FDs can be hazardous for your wealth creation plan

Do you know of anyone who has become wealthy by leaving his or her money in the bank or a fixed deposit (FD)? If you want to create wealth and fulfill your financial goals over a long period of time, you must shun that pure conservative way of investment. A lot of people in India think that a savings account or an fixed deposit is the best home for money. According to a report, only 11 per cent of the household savings are channelised in our equity markets. Majority of the savings are still lying idle in our banks’ savings accounts or probably earning a measly interest in a fixed deposit. Despite being among the best saving class in the world, we have not the smarted investors yet.

Much has been made of the so-called comparison between mutual funds and unit-linked insurance products (Ulips) in the recent past few months. Our opinion is that the public debate on these two investment options misses the bigger point.

The reality is that the bulk of the household savings for Indian families is tied up in bank accounts earning 3.5 per cent interest and in FDs — both of which are highly inefficient investment options for wealth creation.

Add to this the rising inflation that has touched double digit, and therefore, it becomes even more scarier that most of us still prefer to leave our money in a bank, rather than in instruments that give higher returns — be it equity mutual funds or ulips or probably direct investment in equity markets.

So the real debate should be whether families in their effort to create wealth are making a mistake in leaving their money in the bank while they should be penciling in on other investment instruments like mutual funds and ulips that offer a reasonable prospect of better long-term returns.

Mutual Funds v/s ULIPs - no big deal

Call it a turf war or clash of regulators, frankly in the long run it's not a big deal from the end customer's perspective. Whether its SEBI or IRDA, consumers should feel comfortable and secure that there is a regulator who is mandated to look after their interests.

Every investment instrument has pros and cons. We challenge you to find one that is perfect. So, there will always be promoters or detractors of both mutual funds and Ulips.

Objectively speaking, however, there is a better chance of you being able to meet your long-term financial goals through equity mutual funds and/or a Ulip than the default option for most Indians, which is to leave money in the bank.

Almost every one of us will have one of the following goals that will require a substantial amount of money in the future: funding our graduate education, marriage, house purchase, taking care of children's financial needs, funding their education and marriage, being adequately funded towards our own retirement.

Experience from all over the world has shown that our salaries are not enough to fund these goals. We need to invest into the capital markets, subject to our risk taking capacity, to take advantage of the compounding of capital, i.e., money that creates more money. No lesser authority than Albert Einstein remarked, "compounding is the eighth wonder of the world because it allows for the systematic accumulation of wealth".

The advantage of equity mutual funds and Ulips is that they are instruments that offer you a better rate of compounding for your capital than cash lying in the bank, and thereby provide a better chance of creating wealth in the long run.

Savings accounts and FD - bad dosage for financial health

Let's make ourselves clear. Savings accounts and FDs have a purpose and we cannot over generalise and make a blanket statement that they are bad instruments. However, when it comes to wealth creation they are not good instruments for you to invest through. We will show you why.

First of all, a savings account earns you a mere 3.5 per cent interest rate, a level that is fixed arbitrarily. Similarly, a fixed deposit contractually fixes the rate of return at the start date of your deposit, and you cannot earn more than what you signed up for, even if interest rates in the markets were to rise.

Compare this to a return that the equity market can earn you. History and experience of equity markets from around the world suggests that in the long-term equity markets are likely to "compound your capital" at approximately 12 per cent per annum. Compared to this, a 3.5 per cent savings account return just does not match up.

Secondly, savings accounts and FDs are highly tax inefficient. Any interest you earn through these will be taxable in your hands as income, and you will be liable to pay tax on this income.

Compare this to equity mutual funds and Ulips where at least for the time being until the new direct tax code is implemented you pay zero taxes on your gains if you hold these instruments for the long-term. And, if you invest into an equity linked savings scheme of mutual funds, you might find this an even more tax efficient investment than a regular mutual fund.

Finally, and perhaps most crucially, by leaving your money in a bank or an FD, you are losing the purchasing power of that money. Because you are earning a fixed return through these instruments, these instruments cannot offset the corrosive effect of inflation or rising prices within the economy.

If one's bank account returns only 3.5 per cent pre-tax, but the level of prices is rising at 10 per cent, one doesn't have to be a mathematical genius to figure out that in the long run one's standard of living will suffer. You will hardly be able to create any wealth, because whatever returns you earn does not even help you keep pace with the rising prices in the economy, let alone give you a surplus that can earn you further returns.

If you are already wealthy then FDs might be a good wealth preservation instrument, but please don't use them to create wealth for yourself.

Don't sit idle, invest actively

Putting your money into a savings account of an fixed deposit is almost akin to sitting idle. India is going through an inflection, which is likely to last for a few decades, where the equity capital markets will be the best avenue for long-term investment and a good way to build an alternate and legitimate source of wealth. If you believe in India's economic growth potential, then move at least some of your money from your bank account into a higher yielding instrument to give yourself a fair chance to create long-term wealth.

Source: http://www.expressindia.com/latest-news/FDs-can-be-hazardous-for-your-wealth-creation-plan/642271/

ICICI Prudential MF introduces Daily Systematic Transfer Facility for two of its schemes

ICICI Prudential Mutual Fund has hereby made available Daily Systematic Transfer Facility to the investors/unit holders of ICICI Prudential Monthly Income Plan and ICICI Prudential MIP 25 under the dividend option of the source schemes, effective from 09 July 2010.

ICICI Prudential Monthly Income Plan and ICICI Prudential MIP 25 have been included in the existing list of source schemes whereby investor can avail daily systematic transfer facility to target schemes, wherein the specified amount subject to minimum of Rs. 250/- and in multiples of Rs. 50 can be transferred to the target schemes.

The investors/unit holders are requested to kindly refer to the Notice-cum-Addendum dated 14 June 2010 for the list of source and target schemes.

Source: http://www.apollosindhoori.cmlinks.com/MutualFund/MFSnapShot.aspx?opt=9&SecId=10&SubSecId=22,24

UTI MF Introduces Micro SIP under 32 Schemes

UTI Mutual Fund has announced the introduction of Micro Systematic Investment Plan (Micro SIP) under 32 schemes with effect from 28 June 2010.

The eligible schemes are UTI-Balanced Fund, UTI-Banking Sector Fund-Regular Plan, UTI-Bond Fund, UTI-Contra Fund, UTI-Dividend Yield Fund, UTI-Energy Fund, UTI-Equity Fund, UTI-Equity Tax Savings Plan, UTI-Floating Rate Fund-Short Term Plan-Regular Plan-Growth Option, UTI-Gilt Advantage Fund, UTI-G-Sec Investment Plan, UTI-G-Sec Short Term Plan, UTI-Infrastructure Fund, UTI-Leadership Equity Fund, UTI-Liquid Fund Cash Plan-Regular-Growth Option, UTI-Master Plus Unit Scheme, UTI-Master Value Fund, UTI-Mastershare Unit Scheme, UTI-Mid Cap Fund, UTI-MIS Advantage Plan, UTI-MNC Fund, UTI-Monthly Income Scheme, UTI-Money Market Fund-Regular Plan-Growth Option, UTI-Opportunities Fund, UTI-Pharma & Healthcare Fund, UTI-Service Industries Fund, UTI-Short Term Income Fund, UTI-Top 100 Fund, UTI-Transportation & Logistics Fund, UTI-Treasury Advantage Fund-Growth Plan, UTI-Variable Investment Scheme-Index Linked Plan and UTI-Wealth Builder Fund-Series II (Retail Plan).

Minimum installment amounts under Micro SIP shall be Rs 100 and in multiples of Re 1 thereafter.

Under Monthly periodicity: Rs 100 and in multiple of Re 1 thereafter.

Under Quarterly periodicity: Rs 300 and in multiple of Re 1 thereafter.

Installments can be variable subject to a minimum of Rs 100 per installment

Source: http://www.indiainfoline.com/Markets/News/UTI-MF-Introduces-Micro-SIP-under-32-Schemes/3154724496

Exit load likely on early redemption in liquid plus plans from August 1

Indian fund houses plan to charge a fee, known as exit load, for early redemption of investments in the popular liquid plus schemes of mutual funds, starting August 1, which may prompt institutional investors such as banks and corporates to switch a part of their surplus money to other short-term debt schemes.

Mutual funds may impose an exit load of 0.1-0.5% for early redemption in liquid plus schemes, which constitute about 35% of the mutual fund industry’s total assets under management (AUM) of Rs 6.76 lakh crore, according to officials in fund houses and mutual fund distributors. The bulk of the investments in such schemes are in money market and debt securities with a maturity of over 91 days.

Fund houses intend to charge this fee to smoothen flows into such schemes and reduce volatility in returns as a new norm to value debt securities with maturities of over 91 days kicks in on August 1. Mutual funds fear that the new valuation rules could increase uncertainty in returns from this product, thereby reducing their popularity among investors.

The period for which this fee or exit load would be charged would depend on the tenure of the scheme. “Liquid plus schemes can go negative on a day-to-day basis if average maturity profiles are longer and the mark-to-market (MTM) portion is higher,” said Sunil Jhaveri, chairman, MSJ Capital and Corporate Services, a New Delhi-based mutual fund advisor.

Liquid plus schemes with an average maturity of 100-110 days could have exit loads between 7-15 days while the more aggressive liquid plus products with an average maturity of 120-140 days are likely to have exit loads between 15-30 days, according to Jhaveri and mutual fund industry officials.

“By imposing exit loads depending on the average maturity, we are telling investors give us at least this time to give you reasonable returns,” said a senior official with a leading private mutual fund. “If there is volatility in the corpus, it will be difficult for us to manage the scheme,” he said, requesting anonymity.

The imposition of exit load after August 1 could lead to some investors shifting money from liquid plus to liquid schemes. Liquid funds, which invest in debt instruments with maturity below 91 days, do not have exit loads.

Fund officials said some mutual funds that had introduced this fee on early liquid plus redemptions a couple of years ago were forced to withdraw it because of protests from investors.

This time, the fee may stay as industry officials and distributors do not expect investors to throng to liquid schemes because liquid plus schemes fetch better returns and are taxed lower.

A DDT of 28.33% is charged on liquid funds while it is 22% for other debt schemes, including liquid plus schemes. Liquid plus schemes are likely to return 4-4.25% annualised in August because of their investments in securities of longer maturity.

Returns from liquid schemes are expected to be 3.50-3.75% when the liquidity improves next month. “Investors have few alternatives... Many of them would be forced to stick to liquid plus,” said. Not all asset management firms are likely to impose these exit loads.

“We are not likely to impose any exit load on our liquid plus scheme. Instead, we would advice investors to put money in our short-term fund (of maturity 6-15 months), which has a 15-day lock-in, that is of minimal risk,” said Nandkumar Surti, chief investment officer, JPMorgan Asset Management.

Source: http://economictimes.indiatimes.com/personal-finance/mutual-funds/mf-news/Exit-fee-may-take-zing-out-of-liquid-plus-plans/articleshow/6137075.cms

IDBI MF Launches IDBI Liquid Fund

IDBI Mutual Fund has launched a new fund named as IDBI Liquid Fund, an open ended liquid scheme. The New Fund Offer (NFO) price for the scheme is Rs 10 per unit. The new issue is open for subscription from 7 July and closes on 8 July 2010.

The investment objective of the scheme will be to provide investors with high level of liquidity along with regular income for their investment. The scheme will endeavour to achieve this objective through an allocation of the investment corpus in a low risk portfolio of money market and debt instruments.

The scheme offers two options viz. growth and dividend option. The dividend option has three sub-options (frequency of dividend declaration) - daily dividend (compulsory reinvestment), weekly dividend and monthly dividend.

The scheme would allocate 50% to 100% of assets in money market instruments with maturity / residual maturity upto 91 days. It would further allocate upto 50% of assets in debt instruments (including floating rate debt instruments and securitized debt) with maturity / residual maturity / interest rate resets upto 91 days. Investment in securitized debt would not exceed 50% of the net assets of the scheme.

The minimum application amount is Rs 5000 and in multiples of Rs 100 thereafter.

The fund seeks to collect a minimum subscription (minimum target) amount of Rs 10 crore under the scheme during the NFO period.

Entry and exit load charge will be nil for the scheme.

Benchmark Index for the scheme is CRISIL Liquid Fund Index.

The fund manager of the scheme will be Mr. Gautam Kaul.

Source: http://www.indiainfoline.com/Markets/News/IDBI-MF-Launches-IDBI-Liquid-Fund/3162097092

Bond yields, swaps ease on better cash view

Indian federal bond yields and swap rates dipped on Tuesday on expectations cash conditions would improve, but a $2.6 billion government debt sale this week kept investors cautious. At 10:33 a.m. (0503 GMT), the yield on the benchmark 10-year bond was down one basis point at 7.60 percent from the close on Monday, when it had hit 7.65 percent during trade its highest since June 25. Volumes were moderate at 27.75 billion rupees ($593 million) on the central bank's trading platform.

The one-year swap rate shed four basis points to 5.60 percent. On Monday, it had climbed to 5.68 percent intraday, its highest since Nov. 19, 2008. "There are first signs of liquidity improvement. With all third-generation and broadband auction outflows now past, the worst of liquidity is over," said a senior trader with a mutual fund. "I think 1- year swap rate has peaked yesterday and I expect it to move to 5.50 and below," he said.

Traders said liquidity in the system had improved following likely government spending last week. Cash balances of commercial banks with the Reserve Bank of India dropped to 2.9 trillion rupees on July 2 from 3.08 trillion a day earlier, data on the central bank's website showed, indicating the government may have started to spend more money. Dealers said lower US yields were also supporting prices.

US 10-year Treasury notes rose in Asian trading on Tuesday, supported by ongoing worries about the outlook for the US economy, with moves exaggerated by thin trading volumes. However, domestic sentiment was cautious after the government said late on Monday it would sell 120 billion rupees of bonds on Friday.

Traders had been hoping the government would reduce the scheduled borrowing as it did last week because of tight cash conditions. The central bank is likely to raise interest rates again in its quarterly review on July 27, a new survey found, and rates at the end of the year are likely to be higher than forecast before Friday's rise.

Source: http://economictimes.indiatimes.com/markets/bonds/Bond-yields-swaps-ease-on-better-cash-view/articleshow/6133620.cms

‘Sustained growth, post stimulus rollback, justifies valuations'

The moving variable to look for is whether growth exists in the system and how profitable the growth is. You will get that from a smattering of large companies and the gigantic listed universe of small and medium enterprises.

There are no defensive businesses, says the contrarian Mr Kenneth Andrade, Chief Investment Officer, IDFC Mutual. There are only shifts in capital allocation based on the earnings growth of sectors vis-à-vis the index. Not wanting to view opportunities based on market-cap segments alone, Mr Andrade, throws up quite a few interesting ideas for investment based on global changes in an interview with Business Line.

Excerpts from the interview:

Indian markets have outperformed most global peers on a year-to-date basis. Are markets taking less note of global risks?

Markets are not less concerned about the global risks that exist except for the fact that, if you look at a couple of trends that have been happening in India and in a significant part of the emerging market, it is contrary to what's happening in the West.

So, that resilience itself is holding out. When I say contrary trends, you've got the US and probably Europe heading into stagflation while you still have inflation in the emerging part of the world. And that, by itself, attracts a reasonable amount of money because inflation is a derivative of growth. So that will hold out in the near term.

What do you make of the current Indian market valuations compared with peers?

We are not expensive; we are not cheap. We are very close to the long-term median line. Added to this, stimulus withdrawal has been happening across the world. In a way India has already had a roll-back of some parts of the excise duties and now the realignment of petrol prices to some market-driven formula.

These are all very good from a macro-point of view as it helps the fisc significantly. And, if growth still does not stop then somewhere you will justify the premium valuations that you trade at.

But we have been seen growth moderation in sectors such as cement or telecom with profit margins too compressing. Could that extend to other sectors?

That will always happen in any industry where there is fragmentation of capacity or introduction of new players. When capacity grows significantly faster than the demand, you would see near-term contraction in margins. The contraction is also essential to make sure the strongest survive.

It's very prevalent in real estate and in some phases in infrastructure where the pricing power just does not exist with the contractor anymore because there is so much of fragmentation. You will start seeing it in the commercial vehicle and automobile market because India has moved from duopoly to probably 10 companies manufacturing four-wheelers andwe have more lined up.

Going forward we will see more segments actually fragmenting and that will lead to contraction in margins, competitive price points and product innovation to stay ahead of the curve.

In the recent rally we saw the traditional defensives pharma and consumer goods outperform. Are we seeing a shift in the classification of defensives?

What is defensive and what is offensive! Let me put this in perspective. You had an FMCG business at the turn of the century which was steadily growing at 15 per cent per annum and then there was this sector that turned up — technology — which grew at 50 per cent per annum. So you simply had a capital allocation choice. So you took that money and allocated it to technology. And yet the FMCG businesses continued to grow at 15 per cent per annum.

At the turn of the century, technology collapsed and FMCG grew at 15 per cent per annum. And so, FMCG was a defensive. But you have to remember one thing, when technology contracted, your index earnings contracted and the (index) growth levels went below the FMCG earnings growth levels. Then the investment economy picked up. You had the same scenario – FMCGs grew 10-15 per cent, while capital goods grew at 30 per cent. Again, there was a capital allocation choice and everything went into capital goods. You had polarisation of capital, so FMCG was overlooked.

Today you have a scenario where the index earnings is significantly below the earnings of the FMCG companies. So you now have a capital allocation which is moving steadily towards the consumer part of the economy as the latter is now growing faster than the investment economy and probably faster than even the outsourcing economy.

And that's playing itself out in the index. So I don't think there are any defensive businesses, expect that while growth has always been there, they trailed the markets; the growth has actually stepped up now. This is true of pharma as well. While domestic formulations businesses have stepped up in growth , the export-driven businesses suddenly have flush, large tie-ups coming from MNC companies, wanting to take the manufacturing capabilities of the local companies to their countries.

The valuation gap between mid and large-caps has shrunk. Where does the opportunity lie for investors? I would not want to go with the bias of market capitalisation. The moving variable that we need to look for is whether growth exists in the system and how profitable the growth is. You will get that from smattering of large companies and since you have such a gigantic small and medium enterprise universe that is listed, you would also get it from some part of that market. So you just have to look at opportunities and there are plenty of them out there.

The consumer story is probably one of the biggest that's setting itself in India. And when we talk about the consumer story we are not saying it in isolation because all emerging market economies are focussing on the fact that they would try to get the consumer back to revive their economies. So, China is no longer looking at the American consumer, it is looking at its own for growth. India or Latin America or some parts of Asia are all doing the same thing.

Two, on the outsourcing front we still enjoy the arbitrage in the standards of living between the West and this part of the world. But, more importantly, with wage inflation between 20-30 per cent in China this year, our economy would tend to be a little more competitive in this space. So we will take market share in some of the low value-added items, such as textiles.

Three, there will also be a shift in technology, in the sense that we are moving away from the desktops and networks are getting increasingly more bandwidth-intensive. So you will see a lot of capex happening on the technology part, which does not necessarily mean just software.

Four, Europe is more competitive than China now because Euro has depreciated vis-à-vis the dollar and China is going to peg vis-à-vis the dollar. So Europe goes into being one of the largest (manufactured) exporters in the world all over again. And they have got a very large ancillary base out of India. So, these are all opportunities that exist in the entire system.

Now you can play it through the engineering companies of the foreign MNCs in India, which are large-caps. Or you can play the outsourcing stories on some players in the technology space which are large-caps.

In manufacturing if we need to go back to textiles, which are low value-added, it can be through mid-caps. If we need to play with the entire consumer gamut, we get them through discretionary spends, such as automobiles, which are large-caps, or through domestic appliances, that are either mid- or small-caps or FMCGs, which are available across the entire spectrum.

So, look at the opportunity and if there are large and mid-caps, then they both should go together.

However, small and mid-sized companies carry the risks of being hit by any hike in borrowing costs. Does that make them less attractive?

What is relevant here is to note that the mid-caps are actually much better financed than the large companies. Not too many of them are actually over-leveraged. A lot of them are setting capacities; despite flat top-line they have not made losses.

Some of the very large companies are completely over-leveraged. So, on a structural basis, I think the smaller part of India is a little more resilient than its larger peers. Again, by definition, this does not mean that the smaller part is going to overtake the larger part. All the large companies that we know of are in commodities, engineering, banking and some part of technology.

Of the four, technology is the only one that is deleveraged. On the other hand, if you look at mid-caps, you've got contractors, which are working-capital intensive, so no significant leverage; which is the case in the engineering space as well. Then you have consumers, who are free cash-flow and then pharma companies, that do not need very high cash.

Q. Would the recent deregulation call for a re-rating of stocks of OMCs?

See there is an opportunity in the entire space and the opportunity is that this sector is the largest part of India's GDP and of all them fall in the services part of the GDP. Now, if you look at that and say that private sector does not realise that there is a huge opportunity in addressing this space I think it is very wrong. So I would not put these companies at a significant premium to the existing petrol stocks or oil marketing companies listed elsewhere in the world or in India. Sure they have got depreciated assets, to that extent it is fair, over and above that I am not too sure we will have a sustained re-rating over the next 12-15 months.

Q. One more topical issue is the introduction of base rate – would it impact borrowing costs of corporates?

You may see a hike in short term financing costs but let me also qualify that statement. There has not been a very large build-up of inventories in India. And working capital is probably the largest part of any company's balance sheet. Project finance is relatively a smaller part. So I would not say that the increase in cost would dramatically affect the P&L account of companies. In some cases, you might see an increase by 1-2 percentage points. That's the range in which a lot of companies may report an increase in borrowing costs. But at the same time it also increases the opportunity of creating a very vibrant bond market. It also means that Corporate India would look at alternative sources of funding which includes going overseas.

Source: http://www.thehindubusinessline.com/iw/2010/07/04/stories/2010070450950500.htm

Franklin Templeton MF Announces Change in key personnel

Franklin Templeton Mutual Fund has announced that Mr. Umesh Sharma, Vice President, has been appointed as the fund manager in Fixed Income team with effect from 05 July 2010.

Mr. Umesh Sharma, 33 years, B.com, C.A., C.S., C.F.A, has around 10 years of experience in investments and fund management. Accordingly, Templeton India Government securities Fund, Debt portfolios such as - Templeton monthly income plan, FT India pension Plan etc., fixed maturity plans such as FT fixed Tenure fund Series IV- XIV, FT capital protection fund and FT capital safety fund comes under Mr. Umesh Sharma with effective from 05 July 2010.

Source: http://www.apollosindhoori.cmlinks.com/MutualFund/MFSnapShot.aspx?opt=9&SecId=10&SubSecId=22,24