With increased internet penetration , most financial transactions have gone online. Not only online transactions take less effort, they are also easy to organise. Furthermore, a search for a history of transactions is easily possible. These advantages and more are available when you buy mutual funds online.
RESEARCH AVAILABILITY
With several hundred mutual fund schemes on offer, which one to buy is a tough question . Most websites facilitating purchase of mutual funds online offer live research support , which means you can check out the topperforming funds in each category for different time periods.
Comparisons can be done right up to the last NAV. In-house research teams also advise investors based on their individual investment horizons.
This apart, there are readymade asset allocation models you can use to construct your portfolio based on your age and risk appetite, and if you want to keep it simple, you can just mimic these model portfolios. You are also supported with various calculators.
PORTFOLIO TRACKER
Your portfolio is updated on a daily basis. Your entire mutual fund portfolio — be it in equity or debt — is consolidated and can be viewed on a single screen. “The customer’s portfolio is updated daily with the latest NAV and he can also see our research recommendation against the schemes,” says Vineet Arora, head (products and distribution), ICICI Securities. This helps the investor take decisions about his portfolio quickly and with minimum delay.
INTEGRATED PAPERLESS APPROACH
In the physical route, investors are burdened with paperwork and movement of paper. With online, they get the ease of transacting from any corner of the world at any point of time. You can just go online and invest. As internet banking spreads, the integration of your banking account with your mutual fund account also ensures seamless transactions and instant confirmation of transactions.
“When you transact online, you do not have to wait for paper to know whether your cheque is cleared, or something is missing in your form,” says Rajesh Krishnamoorthy, managing director, fundsupermart.com, a website where investors can transact in mutual funds.
INVEST IN SIP/SWP Investing in a systematic investment plan or a systematic withdrawal plan is a pleasure when you do it online. In the case of an emergency , even at the last moment, one can stop a payment. In the physical mode, one would have to fill in forms and send it to registrar, which would require a minimum of two days. An added advantage is automatic reminders that inform you when your SIP gets over.
BUY THROUGH BROKERS With stock brokers now being allowed to buy and sell mutual fund units through the exchange , you can also buy mutual funds by logging on to your trading account. However, it is yet to catch investors’ fancy.
QUERIES
Some websites give you an opportunity to build communities where you can interact with other investors. The communities provide a platform to clarify doubts on investments in mutual funds, financial planning and such other related areas
WHY ONLINE MUTUAL FUNDS ARE CATCHING ON
SEBI abolished entry load on mutual funds in August 2009. Prior to this, whenever investors invested in an equity mutual fund, they were charged an entry load of 2.25%. This amount was deducted from the investor’s investment by the asset management company (AMC) and passed on to the distributor as fees.
However, this has changed after August 2009. Now, distributors can charge an advisory fee from investors for their services and earn a trail fee of 0.5% from the AMC. The reaction of distributors to this move has been mixed. While some distributors charge an advisory fee for their services, others do not. Hence, this has reduced distributor margins.
For example, if a customer wants to invest Rs 10,000 in an equity fund today, a distributor may earn only Rs 50 as trail fees plus advisory fees charged if any, compared to Rs 225 which he earned as entry load plus the trail fees. Fall in margins makes industry players invariably look at boosting business volumes.
As a result, more distributors are going online because it helps to reduce costs and maintain their margins. For example if a customer invests online, he does not interact with an advisor, nor does the advisor have to physically complete the transaction for the customer. This saves valuable manpower cost and other servicerelated costs for the distributor which makes up the biggest component of distribution cost.
Saturday, March 27, 2010
Saturday, March 20, 2010
Beware of highest-NAV schemes
Over the last few months, one after another, a number of insurance companies have launched ULIPs which promise to repay the investor on the basis of the highest NAV that the fund has achieved. The pitch is that these funds' NAV effectively does not drop. Once a level is achieved, then the investor is assured of getting at least as much, no matter what happens to the market. It's certainly a very attractive idea. From the way insurance companies are stampeding into launching such products, I'm sure investors must be putting down their money in good numbers-in just a couple of months, six ins
urance companies have launched such products. Any investor who is told of this concept will immediately start salivating at the thought. Imagine how rich you could have been had you been invested over the last ten years and had been able to lock your investments at the magical value that the markets achieved on the day when the Sensex touched 20,873!
Any investor thinking about this product would say, "What a wonderful idea!" Why don't all investment schemes-whether mutual funds or ULIPs or even portfolio management schemes offer this kind of a protection on all their products anyway. The answer to this obvious question is simple. There is no free lunch. These products don't actually offer what you think they are offering. That is, they do not offer equity returns that never fall. Instead, they offer an investment system with a very long lock-in (seven to ten years) in which protection is achieved by progressively putting your gains in a fixed income assets which will give returns far more slowly than a pure equity option. The lock-in and the non-equity assets make this a very different kind of investment than the equity-gains-without-losses dream that these funds' advertising seems to imply.
However, even that's not the real reason that these funds are useless. The real reason is that if you are willing to lock-in for seven to ten years, then practically any equity mutual fund would deliver this dream of equity-gains-without-losses. Seven years is a very long time. Over such a period practically any equity portfolio into which any kind of thought has gone would capture substantial gains. This is not mere conjecture. Since at least 1997 the minimum total return that the Sensex has generated over its worst seven is 12 per cent, which was over the seven year period from 6th July 1997 to 5th July 2004. The truth is that in a growing economy like India's it's extremely hard to lose money over a long period like seven years. If you are willing to lock in your money for seven years, then for all practical purposes, you have a guarantee of making a profit.
Of course, this is not a guarantee that is signed in a contract and legally enforceable, but it's the kind of guarantee that any thoughtful investor would be willing to believe in. Mind you, this is also not a guarantee that you will get the highest NAV achieved but again, that's the kind of thing that can't be attained if you want the gains of pure equity anyway.
The most instructive thing in this whole business of guaranteed highest NAV products is the contrast between the illusions spun by those peddling complex financial products and the reality of simple, straightforward investing. It just reinforces one's belief that financial products are being designed whose goal is nothing more than to create a marketing hype which can manipulate the psychology of the ordinary saver.
Source: valueresearchonline.com
urance companies have launched such products. Any investor who is told of this concept will immediately start salivating at the thought. Imagine how rich you could have been had you been invested over the last ten years and had been able to lock your investments at the magical value that the markets achieved on the day when the Sensex touched 20,873!
Any investor thinking about this product would say, "What a wonderful idea!" Why don't all investment schemes-whether mutual funds or ULIPs or even portfolio management schemes offer this kind of a protection on all their products anyway. The answer to this obvious question is simple. There is no free lunch. These products don't actually offer what you think they are offering. That is, they do not offer equity returns that never fall. Instead, they offer an investment system with a very long lock-in (seven to ten years) in which protection is achieved by progressively putting your gains in a fixed income assets which will give returns far more slowly than a pure equity option. The lock-in and the non-equity assets make this a very different kind of investment than the equity-gains-without-losses dream that these funds' advertising seems to imply.
However, even that's not the real reason that these funds are useless. The real reason is that if you are willing to lock-in for seven to ten years, then practically any equity mutual fund would deliver this dream of equity-gains-without-losses. Seven years is a very long time. Over such a period practically any equity portfolio into which any kind of thought has gone would capture substantial gains. This is not mere conjecture. Since at least 1997 the minimum total return that the Sensex has generated over its worst seven is 12 per cent, which was over the seven year period from 6th July 1997 to 5th July 2004. The truth is that in a growing economy like India's it's extremely hard to lose money over a long period like seven years. If you are willing to lock in your money for seven years, then for all practical purposes, you have a guarantee of making a profit.
Of course, this is not a guarantee that is signed in a contract and legally enforceable, but it's the kind of guarantee that any thoughtful investor would be willing to believe in. Mind you, this is also not a guarantee that you will get the highest NAV achieved but again, that's the kind of thing that can't be attained if you want the gains of pure equity anyway.
The most instructive thing in this whole business of guaranteed highest NAV products is the contrast between the illusions spun by those peddling complex financial products and the reality of simple, straightforward investing. It just reinforces one's belief that financial products are being designed whose goal is nothing more than to create a marketing hype which can manipulate the psychology of the ordinary saver.
Source: valueresearchonline.com
Friday, March 19, 2010
Home loan repayment reduces tax liability
You can reduce your income tax burden through the interest you pay on a home loan. Under Section 24 of the Income Tax Act, interest paid up to Rs 1.5 lakhs a year on a home loan can be set off against 'loss' from other heads for a self-occupied property.
In case the property has been acquired before April 1, 1999, interest up to Rs 30,000 a year can be set off. In case the property has been rented out, the entire interest paid is deductible from the taxable income after computing rental income. If the loan is taken for renovation, interest up to Rs 30,000 a year is deductible.
The pre-equated monthly instalment (pre-EMI ) interest amount (the interest amount paid during construction) is deducted under Section 24 of the Income Tax Act equally over five years from the year of completion of construction. It is to be noted that if you have taken a loan only for the land purchase, it is not eligible for any tax benefits.
In case you take a composite loan (for land and house construction), you will be eligible for income tax benefits only after the completion of the construction.
Tax benefits are available on loans to construct a residential property, buy a residential property, extend a house, and for major repairs or renovation of a house. The home loan is disbursed through a number of instalments as the construction progresses.
During the construction period, you have to pay pre-EMI interest every month. The entire pre-EMI interest paid is allowed as a deduction (under Section 24) equally over five years starting from the year in which the construction is completed.
However, for a selfoccupied house, the total deduction allowed towards interest on the home loan is Rs 1.5 lakhs a year. There is no limit for deduction on interest paid towards a second home loan, provided you add the rental income (annual rental value of your second house) to your income. The annual rental value will be the higher of actual rent received a year, municipal value, and fair rent fixed.
Out of the total annual rental value, there is standard deduction of 30 percent available towards maintenance charges and municipal taxes. The insurance premiums paid on the property can be deducted too.
The deduction in respect of principal loan amount repaid is restricted to Rs 1 lakh. In case you have taken a personal loan from a bank and used the money to purchase or construct a house, you can claim tax benefits on both principal and interest paid.
However, if the loan has been borrowed from a friend or relative, you can claim tax benefits on the interest paid only.
Co-owners can claim tax benefits separately, as per the shareholding in the property. If the shareholding is not mentioned in the purchase deed, they can execute an agreement on a requisite stamp paper, mentioning the shares in the property, and claim the benefits separately.
Both can claim deductions up to Rs 1.5 lakhs a year separately towards interest paid for a self-occupied house and the entire interest paid on a rented-out house, after computing rental income received, and also up to Rs 1 lakh towards principal repaid.
Under Section 80C of the Income Tax Act, home loan borrowers can claim a deduction of up to Rs 1 lakh from the taxable income on a loan repaid during the year, along with specified savings instruments.
Along with the other specified savings instruments, a home loan repayment amount, the amount spent on stamp paper and registration costs on registering a house, all up to Rs 1 lakh is deductible from the total income.
If you sell the property within five years from the year in which you started, you lose the tax benefits availed under Section 80C (on the principal loan amount) and the amount will be clubbed to the income of the year in which the property has been sold. However, you will not lose the deductions claimed on interest paid under Section 24.
source:economictimes.com
In case the property has been acquired before April 1, 1999, interest up to Rs 30,000 a year can be set off. In case the property has been rented out, the entire interest paid is deductible from the taxable income after computing rental income. If the loan is taken for renovation, interest up to Rs 30,000 a year is deductible.
The pre-equated monthly instalment (pre-EMI ) interest amount (the interest amount paid during construction) is deducted under Section 24 of the Income Tax Act equally over five years from the year of completion of construction. It is to be noted that if you have taken a loan only for the land purchase, it is not eligible for any tax benefits.
In case you take a composite loan (for land and house construction), you will be eligible for income tax benefits only after the completion of the construction.
Tax benefits are available on loans to construct a residential property, buy a residential property, extend a house, and for major repairs or renovation of a house. The home loan is disbursed through a number of instalments as the construction progresses.
During the construction period, you have to pay pre-EMI interest every month. The entire pre-EMI interest paid is allowed as a deduction (under Section 24) equally over five years starting from the year in which the construction is completed.
However, for a selfoccupied house, the total deduction allowed towards interest on the home loan is Rs 1.5 lakhs a year. There is no limit for deduction on interest paid towards a second home loan, provided you add the rental income (annual rental value of your second house) to your income. The annual rental value will be the higher of actual rent received a year, municipal value, and fair rent fixed.
Out of the total annual rental value, there is standard deduction of 30 percent available towards maintenance charges and municipal taxes. The insurance premiums paid on the property can be deducted too.
The deduction in respect of principal loan amount repaid is restricted to Rs 1 lakh. In case you have taken a personal loan from a bank and used the money to purchase or construct a house, you can claim tax benefits on both principal and interest paid.
However, if the loan has been borrowed from a friend or relative, you can claim tax benefits on the interest paid only.
Co-owners can claim tax benefits separately, as per the shareholding in the property. If the shareholding is not mentioned in the purchase deed, they can execute an agreement on a requisite stamp paper, mentioning the shares in the property, and claim the benefits separately.
Both can claim deductions up to Rs 1.5 lakhs a year separately towards interest paid for a self-occupied house and the entire interest paid on a rented-out house, after computing rental income received, and also up to Rs 1 lakh towards principal repaid.
Under Section 80C of the Income Tax Act, home loan borrowers can claim a deduction of up to Rs 1 lakh from the taxable income on a loan repaid during the year, along with specified savings instruments.
Along with the other specified savings instruments, a home loan repayment amount, the amount spent on stamp paper and registration costs on registering a house, all up to Rs 1 lakh is deductible from the total income.
If you sell the property within five years from the year in which you started, you lose the tax benefits availed under Section 80C (on the principal loan amount) and the amount will be clubbed to the income of the year in which the property has been sold. However, you will not lose the deductions claimed on interest paid under Section 24.
source:economictimes.com
Saturday, February 20, 2010
Strike a balance between different MF schemes
There was a time when investors preferring to invest in equity, had to focus merely on stocks as the portfolio performance depended largely on the market performance of the stocks. In the last decade and half, the options have grown manifold and investors have to choose between stocks and mutual funds (MFs).
Within the MF category, the choice of schemes too has grown substantially with over 1,000 schemes being available from over two dozen mutual fund companies. It goes without stating that the task of building a portfolio of mutual fund schemes is not an easy one.
While the choice is plenty, investors need not chase all stories or themes for their investments. In many cases, the difference between the investment principles of various schemes is very limited and hence investors can limit their options to a few schemes.
For instance, if an investor has decided to invest in a diversified scheme, it would not make sense for him to choose 6-8 diversified schemes though most feel comfortable when they have a bigger basket of instruments.
In reality, a smart mutual fund basket will focus on themes, investment strategy, the fund's ability to counter a downtrend, and most importantly, should have schemes which have a track record of good performance. Every downtrend makes this point increasingly relevant, and for longterm investors, this factor is even a necessity.
How does one go about the task of building an MF portfolio?
Start with a diversified fund as it requires minimum management and holds good for a longer period of time because of the investment being made across sectors. This could be as high as 70 percent of the portfolio if the risk appetite of the investor is low.
Over a period of time, the risk-taking ability generally comes down in line with the age of the investor. The risk capabilities also tend to come down when the corpus gets bigger and accounts for a large chunk of the investor's portfolio. Such investors will have to look at inclusion of debt in their portfolio.
In fact, allocation to debt has to increase over a period of time though it is not a bad idea to maintain debt allocation at all times. Not only will this help in better risk management but also allows investors to take the opportunities arising out of a market downtrend.
Take the case of an investor who had a good percentage of funds in debt funds in October 2008. He would have been one of the few who had the ability to take advantage of the steep market correction if his requirement of funds was not short-term.
Since volatility is an integral part of the equity market, investors, irrespective of their age, will benefit by allocating a portion in debt.
The biggest doubt many mutual fund investors have is whether they should opt for a balanced fund or strike a balance in the portfolio through allocation to debt and equity? The answer is yes and no.
A balanced fund invests up to 35 percent in debt and hence is a medium risk portfolio. This would be ideal for an investor who has earning years of more than 15 to 20.
On the contrary, a retired professional, who wishes to allocate a small portion towards equity, might end up with a higher risk portfolio even if he prefers a balanced fund. Hence, balanced fund should be considered a slightly lower risk option for equity investors, and hence should be viewed as a medium risk option for others. On the other hand, investors looking at striking a balance between various funds should stick to vanilla debt products for their debt allocation.
More importantly, an allocation towards a balanced fund is a good stepping stone for first-time investors who haven't had exposure to equity earlier.
Irrespective of the choice of schemes, one needs to build a portfolio of mutual fund schemes according to their risk-taking abilities and investment tenure as mutual funds, like other investment options, have volatility attached to them.
Source:economictimes.com
Within the MF category, the choice of schemes too has grown substantially with over 1,000 schemes being available from over two dozen mutual fund companies. It goes without stating that the task of building a portfolio of mutual fund schemes is not an easy one.
While the choice is plenty, investors need not chase all stories or themes for their investments. In many cases, the difference between the investment principles of various schemes is very limited and hence investors can limit their options to a few schemes.
For instance, if an investor has decided to invest in a diversified scheme, it would not make sense for him to choose 6-8 diversified schemes though most feel comfortable when they have a bigger basket of instruments.
In reality, a smart mutual fund basket will focus on themes, investment strategy, the fund's ability to counter a downtrend, and most importantly, should have schemes which have a track record of good performance. Every downtrend makes this point increasingly relevant, and for longterm investors, this factor is even a necessity.
How does one go about the task of building an MF portfolio?
Start with a diversified fund as it requires minimum management and holds good for a longer period of time because of the investment being made across sectors. This could be as high as 70 percent of the portfolio if the risk appetite of the investor is low.
Over a period of time, the risk-taking ability generally comes down in line with the age of the investor. The risk capabilities also tend to come down when the corpus gets bigger and accounts for a large chunk of the investor's portfolio. Such investors will have to look at inclusion of debt in their portfolio.
In fact, allocation to debt has to increase over a period of time though it is not a bad idea to maintain debt allocation at all times. Not only will this help in better risk management but also allows investors to take the opportunities arising out of a market downtrend.
Take the case of an investor who had a good percentage of funds in debt funds in October 2008. He would have been one of the few who had the ability to take advantage of the steep market correction if his requirement of funds was not short-term.
Since volatility is an integral part of the equity market, investors, irrespective of their age, will benefit by allocating a portion in debt.
The biggest doubt many mutual fund investors have is whether they should opt for a balanced fund or strike a balance in the portfolio through allocation to debt and equity? The answer is yes and no.
A balanced fund invests up to 35 percent in debt and hence is a medium risk portfolio. This would be ideal for an investor who has earning years of more than 15 to 20.
On the contrary, a retired professional, who wishes to allocate a small portion towards equity, might end up with a higher risk portfolio even if he prefers a balanced fund. Hence, balanced fund should be considered a slightly lower risk option for equity investors, and hence should be viewed as a medium risk option for others. On the other hand, investors looking at striking a balance between various funds should stick to vanilla debt products for their debt allocation.
More importantly, an allocation towards a balanced fund is a good stepping stone for first-time investors who haven't had exposure to equity earlier.
Irrespective of the choice of schemes, one needs to build a portfolio of mutual fund schemes according to their risk-taking abilities and investment tenure as mutual funds, like other investment options, have volatility attached to them.
Source:economictimes.com
Monday, February 15, 2010
Do the due before investing in company FDs
As much as 55% of Indian savings find their way to bank fixed deposits. Over the past one year, fixed deposit interest rates from nationalised banks have gone down from 8-9% to around 6-6.5% now for a period of 1-3 years.
“With fixed deposit rates from banks coming down, investors seeking higher returns from fixed income products are investing in company fixed deposits,” says Aseem Dhru, MD & CEO of HDFC Securities, which has recently started distributing company fixed deposits. Company fixed deposits work for investors seeking assured returns higher than that offered by bank fixed deposits.
Here are some key points you need to keep in mind while investing in company fixed deposits.
Security
Company fixed deposits are unsecured. In case of bank fixed deposits, the Deposit Insurance and Credit Guarantee Corporation of India guarantees repayment of Rs 1 lakh in case of default. There is no such guarantee offered in company deposits and the safety of your deposit depends on the financial position of the company.
This means, as a depositor, you have no lien on any asset of the company, in case it goes into financial difficulties and is wound up. Your turn to get your money back would come only when secured lenders have been paid. So do not invest in unknown companies.
Risk v/s return
Today, investors could expect around 5-8% from income funds, depending upon whether it’s an ultra liquid fund or a long-dated income fund. Schemes like the post office NSC and PPF give you a 8% return, but are locked in for six years and 15 years, respectively.
A corporate like Tata Motors or Mahindra & Mahindra would offer you an interest rate of 8-8.5% while smaller companies like Avon Corporation or Ind Swift offer you an interest of 11-12% for a year. It’s a simple investment philosophy. “You trade return for risk”.
Definitely, the risk involved while investing in smaller companies is higher. Unless you need income regularly, you should prefer cumulative schemes to regular income options since the interest earned automatically gets reinvested at the same coupon rate, resulting in better yields.
Check parentage & financials
You can check with distributors or with friends about the credentials of the promoters and their past track record. Opt for companies that pay dividends and are profit making. Avoid loss-making companies or those who do not pay dividends. If a company has made a one-off exceptional loss in a particular year, but has a good parentage and past track record, you could consider it. Also, it is important to check the servicing standards of the company. How quick are they are in dispatching interest warrants and principal amount is something you should know. However, if the company is relatively new, or has been making losses continuously and its promoters are relatively unknown, then it would be better to avoid it.
Ratings are important
For NBFCs, RBI has made it mandatory to have an ‘A’ rating to be eligible to accept public deposits. Investors should go only for AAA or AA-rated schemes. Go for shorter tenures such as 1-3 years. This way, you can keep a watch on the company’s rating and servicing, and also have your money back in case of an emergency. Watch out for any adverse news on the company you have invested in and take necessary action if need be.
Liquidity
Most companies accept fixed deposits for a period ranging from 1-5 years. Compared to mutual funds or bank fixed deposits, company fixed deposits are rather illiquid. In most cases, premature withdrawal is not allowed before completion of three months. If you wish to withdraw between the third and the sixth month, you get zero interest income.
If you wish to withdraw between the sixth and the 12th month, you get 3% less than the guaranteed return. Also, for those staying in non-metros, in case the company’s banker does not have an account in their respective city, they would have to get a demand draft (DD) issued at a location where the company head office is located.
Similarly, when the company pays back the principal amount, the cheque may take time to clear. FDs are not listed and non-transferable. Interest income from fixed deposits is taxable. So if you are in the highest tax bracket, weigh your options accordingly. If there is a probability, you may need the money before a year, it is beset not to park it in company fixed deposits.
Do not put all eggs in one basket
“Depending on an investor’s risk profile, s/he could consider putting 5-15% of his or her investments in company fixed deposits,” says Anup Bhaiya, MD of Money Honey Financial Services. So if you have Rs 10 lakh to invest, it would then be worthwhile putting around Rs 1 lakh in company deposits for the extra Rs 3,000 per annum.
However, if you have a mere Rs 10,000 to invest, it may not make sense to invest it in company fixed deposits for the extra Rs 300, especially when your next door bank offers you more convenience and flexibility of investments. While opting for company deposits, diversify your risk by spreading your deposit over a large number of companies engaged in different industries. “Overall, investors could have as much as 10% of the total FD investments in one particular company,” says Harish Sabharwal, chief operating officer of Bajaj Capital.
Source:economictimes.com
“With fixed deposit rates from banks coming down, investors seeking higher returns from fixed income products are investing in company fixed deposits,” says Aseem Dhru, MD & CEO of HDFC Securities, which has recently started distributing company fixed deposits. Company fixed deposits work for investors seeking assured returns higher than that offered by bank fixed deposits.
Here are some key points you need to keep in mind while investing in company fixed deposits.
Security
Company fixed deposits are unsecured. In case of bank fixed deposits, the Deposit Insurance and Credit Guarantee Corporation of India guarantees repayment of Rs 1 lakh in case of default. There is no such guarantee offered in company deposits and the safety of your deposit depends on the financial position of the company.
This means, as a depositor, you have no lien on any asset of the company, in case it goes into financial difficulties and is wound up. Your turn to get your money back would come only when secured lenders have been paid. So do not invest in unknown companies.
Risk v/s return
Today, investors could expect around 5-8% from income funds, depending upon whether it’s an ultra liquid fund or a long-dated income fund. Schemes like the post office NSC and PPF give you a 8% return, but are locked in for six years and 15 years, respectively.
A corporate like Tata Motors or Mahindra & Mahindra would offer you an interest rate of 8-8.5% while smaller companies like Avon Corporation or Ind Swift offer you an interest of 11-12% for a year. It’s a simple investment philosophy. “You trade return for risk”.
Definitely, the risk involved while investing in smaller companies is higher. Unless you need income regularly, you should prefer cumulative schemes to regular income options since the interest earned automatically gets reinvested at the same coupon rate, resulting in better yields.
Check parentage & financials
You can check with distributors or with friends about the credentials of the promoters and their past track record. Opt for companies that pay dividends and are profit making. Avoid loss-making companies or those who do not pay dividends. If a company has made a one-off exceptional loss in a particular year, but has a good parentage and past track record, you could consider it. Also, it is important to check the servicing standards of the company. How quick are they are in dispatching interest warrants and principal amount is something you should know. However, if the company is relatively new, or has been making losses continuously and its promoters are relatively unknown, then it would be better to avoid it.
Ratings are important
For NBFCs, RBI has made it mandatory to have an ‘A’ rating to be eligible to accept public deposits. Investors should go only for AAA or AA-rated schemes. Go for shorter tenures such as 1-3 years. This way, you can keep a watch on the company’s rating and servicing, and also have your money back in case of an emergency. Watch out for any adverse news on the company you have invested in and take necessary action if need be.
Liquidity
Most companies accept fixed deposits for a period ranging from 1-5 years. Compared to mutual funds or bank fixed deposits, company fixed deposits are rather illiquid. In most cases, premature withdrawal is not allowed before completion of three months. If you wish to withdraw between the third and the sixth month, you get zero interest income.
If you wish to withdraw between the sixth and the 12th month, you get 3% less than the guaranteed return. Also, for those staying in non-metros, in case the company’s banker does not have an account in their respective city, they would have to get a demand draft (DD) issued at a location where the company head office is located.
Similarly, when the company pays back the principal amount, the cheque may take time to clear. FDs are not listed and non-transferable. Interest income from fixed deposits is taxable. So if you are in the highest tax bracket, weigh your options accordingly. If there is a probability, you may need the money before a year, it is beset not to park it in company fixed deposits.
Do not put all eggs in one basket
“Depending on an investor’s risk profile, s/he could consider putting 5-15% of his or her investments in company fixed deposits,” says Anup Bhaiya, MD of Money Honey Financial Services. So if you have Rs 10 lakh to invest, it would then be worthwhile putting around Rs 1 lakh in company deposits for the extra Rs 3,000 per annum.
However, if you have a mere Rs 10,000 to invest, it may not make sense to invest it in company fixed deposits for the extra Rs 300, especially when your next door bank offers you more convenience and flexibility of investments. While opting for company deposits, diversify your risk by spreading your deposit over a large number of companies engaged in different industries. “Overall, investors could have as much as 10% of the total FD investments in one particular company,” says Harish Sabharwal, chief operating officer of Bajaj Capital.
Source:economictimes.com
Wednesday, October 14, 2009
How to invest in gold and key price drivers
Gold prices surged to a record high above $1,070 an ounce as dollar weakness sparked buying of the precious metal as an alternative asset.
Following are key facts about the market and different ways to invest in the precious metal.
Following are key facts about the market and different ways to invest in the precious metal.
How do I invest?
SPOT MARKET Large buyers and institutional investors generally buy the metal from big banks.
London is the hub of the global spot gold market, with some $18 billion in trades passing through London's clearing system each day. To avoid cost and security risks, bullion is not usually physically moved and deals are cleared through paper transfers.
Other significant markets for physical gold are India, China, the Middle East, Singapore, Turkey, Italy and the United States.
FUTURES MARKETS: Investors can also enter the market via futures exchanges, where people trade in contracts to buy or sell a particular commodity at a fixed price on a certain future date.
The COMEX division of the New York Mercantile Exchange is the world's largest gold futures market in terms of trading volume. The Tokyo Commodity exchange, popularly known as TOCOM, is the most important futures market in Asia.
China launched its first gold futures contract on January 9, 2008. Several other countries, including India, Dubai and Turkey, have also launched futures exchanges.
Gold held in New York's SPDR Gold Trust, the world's largest gold-backed ETF, rose to a record high of 1,134.03 tonnes in June. The ETF's holdings are equivalent to nearly half global annual mine supply, and are worth more than $37 billion at today's prices.
Other gold ETFs include iShares COMEX Gold Trust, ETF Securities' Gold Bullion Securities and ETFS Physical Gold, and Zurich Cantonal Bank's Physical Gold.
BARS AND COINS: Retail investors can buy gold from metals traders selling bars and coins in specialist shops or on the Internet. They pay a small premium for investment products, of between 5-20 percent above spot price depending on the size of the product and the weight of demand.
US DOLLAR: The currency market plays a major role in setting the direction of gold, with bullion prices moving in the opposite direction to the US dollar.
Gold is a popular hedge against currency weakness. A weak US currency also makes dollar-priced gold cheaper for holders of other currencies and vice versa.
London is the hub of the global spot gold market, with some $18 billion in trades passing through London's clearing system each day. To avoid cost and security risks, bullion is not usually physically moved and deals are cleared through paper transfers.
Other significant markets for physical gold are India, China, the Middle East, Singapore, Turkey, Italy and the United States.
FUTURES MARKETS: Investors can also enter the market via futures exchanges, where people trade in contracts to buy or sell a particular commodity at a fixed price on a certain future date.
The COMEX division of the New York Mercantile Exchange is the world's largest gold futures market in terms of trading volume. The Tokyo Commodity exchange, popularly known as TOCOM, is the most important futures market in Asia.
China launched its first gold futures contract on January 9, 2008. Several other countries, including India, Dubai and Turkey, have also launched futures exchanges.
Exchange-Traded Funds: The wider media coverage of high gold prices has also attracted investments into exchange-traded funds (ETFs), which issue securities backed by physical metal and allow people to gain exposure to the underlying gold prices without taking delivery of the metal itself.
Gold held in New York's SPDR Gold Trust, the world's largest gold-backed ETF, rose to a record high of 1,134.03 tonnes in June. The ETF's holdings are equivalent to nearly half global annual mine supply, and are worth more than $37 billion at today's prices.
Other gold ETFs include iShares COMEX Gold Trust, ETF Securities' Gold Bullion Securities and ETFS Physical Gold, and Zurich Cantonal Bank's Physical Gold.
BARS AND COINS: Retail investors can buy gold from metals traders selling bars and coins in specialist shops or on the Internet. They pay a small premium for investment products, of between 5-20 percent above spot price depending on the size of the product and the weight of demand.
Key price drivers
INVESTORS: Rising interest in commodities, including gold, from investment funds in recent years has been a major factor behind bullion's rally to historic highs. Gold's strong performance in recent years has attracted more players and increased inflows of money into the overall market.
US DOLLAR: The currency market plays a major role in setting the direction of gold, with bullion prices moving in the opposite direction to the US dollar.
Gold is a popular hedge against currency weakness. A weak US currency also makes dollar-priced gold cheaper for holders of other currencies and vice versa.
OIL PRICES: Gold has historicaly had a strong correlation with crude oil prices, as the metal can be used as a hedge against oil-led inflation. Strength in crude prices also boosts interest in commodities as an asset class.
POLITICAL TENSIONS: The precious metal is widely considered a "safe-haven", bought in a flight to quality during uncertain times. Major geo-political events including bomb blasts, terror attacks and assassinations can induce price rises. Financial market shocks, which cause other asset prices to drop sharply, can have a similar effect.
CENTRAL BANK GOLD RESERVES: Central banks hold gold as part of their reserves. Buying or selling of the metal by the banks can influence prices.
On Aug. 7, a group of 19 European central banks agreed to renew a pact to limit gold sales, originally signed in 1999 and renewed for a further five years in 2004. Annual sales under the pact are limited to 400 tonnes, down from 500 tonnes in the second agreement, which expired in late September.
Sales under the agreement were low in the later years of the second pact, however. Gold sales under the second CBGA totalled only 1,883 tonnes, down from 2,000 tonnes under the first agreement.
POLITICAL TENSIONS: The precious metal is widely considered a "safe-haven", bought in a flight to quality during uncertain times. Major geo-political events including bomb blasts, terror attacks and assassinations can induce price rises. Financial market shocks, which cause other asset prices to drop sharply, can have a similar effect.
CENTRAL BANK GOLD RESERVES: Central banks hold gold as part of their reserves. Buying or selling of the metal by the banks can influence prices.
On Aug. 7, a group of 19 European central banks agreed to renew a pact to limit gold sales, originally signed in 1999 and renewed for a further five years in 2004. Annual sales under the pact are limited to 400 tonnes, down from 500 tonnes in the second agreement, which expired in late September.
Sales under the agreement were low in the later years of the second pact, however. Gold sales under the second CBGA totalled only 1,883 tonnes, down from 2,000 tonnes under the first agreement.
HEDGING: Several years ago when gold prices were languishing around $300 an ounce, gold producers sold a part of their expected output with a promise to deliver the metal at a future date.
But when prices started rising, they suffered losses and there was a move to buyback their hedging positions to fully gain from higher market prices -- a practice known as de-hedging.
Significant producer de-hedging can boost market sentiment and support gold prices. However, the rate of de-hedging has slowed markedly in recent years as the outstanding global hedgebook shrank.
SUPPLY/DEMAND: Supply and demand fundamentals generally do not play a big role in determining gold prices because of huge above-ground stocks, now estimated at around 158,000 tonnes -- more than 60 times annual mine production.
Gold is not consumed like other commodities. Peak buying seasons in major consuming countries such as India and China exert some influence on the market, but others factors such as the dollar and oil prices carry more weight.
But when prices started rising, they suffered losses and there was a move to buyback their hedging positions to fully gain from higher market prices -- a practice known as de-hedging.
Significant producer de-hedging can boost market sentiment and support gold prices. However, the rate of de-hedging has slowed markedly in recent years as the outstanding global hedgebook shrank.
SUPPLY/DEMAND: Supply and demand fundamentals generally do not play a big role in determining gold prices because of huge above-ground stocks, now estimated at around 158,000 tonnes -- more than 60 times annual mine production.
Gold is not consumed like other commodities. Peak buying seasons in major consuming countries such as India and China exert some influence on the market, but others factors such as the dollar and oil prices carry more weight.
Source:economictimes.com
Monday, October 5, 2009
Plan for a steady source of income
The economy is showing signs of a turn around and the worst may be behind us, but it is not too distant in the past that we heard of pay cuts and pink slips every other day. The loss of active income source or reduction in the monthly take-home was coupled with burgeoning costs of daily necessities .
It is in such tough times that one realises the importance of having a passive source of regular income. Gone are the days when only retirees would need a steady source of passive income. Individuals today are increasingly looking for options to supplement their active income by passive incomes such as rent, interest and dividend income.
Debt investments or fixed income instruments are the key sources of generating a regular income. Coupled with the fact that debt offers diversification and safety of capital, it proves to be an excellent case for investments . There are also a couple of other options from the mutual funds stable which can provide a regular source of income.
Here are some of the options available for a steady passive income:
It is in such tough times that one realises the importance of having a passive source of regular income. Gone are the days when only retirees would need a steady source of passive income. Individuals today are increasingly looking for options to supplement their active income by passive incomes such as rent, interest and dividend income.
Debt investments or fixed income instruments are the key sources of generating a regular income. Coupled with the fact that debt offers diversification and safety of capital, it proves to be an excellent case for investments . There are also a couple of other options from the mutual funds stable which can provide a regular source of income.
Here are some of the options available for a steady passive income:
Post office monthly income plan (POMIS)
The post office monthly income plan (POMIS) offers a fixed monthly return in the form of interest and you can deposit a maximum of Rs 4.5 lakhs and Rs 9 lakhs for single and joint accounts respectively.
The POMIS earns interest at eight percent per annum and though there are no tax benefits and interest is taxable , no tax is deducted at source on the interest.
The tenure is fixed for six years and there is a five percent payout in the form of bonus on maturity.
The POMIS can act as a safe source of additional monthly cash flow which can be either used to meet expenses or ploughed back into investments, depending on the situation.
The POMIS earns interest at eight percent per annum and though there are no tax benefits and interest is taxable , no tax is deducted at source on the interest.
The tenure is fixed for six years and there is a five percent payout in the form of bonus on maturity.
The POMIS can act as a safe source of additional monthly cash flow which can be either used to meet expenses or ploughed back into investments, depending on the situation.
Bank fixed deposit
Instead of opting for a cumulative deposit, you can opt for the monthly or quarterly interest payment facility .
Bank deposits are extremely low risk and offer good flexibility in terms of tenure, but there are no tax benefits (except five year deposits that qualify under Section 80C).
The interest rates are governed by the ongoing interest rates in the economy.
Bank deposits are extremely low risk and offer good flexibility in terms of tenure, but there are no tax benefits (except five year deposits that qualify under Section 80C).
The interest rates are governed by the ongoing interest rates in the economy.
Corporate fixed deposit
Companies offer fixed deposits which usually provide a higher rate than bank fixed deposits, the reason being that they are unsecured and hence the risk is higher.
There are different options for payment of interest (monthly, quarterly etc) which can provide a regular source of income.
It is prudent to invest only in deposits of reputed companies with a superior credit rating.
There are different options for payment of interest (monthly, quarterly etc) which can provide a regular source of income.
It is prudent to invest only in deposits of reputed companies with a superior credit rating.
Debt mutual funds
There are a wide variety of debt mutual funds such as liquid funds, short-term debt funds, income funds, and gilt funds.
These are distinguished by type, credit quality, nature of securities they invest in and length of maturity of the securities. These funds come with a dividend payout option which can be weekly, monthly or quarterly.
A portion of the total debt in your overall asset allocation can be invested in these funds to serve the dual purpose of allocation to debt as well as earning regular income.
However, you should be diligent to select the right fund based on the credit quality, average maturity of the securities and interest rate environment .
These are distinguished by type, credit quality, nature of securities they invest in and length of maturity of the securities. These funds come with a dividend payout option which can be weekly, monthly or quarterly.
A portion of the total debt in your overall asset allocation can be invested in these funds to serve the dual purpose of allocation to debt as well as earning regular income.
However, you should be diligent to select the right fund based on the credit quality, average maturity of the securities and interest rate environment .
Monthly income plans of mutual funds
The monthly income plans (MIPs) usually invest 15-30 percent of the corpus in equity and the remaining in debt.
These plans have an option of monthly or quarterly dividend payment, though not assured.
With the markets gaining some momentum, these plans are back on track with respect to dividend payments.
These plans have an option of monthly or quarterly dividend payment, though not assured.
With the markets gaining some momentum, these plans are back on track with respect to dividend payments.
Systematic withdrawal plans of mutual funds
A lump sum investment in a fund entitles you to withdraw regular amounts monthly or quarterly.
The returns are not assured and there may a risk of withdrawing capital itself if withdrawals exceed the returns. But it is tax-efficient as the returns are treated as capital gains.
There are other incomegenerating options such as Senior Citizens' Savings Scheme and annuities from insurance companies but these are more relevant after retirement.
While one must opt for growth of capital in the early stages of life, building up a stream of income which is not dependant on job, profession or business is equally important to provide for a rainy day.
The returns are not assured and there may a risk of withdrawing capital itself if withdrawals exceed the returns. But it is tax-efficient as the returns are treated as capital gains.
There are other incomegenerating options such as Senior Citizens' Savings Scheme and annuities from insurance companies but these are more relevant after retirement.
While one must opt for growth of capital in the early stages of life, building up a stream of income which is not dependant on job, profession or business is equally important to provide for a rainy day.
Source:economictimes.com
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