Buy mutual funds, cheap

IT pays to buy mutual funds directly from the fund house. Here’s why.

You save money on the ‘entry load’, a deduction made by the mutual fund company from your invested amount and used to pay the agent’s commission.

If you choose not to use the services of an agent, you can save anything between 2 to 6 per cent of your invested amount.

For instance, if you want to invest Rs 10,000, earlier (three months ago when you could not buy mutual funds directly from the company but only through its agent), the fund house would have deducted around Rs 200 (for the agent) and made a net investment of Rs 9,800 on your behalf.

But now, if you choose to invest directly from the mutual fund house, Rs 10,000 will be invested. There are three ways to buy a mutual fund, directly.

1: Head to the nearest office of the mutual fund house.

Visit the office, fill up the form, submit the documents and voila, you have saved 2 per cent. Remember that your bank and the mutual fund house, even if they belong to the same group, are separate entities.

For instance, if you want to invest in a mutual fund scheme from SBI Mutual Funds, you cannot go to the nearest branch of the State Bank of India. In this case, the State Bank of India will act as an agent for SBI Mutual Funds, and you will not save on the entry load.

Instead, head to the nearest SBI Mutual Fund office.

2. Drop in at a collection centre or investor service office.

Applications submitted to the collection centre or investor service centre will not attract entry load. If the fund house does not have an office, collection centre or investor service office in the city, you could courier your form. If the cost of the courier is the same as the entry load, it would make sense to hire an agent and save yourself the trouble.

3: Buy them online.

If you are Internet-savvy, online shopping is the way to go. Buy the mutual fund of your choice by visiting the web site of that particular fund house. Fill up your personal and investment details as asked in the application form and quote your Permanent Account Number (PAN) (this is mandatory).

You can pay through your bank account debit card, if that fund house has tied up with your bank. In case your bank does not feature in list of tie-ups, don’t worry.

There’s always Plan B:Choose to make the payment through a cheque or demand draft. In this case, you need to courier the same.

If you opt for a Systematic Investment Plan (SIP), choose the Electronic Clearance Scheme (ECS). Some fund houses do not offer SIP investments, online. In this case, you will need to visit a branch to do the same.

Top documents

When buying mutual funds you need to submit these:

• Application form
• Cheque, demand draft (depending on mode of purchase)
• Copy of PAN card attested, by an officer at the mutual fund office, your financial advisor, your bank manager, any gazetted officer/notary or judicial authority.

Agent or direct purchase: what’s best for me?

“This move is controversial but progressive. It will empower retail investors. But it makes sense to those who do not want advice and service from their agents,” says Dhirendra Kumar, CEO of Value Research.

This means that if you are a savvy investor and do not need the advice of an agent to know which fund is best for you, the direct route is a blessing. However, if you need that little bit of help, it’s always better to choose an agent and invest in the right fund.

There’s no point trying to save a few rupees if you end up making a bad investment. Also remember, that an agent will take care of all the paper work and will also be around if you need help with redeeming your investment. So, choose the route that works the best for you.

Author: Kapildeo Singh
Source:  Wealth, Moneycontrol

Too broke to invest your money?

QUICK money. Fast buck. Easy moolah. Call it whatever you want, but now is a financially good time to be in for the young.
But then again, this is a call not to lose sight of a few basics in money management.

Here are five mantras. Take a printout, write them down, whatever. But do not lose sight of them!

1. Set your financial goals

Planning for future studies, buying a car, laptop or a pool table, whatever your goals, identify them. Put a monetary value to them. You can achieve your goals only if you save for them systematically.

2. Buy an insurance policy

For those with dependents, insurance is a must. The sooner you get insured, the better. It will also work out cheaper because you have age on your side.

3. Spend less on credit cards

Plastic money is very convenient. Most of us prefer it to actual money, its sheer convenience forcing us to overspend.

Make sure you read the fine print before using your credit card, lest you be shocked with the bills later. Do not forget the basic rule: Don’t spend what you don’t have.

4. Think future

It is never too early to start preparing for your future. Plan for your retirement now.

You will see the power of compounding when you start investing small sums of money, but see it grow gradually to the target amount you set.

5. Invest regularly

There are various options to invest your money. One of the most popular and rewarding options is to invest in mutual funds.Choose from a variety of options (equity, balanced, debt), and a variety of fund houses. Besides, most fund houses have fairly easy procedures for Systematic Investment Plans (SIPs).

Systematic Investment Planning is a simple process of investing the same amount of money every month over an extended period of time, regardless of whether the market is up or down.

Let’s say you invest Rs 1,000 every month.

Invested amount

Current value	Rs 36,000	Rs 60,000
Scheme A (mid-cap fund)	Rs 60,820	Rs 219,325
Scheme B (large-cap fund)	Rs 61,392	Rs 176,181

(All data as of July 2006)

This goes to show the virtues of starting early, investing regularly and staying invested.

It is a time to enjoy life and a time to plan your future, so that you can enjoy the rest of your life, too.

My money mantras

i. Set your goals.

ii. Do not spend what you do not have.

iii. Start saving for your goals; small but systematically.

iv. The future is not too far away. Don’t ignore it.

v. Postpone your expenses, not your investments.

Author: Lovaii Navlakhi
Source: Wealth, MoneyControl

When the stock market crashes

THE last three to four years have proved to be a roller coaster ride for the stock market.

The Sensex doubled from a level of 3000 on May 3, 2003, to 6000 in January 2004. When the Bharatiya Janata Party lost the elections in May 2004, the market plummeted to 4500 (a 25 per cent drop in just four to five months).

But within six months, the market recovered and again, the Sensex touched 6000 before the end of 2004. Thereafter it was almost a one-way journey right up to May 2006, when the market hit the 12,000 mark.

Later, the market saw a sharp correction when it dipped to 9000 level in June 2006. But pretty soon, it crossed the 21,000 mark by January 2008.

Since then, we have witnessed some pretty sharp falls. And the fact that it doesn’t seem to be bottoming out, is making investors a lot more nervous. Of course, volatility is not something new. But the sharp ups and downs are scaring even the old-timers who are in this business.

Read: Don’t look in the rear view and drive

What next?

First, cut out all the noise and clutter around you and get back to basics. This is because 90 per cent of the people around you are as clueless as you are. So, when you let the facts speak for themselves, you have a better chance of eliminating ambiguities. Let’s find out what these are.

Fact 1: The equity market is NOT a lottery ticket. Every share has a fundamental value and is based on the company’s performance.

Fact 2: It is possible for share prices to be widely different from their intrinsic value.

Fact 3: In the long run, share prices always move towards their true value depending on the profitability and growth potential of the company.

Fact 4: Irrespective of whether the United States goes into recession or the sub-prime problem generates more losses, India’s economic growth rate will still be comparatively high.

Fact 5: Unless we have some serious calamity, a political crisis or poor monetary or fiscal policy, we may continue to see over 7 to 7.5 per cent growth rates over the next 5 to10 years.

Fact 6: If the economy continues to grow at such a healthy rate, it has to reflect in the corporate performance as well. This will lead to appreciation of the share price sooner or later.

Keeping these facts in mind, the long-term outlook for India still remains quite positive.Read: The stock market made this nimbu paani owner rich!

Quick lessons!

1. Do not panic.

2. If you have invested in good companies and mutual funds, stick to these choices.

3. It’s a good time to invest in the market.

4. Be patient and disciplined. You will be rewarded!

Author: Sanjay Matai
Source: Wealth, MoneyControl

Careful mistakes you make!!

MISTAKES can be expensive. Ask the guy who looked at a beautiful girl crossing the road instead of looking at the car in front of him. His glance cost him over 1 lakh (Rs 100,000) in damages. But you could argue that this was a careless mistake. But what about the mistakes we make carefully?

Careful mistakes are the ones we make after long deliberation, wrong calculation leading to the wrong choice. And naturally these cost you more. Lets look at Insurance for instance.

Firstly, we need to be a clear about one point — Insurance is a cost. Whether one would want to incur this cost or not, and to what amount, is a matter of personal choice. And since it is a cost, the obvious thing to do is minimize the cost without sacrificing the basic life cover.

The big mistake
This is where the big mistake comes in: Pure-protection policies, where one doesn’t get anything back if one survives the policy term, are the ideal choice for the above objective. But psychologically, it is difficult for people to pay-up hard cash for an intangible product, ie security. So they go in for insurance products with returns.

Hence, moneyback and endowment (and of late Unit Linked Insurance Plans or ULIPs) type of policies are taken. But this is what they forget:

• The same amount that they would otherwise pay in a term policy also gets deducted from these so-called protection and investment policies. And only the net amount gets invested.
• The administrative costs are high
• Corpus is invested in very safe instruments
• Therefore, the returns from such policies are usually very low — usually in the range of 5-7% pa.

Naturally, a person would be better off taking a term policy to get the life cover and investing the balance premium amount say in PPF where he can earn 8% pa returns (assuming he wants no risk of investing in equity, where the returns can be much higher).

The mass exodus
As more people realise their mistake, they want to exit from such insurance policies. Unfortunately, early exit from insurance policies results in a huge loss. So does it make sense to surrender one’s policies despite this loss? There could be three broad scenarios possible, depending on how many premiums you have already paid, out of the total premiums payable.

• Early stage: A policy can be surrendered only if it has been in force for three years and premiums have been paid for these years. If you have paid just one or two annual premiums, then you will get back nothing when you exit from the policy. Even thereafter, you will get back say only 25-35% of the premiums paid + bonus accrued, if any. This is for a typical 20-year term policy. The % varies depending on the term and premiums paid.

Now, if you invest this amount + the future premiums in other investment options, you will need to generate around 9-11% p.a. returns to recover the lost premiums and break-even with the insurance policy if you had continued with it.

If you’re confident take a hit and move on!

• Middle stage: If you are somewhere around the middle of the policy, you can either surrender the policy by taking around 50% of the premiums paid + bonus; and invest this and the future premiums somewhere else. But remember that the absolute loss is higher here as more premiums have been paid and time for recovery is less. So, you need to generate maybe around 14-17% pa returns to break-even.

Optionally, you can make the policy fully-paid. Your sum assured will be suitably lowered. And you will back the premiums paid + bonus earned — but only at the end of the original term. Also no fresh bonus will accrue during this period. The net return for this amount works out about 4%. Invest the future premiums in the other options. Here you may have to generate somewhat lower returns of around 12-15% p.a. to break-even on overall basis.

• Late stage: If your policy is just about to mature in three to five years, then it may well be prudent to let it run its course. You can’t do much by saving 3-5 years’ of premium payments.

These are only broad numbers purely for indicative purposes. It’s important that you do a detailed working for each of your policies, before taking any further action.

But, with a GDP growth expectation of 7-10% over the next decade or so, the returns outlined are pretty reasonable especially if you choose equity. If you have the capacity for a little risk, go ahead. After all, there’s no gain without pain right?

Author: Sanjay Matai
Source: Wealth, MoneyControl

New fund offers, worth the money?

WE’RE all familiar with the phrase ‘Make hay while the sun shines’. Apparently the financial world is also familiar with it because that would explain the slew of mutual fund new fund offers (NFO) due to the buoyant mood of the markets.
And because we all love new things, investors have rushed to redeem their crores from a perfectly well performing existing fund to invest an NFO with similar objectives.

But how smart is that? Mutual Fund NFOs are nothing but commencement of a new scheme. They should not be confused with equity IPO usually get huge listing gain. There is no such upside on MF IPO’s. In fact there very well may be a downside. Lets look at it closely:

1. Ignorance is not bliss
One of the major reasons for the success of mutual fund NFOs has been the continued ignorance of an average investor with regards to the NAV. They have all along assumed that if they are getting the units at par ie Rs10, they are getting it cheap. Huge error!

NAV merely represents the market value of the portfolio. It is the book value. Thus when one invests in a mutual fund one is buying the units at the book value — which is Rs 10 for a NFO and could be Rs 15 or Rs 20 or whatever for an existing scheme.

The NAV of an existing scheme is higher merely for the fact that its portfolio has appreciated since the time it built it’s portfolio. Going forward, the returns over a given period of time will be same from an existing portfolio (with a higher NAV) and an identical new portfolio (with Rs 10 NAV). The earlier appreciation of the old fund does not make it expensive vis-à-vis an NFO.

2. Let’s talk numbers now
Say a fund (Old Fund) was launched in Sept 2004. It raised a corpus of Rs 1 crore and allotted 10 lakh units at Rs 10 each. The corpus of Rs 1 crore was invested equally ie. Rs 25 lakh each in Reliance, ONGC, Infosys and Arvind Mills. Over the next 1-year i.e. till Sept 05 all these share prices appreciated and the corpus became Rs 1.49 crores. Accordingly the NAV of Old Fund now is Rs 14.9608.

Now, assume that in Sept ‘05 a NFO is launched. It raises Rs 1 crore and allots 10 lakh units at Rs 10 each. It also invests in the same 4 shares viz. Reliance, ONGC, Infosys and Arvind Mills. The amount to be invested in a particular share is in the same % as in the Old Fund now (This is important, as we have to compare the impact of NAV on the returns and not the impact of the portfolio).

Now we invest Rs 10,000 each in Old Fund and NFO. In Old Fund, we get 668.414 units at Rs.14.9608/unit. And in NFO we get 1000 units at Rs 10/unit.

After one year in Sept 2006, due to appreciation in the share prices, the corpus of Old Fund increases to Rs 1.74 crores and NAV to 17.4669. And corpus of NFO increases to Rs 1.16 crores and NAV to 11.6751. But the investment value in both cases would have increased to Rs 11,675.

Author: Sanjay Matai
Source: Wealth, MoneyControl

Top learning from Sahara fiasco…

Last week, the Reserve Bank of India (RBI) pulled the plug on India’s largest Residuary Banking Company (RBC), Sahara India Financial Corporation. (What happened??)

An RBC is a financial company, which is not really a bank. It’s just that getting a license to set up an RBC is easier than getting a banking license; it calls for fewer regulations and compliances.

So, companies that don’t want to go the banking way opt to be an RBC. In Sahara’s case, they appear to have failed these compliances.

What went wrong according to RBI

• Sahara did not comply with the minimum interest rate requirement. The minimum interest rate that an Non Banking Financial Corporation must offer is 5 per cent per annum on term deposits and 3.5 per cent per annum on daily deposits. If reports are to be believed, some depositors got interest as 1 per cent per annum.
• They did not have the complete details of the agents involved in deposit collection.
• They did not follow all KYC (Know Your Customer) norms. Under these, the company must collect documents like PAN card copy, address proof etc, from depositors.
• They did not inform depositors about when their deposits would mature.

Note: It is essential for RBCs to follow these rules, so that you, the depositor or investor, are protected. Read all rules.

RBI’s verdict

Though initially, RBI put a complete ban on all future deposits, it later toned down the sentence. Now, Sahara needs to wind down its deposit base within seven years. Sahara will also no longer issue fresh deposits that mature beyond June 2011.

With this, once again, the spotlight is on the millions that investors pour into various avenues, without adequate knowledge and research. What’s more disheartening is that most investors and depositors don’t know their rights are.

Now, for those who have their monies locked into Sahara, there’s no cause to worry. The RBI is here to protect the rights of investors and depositors. Even if there had been a complete ban on Sahara to accept any fresh deposits, common investors will not suffer.

But there’s an opportunity to learn, here. Being aware of what’s happening around you will help you to avoid making mistakes with your money. Here’s what I learned: four cardinal rules of investing.

Exercise your rights

Every time you give your money to somebody else, you have a right to know what is going to happen with it. You have the right to see balance sheets, offer documents and other financial documents and ask any question you might have. When you see these documents, look at these four important details of the company finances:

1. Case flow statement: Every company has an annual report with the balance sheet, profit statement and a cash flow statement. A company with positive historic cash flows, is preferred.

2. Revenues: Look at sales/ revenues and see if they are growing at a healthy rate. Compare this with peer companies.

3. Profit margin: Is the company maintaining a steady profit margin? This will tell you if it is controlling costs. Again, compare with peers.

4. Loans: A company with less loans is always better. Imagine you have two friends, one who is always in debt and the other who borrows less and repays fast. Who would you lend to? The answer: obviously, the latter! Same logic for companies.

Now, these are just basic guidelines. It always helps to learn more. Learn the business model, profits, cash flows, the total assets and how much debt they have taken and what are the risks related to the business.

Get real!
Take promises of high, guaranteed returns with a pinch of salt.

If anyone does promise you a high guaranteed return, which is significantly more than what the Government or nationalised banks are offering, try to find out what’s different here.

Ask yourself, ‘Iif I was running a deposit scheme like this how would I be able to guarantee returns of 200 per cent? What is my business model? Is it logical or is it just a scam?’ Don’t forget that the RBI is not liable to protect you, if you behave irresponsibly and lose your money to dubious companies.

Check management credibility
Whom would you give your money to? A company ridden with controversies? So, check for management credibility when you invest.

Read magazines and newspapers, regularly. The Internet has made life easier, too. Look up the company’s name on search engines and read all the information, it throws up.

Check credit ratings
RBCs are required to get a rating from a rating agency like CRISIL or ICRA, without which they cannot raise deposits. So, check the offer document to see the rating. However use this only as a tool to help you decide. It must not be the only basis for your decision. In the past, several Initial Public Offerings (IPO) with excellent credit ratings, have failed.

Play detective!
Being an investor is akin to being a detective who needs all the information. The better you get, the more you will be rewarded. The world of finance is extremely rewarding for those who know the rules of the game. For those who don’t, it’s pretty risky. So, respect your money and keep your eyes and ears open.

Keep smiling. And yes, happy wealth creation!

Author: Yogesh Chabria, GSIFS.com
Source: Wealth, MoneyControl.