That was the Bank BeES returns
over the past year
typical equity investor in India is a seasonal investor, who tends
to rush into a bull market and gets carried away with the good
returns from diversified schemes," says Hemant Rustagi, CEO,
Wiseinvest Advisors. This is a perfect description. And when the
market gets volatile, like now, or when it slides, the retail
investor, trapped without an exit route, pulls out of equity altogether,
opting to go with small savings, debt instruments and other assured
return, low-risk avenues.
Is there no middle path? For the conservative
investor who would like to start flirting with equity, there are
index funds. However, this option has been largely out of favour
with Indian investors. And for obvious reasons. Returns generated
by diversified funds have consistently beaten those by index funds.
In the past year, diversified funds have given an average return
of 49 per cent compared to 37 per cent by index funds.
Do those numbers tell the whole story? What's
not immediately obvious is that at 37 per cent returns, index
funds make an excellent low-risk, low-cost, low-involvement equity
variant. "I advise conservative investors to start with index
funds, learn to live with the volatility and then move on to other
options," says Gaurav Mashruwallah, a certified financial
| INDEX IN INDIA
| In India, where
the market is not completely mature, diversified funds outperform
the index at any given point of time," says Nilesh Shah,
Chief Investment Officer, Prudential ICICI AMC. Why?
First, it's a developing economy, with small, emerging
companies that post swift, aggressive returns, higher than
the rest of the economy. This is reaped by active fund managers
while the index has to stick to large-cap companies. Points
out Sandesh Kirkire, CEO, Kotak Mutual Fund: "About
99 per cent of the market is technically mid-cap, while
the index is predominantly large-cap."
Then, the state-run oil refining and marketing companies,
which account for a large part of the index (by weightage)
have been under-performing, leading to lower growth of the
index. As the market matures, though, the index is likely
to become much harder to beat.
Investing as they do in the securities of
the target index in the same weightage, the chief attraction of
index funds is that they are passively managed, because of which
they are low-cost and have transparent portfolios. Says N. Sethuram,
CIO, SBI Mutual Fund: "Index funds are purely for investors
who don't want to take any market call; for investors who believe
in passive fund management."
Why does passive management make sense? Because,
as Mashruwallah says: "Active funds rise higher than the
index, but also fall harder." So, while in a bull market,
you might want to hitch your wagon to diversified funds, at the
same time, an index fund provides the necessary hedge.
That does not mean that index funds can form
the bulk of your investment portfolio or replace other equity
altogether. Ideally, experts advocate a 20 per cent exposure to
the index so that it complements your investment portfolio. To
make the most of index funds, mix and match your options, going
for index-plus funds as well, which are basically index funds
that have the freedom to invest a small percentage outside the
index. This means that for a modicum of extra risk, you can add
quite a kicker to the fund's performance. For instance, HDFC Index
Fund-Sensex Plus Plan returned 41 per cent in the past year compared
to 37 per cent from the HDFC Index Fund-Sensex Plan. Similarly,
LICMF's Index Fund-Sensex Advantage Plan posted 36 per cent against
31 per cent from LICMF's Index Fund-Sensex Plan.
The other option is exchange traded index
funds. Says Mashruwallah: "Exchange traded funds have lower
expense ratio than a regular index fund and perform better than
Take, for instance, the Banking Index Benchmark
Exchange Traded Scheme (Bank Bees). This is an open-ended index
fund listed on the NSE that tracks the CNX Bank Index. It is designed
to give you returns that closely mirror the returns from all the
stocks represented by the CNX Bank Index. The Bank BeES has given
a compounded annualised return of 54.6 per cent over the past
The full worth of index funds can be reaped
best in a mature market. Till then, however, don't ignore them;
rather try to use them to give your portfolio a leg up without
adding to the risk.
What Does Free Cover Really Mean?
Free Rs 25-lakh accident cover on your gold
card, says the ad. Do you know, though, that this only covers
air accidents? For rail or road accidents, the cover gets considerably
lower. And if you use your plastic sparingly, you might be in
trouble when it's time to claim. Most banks insist the card must
have been used a minimum number of times in the 90 days before
the accident for you to claim benefits. And if you have any payment
defaults or even a pending dispute on your bill, your claim will
not be honoured. Multiple cardholders, though, can claim benefits
from all their cards.
|Hot tips: Law (left) with KBC winner
Who Wants To Stay A Millionaire?
Winners are never abandoned. In an innovative
new personal finance show with a twist, CNBC-TV18 has roped in
winners of the popular Kaun Banega Crorepati show to its studio,
where a panel of financial experts tells them how to invest their
winnings. Called Kaun Rahega Crorepati, the show is hosted by
Vivek Law, the channel's Editor (Consumer Affairs). Mutual fund
managers, insurance experts, banking and personal loan officers
find out the winner's investment portfolio and life goals, and
then draw up a suitable financial plan. Says Law: "We tell them
about tax breaks and cheap loans." The idea: take personal finance
to the masses.
ULIPs: Yes, They Need Regulation
This will likely get the goat of most private
insurers, but the IRDA's (insurance regulator) apprehensions that
unit-linked insurance policies (ULIPs) are being MIS-sold are
probably correct. Insurers typically pitch ULIPs against mutual
funds, as investments with tax breaks and no lock-in period, plus
regular payouts and assured returns. What they don't tell you
is that payouts depend primarily on performance, as with any market-related
instrument, and that ULIP costs are much higher. Against the roughly
1.5 per cent recurring cost that comes with a mutual fund, ULIPs
come with about 4 per cent, charged to investors. Says Uma Shashikant,
a capital market consultant: "What component of your premium goes
towards investment and what towards fund reserves is not disclosed;
yet ULIPs are being sold as assured return products." ULIPs are
best-sellers primarily because of promised high returns, but companies
don't disclose that you pay a high price for this. Says Shashikant,
"The regulator should worry about disclosure, which is where ULIPs
The Right Call
Blazing growth is predicted for players in
the still nascent telecom market.
|The call of FDI: It's consolidation
decade of revolution has come full circle. Thanks to the hike
in foreign direct investment (FDI) limit to 74 per cent (from
49 per cent) and industrial delicensing, telecom is among the
most exciting sectors today. Low prices have seen cellphones reaching
taxi drivers and panwallahs and yet penetration is only 8-9 per
cent-an indication of the huge potential for growth. Says Gurunath
Mudlapur, MD, Atherstone Institute of Research: "Growth will
be immense for wireless telecom service providers."
With just one in 10 people owning a phone
and over 2.5 million users added each month, India is identified
as a key market by global business. The government predicts 250
million telephones in India by December 2007, up from 110 million,
of which over 65 million are mobile phones. Says Ravi Menon, Director
and Co-Head (Global Investment Banking), HSBC Securities: "About
53 per cent of India's population is less than 25; this audience's
first acquisition is often a mobile. In that context, the government's
target of 250 million phones looks very gettable."
Getting there will require an investment
to the tune of $20 billion (Rs 90,000 crore), which is why the
FDI hike becomes significant. Says Mudlapur: "The FDI relaxation
will help companies access much-needed funds for network expansion."
The FDI hike will also see increased M&A
action, according to a recent Citigroup report. Last quarter,
the Essar Group bought a controlling stake in BPL Communications
for over Rs 4,400 crore, and consolidation will continue. According
to Citigroup, GSM operators like Spice and Aircel, and CDMA ones
like Tata Teleservices remain potential targets. Companies like
Tata Teleservices (Maharashtra) and Reliance Infocomm seem ideal
candidates for attracting large investments, say experts.
According to Mudlapur, stocks of Tata Teleservices
(Maharashtra) and MTNL are good bets from an investment perspective.
"There is very little downside risk in these stocks,"
he says. Citigroup has maintained a buy on Bharti Tele-Ventures,
although indicating that the FDI limit hike will only have a neutral
impact in the long term, as it will also increase competition.
The Gold Rush
The housewife's investing secret: The gold
she bought five years ago has today returned 75 per cent.
don't have to wade through a maze of equity research reports or
try reading Y.V. Reddy's lips for interest rate movements. Just
talk to any Indian housewife for the hot investment tip. She'll
tell you she's been buying gold for centuries now. And guess what,
it makes perfect sense.
Who better to validate this than the market-savvy
private sector banks? The average Indian family has always bought
gold as ornaments or personal consumption items, but banks are
now aggressively selling the yellow metal as a commodity in the
shape of bars or coins in small units weighing 5 gm, 8 gm, 10
gm and 50 gm.
Although bankers refrain from making any
future projections on returns, gold has been a fairly solid time-tested
investment globally. If you take a five-year period, gold has
given returns of over 75 per cent, based on reigning prices at
around $467 (Rs 21,015) per ounce. Gold reached its 18-year high
of $480.25 (Rs 21,611.25) per ounce in October this year, while
in 1975 it traded at $175.80 (Rs 1,442 then). "As an investor,
you have to look at a long-term time horizon," says Chitra
Pandeya, Head (Liabilities), HDFC Bank.
While ICICI Bank launched its retail gold
sales in early 2003, HDFC Bank, IndusInd Bank and the public sector
Corporation Bank have joined the fray recently. While prices at
all banks are based on the daily international bullion market,
rates vary because of festival discounts or the cost of embossing
images on the gold coins (see table).
"Gold fits well in your portfolio diversification
strategy. You should park at least 25 per cent of your surplus
funds in gold," says Moses Harding, Executive Vice-President
at IndusInd Bank. For the risk-averse investor, equity is out
of bounds, although the high-risk, high-reward avenue topped the
returns list, with the Bombay Stock Exchange recording a 100 per
cent jump since 2001. In contrast, the safe haven of the debt
market is in a sad shape, given falling G-SEC (government securities)
prices. Bank deposits are lacklustre-interest rates are 5-6 per
cent per annum in the over one-year category, which doesn't even
cover inflation hovering at 4.5 per cent.
Gold has proved to be both a good hedge against
inflation and has given adequate returns, which is why it is gaining
ground as an investment tool. India is the largest consumer of
gold and now joins Japan, Vietnam and Turkey as the strongest
markets for gold coins and bars. In fact, globally, gold backed
exchange traded funds (ETFs), sold like mutual fund schemes, are
popular among retail investors and the Indian government too has
expressed interest in launching gold ETFs here.
For investors, that's good news because liquidity
is a major concern. Banks don't buy back coins or bars from customers,
and though jewellers are always ready to buy back gold, you lose
out on the price. Once the Reserve Bank of India relaxes the norms
that currently prohibit banks from buying gold from the public,
selling will get easier for investors. One word of caution for
investors though: wait a while. Gold is overheated, and with prices
ruling at an all-time high, this is not the right time to buy
MAXWELL INDUSTRIES; PRICE: Rs 125.85
Quick, who owns and markets innerwear brands like
VIP and Rivolta? Answer: Maxwell Industries. With a corporate
restructuring on the cards, this stock-trading at a P-E multiple
of 24-looks pretty good. Maxwell also owns Microtex India and
Lovable Lingerie, and the board has decided in principle to consolidate
all group businesses into Maxwell. This will double revenues.
Sales grew from Rs 158.55 crore in 2003-04 to Rs 180 crore in
2004-05, with net profits growing from Rs 0.55 crore to Rs 1.88
crore. The dismantling of quotas and a sharper export focus is
also expected to strengthen fundamentals. Analysts advise a buy-and-hold
approach for the long term.
Visa just released its performance figures, showing
an impressive 38 per cent and 45 per cent growth rate in credit
and debit cards, respectively, but it's still all uphill for card
companies. A Visa-NCAER report shows that while total transaction
volumes were about $23 billion (Rs 1,03,500 crore) in 2004, almost
80 per cent of this is from ATM cash withdrawals. The total spend
on a payment card is still less than 1 per cent of the country's
PCE (personal consumption expenditure). Clearly, the comfort level
with credit is still very low in India. Says V. Vaidyanathan,
Sr GM (Retail Banking), ICICI Bank: "The real challenge is to
get the customer to use the card in the first place. Most customers
are still uncomfortable with the 'borrowed' status."