Structure

The issue is divided into 10 series depending on the tenure of the series and coupon payment. And divided into 4 categories – category I, II, III, IV.

Interest on Application Money is at 8.00% p.a. and Interest on Refunded Money is at 6.00% p.a
Tenure of the NCDs are 3, 5 and 10
Coupon payment options – monthly, quarterly and annually
The interest payout metho includes NEFT, RTGS, Direct debit
Floor rate on interest rate for all categories is 8.90% and cap on interest rate for all categories is 9.50%.
Series X is a Consumer Price Index (CPI) linked instrument (Floating Rate Instrument) has a tenor of 3 years and the Coupon Rate for Category I & II investors is currently 9.10% (Reference CPI + 4.08%); and that for Category III and Category IV investors is currently 9.20% (Reference CPI + 4.18%). 12 month average for the period before the record date (currently at 5.02%; Source http://mospi.nic.in.

Allotment is first come first served basis

Issue size and allocation

QIB: Rs. 800 Crore

Corp: Rs. Rs. 800 Crore

HNI: Rs. 1200 crore

Individual: 1200 crore

Total : 4000 crore

Interest rate:

For individuals

9.20% p.a for 3 years

9.25% p.a for 5 years

9.30% p.a for 10 years

For Non-individual

9.10% p.a for 3 years

9.10% p.a for 5 years

9.10% p.a for 10 years

#NRI investors cannot invest in this issue

My Take – #NCDs are being offered by reputed housing finance player, having a minimum investment requirement of Rs. 10, 000. The NCDs are secured, backed by assets, which means incase of default/ non-payment, assets can be liquidated to repay the debts. Credit rating agencies CARE and BWR has awarded highest credit ratings, suggesting lowest risk involved. So, safety score is high for the principle amount.

Now let us look at the interest rate and coupon payment scenario. The #coupon rate across segment is expected to be just above 1.5- 2 % from any bank FDs at this point of time. Though the dematerialised NCDs don’t attract TDS, the investment will taxed at short term (less than a year) and long term (debt investment more than a year are taxed at 10%) depending on the holding period. The interest will be taxed as per the tax bracket of the investor. So, with a high tax bracket investor (20-30%) won’t be benefited much, as the return will be almost similar to Bank FDs.

However, interest rate movement can be a game changer in this investment. Apart from the coupon payment, capital appreciation on principal is possible incase interest rates soften during the tenure of the NCDs. The interest rate and bond prices move in opposite direction and one can sell it at a profit, instead of holding on till maturity. The scenario exactly can become opposite in case of rising interest environment, the prices of the instrument may fall sometimes even below the face value in some rare cases. For the investors in lower tax bracket, instrument offers higher interest rate than bank with minimum risk, may also enjoy capital appreciation incase interest rates fall.

General Risks –

#DHFL’s Business is particularly vulnerable to volatility in interest rates
Any increase in the levels of non-performing assets in loan portfolio, for any reason whatsoever, would adversely affect the business, results of operations and financial condition
Any downgrade in their credit ratings may increase interest rates for refinancing their outstanding debt, which would increase their financing costs, and adversely affect our future issuances of debt and our ability to borrow on a competitive basis.

Also Read: What is NCD and what makes it so attractive

August 3, 2016

What is NCD and what makes it so attractive as an investment instrument

What is NCD and what makes it so attractive

NCD is a fixed income instrument Apart from taking bank loans Corporates, NBFCs raise money through issuing debentures. It is a financial instrument issued by corporates to support their business needs. There are two type of debentures, convertible debentures and non-convertible debenture. Convertible debentures are unsecured bonds and can be converted into equities or stocks at a future date as specified by the issuer.

NCD is financial instrument used for taking loan from the financial market. It cannot be converted into equity shares of the issuer in a future date, hence it offers higher interest rate. The NCD offers atleast 1.5 – 2% higher interest than any fixed deposit by a reputed bank and company deposits. NCDs come in both secured and unsecure form, secured #NCDs are backed by assets. Unsecured NCDs entails higher risk.

Added Edge

1. What makes it more attractive is, in the falling interest regime, the bond prices may surge, hence the value of the funds.

2. No TDS deducted on the demat form of investment (physical form does)

Points for the new investors

1. Once you come to know about a new NCD offer, check with your stock broker for online application.

2. Like any other IPO, it has a NCD comes with opening and closing dates

3. NCD offers coupon rate. Coupon rate is the interest rate paid on a bond by its issuer for the term of the security. For example, if a NCD issue comes with a face value of Rs. 100 and coupon rate 10%, the interest earned will be Rs. 10 per annum. However, in the tenure if the NAV price falls or surge, it will have no impact on the interest pay out, it will continue as Rs. 10 per year throughout the tenure. Hence, coupon rate is fixed on the offer price and continue through maturity

4. Check for the credit rating allotted by #ICRA, #CRISIL, #CARE (triple A rating Suggest good financial health of the issuer, double A may give higher coupon rate, triple A ensures safety of your capital)

5. NCDs are also traded on stock exchanges. Apart from the new offers, investors can also buy exiting NCDs through stock exchanges, however, one need to be double careful and seek guidance from financial planner.

6. Interests are generally paid through direct credit, RTGS, ECS and NEFT mode. It may offer monthly/ quarterly/ annually/ cumulative options.

7. Tax – The investment is taxed at short term (less than a year) and long term (debt investment more than a year are taxed at 10%) depending on the holding period. The interest will be taxed as per the tax bracket of the investor.

8. This is as liquid as a bank fixed deposit. However, there is no penalty fee for pre-mature withdrawal of this investment

9. Additional Features – Some NCD public issues offer special rate of interest to Senior citizens or to shareholder.

Pros

1. It’s #liquidity is as good as any fixed deposit in bank, which has a specific tenure but can be withdrawn any time. However, FD may charge a penalty fee on interest accrued.. but incase of NCD, there is no penalty.

2. If it is compared with company fixed deposit, company deposits (a popular instrument in the senior citizen segment with 0.25- 0.50% extra interest)comes with various conditions for pre-mature withdrawal, for eg – lock-in periods, penalties etc.

3. NCDs come with Rating from #ICRA #CRISIL #IndiaRatings #CARE which gives a clarity to the investor on the risk involved, higher the rating, lower is the risk (AAA being the highest category, followed by AA, A, A-, BBB and so on)

4. Incase of bankruptcy, NCD holders get preference over shareholders

Cons

1. Incase interest rate increase, the value of the NCD may fall, sometimes even below the Face Value.

2. Though, the instrument can be traded on the exchanges, one may not find a buyer for NCDs if the trade volumes on bourses are low.

July 18, 2016

Be home loan Prepared – It is very easy

What suits their image.. The LION’s Den or The LOVE Nest- the fight doesn’t end between the newly married Rima and Manas. The search on websites, apps, newspaper ads and site visits was almost done. The discussions over coffee and drinks gradually took them to a more important topic- The budget, loan requirement and repayment processes. They knew they would need to take some bank loan but the mathematics seemed very difficult when they realised they would require 70% financing and which would take about 15 years to repay. They also realised as their monthly budget would leave them with less money in hand, a plan seemed necessary to tackle the issue of choosing the bank/ housing finance offers and monitor the repayment process carefully.

Rather than getting into the whole subject together in one go, I have decided to make three simple posts on the subject. 1. Preparation (Home Work), 2. Processes 3. Managing the repayment for smart benefits.

Prepare to get loan – Home Work

1. Keep at least last two years’ Form 16. (Tax return details)

2. Keep bank statement for last 1 year (minimum 6 months)

3. You may refer to #CIBIL website to check your credit score (higher the score, your negotiation power will be higher)

4. You have to fetch all your loan history and repayment record.

5. Once you decide your budget, remember bank will finance maximum upto 80-90% of the total amount. So, you have to be ready with the minimum down payment (10 – 20%)

6. If you are close to finalising the property, you may also apply for pre-approved loans. This come with various conditions as well as one need to closely look at.

7. Check for good offers in various websites and other websites for various offers on loan

8. Age – your current age is a factor for bank to consider interest rate negotiation, the preference is 24 -45. Higher the age risk factor for banks increase

9. Income – Bank/ institution not only finance upto 80-90% of the actual price, they also consider your present salary. For, eg. Certain bank can offer 20 times your monthly salary or 4 years of your annual income.

10. co-applicant – An earning co-applicant like wife/ father/ son can reduce the risk for the bank, also can give better tax benefits.

In the next post we will discuss about the processes

July 17, 2016

Financial planning simplified

#Personal finance is a very wide subject. Here I just want to simplify the basics, why we need to take care of our money, why the inflow and outflow of funds need to me managed.

Every person has their own perspective about life, income and expenses. However, we can start with the 5 constants of personal finance apart from the regular aspirations of education for your children, marriage and buying a home.

1. You are going to grow old

2. Prices will go up

3. Value of money will decrease

4. Financial markets will remain volatile

5. There will be unplanned emergencies

Now, what do we do? Start stacking up cash/ gold? Putting in Fixed Deposit? Buy stocks? Mutual funds? Insurance? What?

We need to simply the relation between the goals and financial needs. We need to come in terms with the purpose of the investment so that we allocate funds and plan in a right manner.

How to go about it?

Start as soon as you feel it is important; don’t wait for emergencies to teach you harsh lessons.

Chalk out your financial goals based on the event and the expected timeline. For eg

Own marriage/ buying property/ vacations/ children’s education and marrage/ second home/ retirement planning etc.

Keep in mind

1. Keep goals clear

2. Time in hand

3. Risk taking ability

4. Avoid mixing asset classes

Based on your age, current financial situation, priority and timeline you can plan your finance.

First, prepare an Emergency fund, ideally the most liquid investment like savings account/ Fixed deposit/liquid fund.

Your financial liabilities and dependants should determine the life insurance cover. Chose term plan, stay away from endowment and ulips. See Post to know more.

Health insurance is also a significant part of financial planning. A medical emergency can erode a significant portion of your wealth if not planned for emergencies.

Few goals which are 5 – 10 years away and more, a significant kitty can be built with a monthly investing a small amount into equity mutual fund. See post on wealth creation

Younger the age, risk taking capacity is more. Equity based mutual fund investment can yield maximum return in long term. Thumb rule of equity investment is (100-age)% of total savings can be kept in equity. With increasing age/ nearing the goal gradually shift the investment into debts or fixed instruments like Fixed deposits.

Retirement planning is one more aspect one need to start early. As, the value of money decreases with passing time, maintaining the same lifestyle as today will cost you much higher 20 years later. Hence, investing for retire is important. See post

In other posts will go into details

June 30, 2016

Friend of desires, enemy of bad money managers

All of 23, and first job in hand, Rashmi got a free credit card with her salary account. She was thrilled to have monthly salary and a credit card together. She felt it is a double salary for her. She was amazed at the 50 day credit policy, with awe she listened to the bank representative sharing the features of small monthly EMI schemes for bigger purchases, loan offers, money withdrawal, freebies, and so on.

Her joy was short-lived. She bought a Split AC and a pair of gold earring. The monthly EMI started eating up 80% of her salary forcing her borrow money from her mother for monthly expenses leaving no room for saving and investing for the next 10 months. But, at least she learnt the lesson easy and early life. There are many examples which had much difficult endings. Then why this phenomenon of credit cards such an in-thing. To understand the smart usage of Credit card, we must consider the topic dispassionately or objectively. Credit card is a high cost convenience tool and not a savings account. It should be used with caution.

How it impacts your budget “Buy now, pay later” doesn’t work that easy. Apparently it looks very convenient option, but it comes with a price. When we buy a product in credit, we shift the burden on the next month. So, the next month budget gets affected. If not paid within the stipulated time, the due amount escalates with high interest rates and heavy penalties every due date. So, relook at your monthly financial plan. Don’t over use. Stay within your monthly budget. You need to pay within 50 days/ monthly billing cycle while buying with credit card.

Consider – Is it absolutely necessary to make the purchase in credit. – Will you be able to repay within next due date. – If buying in EMI, consider the processing fee and monthly interest charges – Don’t fall for the “minimum payment” myth. It only saves you from penalty. You still have to pay the amount with interest, compounded every month on the remaining amount.

Withdrawing money with credit card is a financial blunderMoney withdrawal is a big NO NO in credit card. Please check with the bank representatives about the transaction fee, interest rates (compounding quarterly/ monthly in case of delayed repayment.) It can go as high as 40-50% and even double if done carelessly.

Beneficial for cautious people However, this product has its own advantages enjoyed by many smart money managers.
1. It helps you earn a little more interest in your savings account. For ex – If you have 10,000 Rs. In savings account, and the product you wish to purchase is within 10,000. You can buy the product in credit card and repay the amount in the stipulated 50 days of credit card billing cycle (interest free period). In this transaction, your money lies in the account for 50 more days and earns you interest for the said period. It also helps in keeping higher quarterly average in your savings account.

2. Good transaction/ repayment history in credit card earns you CIBIL score (helps in getting better terms for various loans)[will discuss CIBIL in details in another post]

3. The freebies come with it. With every swipe you earn some bonus points. On accumulation, these points can earn you some shopping vouchers/ discount coupons/deals apart from the various cash back offers. In the higher end cards, there are many more benefits like airport lounge access etc. In a whole, it’s a good product for people who can use it smartly.

It is just a convenience tool to be used judiciously.

Note – Please check the fine prints of terms and conditions when you are offered a free credit card from bank. If the joining fee is waived, there is a yearly fee attached, whether or not you use the service. Ask the bank representative about the costs involved in detail. Also, do look for various freebies, vouchers, bonus in detail to make the most of it.

June 27, 2016

Emergency Fund – Plan B at work when your Financial Plan A is at Risk!

Emergency Fund Plan B at work when your Plan A is at Risk!

It was middle of the month; Prakash was done with his loan EMIs, Car Insurance, son’s tuition fee, grocery shopping, and, like every month he could also save Rs. 7000/- in #taxsaving mutual fund and #PPF. As he was just a few clicks away from making the investments, his son came running and
informed him about the school trip, this had skipped his mind while planning. This time they have planned to go to Shimla for camping and the contribution was Rs. 25,000. He almost collapsed to even imagine how his investment plan will go haywire; he may need to borrow from a colleague or somebody to meet the extra expense which will also have negative impact on the budget for next few months. As he was thinking the best possible way to manage things, his wife came to his rescue and handed over Rs. 25,000 to Prakash and smiled. Prakash was in awe an shock as he only gave her money for grocery and some routine expenses each month. The intelligent lady explained as she was given the money, she removed a certain amount and kept in her piggy bank each month for emergency needs and she has been doing this since their marriage. And, today the fund is big enough to take care of family expenses for three months in an emergency situation.

We need an emergency fund

This event is an eye—opener. Many a times we bump into unplanned expenses on account of sudden medical emergencies, education, job loss, accidents etc. An emergency fund doesn’t only helps financially, it also offers a much needed mental peace to handle the situation better. The size of the fund could however vary depending on various factors.

Corpus size

Safer the better, so bigger the better. However, everyone has a risk profile of his/her own. While deciding the amount, keep few things in consideration –
1. Do you have funds to take care of 3-6 month of family expenses handy if you fall sick?
2. Are you confident to take the risk your current job for your dream profession?
3. Will you be at ease financially if your ailing parent need a sudden medical attention?
4. Do you have a child with special care needs? Consider the unavoidable monthly expenses – Loan EMIs, Insurance premiums, investment obligations and other family maintenance expenses

How and when to build that large liquid corpus

Good old days are gone when grandmother had hidden boxes with gold coins. Now, you have better options as your money can also earn. The best moment to start it is the moment you conceive the idea. The fund should only grow bigger as you age. Remember, it should be liquid (easy to withdraw). One can start with a simple savings account or a recurring deposit in any bank. A savvy investor with higher tax bracket (20-30% )can also opt for a liquid mutual fund. {I don’t suggest an equity mutual fund/ stocks here as every investment has its own purpose. Liquidity and safety of the corpus is the priority here}

How do you manage the fundOnce, the corpus achieves the desired level, it can be kept in form of a fixed deposit with a reputed bank or a liquid fund. It also should be reviewed periodically and increased as and when required. Whenever the fund is used, one should take effort to rebuild the corpus again in a planned manner with priority.

What to remember
~~Emergency Fund is a substitute for #health insurance, #life insurance, #retirement planning, #mutual funds.~~
Emergency Fund is not a substitute for #health insurance, #life insurance, #retirement planning, #mutual funds. Emergency fund is a Plan B to take care when the Financial plan A is in danger!

March 7, 2011

How about considering mutual funds in the portfolio to build the retirement kitty!!

Invest some! Spend some! Balance it with intelligent investment decisions

Retirement is the time when you would like to do things that you like most. Hence planning for it with care and a long-term vision is most important.
Planning through equity mutual funds is a viable option to explore, given the facts that non-government employees cannot be a part of NPS (national Pension system) and life insurance companies cannot offer higher returns now after the imposition of a regulatory guaranteed return in pension plans.

The life expectancy is increasing in our country considerably, naturally people are living longer retired life. To ensure the retired life is happy and a desirable one, it is important to ensure good health and wealth for a long run. India is a fast emerging country which is known worldwide for its saving habits. But India is also known to be a conservative investor. This results in saving in instruments that guaranteed safe returns, but not high enough to be able to enjoy a good life in future. Most Indians shy away from saving in instruments that may involve a little risk, but yield better returns. In fact they end up protecting their hard- earned money in a few instruments that also yield minimum returns, rather than creating wealth.

However the ensuing circumstances are expected to pan out differently from the way they panned out for our parents and grandparents. The inflationary pressure on life and longer retired life are expected to go up. In the old age we wouldn’t want to compromise on the lifestyle we lived so far. We will travel abroad, invest in art and music, might grow an interest in photography too!! These are good reasons for most of us to create wealth in a systematic way and enough to ensure that we lead a happy and a better-managed retired life.

Employer Provident fund (EPF) and Public Provident fund (PPF) are good options which not only saves tax but also provides compounded interest of 8-9% year-on-year and have a long lock in period. These options are no-risk- free as well as tax-free on maturity. One should definitely have an exposure to these options. But as the inflation is rising high at 6-7% year-on-year, the corpus built through these funds yield lower return on investment. Hence investing in these instruments is important but would not be enough to take care of your future financial needs.

Lets beat inflation worries and create long term wealth

1. Start early and think for a long term. The earlier you start, the better are your chances of enjoying the benefit of compounding

2. A happy retirement can be planned with systematically investing a fixed amount every month for post-retirement years. A small amount saved every month for a longtime will create a sizable corpus, overtime. Rs.3,000/- pm invested in MF Schemes (yielding 12% pa ) over the working years ( assumed as 30 ), will yield tax free return of handsome Rs.1.05 crore at the age of 60 years! That’s the power of compounding at work.

3. There is no tax on long-term gains for equity investments, although debt investment like fixed- deposits and other similar instruments do attract tax on long- term gains.

4. Do consider the future healthcare cost; it would be a wise decision to make a separate kitty for your future healthcare requirements else it can cause erosion in the other expenses.

5. Diversify your investment to minimize risk and maximize returns. Put your money in different asset class to minimize risk – Debt, Equity and Hybrid.

6. Disciplined investment habit for a long term has a proven history of returns

Equity is one of the investment tools for long-term wealth creation. If we consider Indian equity market, it has seen an average annualised growth of 15% over the last 20 years. So, if somebody had made a Rs. 100,000 investment in Sensex stocks in 1990, in 20 years as on 2010 the return would have been Rs. 1 crore 63 lakhs (tax free).
However, the volatility of markets, wrong advises and fear of loosing money almost at the same rate as you would have gained in equity could deter you from taking the risk. All of us have seen this only too closely that making money in the equity market is easy; losing it is easier. Relying on tips and recommendations is like kissing your money a friendly goodbye, rather knowingly. If we buy a stock directly, it has to be something that we have done our homework on, but we won’t really know how to manage the diverse portfolio or miss out on an interesting opportunity. A better overall policy would be to use mutual funds way. In mutual funds, these nerdy fund managers invest into diverse companies and sectors. The fund management teams comprise of highly educated and experienced team of analysts who thoroughly research on companies, thus minimizing your risk and maximizing returns.

Things to remember while planning for retirement

1. Decide how much income you require to live comfortably in your post-retirement years. Consider aspects like increased medical costs, vacations but reduce costs like children’s education and rent, if you own your home. Map this income based on your current lifestyle.

2. Determine how much you need to save regularly, starting today, to have the right amount. Start allocating funds towards your retirement kitty.

3. Select a set of investment instruments that will help you meet your post-retirement requirements.

Start saving early has amazing benefits!!

Wish you all cool and rocking retired life!!

October 25, 2010

S I P (Systematic Investment Plan) – TREND AMONG THE FIRST TIME INVESTORS, making a strong case for Mutual Fund Industry

In the recent past, especially post August 2009 (banning of entry load in Mutual Fund) media has bashed the MF industry many a times predominantly on net negative flow on equity funds despite remarkable market rallies. But if we closely analyze market data, there is a strong SIP movement fuelling up underneath this vulnerability. The new investors are taking SIP (systematic Investment Plan) way to create long term wealth.

Data from industry sources show that there has been consistent upward movement in the SIP folios in last one year in all Metro investors, Non metro cities (next top 25cities) and the smaller cities. The ticket size of average SIP has moved up from Rs. 2100 to Rs. 2200.

Micro SIP category (below Rs.1000, which is dominantly from semi urban and rural India) has seen a surge of 16% from the earlier 13% market share. Though the industry suffered a negative flow in equity funds, the financial year has seen a healthy growth trend with 3.24 Lakh new registrations.

Mutual Fund SIP – Beginners’ route to create a long term wealth
Systematic Investment Plan is a disciplined way of investing into mutual funds. Where in investors have option of investing a fixed amount of money in weekly, monthly or quarterly interval into a specific fund. It can be done by submitting dated cheques or ECS from a specified bank account (Electronic Clearing Systems – Used by banks for transferring fund from one account to another)

For eg. An investor investing as small as Rs. 1000/- per month making a total investment of Rs. 12, 000. Instead of investing Rs. 12,000 at one go, investors now have option of putting the amount in 12 equal installments.

And during volatile market movements, the cost of investment will be average and can see a consistent appreciation of the investment over long period of time.

Beginners’ first step of investment can start with Mutual Fund SIP. Here is why –
1. Small Installments – The new investors who do not have big money ready to invest and allocate in different things, can build their portfolio with a weekly/ monthly/ quarterly SIP over a long period of time. Eg . a ECS deduction of – 1000 per month make a investment of 12,000 in a year.
2. Disciplined Investing – The investors are seeing this an opportunity for a long-term investment as the amount needed for every installment is low and has the benefit of investing through a long span.
3. Beating the volatility of equity market– Investing equal amount every month (similar to saving in a recurring deposit) gives the investor a chance of averaging the risk of losing money through beating the short-term volatility by committing to a long-term disciplined investment.

But, we must look at few reasons why there is net negative outflow in last 1 year –
Reason 1. Advisors are less motivated to sell MF schemes as, as the easy brokerage has stopped coming in
Reason 2. Post market correction of 2008, the 2009-10 rally has made extra ordinary profits in many schemes, so the old investors are booking profits, which had grown multi folds over many years.

But yes, before investing, one should definitely choose the fund carefully.

October 21, 2010

Banning of entry load brought transparency in the Mutual Fund industry

Recent steps taken by Sebi to ban the entry load on MF purchase will attract more investors to capital market. Some regulations are yet to be formed to make the market more transparent; however this is definitely an important step towards the final goal.
Until August 2009, the MF investors were required to pay an entry load of 1-3% on every MF purchase. So if you were investing Rs. 1000 in an MF, at least Rs. 10-30 would go towards the advisory cost which the MF firm would collect to pay off the brokers. So, in effect you invested only Rs. 970- Rs. 990, which would see appropriate appreciation in due course. This obviously encouraged brokers to promote only those MFs that promised them the highest brokerage fee, thus ignoring the need for unbiased and informed advice.
Mutual Fund companies went into a panic mode when the entry load was banned by the protector of the Investors (sebi). Suddenly the chunk of thick pocket advisors moved away from selling mutual funds and turned towards money minting ULIPs (Unit linked insurance product). Then came the IRDA strict guidelines and caps on advisors spending- another wake up call !!!

One year down the line after many hustle –bustle investors have come back on their own or with the advisor’s guidance to save the Mutual Fund industry in India. This turn around is observed through the increasing number of SIP (Systematic Investment Plan) folios in the last one year. The ban of entry load has brought in the sense of responsibility in the advisors group as well as the Mutual Fund companies towards their fund performance, investors’ education to live up in this competitive market.
What just went wrong and again falling in place?
Mutual Fund is a product driven by group of investors to serve the best interest of investors through a transparent method to invest the pool of money to create long term wealth for the investors. In India, Mutual Fund is still in its nascent stage. Though Indian investors save more than 12% of their income, they are conservative in approach, they like to see consistency, predictability and transparency, where Mutual Fund though have tendency to give higher returns, can see a negative returns as well. In that scenario, when Indian equity market is growing 17% annual basis, still retail participation remained zilch. To increase investment in Mutual Funds, companies started paying handsome money to the investment advisors to push Mutual Fund products with more human touch. The greed of making money caught the advisors segment, who pushed the products with higher commission promised without paying much heed to the performance of the fund, credibility of the fund manager.
Things were good at the boom time, investors pumped in money, got returns on anything, but when market fell and crashed badly, thankfully SEBI woke up first to the investors’ cry and took the first step towards making Mutual Fund most competitive equity product. Indian economy is set to grow so as the market, then Indian Investors has all the right to get maximum benefit from the market.
So What Next !!
Now, through this stricter norms in all financial products, market is set to be more competitive and making it more level playing ground for the investors. Advisors are forced to do that extra bit of research to advice on good products, because they are gradually understanding the benefit of long term relations. The more steady the investors’ wealth grow, the better opportunity for the advisors and finally for the Indian Mutual Fund Industry as a whole. .
So, hail those laws and regulations which make Indian market more transparent, more regulated and most attractive in the world.
And Indian Investors – Smile On!!! 🙂