Dear Investors

I have got very interesting information through mail and I am forwarding the same as I got.

Insurance has been the most ab(used) word, thanks to the mis-selling done by most of the agents / Bank RMs. When earlier ULIPs was offering 40-50% commission, they were busy pushing ULIPs and now when ULIPs are a lot more better thanks to the cleaning work done by the regulator, the insurance companies and agents have shunned ULIPs and moved to selling endowment plans (plans which combines insurance and savings) as can be seen in the below chart which currently offers anywhere between 20-40% first year commission.



We would like to offer following suggestions so that you are not trapped in the game plan of the insurance mis-sellers.

1. The only insurance you should buy is a Term Plan. All other products like Endowment plans, ULIPs, Pension plans, Highest NAV plans are very expensive policies.
2. Never take insurance policies for investment purpose. The returns from endowment policies has been very dismal ranging from 5-7%. Mutual Funds or other avenues are much better vehicles for investments as they are very cost friendly.
3. Whenever an insurance agent or a Bank RM is pushing for a particular policy, ask him if he himself has purchased the same policy. You will know the truth and he will never trouble you next time.
4. Don't trust your agent blindly.
5. Don't take the advertisements at the face value. Most of the time they are mis-leading.
6. Read the fine print carefully ( “Nothing in fine print is ever good news.” ~ Andy Rooney)
7. Incase if you have been sold wrong policies in the last 1-5 years, its better to cut your losses and exit the policy rather then nursing the pain for another 15-20 years.

Pls read the below story on How Insurance Mis-sellers are fooling gullible investors carried out in ET Wealth (23rd July edition)

Warm Regards
Arvind Trivedi
Certified Financial Planner
arvind.trivedi79@gmail.com

How to be prudent investor..?

There are many investors that have very healthy portfolios. This means that not only have they invested in strong, long term, wealth building mutual funds and other personal finance instruments, but they have also followed some simple but strong  investment guidelines. If you want successful  investor, follow some given basic guidelines:

Asset Allocation :

There are many type of thoughts regarding asset allocation. Most individuals that come to us for Financial Planning aren’t sure what their ideal asset allocation should be. The most common approach are for asset allocation is age thumb rule. According to this rule that your equity exposure should be 100 minus your age and put the remaining money into debt.
The amount that you need to have in equity doesn’t depend on your age, but rather on your goal time horizon and your personal risk appetite and tolerance. If you have 10 years left till your financial goal comes around, you can go up to 75% into equity, with 10% and 15% in debt and gold respectively. If you have less than 3 years to go till your goal arrives, try and avoid exposure to equity altogether and go completely into fixed income products. Considering the current interest rate scenario, your debt portfolio could give better yield.

Inflation Impact

We should not underestimate inflation impact. Inflation is going to greatly increase your cost of living with each passing year. You will have to pay more to maintain your current life style. So make your financial plan to achieve your financial goal with the inflation factor. If you ignore inflation impact, certainly you will have to reduce your current life style in your future.

Time Horizon of investment

Before investment you should fix the tenure of investment. After fixing the tenure you should invest your money in suitable product. In general rule, if your horizon more than 10 year then invest in equity may fetch decent return. If investment horizon around 5 year then debt instrument is suitable option for investment and if you need money within one year but don’t know exact time, in that case you can consider liquid fund option.

Keep thing simple and know your risk appetite

When you think about investment, keep things very simple. Complex products always do not fetch great return. You should also know about your risk appetite and risk tolerance. Every person have different risk appetite and tolerance. It is very important to know about your risk profile because it is your hard earned money. Try to be honest and sensible with your money.

In choosing investment option if you have some problem, you can approach for advice financial planner or market expert.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com

Upcoming Shriram Transport Finance Corporation NCD Issue

Shriram Transport Finance Corporation will be launching the first public issue of Non-Convertible Debentures (NCDs) this financial year from July 26th. The issue size is Rs. 600 crore including a green-shoe option of Rs. 300 crore. The company plans to use the proceeds for various financing activities including lending and investments, to repay existing loans, for capital expenditures and other working capital requirements. The issue closes on August 10, 2012.

The bonds offer an annual coupon rate of 10.25% and 10.50% for a period of 36 months and 60 months respectively. What the company has done to make these NCDs attractive for the individual investors is that they will be offered an additional 0.90% p.a. making it an annual coupon rate of 11.15% and 11.40% respectively. This means even if an individual investor buys it from the secondary markets they are going to get 11.15% or 11.40%.

Many of you must have remembered that the company came with a similar kind of issue last year also. Bonds issued last year are currently yielding 11.07% under the 60 months reserved individual option and 12.23% under the 36 months reserved individual option. So, going by these yields, 11.40% and 11.15% is actually attractive for the individual investors.

The investors will have the option to get the interest either paid annually or at the end of the tenure along with the principal. Under the cumulative interest option, retail investors will get Rs. 1,716.15 after 5 years and Rs. 1,373.19 after 3 years for every Rs. 1,000 invested. For all other investors, these amounts stand at Rs. 1,647.90 and Rs. 1,340.10 respectively.

The interest earned would be taxable but the company will not deduct any TDS on it as is the case with all of the listed NCDs. The issue keeps a minimum investment requirement of Rs. 10,000 (or 10 bonds of face value Rs. 1,000) which seems reasonable from the small retail investors’ point of view.

These bonds will offer reasonable liquidity to the investors as they are going to list on both the stock exchanges – NSE and BSE. Unlike last year, the retail investors will have the option to apply these bonds in physical form also. All the remaining investors will have to subscribe these bonds compulsorily in demat form only.

40% of the issue is reserved for the Reserved Individual Category i.e. for the individual investors investing up to Rs. 5 lakhs and another 40% of the issue is reserved for the Non-Reserved Individual Category i.e. for the individual investors investing above Rs. 5 lakhs. 10% of the issue is reserved for the institutional investors and the remaining 10% is for the non-institutional investors. NRIs and foreign nationals among others are not eligible to invest in this issue.

A slew of NCD issues had hit the markets last year when companies like Shriram Transport, Shriram City Union Finance, Muthoot Finance, Manappuram Finance, Religare Finvest, India Infoline Investment Services etc. came with approximately ten such issues. I must tell you, except Shriram Transport NCDs, all other NCDs listed at a discount and that too at quite a deep discount of 5-8% in some cases. Many of them have still not been able to recover from those losses. They must be yielding higher than 13% even now.

But Shriram group is a quite stable group and the issue has been rated ‘AA/Stable’ by CRISIL and ‘AA+’ by CARE suggesting that these bonds are reasonably safe to invest. Unlike last year, there are no put/call options available either to the investors or to the company.

Regards,

Arvind Trivedi

Certified Financial Planner
arvind.trivedi79@gmail.com

How Traffic Light Signal can help us understand Equity markets 

I have received a mail from my friend regarding equity market performance. I think it is very useful for all of us. So here I am giving you same mail content as I have received:

I am sure you would agree that the role of Traffic Light Signals in our day to day lives cannot be undermined (It's a different story that we try to jump signals when the traffic constable is not in our radar). The same traffic light approach was introduced around a decade back on the labels of food products (Green Dot means Vegetarian and Red Dot means Non-Vegetarian) and believe it or not, now it has become very easy for us to identify whether the product is suitable for us or not. I still remember how I sometimes ended up buying Chicken Maggi instead of Maggi Masala because of the similar packaging. Now a days even many medicines are mandated to carry out such distinct colour marks. This helps right from a 5-year old kid to 85-year old grandma in understanding the suitability of the product. What a simple yet powerful concept.

Recently, IDFC Mutual Fund has has come out with the usefulness of the same Traffic Light signals in understanding Equity Markets in India. Sounds crazy!!! When I first looked at the study, I was also amazed and realized how things can be made easy and simple enough to educate the retail investors considering that in our country only 10% of the people are financially literate. In this analysis, they have a done a research on the performance of Daily Sensex P/E (basis trailing 12 months earnings) from the period 2nd June 1995 to 30th June 2012 and this is considered as a fairly decent time frame from the point of view of the efficacy of this study. P/E stands for Price i.e a valuation ratio of a company's current share price compared to its per-share earnings. For example, if a company is currently trading at Rs 43 a share and earnings over the last 12 months were Rs 1.95 per share, the P/E ratio for the stock would be 22.05 (Rs 43 / Rs 1.95).




As you can see from the above chart, when the markets are in the Green Zone i.e PE Ratio < 16 (signal for buying), it has received only 8% of the net inflows (Total inflows less Total outflows). On the other hand when the market is in Red Zone i.e PE Ratio > 19 (signal for not buying) it received 65% of the Net inflows. Even a Class IV student knows that the right time to buy is when the markets are low and vice-versa. What an irony, but this is how world over investor behaves.

In this chart, it shows us when to invest and when not to invest based on the last 17 years of the SENSEX. If you would have invested when the signal was green, you would have made handsome money both in the short term (3 years or so) and in the long term (5 years+). Doesn't this look so easy and no brainer. Yet 90% of the people chose to do the opposite and then blame their stars.

Finally, this chart tells you that when you follow the discipline of investing using the Traffc Signal approach, chances are that you will make smart gains. When the markets have been below <16 PE ratio, the next 3-year average annualized returns have been 21%.

The whole idea of sharing these insights with you is to advise you that investing in Equity markets is all about common sense investing. Many a times we pay attention to so much of micro details and  the noise emanating from various media channels and in the process forget the basics of investing.

Pls note this is just a study based on the past data and as you would know past performance may or may not be sustained in future.

Kindly share this wonderful analysis with your friends / colleagues so that next time when we see the Equity market signal, we know what to do. Isn't this a great idea, Sir ji.........

Regards,

Arvind Trivedi

Certified Financial Planner
arvind.trivedi79@gmail.com

Do you know about Expense Ratio...?

All of us know that now mutual fund investment is totally free from entry load. It means if we invest Rs 10,000 in any mutual fund scheme, the entire Rs 10,000 amount invested in mutual fund’s scheme. For retail investor it is very encouraging thing as earlier there was heavy fee in the name of entry load. After removing entry load we often assume now there are not any fee except exit load if we exit from the scheme within one year. There are a price for every product and a charge for every service. You always pay for what you get, one way or another.
In mutual fund investment, we should not judge it only one parameter like entry fee. We should also check various parameters, such as its past performance with respect to its benchmark and category average, its asset allocation pattern and the fund manager's history and its expense ratio.

The Expense Ratio is also known as Annual Recurring Expenses. It includes the fund management fee, agent commission, registrar fees and the selling and promotion expenses. Other than these charges, a fee is also paid to the custodian, who buys and sells securities in large volumes. A fund’s expense ratio states how much you pay a fund in percentage terms to manage your money.

A mutual fund recovers such costs through its unit holders on a daily basis. The daily net asset values (NAVs) of a fund scheme are reported after deducting such expenses, though the expense ratio is disclosed only once every six months. The market regulator, Sebi, has set a ceiling for the expense ratio. For an equity mutual fund, it cannot be more than 2.5% of its average weekly net assets. For debt funds, the ceiling is 2.25%, while for index funds and fund of funds (FoFs), the expense ratios are capped at 1.5% and 0.75%, respectively.


Many investor do not pay much attention on expense ratio but it is important to know how much it impact to our portfolio return.For example, if you invest Rs 1,00,000 in a fund with an expense ratio of 2.0 per cent. This means that you pay the fund Rs 2000 to manage your money. The expense ratio affects the returns you get as well. If the fund generates returns of 10 per cent, what you will get is just 8.0 per cent after the 2.0 per cent per annum, Different funds have different expense ratios. However to keep things in check, the Securities & Exchange Board of India (SEBI) has stipulated an upper limit that a fund can charge. The limit stands at 2.50 per cent for equity funds and 2.25 per cent for debt funds.

In the below table we can see clearly the impact of expense ratio.

Expense Ratio	5  Year	10 Year	15 Year
0%	1,76234	3,10,585	5,47,357
0.5%	1,71,872	2,95,400	5,07,711
1.0%	1,67,597	2,80,887	4,70,759
1.5%	1,63,407	2,67,019	4,36,329
2.0%	1,59,302	2,53,770	4,04,261
2.5%	1,55,279	2,41,116	3,74,403

In the above table, where the value of Rs 1 lakh is growing at 12% a year. In 15 years, the fund with a 2.5% expense ratio has reduced the value of investments to 20%, compared with a fund that has a 1% expense ratio. If you compare this with an imaginary fund that has no expense ratio, the fund with a 2.5% recurring expense ratio will see an erosion in value of the investment to 32%. This clearly indicates that a high expense ratio can eat into your returns, so you must take into account this factor while investing in a mutual fund.


The impact of expense ratio is greater in case of debt funds, which earn 8-9% on an average. For an investor of an equity fund, paying 2% from an average return of 15-20% may not pinch, but it will hurt to pay 2% in case of an 8-9% average return for debt funds.


There are one more important thing that the expense ratio is charged even when the fund’s returns are negative. Overall, before you invest in a mutual fund, it is important factor that you check out the fund’s expense ratio. But remember that a low expense ratio doesn’t necessarily mean that the fund is good. A good fund is one that delivers good returns with minimal expenses.

Regards,

Arvind Trivedi

Certified Financial Planner
arvind.trivedi79@gmail.com

Mutual Fund Taxation

The awareness of mutual fund is increasing day by day. There are different types of mutual fund available in the market according to risk and time horizon. You can invest in any mutual fund according to your financial goal and risk profile. Often we are confused about tax liability on mutual fund return. However tax rule is subject to the matter of change in every year depends upon budget of Govt of India. We are here trying to find out tax liability of mutual fund return for financial year 2012-13.
We can divide mutual fund into 2 parts for taxation point of view. One is dividend paying mutual fund and the other is non dividend paying mutual fund. So first we talk about tax implication on dividend received by mutual fund unitholder.


Tax for Dividend paying Equity Mutual Fund:
The dividend received in hand of unitholder is completely tax free. It is also tax free to the mutual fund distribution house. It means the fund house also not liable to any tax on distribution income or dividend. So in equity mutual fund dividend is tax free for unitholder and fund house both.


Now we move on towards capital gain. If we make profit and hold unit more than 12 month we have to pay Long Term Capital Gain Tax and if we hold less than 12 month (make profit) we are liable to pay Short Term Capital gain Tax.


Capital Gain for Equity Mutual Fund:
In equity oriented schemes there are no long term capital gain tax at all for all categories investor.
The Short term capital gain is different for different category investor. For individual / HUF , domestic company and NRI it is (15%+ 3% cess)15.450%, If domestic company income more than 1 Crore (subject to marginal relief)  then it is ( 15% + 5% surcharge + 3%) 16.223.


DDT for Debt Mutual Fund:
However, dividend received in hand of unitholder is completely tax free in the debt mutual fund also. But this is taxable to the mutual fund distribution house. The fund house have to pay DDT (Dividend Distribution Tax) on distribution income. It means the investor will get dividend in their hands after DDT paid by the fund house.
For individual/ HUF and NRI, DDT are (12.5% + 5% Surcharge + 3% Cess) 13.519%. For domestic company it is (30% + 5% Surcharge + 3% Cess) 32.445%.


DDT for Money Market and Liquid Mutual Fund
There are also one more category in debt mutual fund. These schemes are also same as debt mutual fund. For the purpose of DDT it has been maintained separately here.  For individual/ HUF and NRI, DDT are (25% + 5%Surcharge + 3%Cess) 27.038%. For domestic company it is (30% + 5% Surcharge + 3% Cess) 32.445%.

Capital Gain for Debt Mutual Fund:
For all type of debt mutual fund, the unit holder can pay long term capital gain tax with indexation or without indexation whichever is lower. For individual / HUF, domestic company and NRI it is (10% + 3% Cess) 10.300% without indexation and (20% + 3%Cess) 20.600% with indexation.
If domestic company, income more than 1 Crore (subject to marginal relief) then long term capital gain without indexation (10% + 5% Surcharge + 3% Cess)10.815% and with indexation (20% + 5% Surcharge + 3% Cess) 21.630%.
The short term capital gain tax levied on individual / HUF, and NRI depend on their respective income tax slab. For example, if anyone in 30% income tax slab then short term capital gain tax would be (30% + 3% Cess) 30.900%. For domestic company it would be 30.900% and if domestic company income more than 1 Crore (subject to marginal relief) then it is (30% + 5%Surcharge + 3% Cess) 32.445%.

Note that short term/long term capital gain tax will be deducted at the time of redemption of units in case of NRI investors. Securities transaction tax (STT) will be deducted on equity funds at the time of redemption and switch to the other schemes. Mutual Fund would also pay securities transaction tax wherever applicable on the securities bought / sold

If you have any query about mutual fund taxation related please feel free to ask.

Regards,

Arvind Trivedi

Certified Financial Planner
arvind.trivedi79@gmail.com

Fine Balancing  Act of RBI

From last one week all economic analysts have been given their opinion about RBI interest rate. Economists polled by Reuters had forecast a rate cut, most likely of 25 basis points, while some government officials had also been calling for a rate cut. In my personal view, RBI has done fine balancing act and my sincere thanks to RBI governer for the appropriate decision at this crucial time. There was no need to rate cut at this moment when inflation no. is not comfortable.


After unchanged interest rate many analysts and economist will be certainly disappointed about growth. India's economy has been slowing sharply due to a combination of factors such as high borrowing costs, government inaction on key policies and sluggish global environment. 


The RBI kept its policy repo rate unchanged at 8 percent and left the cash reserve ratio for banks at 4.75 percent.The RBI obviously feels that inflation pressures remain too strong to ease policy further from here. The RBI has taken a very cautious step and has given a signal that it would like to wait for comfortable inflation figure.  Although it is very tough to contain both factor inflation and growth simultaneously. In my point of view, inflation is serious threat to us. First, inflation should be controlled because in last couple of  years inflation has been uncontrollable. Every person has been affected from this serious problem. 


Earlier in the day, CLSA economist Rajeev Mallik summed up the situation pretty well when he compared India's economy to a truck which was having problems. "The problem is in the gear box (government policies), adding more fuel in the tank (through interest rate cuts) is not going to solve the problem," Mallik told CNBC-TV18.


There are many reasons, cited by the RBI for not reducing interest rates:


* Estimates suggest that real effective bank lending interest rates, though positive, remain comparatively lower than the levels seen during the high growth phase of 2003-08. This suggests that factors other than interest rates are contributing more significantly to the growth slowdown.


* There are several factors responsible for the slowdown in activity, particularly in investment, with the role of interest rates being relatively small. Consequently, further reduction in the policy interest rate at this juncture, rather than supporting growth, could increase inflationary pressures.


* Should there be an event shock (in the Eurozone), central banks in advanced economies will likely do another round of quantitative easing. This will have an adverse impact on growth and inflation in emerging and developing economies (EDEs), particularly on oil importing countries such as India, through a possible rebound in commodity prices.


* Though international crude prices have fallen significantly from their levels in April 2012, the rupee depreciation has significantly offset its impact on wholesale prices.


* Moderation in wholesale price inflation has not transmitted to the retail level. Notwithstanding the moderation in core inflation, the persistence of overall inflation both at the wholesale and retail levels, in the face of significant growth slowdown, points to serious supply bottlenecks and sticky inflation expectations.

Regards,

Arvind Trivedi

Certified Financial Planner


(The above article based on money control news)