Wednesday, January 30, 2008
For instance, one question that many people ask me after I recommend a fund for them is: "What must be the NAV of this fund now?" If I say something like 70+ or even 100+, they immediately retort by saying it's too expensive! Even regular readers of my magazine and those whom i advice regularly about MF investments, raise this doubt every once in a while about my recommendation's NAV level. The lower the NAV, they say, it's cheaper to buy it. Despite educating investors and readers regularly, this is the biggest MF myth that we (responsible) correspondents and analysts have repeatedly tried to break, but, with very negligible success. It's called the 'Rs 10 myth'. In simple words, a fund whose NAV is at Rs 10 is not necessarily better than the fund whose NAV is at Rs 50.
Let me explain. Assume there are two funds, 'fund A' whose NAV is at Rs 10 and 'fund B' whose NAV is at rs 50. Assume also that both these funds have invested their entire corpuses in HUL at, say, Rs 100 per share. Now if HUL moves up by 5 per cent, both the funds would also move up 5 per cent. So A's NAV will be 10.5 and B's NAV will be 52.5. Both the NAVs have gone up by an equivalent margin, i.e. 5 per cent. If however, if A had invested in HUL whose market price went up by 5 per cent, and B had invested in ABB that went down by, say, 10 per cent, fund A would hve experienced a gain, while fund B would have experienced a loss.
How high or low a fund will go, depends on the underlying investments of a MF scheme. Investments in MFs is different from investment in shares. While equity shares are bought of companies that you think would do well in future and whose share prices would rise to reward you, a mutual fund is an investment vehicle through which you invest in a variety of companies by buying their shares and bonds. A share price goes up or down, depending on what the equity market perception is about that company in terms of its future growth, sales, profitability and business model.
A mutual fund’s net asset value (NAV) - similar to a share price - doesn’t rise or fall the same way. As mutual funds invest in shares and bonds of companies, it depends on the fund manager’s intellect and perception about which companies, in his opinion, would or won’t do well. He’s a professional in whose hands you entrust your money in, to manage on your behalf. If the underlying companies do well, your MF’s NAV rises, else it falls. Your MF’s performance, therefore, hinges on your fund manager’s ability to pick up the right kind of stocks and profit from them. Hence while a company with a lower share price, in many cases, is better than those with a higher share price, a lower NAV MF is not necessarily better than a higher NAV one, because a share price is largely driven by market perception and a MF’s NAV is more of a function of its fund managerial skills.
The true picture: The next time you see a higher NAV, remember that the fund's NAV is higher than others is because this fund, and thereby its NAV, has been in existence for a long time. Since a new fund starts at Rs 10, over a period of time and years into its existence, the fund's NAV would gradually and eventually keep rising. This is why its NAV is higher and not because it is "over-priced" or something. Actually, MFs can never be over-priced or under-priced. As NAV stands for Net Asset Value, it just reflects the value of the underlying assets, plus all the profits that it has booked since its inception.
Wednesday, January 23, 2008
Two of my favourite commercials. BOI's service standards and customer satisfaction may be another story, but it sure sends out a poignant message here. That unlike some banks, especially foreign, that do not want their customers to come to the branch, BOI would love to have them over, every once in a while.
Sunday, January 20, 2008
Friday, January 18, 2008
Have you noticed how mutual fund (MF) fact sheets differ from fund house to fund house? While Sundaram BNP Paribas MF always profiles its fund managers in its fact sheet, most others just mention their names while funds like Birla MF carries just their names on their last pages without saying who manages which fund. Few MFs like Templeton disclose key risk-return ratios, while most others avoid. How detailed scheme objectives are explained also differs from MF to MF.
In a move to standardise the information that you get to read in a fund fact sheet so that fair comparisons can be carried out, the Association of Mutual Funds of India (Amfi) has now recommended a standard format for fact sheets.
Amfi recommends that apart from the basic information like a scheme’s name, its objective, and type, all MFs must also disclose the names and experiences of fund managers. Apart from expense ratios, you will now get to see how much your new fund offer charged as initial issue expenses and how much of that is amortised. As the Indian MF industry is evolving and investor awareness on a rise, Amfi has also recommended that MFs disclose key financial ratios like Sharpe, standard deviation, beta, portfolio turnover ratios for equity funds and modified duration and average maturity for debt funds. These ratios help a better comparision between schemes on volatility and risk adjusted return basis.
What’s the catch?
While Amfi’s intention is well-placed, it is not binding on MFs as Amfi is merely an association of MFs and not a regulator. For it to become a law, Sebi needs to impose this guideline. It remains to be seen which MFs adhere to these best practices and which don’t. I’ll keep you posted.
Invest in real estate, they say. It costs only Rs x a square foot, they add. But you cannot buy a couple of square feet of land even as an investment. And that’s why the idea of a real estate investment trust or REIT is so attractive. After a long wait, the securities and exchange board of India (Sebi) has drafted guidelines on Real Estate Investment Trusts (REIT) to be launched in India. It is expected to issue the final guidelines later this year.
How will it work?
A REIT will be structured in a similar way as a mutual fund in India is structured. The sponsor company will need to set up a real estate investment management company that will manage the funds on a day-to-day basis. This investment management company will need to report to a real estate investment trust, in whose hands your money will be entrusted in. The investment management company and trust will then launch real estate schemes that will solicit monies to be invested in real estate. They will need to be only closed-end and will be listed on the stock exchanges within six months after they are launched.
A REIT will then invest this money it collects, in various real estate projects. REITs will not be allowed to invest in equity and debt securities of real-estate companies; they must invest only in real estate directly. REITs will not be allowed to invest in vacant plots, they would need to invest in developed properties that it will then rent out. The rental income it so earns on them will be your – the unitholder’s – returns.
Note, that REITs are income-generating instruments as they will have to distribute at least 90 per cent of all the gains, as dividends, that they make, in a year. A REIT, under all its schemes would not be allowed more than 15 per cent in a single real estate project and more than 25 per cent in real estate projects developed and marketed by a single group of companies.
REITs will have to appoint an independent property valuer to value the underlying real estate. The principal valuer will need to value all the underlying real estate once a year or when a new scheme is launched. Based on the Valuer’s reports, a REIT scheme will disclose its net asset value (NAV). The draft guidelines are not clear as to the frequency of NAV disclosures – remember real-estate experts had objected to a daily NAV declaration when Sebi had proposed it initially saying valuing real estate on a daily basis is neither feasible nor makes sense as prices do not show noticeable changes every day – but the guidelines indicate that the NAV will need to be declared once a year on an average. What may also happen, once the final guidelines are issued, is that all underlying real estate would have to be valued once a year, but the NAV will need to updated or declared every time when any of its underlying real estate is valued.
Assume that a REIT scheme buys four properties in a given year, say, at the end of four quarters i.e. March, July, September and December. If all these properties need to be valued after each of then completes a year, a REIT will declare NAV four times in a year, once every time its underlying property is valued.
How much returns?
The draft guidelines are silent on a REIT’s cost structure, taxation incidences. Although it’s too early to make predictions, real estate players expect a return of around 10-15 per cent returns per annum. “Typically, this will be rental income. But once in three to five years, a REIT could also sell a property and distribute the proceeds to unitholders. This is when unitholders will make a capital gain”, adds Ambar Maheshwari, director-investment advisory, DTZ – a real estate advisor.
Isn’t it sad that if you have been investing in mutual funds (MF) after researching about various options, zeroing in on the chosen one, filling up forms and submitting them to the fund house, all of this by yourself, you still had to pay the upfront charges or entry loads to the MF house, that would eventually be passed onto agents?
Not any more. The securities and exchange board of India (Sebi) has scraped entry loads on direct applications to MFs. This means that if you invest directly with the fund house by submitting your application forms at any of its collections centres, you don’t need to pay entry loads (presently 2.25 per cent). Internet transactions done through the MF’s website are also now exempt of loads. However, if you apply to MFs through an agent, you will continue to pay the entry loads. No-load options will now be available in all existing schemes as well as new schemes. Load would be charged even if you apply to MFs through online web trading portals like ICICI Direct. It’s only when you buy units from your MF’s own website that you get exempted from paying entry loads.
The power of compounding
A 2.25 per cent entry load sounds small, but bites a chunk of your returns over a long period of time. For instance, Rs 1,00,000 invested directly in the no-load option of an equity fund that grows at a rate of 15 per cent over a period of 20 years yields you Rs 16,36,653.74 , as against Rs 15,99,829.03 that a load fund would return - a difference of Rs 36,824.71. This is because even a small sum of 2.25 per cent gets compounded over the years.
It may not pinch you as much in a one-time investment as it typically does in a systematic investment plan (SIP). As SIPs entail investments on a regular basis, say every month, you end up paying entry loads on all your installments. Assume you had invested Rs 5,000 in Reliance Vision Fund on January 1, 2003 through a monthly SIP. If you had withdrawn your entire investments after five years, on December 31, 2007, you would have got back Rs 11.52 lakh in the no-load option, as against Rs 11.25 lakh in a load option, a cool difference of Rs 25,914. Think of the things you could buy with Rs 25,914!
Says certified financial planner Jayant Pai: “This is a bold step and would help informed investors to approach MFs directly without unnecessarily paying agent commission.” Adds Ranjeet S. Mudholkar, CEO, financial planning services board India: “It promotes financial planning as those agents who were merely form vendors will now need to upgrade their skills and offer complete financial planning to their clients. They now need to earn their 2.25 per cent commission.”
Though many MFs, distributors and planners have welcomed the move, a section of the industry is worried. They feel a few smart investors might consult a financial planner but then invest directly with the MF, thereby avoiding entry load. “This is possible. But agents are also vigilant and will come to avoid such investors eventually”, says Pai.
Most agents and MFs though feel that investors will not mind paying entry loads to quality agents and financial planners who service them well. And apart from a miniscule portion of investors who invest through the internet, most find it tedious to visit MF offices every time they want to invest or withdraw.
Should you opt for no-loads?
We’ll say this unabashedly; if you’ve been reading Outlook Money, no-loads offer a better proposition unless you employ a financial planner that takes care of your entire portfolio.
But if you rely on these pages to guide you through the MF maze taking cues from picks, recommendations and Outlook Money annual mutual fund rankings and star ratings, a no-load option looks attractive. Plus, with the insurance regulator mandating insurance agents to provide additional transparency in disclosing costs to investors, it won’t be easy for agents to shift to selling unit linked insurance plans, from MFs.
Effective January 1, 2008, Permanent Account Number (PAN) card is mandatory for all your mutual fund (MF) investments, as against in excess of Rs 50,000 earlier. In addition to submitting your PAN number, you will now also have to adhere to ‘Know your Customer’ (KYC) norms.
All these norms will now be followed to help MFs know their investors better. KYC norms are required under the ‘Prevention of Money Laundering Act (PMLA)’, to keep a check on the legality of funds used for investments. Money laundering means converting money that is earned through illegal ways, like terrorism, into legal money by passing it through various banking channels. This makes it difficult for authorities to track the ‘dirty money’ to their illegal origins. It’s is a serious issue globally, as according to an International Monetary Fund report, the aggregate size of money laundering in the world could be somewhere between US $ 590 billion and US $ 1.5 trillion.
Follow these three steps for a hassle-free MF investing in 2008 and beyond.
Step #1: Fill the KYC form that you get from Amfi’s website or on your MF’s websites or 283 KYC centres that Amfi has appointed throughout the country. Visit Amfi’s website to know the centre in your city that is closest to you.
Attach a self-certified copy of your PAN card and an address proof along with your KYC form and submit them to your nearest centre. Don’t forget to carry your original PAN card also; they’ll give it back you instantly after verifying it with its copy. The centre will give you an acknowledgment across the counter on the same day.
Although KYC is presently required for investments of Rs 50,000 and above, we suggest you get your KYC done irrespective of your investment amount. Just like PAN started with Rs 50,000 and above investments but will now encompass everyone, it’s only a matter a time when KYC will be imposed on everyone.
Step #2: Wait for 10 days for any response from CDSL Ventures – the Amfi-appointed agency to overview KYC requirements. If you do not receive any such letter, it means your KYC form is now legally acceptable.
Submit a copy of this acknowledgment to all the MFs that you have invested in until now so that they can update their records. Mention, in a separate letter your folio and account numbers and scheme names of all your investments in a fund house that bears your name (first, second or guardian to a minor) to which your KYC acknowledgment should be applied. Remember, KYC and PAN norms are applicable to all mode of holdings, irrespective of whether you are the first, second or third account holder, across MFs.
Step #3: In addition to the KYC compliance, you will also need to submit a copy of your PAN card as well as quote your PAN number on your MF investment forms. If you invest in MFs through an agent, he can also do your verification. But if you apply directly to MFs, carry your PAN card every time you visit your MF to submit a fresh application.
If you have a MIN already…
…you are said to be KYC-compliant already. All you need to do is submit a copy of your MIN acknowledgement letter to all your MFs and your KYC is done. A PAN copy for all your future investments though, will still be mandatory.
It’s good that compliance in investments is on a rise. What is also needed is KYC compliance across investment avenues, such as small savings and insurance, not just MFs. Market sources say some insurance companies have been luring gullible investors on the basis of an absence of KYC compliance.
Thursday, January 10, 2008
Today, Tata Motors unveiled the much talked-about Rs one-lakh car, called Nano, at the Delhi auto expo exhibition. The reason why so much buzz has been about this car is its price tag. Nano's price makes it the cheapest car to be available in India and breaks more than a decade old record that was earlier set and maintained by Maruti 800.
Boom for industry.....
The car makes great economic sense. It automatically gives an impetus for bike and two-wheeler owners to upgrade to a car by paying marginally high cost. Reports say that car is comfortable for four large people. Besides, it's great for the Indian automobile industry if cars can be produced and sold en-mass for such a low cost. With Indian aspirational values on a high and still rising, in simple words many people now would be now able to afford a car, as against, say five or 10 years back.
....but a curse for the cities
Having said this, I have no doubt in my mind that Tata Rs 1-lakh car is a CURSE for Indian cities. India's infrastructure was crumbling up till two years ago; today the infrastructure has crumbled. There are potholes all over Bombay. Roads are first made or concretised and then dug up within less than a month, for a new project. Once these projects are completed, dugged up roads are filled up, only to be dug up, yet again, for a new project after barely 3-4 months. This is the state of Bombay's condition. It takes a half hour to travel from Nariman Point to CST what usually should take only about five minutes. Partly on account of a flyover being built outside the domestic airport in Bombay and significantly due to the increasing traffic on the western express highway, my cousin and her family recently spent an hour inside their car at that signal, to just cross it and take a right turn to enter into a hotel at that junction!
Few days back I travelled from my house to Lalbaug. I have been going to Lalbaug for the past 15 years and never once have I encountered bumper-to-bumper traffic, all the way from Chinchpokhli bridge to Lalbaug (Bharatmata theatre). Later, I am told this kind of traffic is a common and daily occurrence now. The traffic near and around Andheri, Andheri-Kurla road and Saki Naka areas is shocking and would tell you a thousand horror stories. My friend takes two hours daily by crowded BEST buses to return from work in Saki Naka to his residence at Lalbuag, late in the evening.
Now imagine, once Tata Nano hits the road. The sheer number of people who can afford to - and will - buy it will rise by leaps and bounds. What will happen to our infrastructure once the car rolls out, is anyone's guess. There are no signs of infrastructure improving, yet more and more cars are getting launched and choking our already-choked roads. The problem will become worse once Nano gets launched. Traffic will become absolutely horrible and unbearable, thanks to a zillion Nano cars that people now will be afford. I fear the traffic will become so horrible, that out of just frustration, road rage - that is already quite atrocious here - will become even more atrocious.
True that more and more people will now be able to own a car. And good for them. But do we have enough roads for all the cars? And do such roads have the capacity to accommodate this latest craze?
So, what's the solution?
Improvement in infrastructure is a must, to repeat a cliche. But drastic times call for drastic measures. The government must act quickly and expedite the various infrastructure projects in Bombay, as well as across the country.
Further, Tata's Nano car is not meant for cities. It may be good for villages and the rural areas, but our cities, especially Bombay, Bangalore, Poona, Delhi, etc are better off without cars like Tata Nano. If things are in my hands, no passenger cars whould be made available for less than Rs three lakhs, public transport should be upgraded and the bar here would be generously raised, so that people feel happy and glad to use it, rather than compelled, as is the current case.
Wednesday, January 9, 2008
Bundling your insurance and investment needs into one is an expensive proposition as insurance policies like unit linked insurance plans that aim to meet your investment needs charge commission as high as 30 per cent. Your investment needs are well taken care by mutual funds (MF) at a much lower cost, but do you have a choice when it comes to insurance?
You may well have one now. Kotak MF has launched a facility, called Kotak Star Kid (KSK), which marries your investment as well as insurance needs into one single product and offers it to you at a lower cost. All you need to do is start a fresh systematic investment plan (SIP) in either Kotak 30 scheme or Kotak Tax Saver fund over either 5, 10, 15 or 20 years, and then appoint your child as a nominee. KSK offers you a life cover - provided by Kotak Life Insurance - at a cost of 3.25 per cent, one per cent more than a typical SIP charge (2.25 per cent). Your choice is not unlimited though; the MF has laid out the options for you depending on your age
How much cover? At any time after the 13th month, your cover is the sum total of the remaining SIP installments. For instance, if a unit holder opts for a five-year SIP at a monthly sum of Rs 5,000. Say, he dies in the 13th month. The amount that the nominee gets will work out to be Rs 2,40,000 (60 months less 12 months * Rs 5,000). Until the 12th month, the cover is 10 times the monthly SIP value. Under both cases, the nominee will also receive the prevailing value of all the installments already made. No medical tests are required up to a maximum cover of Rs 10 lakhs; between Rs 10 lakhs and a maximum cover limit of Rs one crore, tests are mandatory. KSK does not cover existing SIPs; you’ll need to start a fresh one if you wish to opt for this facility.
KSK is akin to the Super SIP facility that DSP ML mf had launched in 2005 with minor differences. Despite being a good initiative, the product found few takers as many investors refused to commit money for long-term. Sandesh Kirkire, chief executive officer, Kotak MF however is confident that KSK will work in the market as their product is simpler to understand than Super SIP. “Also, KSK is an on-going facility and is open throughout. Unlike SSIP, we do not intend to keep it open for a limited time period”, adds Kirkire.
Should you opt for it? KSK is presently available only in Kotak 30 and Kotak Tax Saver. It’s not yet available in Kotak Opportunities fund (KOF) – the mf’s most successful fund in the past three months. Kirkire assures that KOF and a host of other Kotak schemes will soon get included in KSK. By turning the tables on insurance companies on the back of sweetening systematic investing with a cheap insurance cover, here’s one effort that ought to give a boost to the MF industry caught on the wrong side on account of aggressive mis-selling of ulips on the back of higher commission. Opt for KSK in Kotak 30 or wait till the mf includes KOF in the plan.
Wednesday, January 2, 2008
So this year, instead of celebrating in the late evening as is customary for New Year’s Eve celebrations, we celebrated during the daytime. Mamu and Moti Mummy had to retire to bed early as they left the next day to Bombay. We left the following day, on 2nd, and returned home to Bombay after a great vacation. The journey back to Bombay though, wasn’t as expected, and came with a few bumps.
Last note: When I was in school and college and had an active social life with friends, I used to detest the idea of going to the hills and spending more than a handful of days there. I used to get bored with the slow life there. Now those days are far behind and its work, work and only work. Fewer movies, less outing and more of running in the rat race. Life has become so hectic with its fair share of pressures that I now value my time spent on the hills. I look forward to go there, but do not feel like coming back.
Quite unlike some of our greedy and shameless guests who expect to be served chicken and mutton extravagances day in and out. For instance, we’ve had some guests over at our house that treat our home as a hotel, have a hearty breakfast and set out for sightseeing leaving mom alone in the house to cook lunch and dinner for them. Then, there was this family who despite knowing the acute water shortage, used to bathe, each of them, twice a day, daily. Then, there was this person who took offence once just because mom did not offer her own Pond’s cream to her. Or so we heard from somewhere. Guess there are such types of guests also.
So having the Lord and the Queen (“I’m so sorry”), with us on the hills, is always a pleasure and besides they’re good company. We went to Mahableshwar on Sunday and took a stroll through their market. At the end of the market is a departmental store called ‘Imperial Stores’. It’s a tradition for us. Whenever we go to Mahableshwar and visit their market, we always visit the Imperial Stores – the last shop right at the edge of the market – and have our dinner or lunch (whatever the case may be) there. This time, we opted for their pizzas, chicken kebabs and roast chicken.
Their pizzas turned out to be quite useless considering they were around Rs 120. There were hardly any layers. The vegetable pizzas was woefully short of tomato sauce, had only capsicum and a few slices of onions. Even the pizzas at the Mapro garden that we visited the next day looked tastier. While the kebabs were good, the roast chicken was passable.
In what could be called as one of the best examples of religious harmony in recent memory, although the Shroffs get children across religions, they never try and impose their preaching on the kids. This, despite the Shroffs belonging to a particular religion and going to their temples, themselves, regularly. While the Shroffs are devout Parsis, they made a common prayer for the kids, to be prayed to who was told to them, lives up there – GOD. No name, no religion was attributed here, only pray to GOD. That’s it. In their haydays when I had gone there, they had shown me that prayer, one that prays to GOD and not to any religion.
Mr Shroff is no more. Mrs Shroff is partially paralysed, said to be more than 100 years old, and now looked after by the children who she and her late husband had brought up here, and their children too. I met Mrs Shroff this time around, and I could not recognize her as she looked very different than what she looked like, say, 15 years ago when I had last met them. Though, she was still looking fresh and quite angelic, sitting in a corner room watching TV. She not only looks like an angel, she is one herself and so was her husband.
Week # 1 is almost over. The kids leave on Sunday and today we have Mamu and Moti mummy with us. Just like last year, but minus Shirin. She’s slogging in London this month.
What set apart this trip from most of the recent ones is that I got to be a kid again. And gladly. This time around, my friends were these three little kids named Dev and Disha (10-year old twins) and little princess Khurshid.
I spent all my first week’s afternoons playing Badminton with them in Desai’s garden. I would go there thinking it is afternoon and that I should get some sleep so I should play for like ½ hour and would then take leave. But ½ hour would soon turn into an hour and then two to three hours would just sweep by without realizing. Time flies by so fast.
I have always been horrible at sports, including badminton, but after practicing for like 4-5 days with them, I must say that my badminton is not all that bad! Carom too was played over steaming hot cups of ginger tea - the best that I have had in a long time – prepared by Mr & Mrs Desai.
What else? I observed that I would get a bit tired after about 2-3 hours, but the kids would go on and on and on. They are such a bundle of energy; we adults tend to get tired after some time, but they don’t. Of course on my second day itself, I decided I would play with them the whole afternoon. After all, where do I get a chance to let loose myself and become a child once I am in Bombay. And unlike some people who feel too “grown-up” to be playing and mixing with children, I have no qualms and instead look forward to such opportunities to play with them.
When I go to Panchgani, a trip to Wai’s Ganapati temple is a must. Nestled in the foothills of Panchgani and just before the last of the four ghats you climb to reach Panchgani, Wai is a temple town, famous for its Ganesh temple.
This time we went with our Phiroozmand neighbours and Farida and her little sweet daughter Khurshid. The Phiroozmand neighbours are a good company as they are constantly arguing and fighting or heavily discussing something or the other in Dari language which, by the way, does not seem to have a full-stop or a comma in its vocabulary! The way they talk; they could be discussing something trivial that barely merits your attention, but the way they talk and discuss and keep going on and on and on and on for hours, weeks, days and months, you feel as if they have more work than the prime minister of our country! You don’t understand them, but they still amuse you. But the Phiroozmands are very helpful and resourceful and always ready to lend a helping hand. We feel nice when neighbours are around, otherwise it can get very lonely in the hills.
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