There is a story about making money in the stock market. It is said that if you ask 10 people how to make money from stocks, you will end up with 10,000 answers. The truth is, there are no simple answers. Equity investment is a process that requires continuous tracking of companies, industries and the economy. Despite this basic fact, though, there are literally tens of thousands of investors out there who buy stocks like they would buy lottery tickets: tic-tac-toe and hey, let's go with Company X. Of course, they lose their shirts, but seem quite willing to do the same over again.

Now, the thing is, if you do this kind of thing with a large company, say, an Infosys or a Reliance, the chances you will end with egg in the face are fairly low. The odds against a blue-blooded stock turning belly-up are quite high. However, the same shying-at-coconuts approach to stocks in the mid-cap space could be fatal. And this is the biggest and most telling difference between a large-cap and mid-cap stock. As Abhay Aima, Country Head (Equities and Private Banking Group), HDFC Bank, says: "Large-caps have historically been less risk-prone than mid-caps."

Of course, mid-cap stocks are always hugely more attractive, if for nothing else but their prices. These are stocks that show tremendous growth promise and are available at bargain prices. There is obviously the temptation to assume that all low-priced mid-cap stocks will grow by leaps and bounds, but nothing could be further from the truth. Before buying, you have to analyse if the stock has the potential to grow exponentially. If your analysis is correct, your buy could be a multi-bagger. This is why research is so important, much more so than for large-cap stocks. Remember, the amount of information available in the public domain about large-caps is far greater than that for mid-caps.

The other important criterion for investing in mid-caps is investment horizon. Since these are growth stories, it would be foolish to buy them for instant gains. Instead, buy them for the long term, which means a two to three year time horizon (see Caution: Bump Ahead).

What Are They? Defining mid-caps has always been tricky.

There are no industry standards yet on the right classification of mid-caps. one school classifies mid-cap stocks as those with market capitalisations between Rs 1,000 crore and Rs 3,500 crore. That, of course, will also depend on the stage the market is in. In a bull run, the range will obviously be stretched at both ends of the band. The BSE Mid-cap Index has stocks like Adlabs Films, Yes Bank and Videocon Industries. Adlabs Films' market cap is at about Rs 1,200 crore, Yes Bank's at about Rs 2,330 crore while Videocon Industries' is a huge Rs 9,250 crore. The NSE's classification includes companies with market cap between Rs 750 crore and Rs 7,500 crore, the band into which our five stocks fall.

Caution: Bump Ahead Mid-caps are inherently more risky than large-caps, so take the road with care.

ALWAYS » Look for value in the stock at the right price » Have a long-term outlook-never less than two to three years » Do your research, and keep updating it » Monitor stock performance at regular intervals NEVER » Panic if your stock's performance is affected by government policies » Get unnerved by technical factors; you are here for the long term » Get into mid-caps with the aim of making a quick buck and exiting » Pay too much for a mid-cap stock. You'll suffer worst in downturn

When you invest in a mid-cap today, you could be buying tomorrow's blue-chip. Videocon Industries, which still figures in BSE's mid-cap index, has a market capitalisation of a massive Rs 9,250 crore. It obviously did not start off that way. Interestingly, India has the highest proportion of mid-cap stocks that have eventually become large-caps.

The mid-cap story is not about size or stock price alone. "It is about the business and at what stage of business the company is in. Also, the company's business potential at the time of investing is important," says Aima. A pharmaceutical company depending totally on exports, for instance, and with a total order book of $10 million (Rs 47 crore), stands to gain enormously if it wins an order to the tune of $3 million (around Rs 14 crore). Needless to say, the loss of an order of the same value could be perilous to the company's very future. The impact on the company's earnings per share (EPS) and the resultant P-E (price-earnings) multiple could be huge. On the other hand, a loss or gain of the same order would mean little to a company whose turnover is about Rs 1,000 crore.

Investing Right

A volatile market frightens average investors off even large-cap stocks going cheap, but it positively panics them about mid-caps. The fact, of course, is that this is the best time to buy. Quite a few mid-caps have fallen sharply from their May highs, with some falling by as much as 50 per cent. "At these levels, they offer enormous value. For people with a two to three year time frame, there is merit and value in the mid-cap story," says Alok Vajpeyi, Vice-Chairman and Managing Director, Dawnay Day AV Financial Services.

So, even today, there are solid mid-caps to be had at good valuations, if you look carefully and do your homework. "The investor has to look for a company with good management, robust earnings and a good business," says Vajpeyi.

The Good Lookers Why business looks good in the long term for these mid-cap firms.

LIBERTY SHOES: New product range to cater to wider income group. Launching concept stores called Revolutions to address lifestyle market. Tie-up with Pantaloon for multi-brand footwear stores. PRITHVI INFOSOLUTIONS: In the past three years, revenues have grown at 42 per cent CAGR. Good distribution of clients, with no one client accounting for more than 5 per cent of revenues. NITCO TILES: Leading player in tiles industry, provides entire flooring solutions range unlike its peers. Policy changes have increased its marble imports. Strong growth in vitrified tiles business from increasing construction work. MERCATOR LINES: Among fastest-growing shipping companies. Aggressively adding capacities. Judicious tonnage division between time and spot charters counters market fluctuations and provides earnings stability. SADBHAV ENGINEERING: Potential in the business of road construction and mining. Includes work on the Mumbai-Nashik expressway and lignite mining from Gujarat Heavy Chemicals.

The Fund Story In the long run, mid-cap mutual funds have outperformed the Sensex.

Staying power: Gives long-term gains Don't get fooled by June. The massive selling by FIIs during that month dragged mid-cap funds down heavily. Ten funds recorded an average return of -8.7 per cent over the past three months compared to -6.2 per cent from the CNX Mid-cap Index. Leaving aside this temporary MIS-step, however, mid-cap funds have largely outstripped market averages. In fact, over two and three years, mid-cap funds have even overtaken the broader BSE Sensex and the S&P CNX Nifty. On an average, they recorded 54.3 per cent and 62 per cent returns over two and three years, respectively, while the BSE Sensex returned 51 per cent and 41 per cent, and Nifty 45.4 per cent and 37 per cent, respectively, over the same period. Says Tridib Pathak, CIO, DBS Cholamandalam AMC: "India being a growth story, mid-cap is the story of evolution. Today's mid-cap is the large-cap of tomorrow and this is the reason why, over a longer period of time, they have delivered better returns than the broader indices. However, investors have to be patient as the investment horizon is longer than that for large-cap stocks." Despite the recent poor run in mid-cap funds, fund managers say they should form part of your overall equity portfolio, with a three to five year horizon. With 14-15 per cent of the overall market cap accounted for by mid-cap stocks, fund managers recommend a minimum 15 per cent of total equity exposure in mid-cap funds.

The five stocks we have picked from the space (see Numbers Talk) show solid financials and good valuations. Sadbhav Engineering, for instance, in the booming infrastructure space, has shown steadily growing turnover and profits. It has a road construction order backlog worth roughly Rs 1,000 crore, according to a Karvy Stock Broking report.

Or take Liberty Shoes. Not only is the footwear industry on a growth path but, as Arun Kejriwal, Director of Mumbai-based KRIS Securities, says: "Liberty seems to have a good range, with prices that cater to every market segment." Post-vat (value added tax), the price differential between the organised and unorganised sectors can only fall, points out Kejriwal.

Often, it is the business model that proves the company is on the right track. V.K. Sharma, Director and Head of Research, Anagram Stock Broking, cites the case of Mercator Lines. "The shipping company has entered oil exploration by acquiring offshore rigs. It seems to be deploying them at good rates, which ensures that the risk is mitigated." According to him, returns from this stock will be good.

Steady growth is one sure sign of solidity. Prithvi Infosolutions' revenues have grown at a CAGR (compounded annual growth rate) of 84 per cent over the past seven years. Its other advantage is its presence across a healthy range of verticals, from banking and finance to logistics and manufacturing.

The prospects of the industry a company is in, is another factor that makes a difference. Take the case of Nitco Tiles. This company, says Kejriwal, will gain from the housing boom: "The demand for tiles can only increase." Nitco also imports a large part of its requirements from China at low duty levels, besides manufacturing them. "While margins on imported tiles are greater than locally manufactured tiles, the blended margins are a healthy 16-17 per cent," points out Kejriwal.

In a nutshell, identify niche businesses, identify leaders in their respective industries, and look sharply for healthy financials. If you can get all this and a healthy valuation, you are half-way home.

-additional reporting by Mahesh Nayak

Poor Specifics

Sector play is not always the winning gambit it's made out to be.

By Mahesh Nayak

Raj Menon is a regular equity player. He was one of the original investors who put in Rs 10,000 in Franklin Templeton's Infotech Fund launched in August 1998. Till July 2006, Menon's investment has grown close to Rs 84,000, a profit of 740 per cent. That sounds good.

Here's something, however, that takes the sheen out of the performance. If Menon had been a keen equity tracker and exited the it fund in 2000 when the rally was losing steam, he would have made nearly Rs 1.2 lakh in 18 months.

That pretty much sums up the sector funds story. They can give excellent returns, no doubt, but a lot depends on timing. For seasoned investors who can time their entries and exits perfectly, sector funds can give a terrific kick to portfolios. For the average investor, who usually just dumps his money in and watches it grow passively, sector play is not the unqualified winner it is made out to be.

Some Numbers

Does It Suit You? What's the profile of a sector fund investor?

Sector fund: Suits active investors Sector funds are not for everybody. for one, the risk is way too high. They are recommended only for experienced market players. As Ved Prakash Chaturvedi, Managing Director, Tata Mutual Fund, says: "A sector fund is only for active investors. For beginners and passive investors, it's a clear no-no. When actively managed, sector funds do wonders in generating investor wealth." Sector funds need active management because any sector-whether pharma or IT-remains attractive from an investment perspective only for a certain period. Investors should know when to enter and exit if they want to maximise returns. Most investors make the mistake of either entering the fund at the wrong time, or staying invested too long. However, good management of sector funds can produce impressive returns; thus, it works very well for investors who already have well-diversified portfolios. A small percentage of the portfolio can be put into sector funds to produce aggressive growth. Sector funds also make sense for investors who think there is growth potential in a particular sector but don't have the time or wherewithal to research individual stocks. However, the caveat of timing your entries and exits remains. Sector fund investors will usually accept a degree of risk in a portion of their portfolio while ensuring that it is otherwise well diversified. They are active stock trackers who are comfortable keeping a sharp eye on their investment.

In the past year, diversified equity funds have, on an average, outperformed sector funds. The former generated nearly 35 per cent returns compared to the latter's 27 per cent. While this sounds excellent compared to a bank FD or a savings deposit where interest rates are as low as 3.5 per cent, given the equal risk level of sector and diversified funds, the latter's superior performance stands out. Again, a lot depends on specific sectors. In the past year, sector funds generated returns between 0.3 per cent and 51.3 per cent. Of these, seven of the top 10 funds were invested in it, while two were FMCG and one was a power fund. Average one-year returns from banking sector funds, however, were as low as 2.8 per cent.

UTI Software was the biggest gainer among sector funds, recording one-year returns in excess of 50 per cent, followed by Magnum it (48 per cent) and Franklin Infotech (47 per cent). The impressive performance of these three came from software giant Infosys Technologies. All three funds are heavily invested (22 per cent, 20 per cent and 40 per cent of portfolios, respectively) in Infosys. In the past 12 months, Infosys has risen 56 per cent (Sensex: 48 per cent). If Infosys had given a less than stellar performance, it sector funds would have had a very different story to tell. This heavy dependence on a single stock bodes ill.

Also, just one sector fund, UTI Software, delivered returns above 50 per cent. In the same period, 11 diversified funds generated over 50 per cent returns, with Sundaram BNP Paribas Select Mid-cap posting returns of 61 per cent.

Diversified Results

"Pure thematic play is completely ruled out. The India story is all about growth, across sectors, and in this scenario diversified funds make more sense than sector funds," says Sandesh Kirkire, CEO, Kotak Mahindra AMC. "Also, investors don't know when to get out. They are exposed to negatives due to global factors or government regulations."

Sector funds bet purely on the perceived upside in a particular sector, much like how a contra fund manager hopes to generate high returns by trading in mispriced stocks. However, the difference is that the sector fund manager has just the one sector to find his picks, thus making it highly under-diversified. With a much smaller search universe, chances are high that the fund manager will be forced to invest in stocks that the market has already discounted heavily, thus impacting returns.

The secular bull run of the past three years has seen sector funds do well, but there is little guarantee that they will continue in this vein during a downturn. This, however, is something investors forget while buying sector funds. They use past performance as a guide to the sector's potential, which is dangerous.

Second, as the market has consolidated, the rise has been purely stock specific, and fund managers now pick stocks using the bottom-up approach. "Unlike last year, the market has become a stock-pickers' market. Select stocks will do well, not sectors," says Gagan Banga, Executive Director, Indiabulls Financial Services.

Third, sectors are active only for specific periods. You should know when to enter and exit to generate the best returns. A better idea, according to Ved Prakash Chaturvedi, Managing Director, Tata Mutual Fund, would be to invest in theme-based funds such as infrastructure or a rural India theme. "It diversifies the risk of being exposed to one sector," he points out.

In an otherwise well diversified portfolio, sector funds can make up 10-12 per cent of an investor's equity portfolio. Otherwise, pure vanilla diversified funds can give far higher returns than any sector fund, however much the concerned sector is in favour this season.

NEWS ROUND-UP

Realty Check
Realty funds are hot, but not yet for retail investors.

In march 2005, the real estate sector was opened up to foreign investment through the foreign direct investment route. This brought in several foreign funds, investing directly in land projects. "The last 15 months have seen a flood of money coming into real estate," says Ashwin Ramesh, Principal, Primary Real Estate Advisors.

Indian firms are not far behind, with Future Group's Kshitij Venture Capital Fund, Ajay Piramal Group's IndiaReit Fund, the Anand Rathi Realty Fund, and others setting up real estate funds over the last couple of years.

The total realty fund corpus in India is about Rs 6,000 crore. However, retail participation is as yet minimal, with 90 per cent of the investment being institutional. Of the remaining 10 per cent, a large chunk is accounted for by HNIS (high networth individuals).

Comparison with other funds like equity or debt is difficult because real estate funds are a different ball game. "Real estate is a completely different asset class. The risks are different and so is the return profile," says Kishore Gotety, Director (Investments), ICICI Ventures. In fact, it takes anywhere from one to three years for a fund to start investing, he points out.

Funds invest across the realty spectrum: From retail, commercial and residential properties to entertainment areas and special economic zones (SEZs).

As more funds come in, the industry is getting more organised. The growth potential is high, but as of now, fund management skills stay unproven. As Ajit Dayal, Director, Quantum Asset Management, says: "There is great promise and such funds are a fabulous idea, but we need to know if these people really understand the real estate business." Our advice as always: wait and watch.

-Ahona Ghosh

Dear Gold
So dear to our hearts and becoming so hard to buy.

Chances are gold will get even more astronomical in the next few months. All the signs are in place: inflation in the us market is set to climb, more hedge funds are likely to be pumped into the global gold market, and the marriage season in India is upon us. Many bullion traders anticipate prices to touch new highs, possibly even Rs 2,000 more than present rates (about Rs 9,500/10g).

"The current us situation and pressure from hedge funds may see gold prices hitting Rs 12,000/10g," says Pritviraj Kothari, a leading bullion trader in Mumbai. Since May, gold prices have been volatile, hitting a high of Rs 10,715/10g that month, then a low of Rs 8,335 in June and again climbing to Rs 10,120 in July.

While the top might be anything from Rs 10,200 to Rs 12,000, prices are unlikely to fall below the Rs 8,700/10g mark, says Mumbai-based bullion trader Suresh Hundia. The only events that could cause a slide are falling crude or metal prices, both of which seem unlikely. In fact, Hundia predicts prices crossing the Rs 10,000/10g mark within a week or so.

The price of the yellow metal in the international market had touched $730 or Rs 34,310 an ounce, a 26-year high, around mid-May this year because of huge investments by hedge funds. The effects were felt in the India market, and gold prices in Mumbai hit an all-time high of Rs 10,715/10g at the time. Experts put the level of volatility in gold prices in the April-July period at a high 15-16 per cent.

Interestingly, while global demand for gold jewellery fell 24 per cent during the six months between January and June 2006, investment demand rose over 40 per cent to touch Rs 2.83 crore during the same period, as per World Gold Council data. In the price-sensitive Indian market, the demand for jewellery during the same period declined drastically by 43 per cent.

-Amit Mukherjee

Property Issues
Some bargains to be had in real estate.

Dream house: Right time to home in on a good deal

Schools have just reopened and the rains are at their unpredictable best. Add to that the shraadha paksha period between July and August during which certain communities don't buy or invest in property and what do you get? A yearly phenomenon of stability in residential property prices, a fall in enquiries by as much as 20-25 per cent, and thus the best time to wrangle that better finish or polish from the builder.

But don't mistake this phase for a downturn, caution property consultants. Says Pranay Vakil, Chairman, Knight Frank, a property consultancy, "This is not a slowdown or the beginning of a downward trend. It is just that prices depend on volumes and since volumes are low during July-August, property prices tend to stabilise."

Pritam Chibukula, National Director (Office Leasing and Retail), Colliers International, too, calls for caution before making investment decisions based on the recent stability in prices. "There is a lot of supply coming in, so, if people are looking to buy property for investment or self-use, we would advise them to wait and watch."

July saw residential property prices stabilise in Delhi, Mumbai, Bangalore and Chennai. While there has been a slowdown in the number of deals in the last few weeks in Mumbai, in Delhi, demand shifted towards the South Delhi borough of Greater Kailash-I as a result of spiralling prices in the Lutyens zone, and in Chennai, the demand was affected due to increasing interest rates.

The trend, however, does not apply to commercial property. According to Colliers International, despite the volatility in the stock market, demand for office space continued to remain strong, thus driving up rentals by 7-10 per cent across the four metros. The wait and watch game continues, for now.

-Shivani Lath

SMARTBYTES

Cyber Bookings

As the battle among low-cost carriers intensifies, the airlines are trying to build viable business models around an array of allied services. In a recent move, low-cost carrier SpiceJet announced the launch of Spicejet Hotels, an online hotel booking facility.

SpiceJet has tied up with more than 100 hotels in 13 major cities across the country to launch a booking site that allows you to make web reservations even as you book your air tickets. "The site will provide instant confirmation with details of reservation and confirmation number," says Siddhanta Sharma, Chairman, SpiceJet.

The good news is that booking the rooms online will get you a discount. "Being online reduces operational costs, so rooms will be available at rates that are 15-30 per cent cheaper," says SpiceJet's Sharma. Set up in collaboration with Yatra Online, the hotels online will range from two-star to five-star, plus some as yet unspecified budget hotels.

-Amit Mukherjee

Reining In The Cable Guys

Good news: Consumer-friendly CAS rules being made

The Conditional Access System (CAS) confusion is yet to be sorted out, but Telecom Regulatory Authority of India (TRAI) has made some consumer-friendly recommendations. TRAI has asked the Ministry of Information and Broadcasting not to dilute the inter-operability condition among different direct-to-home operators. This means consumers can shift from one operator to another without changing set-top boxes. Cable operators have been asked to set up customer service centres and attend to complaints within eight hours. They have to respond to pay channel requests within five working days, and can't take channels off air without prior notice. These are certainly steps in the right direction.

-Kapil Bajaj

All In The Family
Are family floater policies really as smart as they are made out to be? Find out where they score and where they lose.

By Nitya Varadarajan

Punjabi, 42, Bangalore-based businessman with family POLICY: Cholamandalam MS Family Health Floater COVER: Rs 3 lakh PREMIUM: Rs 7,000 per annum "The floater cover makes the policy attractive. I don't have a general health policy, and I find this value for money"

If you are a suit-and-tie employee for a large corporate entity, you are probably acquainted with floater plans. For years, this cover was available only to corporate employees as part of the group policy. The premium was paid by the employee, and the cover extended to the spouse, two children, sometimes parents. These policies offered a host of benefits not found in Mediclaim, for instance, pre-existing illness cover and maternity benefits.

Now, finally, the floater concept comes to the rest of us as well. Three insurers have launched this policy, and more will doubtless follow suit.

Just what is a family floater cover? It means paying a single premium and buying a health policy that covers the entire family. Of course, there are conditions about age of members and so on, but more of that later. Basically, the floater allows all members to avail of one policy to the extent of the cover. So, for instance, if the wife is hospitalised and uses about one-third of the cover, others in the family can still use the remaining amount till the next renewal. However, if the entire cover is used up by one or two members, the others cannot avail of any cover that year.

Premiums for a floater health cover are not huge. Says Shivakumar Shankar, Head (Retail), Cholamandalam MS General Insurance (Chola MS): "We came up with a family floater to encourage more people to take health insurance. It provides for exigencies for children at an affordable rate." Generally, the slab rates for floater covers don't include any premium charges for children up to 18, which means they get free cover. The cover also comes with the advantage of not requiring any health check-ups till age 45.

Cost Factor

Compared to individual Mediclaim policies for each member of the family, the floater plan works out cheaper. Take a family of four, two parents between 30 and 35, and two children below 18. If they take the Chola floater cover (see Premium Calculator) for Rs 2 lakh, their premium outgo will be Rs 5,860 per annum. If, on the other hand, all four members buy a traditional Rs 2 lakh healthcare policy each, their total outgo will be Rs 10,272 per annum.

Says Sarthak Chandra, Head (Sales), Max Healthplan, "A family of six (eldest member 58), will pay Rs 22,404 per annum for a floater of Rs 5 lakh, but regular health plans of Rs 5 lakh per individual will work out to Rs 55,000 per annum."

While this sounds good, don't lose sight of the fact that the floater plan is Rs 2 lakh divided by, say, four members: that is, Rs 50,000 cover per person, and even one hospitalisation for appendicitis could cost more.

Where the floater plan makes sense is when the family thinks a particular member is healthy enough not to need a full cover. Or when a family has young children who can be covered for free under a floater.

Another compelling argument for floater policies is the advantage to senior citizens. If you buy an ICICI Lombard floater healthcare policy today, with renewals, the policy is available to you till the age of 70. On the other hand, renewing your regular Mediclaim policy after 60 has just been made very difficult, in many cases impossible, by both public and private insurers.

None of these policies, however, allow retirees above 60 to enter a new policy. ICICI Lombard and Max Healthcare have an upper age entry limit of 59 (with health check-ups mandatory above 45), while the age limit for Chola is 45. The former allow renewals up to age 70, while the latter allows renewals only up to age 65. However, premiums are fixed by the age of the oldest member under the cover. Including your retired father will thus up your outgo.

Ideally, while buying a floater plan, try and find the features (see What's Inside) that you and your family are likely to need the most. If your family includes a senior citizen, then take a plan that includes home nursing. The trick is to calculate the premium outgo before deciding between an ordinary versus floater plan.

Good Medicine
The mid-cap companies seem to be the antidote to pharma woes.

By Aman Malik

After a sluggish 2005-06, mid-size firms are seeing some real action

The last 12 months have been quite an annus miserabilis for the pharmaceutical industry. And coming after the impressive performance of 2004-05, the sluggish growth through 2005-06 was especially daunting. The new patent regime, some significant legal reverses, plus increasingly tough global regulations and competition took their toll on the industry. The year saw no big product launches either in India or in the US and orders for almost all companies were hard to come by. "The fact that not many outsourcing contracts were signed during 2005-06 really hit the pharma companies hard," says a Mumbai-based stock analyst.

But the present fiscal promises to be a different story altogether. "fy07 has already seen some action and the sector as a whole is poised for high growth," points out Shahina Mukadam of IDBI Capital Market. In June this year, Dr. Reddy's announced the us launch of its generic version of Merck & Co's Proscar drug to treat enlarged prostates; in July, it got the go-ahead to sell its version of the diabetes drug Glucophage in the us; reports indicate that Ranbaxy Laboratories is on the verge of acquiring Russian generic drugs maker Akrikhin for $100 million or Rs 470 crore. In short, the action has started again.

The real action though might be brewing in mid-sized pharma companies. Ahmedabad-based Dishman Pharmaceuticals took over Swiss company Cabbogen Amcis AG from Solutia Europe (SESA) for about Rs 350 crore in late August. Others like Cadila, Jubilant and Aurobindo are scouting for buying opportunities in the US and Europe. Mid-caps like Orchid Pharma, Shasun Chemicals and Aurobindo notched first quarter growth figures in the range of 15-20 per cent compared to marginal growth from large-cap companies and a decline for MNC. Analysts point out that these companies are seeking to diversify their product range and are bullish on the lucrative contract research and marketing services (CRAMS) and generic spaces.

"The midcap companies anticipate good earnings in the current fiscal, so they have all the more reason not to buckle under market forces, at least not in the medium to long term," says Mukadam. Also, post-crash, valuations of some of these companies do look more attractive.

SECTOR WATCH

Viable Choice
RNBC deposits offer higher rates and are not as risky as before.

Interesting times: For RNBCs

Deposit is quite the magic word these days, with reports indicating that Indians, eschewing gold because of its escalating price, have actually swelled the fixed deposits (FD) corpus instead. It's interesting to note that quite a bit of this is going into the coffers of the Residuary Non-banking Companies (RNBCs). That's about 8 per cent of public deposits with all non-banking finance companies (NBFCs) and 1.20 per cent of the aggregate deposits with all scheduled commercial banks. Of the four RNBCs in the country, the two largest, Peerless General Finance and Investment Company and Sahara India Financial Corporation, account for 99.98 per cent of all RNBC deposits.

The attraction is clear: higher interest rates of 8.5-8.75 per cent compared to 7.5-8.25 per cent offered by banks. Added to this are various freebies and add-ons. For instance, the FD from Peerless comes with free accidental death insurance and critical illness cover, while taking a Sahara FD gets you an easy and higher liquidity, 'Death Help' (for nominee) and 'Children Welfare Plan'.

An RNBC is basically a NBFC that is allowed to accept public deposits, but does not fall into the standard NBFC category of leasing, hire-purchase or loan company. Right now, banks are not too bothered about the higher rates or freebies. "There is a huge mismatch in the original balance sheet of these companies. In order to marginalise this gap, they mobilise deposits with higher rates. Any discerning depositor will come to recognised banks only," says a bank spokesman.

RNBCs, however, might not be as risky as once perceived to be, being fully regulated by RBI and with transparency enforced in advertising and promotion, as Naresh Pachisia, Certified Financial Planner and Director, Financial Planning Standard Board of India, points out. He adds: "Depositors, I believe, have more opportunity and more choice now. Having said that, I still think mutual funds and debt funds are better options, the marginally lower returns notwithstanding."

-Ritwik Mukherjee