Everything you need to know about FDs

Fixed deposit (FD) is an investment option that allows you to invest a sum of money for a fixed time period and at a fixed rate of interest. During the course of the FD, even if the prevailing interest rates go up or down, you will be entitled to the rate of interest that was committed to you.

FDs pay a higher rate of interest than your savings bank account. The current rates, as of early April, for a one-year FD are approximately 8-8.5%. Your savings bank account offers you only 3.5% interest.

Other conditions being equal, you are better off putting your money in an FD account rather than a savings account. The interest can be paid to you quarterly, half-yearly or annually. If you are a senior citizen, the interest rate on your FD may go up by 0.5%.

Two types:

1. Bank and NBFC FDs: Offered by banks or non-banking finance companies; the Reserve Bank of India (RBI) regulates these institutions.

2. Corporate FDs: These are offered by companies that are looking to raise money from the open market. Corporate FDs typically pay a higher rate of interest, but also carry a relatively higher risk than bank FDs.

Advantages

• FDs offer a safe return: FDs are usually secure and are very low-risk investments. Bank FDs are guaranteed up to Rs1 lakh by the Deposit Insurance and Credit Guarantee Corporation.

• You can raise a loan against your FD: You can borrow up to 85% of your deposit amount (in some cases, only after a few months of your FD’s existence). This is valid only for bank FDs.

• Low maintenance: Unlike other investments such as stocks, mutual funds or even real estate, you don’t need to monitor your FDs on a daily or monthly basis, or undertake any kind of maintenance work.

• Choice of time period: You can make a deposit for any period of time, from 15 days to 10 years.

Disadvantages

• Relatively low returns: Because FDs are very low-risk instruments, they offer low returns compared with alternative investment options such as stocks and mutual funds.

• Lock-ups: Your money will be locked up in an FD for the duration of the deposit. As a result, unlike a savings bank deposit, you will lose the flexibility of accessing your funds whenever needed. You can break your FD if needed, but you would have to pay a penalty, which could include both a reduced interest rate as well as charges that are typically around 1%of the investment amount.

• Unfavourable tax treatment: Unlike other investment options, interest income earned from FDs will be added to your income and taxed.Taxes and FDs

• Tax-saving investments: Under section 80C, you can get a tax deduction of up to Rs1 lakh a year if you invest in a five-year FD.

• FDs and tax deduction at source (TDS): If the aggregate interest income that you are likely to earn from all your bank FDs held in a single branch is at least Rs10,000 in a financial year (Rs5,000 in the case of corporate FDs) then TDS will be deducted at 10%.

• If you do not fall in a taxable slab, then furnish Form 15G or 15H to your bank to prevent TDS on the interest income that is paid to you.

7 things to watch out for

1. Always appoint a nominee on your FD for quick withdrawals, and to avoid hassles if you are not around.

2. FDs from companies might pay more but come at a much higher risk than bank FDs. These FDs are not deposit-guaranteed.

3. In times of rising inflation, avoid FDs because your money will lose its purchasing power.

4. When making a deposit, check the penalty clause for early withdrawal.

5. If you need to withdraw funds for an emergency, instead of breaking the FD, you might want to consider taking an overdraft of up to 85% on your FD rather than pay the withdrawal penalty.

6. You might want to split your investment and make multiple deposits in small sizes and spread them across different maturities as opposed to making a single large deposit. This way, even if you do have to make a premature withdrawal, you will not pay a penalty on the entire amount but just on the limited amount you withdraw.

7. For FDs longer than a year, if your interest is paid at maturity, the taxes on interest income from your FDs are due on interest earned, even if the interest hasn’t been received by you.

Source: http://www.livemint.com/2009/04/12222430/Everything-you-need-to-know-ab.html?h=B

Debate on over load structures on MFs

The NSDL (National Securities Depository Ltd) case will be on top of Sebi's agenda when it meets on Monday, but another issue that may come up at the board meet is the proposed introduction of variable load structures on mutual funds.
Market regulator Securities and Exchange Board of India (Sebi) is keen to introduce a variable load structure for mutual funds that will allow investors to negotiate the commission they pay to distributors.
But, given the resistance from distributors and fears that distributors may end up pushing insurance products that offer higher commissions, the industry is urging the regulator to try a different approach.
"Every business for a distributor should be profitable, so today he is finding challenges in one product. We as AMCs should ensure our profitability to them," said Nimesh Shah, MD & CEO of ICICI Prudential Mutual Fund.
Industry body AMFI (Association of Mutual Funds of India) suggests giving investors two options.
Under plan A, a variable load could be charged depending upon the service or advice rendered by the distributor while under Plan B no upfront load is charged to investors but the distributor would be compensated by the fund house in the form of higher trial fee, which in turn will charge the customer an expense fee.
" Within the load there should be some variability, so the investor and distributor together decide what should be the load depending on the quality and extent of service and advice rendered. The second option is when there is no upfront load at all but to compensate the distributor must be given a trail commission," said AP Kurien, chairman, AMFI.
A trailing commission is not only likely to confuse investors, but they may also be made to fork out a bigger expense fee, which doesn’t serve Sebi’s objectives of cost control and transparency.
Meanwhile, according to our sources in Sebi, the probability of plan B getting cleared is remote.

Source: http://profit.ndtv.com/2009/04/10113357/Debate-on-over-load-structures.html

India's first sharia fund collects 50 mln rupees

India's Taurus Asset Management has collected about 50 million rupees in the country's first actively managed sharia-compliant equity mutual fund it launched in February, chief executive Waqar Naqvi said on Wednesday.
"Around 5 crores... not bad given the fact that even very large fund houses collected some 2 crores or 3 crores," Naqvi said, referring to the mop-up.
Taurus held average assets of about 2 billion rupees in March, making it one of the smallest players in India's 35-member mutual fund industry.
"While the enthusiasm was there, the market condition was really tough," he said, referring to a volatile Indian stock market that has led to a pause in inflows into the industry.
New equity funds, not including Taurus, collected about 60 million rupees in the first two months of 2009, according to data from the Association of Mutual Funds in India.
Taurus' fund joins the fast-growing Islamic investments industry estimated to be managing about $65 billion globally with nearly half of the money invested through mutual funds.
Islamic investing forbids Muslims from receiving interest payments and investing in companies involved in the production or sale of pork, alcohol, tobacco, pornography, gambling and non-Islamically structured finance or life insurance.
Source: http://in.reuters.com/article/businessNews/idINIndia-38952020090408

Cash rich mutual funds risk missing stocks surge

Indian fund investors have missed large part of the surge in domestic shares in the last one month and may be in for more disappointments as their fund managers sit tight on a multi-year high cash levels.
Sensex fell to its lowest level in 2009 on March 9, but has surged almost 30 percent since then, helped by a revival in global risk appetite and some flow of funds into emerging markets, including India.
However, nearly 300 diversified funds have seen their net values rise by an average 20.2 percent, held back by unusually high cash levels, with only nine of them rising more than the main stock index, data from global fund tracker Lipper showed.
"These cash calls would certainly impact fund returns once the market bounces back, which we saw in March," Chintamani Dagade, a senior research analyst with Morningstar India, said.
He said most of the large-cap diversified stock funds held double digit cash levels throughout 2008 in a bid to soften blow from falling shares, which went on to end the year down more than 50 percent, their sharpest fall on record in any year.
However, the strategy did not work for most funds. Net asset values of stock funds recorded their worst annual fall of 54.7 percent during the year, giving up the entire gain made in the previous two calendar years, with nearly half of the actively managed funds also underperforming the benchmark index.
Most funds continue with the strategy and some have raised the cash levels further ahead of general elections in April-May, anticipating a volatile share market, resulting in a major underperformance in the last one month.

Source: http://economictimes.indiatimes.com/Cash-rich-mutual-funds-risk-missing-stocks-surge/articleshow/4374019.cms

Index funds versus individual stock picking

“Where should I invest my hard-earned money?”

This question invariably puts investors into a serious dilemma as to which investment option should they consider. They get deeply consumed in the process of assessing, determining and considering options which would render optimal returns to them, involving minimal risk and offering safety to their capital.
Investment in equities (individual stock picking) and various types of mutual funds are two very obvious investment vehicles that would come to investors` mind. Equity funds, debt funds, balanced funds, index funds and so on are the several types of mutual funds, which can be considered. Which type of fund is better amongst them? The answer to this question would depend upon the investment goal, risk appetite and time horizon of the investor.
Let us compare individual stock picking and index funds in detail:
Individual stock picking is nothing but merely equity investing. It is the most popular investment vehicle amongst investors. It is considered a high risk- high returns investment vehicle.
But the Bear Market Run carrying on since last year has been responsible for the erosion of capital of several investors. On a broader side, the returns depend on the financial health of the company (of which you have purchased the shares), the performance of that particular sector and the overall market performance in general.
On a narrower side (investors' side), the returns depend on investors' investment objectives, risk taking capacity and tenure of the investment. If the particular sector or company's shares are not performing well, the investors incur losses. Risk of losing money is high in case of equities due to volatile nature of markets.
Index Funds are a category of mutual funds which invest into a whole index [Sensex (30), Nifty (50)] rather than a specific stock. This strategy is also called ‘indexing’. The goal of most index funds is to follow the index performance. Index funds buy all the stocks of a particular index. This is a passively managed scheme.
The fund managers of these schemes do not get involved actively in shares selection and the process of investing. However, the volatility of markets (indices) is uncertain. The performance of the indices cannot be foreseen by any one. In India, the indices (Sensex, Nifty) are small as compared to US index of S&P 500.
Benefits of index funds
Economical: Indexing is a passive investing strategy; it does not involve any active management by the fund managers as in the case of the actively traded funds. The main objective of index funds is to reflect the performance of indices. The cost of analysts` salaries, research cost, and brokerage is saved in case of the index funds.
Better Performance: The performance of passive funds is likely to be better than actively or professionally managed funds. In the long run, any particular stock cannot beat the whole index performance.
For the week ended Mar. 20, 2009, Index funds were the biggest gainers among all classes of mutual funds with 3.16% gain as the 30 share index, Sensex rose 210.07 points, or 2.40%, to 8,966.68 in the week ended Mar. 20, 2009. On the other hand, the broad based NSE Nifty rose 87.8 points, or 3.23%, to 2,807.05 in the same period.
NAVs of the index funds category gained 3.16% in the week Mar. 20, 2009.
Among the index funds, Nifty Junior BeES gained 4.33%, Benchmark S&P CNX 500 Fund added 3.49%, J M Nifty Plus Fund rose 3.33%, LICMF Index Fund - Nifty Plan climbed 3.27%, Birla Sun Life Index Fund gained 3.24%. (Myiris).
Diversified Portfolio: Index funds invest in all stocks from different companies and different sectors of a particular index, leading to a wide range of stocks, which helps in the diffusion of risk.
Returns: Returns in index funds are largely dependent on the performance of whole indices; the Sensex and Nifty being benchmarks of the index funds` performance in India.
Saves time and money: The hard core research of specific stock or sector is not required in case of index funds as these funds track the performance of whole indices and not a stock and sector in particular. This saves time and money also as nothing comes free and research is not an exception.
Disadvantages of index funds
Market risk: When the market undergoes a fall, you also lose in case of index funds as these funds are entirely based upon the ups and downs of the market
Less Flexibility: Index funds lack in flexibility, as investors don’t get the opportunity to invest into stocks in that particular index. This is so because there is no scope of selecting stocks of personal choice, based on quality and research.
Conclusion:
To conclude, index funds can possibly offer higher returns in the longer period of time, subject to performance of indices or markets. Index funds thus seem to be a better option between the two, as their advantages considerably outweigh the disadvantages. Diversification, lower cost and maintenance give them an edge over individual stock picking.
Source: http://in.reuters.com/article/personalFinance/idINIndia-38898620090406?sp=true

SBI gives top rate of 9.7 per cent among PF fund managers

State-owned lender State Bank of India has given a return of 9.7 per cent on provident fund deposits, which is over 50 basis above the top rate of 9.1 per cent offered by private sector provident fund managers for the quarter ended December 2008.
The other three fund mangers – all from the private sector - including Reliance AMC (9.1 per cent), ICICI Pru AMC (9.0 Per cent) and HSBC AMC (8.5 per cent) offered returns below the SBI's payout during the 17 September to 31 December 2008 period, an Employees' Provident Fund Organisation (EPFO) source said.
The EPFO, managing about 4.4 crore provident fund depositors, allowed the three private fund managers to manage its incremental deposits of about Rs25,000 crore per annum in July last year.
The aim was to improve the returns on EPFO's investments, which was earlier confined mostly to government securities and special deposit schemes.
The EPFO has invested Rs30,461 crore in central government securities, which earns a return of 7.25 per cent, and Rs20,000 crore in state government securities and loans, which fetches 7.5 per cent return.
Meanwhile, an advisory committee of the EPFO had, last month, rejected a finance ministry proposal to invest up to 15 per cent of its funds totaling around Rs1,82,000 crore in the stock markets. The rejection of a proposal to park this corpus amount in publically-listed companies and mutual funds for higher returns came in the wake of continuing volatility in the stock markets.

Source: http://www.domain-b.com/finance/banks/SBI/20090406_pf_fund.html

Future of MFs is in smaller cities: Birla MF CEO

Birla Sun Life Mutual Fund has retained its number 5 position among the top five fund houses, though its corpus declined by 3 per cent to Rs 47,096.23 crore as at end March. Birla MF is working on schemes that will act as a hedge to the market volatility and safeguard investors against capital erosion. ET spoke to Chief Executive Officer Anil Kumar to know more. Before shifting to Birla MF, Kumar was global head of Citibank’s NRI business last three years. He is an alumnus of IIM Ahmedabad and NIT Warangal.
Excerpts from the interview:
Q. What is your road map for the future in these troubled times?
A. We will continue our focus in launching innovative products capable of hedging against volatility in the market. We are looking at re-launching old schemes on similar lines, and are exploring the possibility of launching arbitrage and exchange traded funds.
We have consistent policy of declaring dividend in our schemes. Whenever we have surplus income, we will keep declaring dividend. Birla Sun Life Tax Relief ’96 declared 50 per cent dividend in 2008-09 despite these troubled market times. It was 200 per cent dividend in 2007-08.
Q. What do you give priority in running your AMC?
A. We give top priority to portfolio quality and security, size of fund corpus and ultimately our brand image. Identifying customer needs at the right time is a crucial aspect. Recession helped big fund houses to prove their worth in this respect.
Anticipating effects from the collapse of Lehman Brothers, we launched a short term debt fund that would invest in commercial deposits and commercial papers of PSU banks in the third week of September 2008. By October, it managed to raise Rs 3,800 crore from all classes of investors despite the economic turmoil.
Q. What prospects do you see for sustainability of the MF industry in India?
A. MF industry is in a “sweet spot” in India but it has a long way to go, as penetration is still very low. However, the market potential is huge. Only 5-6 per cent of household deposits in India find their way to MFs, which is lower than even the BRIC countries.
In the last five years, the industry has been growing at CAGR of 35 per cent. The future of the MF industry lies in Tier-II and Tier-III cities. The rate of deposits in these cities is proportionately higher, irrespective of market condition. Tapping this source will help MF grow manifold.
Further, opening up of the pension funds will help increase mutual funds reach. As a fund house, we will be looking at these new avenues to expand our product kitty.
Q. What are the product offerings you plan for smaller cities?
A. We are mostly promoting systematic investment plans through different equity schemes. We are also selling balance fund and debt schemes. We approach investors with two-pronged communication: 1) invest with 3-5 year time horizon 2) diversify your asset allocation with a mix of equity, balance and debt schemes.
Q. What sectors are you looking at for investment growth?
A. We look at sectors from a long term perspective. Infrastructure, FMCG and capital are three good sectors to look at. Realty, though currently going through a correction phase, has huge potential as there will be huge demand for housing in the long run due rising urban migration.
Q. Is the recently market rally indicative of a recovery?
A. It is difficult to take a definite call on this. Any negative global cue and uncertainty over general elections can play spoilsport. With sectors like steel, auto and cement showing signs of improvement, we however see revival/stability of economy by last quarter of the current calendar year.
Q. Can the MF industry, along with insurance companies, be an alternative to FII dominance in driving equity indices?
A. MFs and insurance companies are growing at a much faster pace. There is scope for further growth given the large untapped market space. During Q3 of FY 2008-09, MFs were sitting on cash of around Rs 15,000-20,000 crores. Had the same amount been invested in equities, it could have diluted FII impact. Larger participation by domestic institutions can definitely counter FII impact.

Source: http://economictimes.indiatimes.com/Future-of-MFs-is-in-smaller-cities-Birla-MF-CEO/articleshow/4366264.cms

Birla Sun Life posts highest growth of 31.17% amongst Top 5 MFs

The nine Mutual Funds, which posted the growth, are Birla Sun Life Mutual Fund, Baroda Pioneer MF, Canara Robeco MF, Escorts MF, HDFC MF, IDFC MF, JP Morgan MF, Kotak Mahindra MF and LIC MF.
Nine Mutual Fund companies out of 37 Mutual Funds (33 AMCs) grew their average assets under management (AAUM) by Rs. 384.10bn as of March 31, 2009, as compared to March 2008 (Source AMFI data).
And this growth arrested the slide and ensured that the industry’s AAUM y-o-y (March 2009 to March 2008) fell by 7% and not 14% (double the fall posted as of March 2009 as compared to March 2008).
The nine Mutual Funds, which posted the growth, are Birla Sun Life Mutual Fund, Baroda Pioneer MF, Canara Robeco MF, Escorts MF, HDFC MF, IDFC MF, JP Morgan MF, Kotak Mahindra MF and LIC MF. In fact, only Birla MF and HDFC MF amongst the Top MFs have posted a positive growth.
Birla Sun Life Mutual Fund (BSLMF) posted an absolute increase of Rs. 111.90bn
and a growth of 31.17% in its AAUM of March 2009 over March 2008. This growth is higher than that of HDFC MF (29.44%), Reliance MF (-10.97%), ICICI Prudential ( - 5.32%) and UTI MF (-0.47%).
BSLMF contributed 29.13% (absolute of Rs. 11,190.19 crore) to the overall growth in AAUM of Rs. 38,4.10bn. Amongst the 9 MFs that have posted positive growth, only BSLMF and HDFC MF have posted an absolute increase of over Rs. 100bn in AAUM while LIC MF comes close with Rs. 90.36bn.
BSLMF also increased its market share to 9.7% (up nearly 43%) as of March 2009 as compared to March 2008. The growth in market share of 43% is much higher than any of the peers. BSLMF has grown in a declining market; increased market share and added new customers.
Over the past one year the Birla Sun Life Mutual Fund, one of the India’s top 5 mutual fund houses, has registered impressive growth across parameters viz. Average AUM, distributor base, or customer base. Since January 2008, the AAUM has grown 40%, distributor base has doubled to over 26,000 and number of branches to 109. It has also doubled its customer folio base to 21.5 lakh.
Anil Kumar, CEO, BSLMF and BSLAMC, said, “Birla Sun Life Mutual Fund has become the fastest growing fund house in India due to its strong heritage and track record of consistent performance across equity and debt asset classes. We are proud of having earned the unique distinction of being the only Mutual Fund house to have won the most coveted CNBC TV18 Crisil award for the second time in a row.”
Birla Sun Life Mutual Fund has bagged the most coveted and respected industry award - CNBC TV 18 Crisil – ‘Mutual Fund House of the Year’ award for the second successive year. Birla Sun Life Mutual Fund has created history in the Indian mutual fund industry by bagging this prestigious award twice in succession for the years 2007 and 2008, demonstrating its clear focus on fund performance and product innovation.
Additionally, for the year 2008, Birla Sun Life Mutual Fund also received Debt Fund House of year award. Three of the funds also won the best fund award in their respective categories – Birla Sun Life Income Fund, Birla Sun Life Short Term Fund – Retail, Birla Sun Life Gilt Plus – Regular plan.

Source: http://www.indiainfoline.com/news/innernews.asp?storyId=98151&lmn=1