of the fastest growing private sector mutual funds in the industry,
Tata Asset Management Company, does not want to launch any new
schemes, at least in the near future. Why? Its CEO, Ved Prakash
Chaturvedi, believes that the current market conditions demand
consolidation, not expansion. And guess what? Chaturvedi, who
manages Rs 12,500 crore in assets, is not the only fund manager
who thinks consolidation ought to be the flavour of the season.
What explains the mood of caution in the
Rs 3,00,000-crore mutual funds (mf) industry? Faced with heavy
redemptions by investors, fund houses went on a launch spree.
In 2005-06 alone, they rolled out more than 130 schemes, mopping
up a record Rs 50,000 crore from investors. And as the Bombay
Stock Exchange bellwether index, Sensex, continued on its dizzy
climb from the 3,000 levels back in 2003 to 12,600 levels in early
2006, investors were only too happy to stay invested or put more
money into MFs.
Things, however, look far more difficult
for both fund managers and investors. The Sensex is at a giddy
13,000, reflecting a price-to-earnings (PE) multiple of more than
21, and the rally from now on is going to be very selective, unlike
the relatively broad-based bull run so far. Besides, the redemption
pressures on MFs have eased a bit and they are now trying out
long neglected close-ended schemes, where there are no easy exits
for investors. Gold and overseas funds are other investment options
that have caught the fancy of the mf industry.
highs of stock markets are possibly good news for existing investors
in mutual funds, but what about those who either missed the stock
market boom or are trying to enter it via MFs at this stage? What
are their chances of raking in the sort of returns that investors
of vintage have racked up? Very slim. For one, with few fund houses
mulling new schemes, the choice for investors boils down to existing
schemes. But we already know what the problem is with such funds:
Their net asset values (NAVs) are high, meaning the small investor
has to shell out big money to enter into a scheme
Take, for instance, some of the best funds
in the business (see Star Performers...). HDFC Equity Growth,
which returned 58.52 per cent over the last year, has a net asset
value of Rs 138.29; Prudential ICICI Dynamic Plan, which fetched
identical returns, has an NAV of Rs 57.79. Similarly, some sector-specific
funds such as Franklin Infotech Fund and UTI Petro Fund are available
if you are willing to shell out more at Rs 25 per unit. "Price
is immaterial. It is the growth in the NAV that matters,"
advises R. Swaminathan, National Head (Mutual Fund), IDBI Capital
It's an advice worth a million dollars, but
not quite reflective of the typical mf investor psyche. Most of
them tend to, or at least want to, enter funds at Rs 10 or at
a discount. Few of the good existing schemes allow you to do that.
"In any existing scheme, what investors should be looking
at is the track record of the fund house, investment approach
and the brand strengths," argues Chaturvedi of Tata Mutual
Fund. Perhaps not surprisingly, Chaturvedi recommends investors
to look at Tata Pure Equity Fund (NAV Rs 57.27 per unit), which
has racked up a CAGR (compounded annual growth rate) of 35 per
cent over the last eight years. Yet another fund he suggests is
the Tata Infrastructure Fund, available at an NAV of Rs 21.76
| NFOs At A Discount
Here's a list of funds worth taking
a look at
| SCHEME: ABN
Amro Future Leader
LAUNCH: April 2006
SCHEME TYPE: Open-ended equity scheme
OBJECTIVE: Middle- and small-cap commpanies for long
term growth. Top holdings in Unitech, India Cements, Kesoram
& Gulf Oil
SCHEME: Kotak Lifestyle
LAUNCH: March 2006
SCHEME TYPE: Open-ended equity growth scheme
OBJECTIVE: Capitalise on the growing consumption
boom. Top holdings in Indian Hotels, ITC, Bharti Airtel,
ICICI Bank & Pantaloon
SCHEME: UTI Contra Fund
LAUNCH: Feb 2006
SCHEME TYPE: Open-ended equity oriented scheme
OBJECTIVE: Invest in stocks that are undervalued
because of emotional and irrational behavioural pattern
on Dalal Street. Top holdings in Infosys, Reliance Energy,
PNB & Bharti Airtel
SCHEME: Reliance Equity
LAUNCH: March 2006
SCHEME TYPE: Open-ended diversified equity scheme
OBJECTIVE: Invest in top 100 companies by market
capitalisation. Top holdings in RIL, Infosys, Reliance Communications,
ONGC and SBI
SCHEME: Prudential ICICI
LAUNCH: March 2006
SCHEME TYPE: Close-ended equity scheme
OBJECTIVE: Long term horizon for better returns.
Top holdings in J& K Bank, RIL, Mahindra Gesco &
NAV: 10.58 NAV in Rs per unit as On October 17, 2006
Source: AMFI, IDBI Capital Markets
"Study how the fund has performed in
a rising and a falling market. It's advisable to go for an existing
fund that has gone through at least two stock market cycles,"
says Dhirendra Kumar, CEO, Value Research India. Kumar rates Franklin
India Prima, and hdfc Equity Fund as star performers in the existing
fund pack. N. Sethuram, Chief Investment Officer, SBI Mutual Fund,
warns investors to be cautious. "One should study the investment
objective of the fund and the actual portfolio allocation before
plunging in," says Sethuram. "Any scheme that does not
stick to its investment objective should be avoided," Sethuram
cites SBI's Magnum Equity Fund, a large-cap fund, which never
changed course, despite many fund houses shifting the investment
objective from large cap to mid cap as well as small cap in 2003
and 2004. Today, the Magnum Equity Fund has returned over 16 per
cent since its inception. Sethuram also recommends SBI Magnum
Global, which is available at Rs 36.35 per unit.
| How To Invest In Existing Schemes
Some groundwork and preliminary
research can prove beneficial.
Always consult a financial advisor or approach
a bank or institutional distributor for advice
» Be clear
whether you want to invest in a pure equity, large-cap , small-cap
or a diversified scheme. It will focus your investment
into schemes that have at least six months of performance
up at par or below par schemes of two or more fund houses
instead of buying a single expensive scheme
the cash balance if the market is at an unreasonably high
the investment objective of the fund with the actual portfolio
buy in lots spread over a year or more simply, go for systematic
investment plan in small lots
at the fund house's past performance in equity or debt or
diversified; Standard Chartered Mutual Fund, for example,
is heavily into debt schemes
the portfolio composition to ensure there is no concentration
in a single stock or a few stocks
As it happens, every fund house has a fund
to suggest or a tip to offer, but we have short-listed a few theme-based
schemes that tapped the market in early 2006 and are now available
at a discount or Rs 10 per unit. We have only looked at funds
that have some track record to speak of, and have more than Rs
500 crore in corpus. As a rule, the investor should also keep
certain investment principles in mind before investing. Be clear
about the type of fund you want to invest in: equity, large-cap,
mid-cap or small-cap, or a diversified scheme. Make sure the fund
is not heavily invested in one stock and that the type of stocks
it has in its portfolio is in keeping with the stated fund objective.
At any rate, you should seek as much professional advice as possible
(see How to Invest in Existing Schemes).
Now, for the five funds that we have identified
Follow The Leader: ABN Amro's Future
Leader is yet to complete six months, but the fund has returned
handsomely ever since its launch. For instance, its three-month
absolute return is at 22.84 per cent, although the NAV performance
since inception is negative at 8.29 per cent. The objective of
the scheme is to generate long-term capital appreciation by investing
in both mid-cap and small-cap stocks of companies in high-growth
sectors. If you are a long-term investor, which is what every
retail equity investor should ideally be, then the Future Leader
fund is something you should be looking at.
Take A Lifestyle Bet: Kotak Life Style
Fund is betting on India's changing demographics, rising consumer
spending and lower cost of retail credit. While its top holdings
are in Indian Hotels, ITC and Bharti-Airtel, the fund also has
exposure in new growth stories like Shoppers' Stop, multiplex
chain operator PVR, retailer Pantaloon, logistics provider Gati,
Balaji Telefilms and Indiabulls Financial Services. If the fund
continues to hold on to these stocks, investors can look forward
to some decent gains over the long term.
|"Price is immaterial.
It is the growth in net asset value that matters"
National Head(Mutual Fund), IDBI Capital Market Services
look at the track record of the fund house and its investment
Ved Prakash Chaturvedi
CEO, Tata Mutual Fund
to go for a fund that has gone through at least two stock
CEO, Value Research India Ltd
Get Close and Invested: A close-ended
fund is for all those who wish to remain invested for a longer
duration in a scheme. Prudential ICICI's Fusion Fund is the only
close-ended diversified equity fund available at a throwaway price.
Since it's a close-ended fund, there is not going to be any redemption
pressure and the fund manager has sufficient time to build a long-term
portfolio. This five-year scheme adopts a bottom-up approach to
investing and has high exposure to the capital goods, construction,
and software sectors.
Lock In With Sensex Toppers: Reliance
Equity Fund, an open-ended diversified equity scheme, looks at
a universe of only 100 blue chip companies by market capitalisation,
with minimum 75 per cent allocation to equity. Today, the fund
is fully invested in equity and debt. In fact, in a six-month
period, Reliance Equity Fund has given better returns than the
key benchmark indices. By the way, this fund from the Anil Dhirubhai
Ambani group is also using the derivative route to hedge the equity
Go Contra: If you believe in buying
things in off season, then UTI Contra Fund may appeal to you.
It offers the best opportunity in the current market, where only
fundamentally strong stocks would reward the shareholders. True
to its name, the fund has little or no exposure to the so-called
overvalued sectors like auto and auto ancillaries, software, metals,
oil & gas, and steel. The fund is amassing fundamentally strong
stocks in relatively neglected sectors like banks, power generation,
pharmaceuticals and textiles. The fund's objective is to invest
in stocks that are fundamentally strong, but out of favour due
to short-term concerns or the market's inability to recognise
As you can see, despite high Sensex valuations,
there are still plenty of opportunities for the smart investor.
Which of the five funds mentioned here you decide to go with will,
of course, depend on your own risk appetite and biases. But it's
a no-brainer that you'll be better off buying a cheaper, but fundamentally
strong, fund than a high-priced scheme, where appreciation in
the NAV may not just be hard to come by, but the risks of it dropping
are high too. Even if you are a mutual fund investor, good investing
is all about buying long-term winners early on and cheaply.
are hundreds of mid-cap stocks that are trading way off their
peaks, making them good bets for the long term.
|Gateway Distriparks: The company's stock
is down 34 per cent from its peak
popular lament among stock investors these days is that with the
Sensex hovering near 13,000 points, there just aren't enough value
picks left in the market. Nothing, we say, could be farther from
the truth. First of all, what the Sensex reflects is just the
performance of 30 blue-chip stocks. That means there are hundreds
of other stocks-there are 4,700 companies listed on the Bombay
Stock Exchange (BSE)-that stand to gain from the robust economic
growth, but aren't getting the same kind of investor attention
possibly because they are relatively small. So, if you are kicking
yourself for missing the Sensex rally, don't. Between the Sensex
high of 12,994 on October 17, 2006, and the previous high of 12,671
on May 11, 2006, there were nearly 1,900 stocks trading up to
92 per cent below their highs. As you could have guessed, most
of these are mid-cap and small-cap stocks.
Should investors be looking at some of these
battered stocks? "Yes. Apart from sugar stocks, investors
can invest in mid-cap stocks pertaining to FMCG, hotels, tyres,
auto, construction & engineering, cables, pipes, paint and
paper sectors," says Alok Agarwal, Senior Analyst, Motilal
Oswal Securities. What's wrong with sugar? The government has
banned export of sugar and mills are staring at the possibility
of having to sell their output below their cost of production.
In other words, their bottom lines are going to get hit. "That
is the reason why most of the sugar stocks are trading up to 70
per cent lower than their previous highs," notes Agarwal.
(According to some reports, the government is considering lifting
the ban on sugar exports.)
Coming back to the other sectors, analysts
say that mid-caps are in for good times because global worries
on oil prices are easing and higher rates of interest mean lower
raw material cost as well as cheaper availability of money for
capex. In fact, some analysts say that mid-caps are the only category
that can deliver multiple returns, since they are theoretically
supposed to out-perform large caps in the long term. Why? Simply
because their growth potential should normally be higher than
those of large companies. But if you look at their performance
so far this year, you'll find that most of the mid-caps have under-performed
the Sensex. Stretch the period of examination and you get a different
result. For instance, between January 1, 2001, and October 20,
2006, the S&P CNX Nifty Index recorded a return of 193 per
cent, while the CNX Mid-cap Index jumped 313 per cent.
|Pyramid Retail: A good pack
Big Returns Ahead
Point: This may be a good time to enter mid-cap
and small cap stocks, given that several of them are trading below
their historical peaks. "Not every stock is good, but most
of them are still trading below their fair valuations," says
Amitabh Chakraborty, Head of Research (PCG), BRICS Securities.
"Unlike the last time round, the rally in the market is not
euphoric. Earlier, the valuations were unrealistic and, therefore,
when liquidity got skewed, they all fell." Chakraborty says
that if the business fundamentals of a company are good, it is
well managed, and its financials are healthy, your investment
would not only survive weak markets, but also fetch good returns.
His top picks among mid-caps are Venus Remedies, Micro Technologies,
Mangalam Cements and Lloyd Electric. He feels these stocks will
rise 45-50 per cent over the next 12 months. "India being
a growth story, one can't avoid mid-caps," says Paras Adenwala,
CIO (Equities), ING Vysya AMC. "Mid-caps have underperformed
the index, but fundamentals have improved, therefore, it's just
a matter of time before one sees a huge upswing in the mid-caps."
Adenwala might just be right. For the quarter
ended September 2006, 59 of the 200 companies in the CNX Mid-cap
Index recorded a 75 per cent jump in combined net profit to Rs
1,550.6 crore, compared to Rs 884 crore in the same period previous
year. In comparison, 21 of the 50 Nifty stocks recorded a 20.6
per cent rise in net profit to Rs 13,378 crore (Rs 11,092 crore).
"The big returns are yet to be seen among mid-caps,"
says Agarwal. "We may see a huge re-rating in the mid-caps
that have significant potential for an upswing ." Agarwal's
top picks among mid-caps have been Taj GVK Hotels, MRF, Apollo
Tyres, Man Industries, Welspun Gujarat and Ashapura Minechem.
He expects the return in these stocks to be anywhere between 35
and 140 per cent over the next 18 months. "Many mid-caps
could double in the next 18 months to two years. From here on
to fy2008, we expect a valuation re-rating in mid-caps by 60-100
per cent," says Agarwal.
Follow some simple steps while investing
in mid-cap stocks. For starters, buy stocks with good quality
management and good financial performance. Says Chakraborty: "Going
ahead, quality of management will hold the key for mid-cap stocks
to deliver." Two, ensure there is sufficient visibility on
future earnings growth. Three, buy with conviction and hold on
to the stocks irrespective of the stock market movements. Four,
sell on euphoria and buy in distressed. Says Adenwala: "Despite
good results, if mid-caps don't perform, it's time to accumulate
more of them since in the future, earnings will only drive the
momentum in the mid-caps."
Despite the positive outlook, Agarwal claims
it's difficult to convince investors to invest in mid-caps. He
says the general tendency among investors is to wait for mid-caps
to move before they invest. "Unlike blue-chip stocks, where
they have blind-faith, there is a lot of disbelief in the case
of mid-caps. Investors value mid-cap stocks on a trailing multiple
basis, while giving a forward multiple to blue-chip stocks,"
he says. The fear of losing money is the major reason why investors
are wary of mid-caps. But they shouldn't forget that yesteryears'
mid-caps are some of today's high performing large-cap stocks
like Infosys Technologies and Reliance Industries.
collecting, or philately, can be a lucrative pursuit, provided
you know how to go about it.
|"Stamps are alternative investments
and the great thing about philately as an investment is its
portability and the fact that stamps have a global market"
Philatelist, New Delhi
late 2001, Chennai-based Paresh Kumar (not his real name) bought
a stamp, dedicated to the Mahatma, from an amateur fellow collector
for Rs 400. About three months ago, Kumar sold the stamp for Rs
30,000 through the net to a non-resident Indian (NRI). Point:
buy stamps if you love them and want to make money, but the game
is not for amateurs. For the record, Kumar has been collecting
stamps for nearly two decades.
Philately, as the professional stamp collectors
like to call their art, can be a lucrative investment. "Stamps
are alternative investments and fall in the same category as antiques
and works of art like paintings," says New Delhi-based philatelist
Madhukar Jhingan. "The great thing about philately as an
investment is its portability and the fact that stamps have a
global market. After toothaches, the most common thing in the
world is stamp collecting," says Jhingan, who has been collecting
stamps for more than three decades and runs a website called stampsofindia.com.
Even though numbers are hard to come by for
India, it is estimated that globally stamp prices have shown a
9.5 per cent increase per annum over the past 50 years (see Did
You Know?). According to international stamps auction and investment
house Stanley Gibbons, there are 48 million collectors worldwide.
Gibbons also identifies India along with Brazil, Russia and China
among the fastest growing stamp collecting markets in the world.
Philatelists also see a lot of demand coming
from NRIs, who buy and sell through sites like eBay and Amazon.
"There is a lot of interest from NRIs, who are eager to have
a part of their heritage," notes Kolkata-based Kalyan Negal,
Secretary, Indian Philatelic Traders Association. "The net
has also been a boon for Indian philatelists. Earlier, we used
to sell stamps to wholesalers who in turn sold the stamps to customers
abroad. Now we can directly sell the stamps to collectors worldwide,"
says Negal. In fact, stamps are the third most popular category
on eBay. Indian stamps themselves are much sought after. A cursory
search for Indian stamps on eBay throws up stamps selling from
$1-2,000 (Rs 46-92,000).
| Did You Know?
The SG100 Stamp Price Index, which measures the
performance of the 100 most popular and traded items across
the world, has risen by 57.8 per cent in the seven-year period
ending December 2004, and a further 6.9 per cent by August
prices have grown by 9.5 per cent per annum over the past
50 years, according to Stanley Gibbons
the rarest stamps of the world is an Indian stamp-the Inverted
Head of Queen Victoria four-anna stamp issued in 1854. Incidentally,
the stamp was a misprint with Queen Victoria's head printed
*Source: Stanley Gibbons
Philatelists also contend that a good investor
must be smart enough to realise the trends and popular demand
cycles in the philately market. For example, Iraqi stamps were
not very popular among philatelists till the US invaded Iraq.
Now, Iraqi stamps are the rage in philately circles. So are stamps
of Mahatma Gandhi. Veteran philatelists draw parallels to the
stock market. "Higher priced stamps behave like high-priced
stocks. The more a stamp is sought after, the more valuable it
becomes. There might be a stamp of which only one copy is around,
but if nobody asks for it, it does not get a good price,"
But unlike the stock market, busts are far
and few in the philatelic market. "There are busts and booms
like any other market, but they are more spaced out. Over the
30 years, I have seen just two busts-one in 1969 and then one
in 1981," says stamp business veteran Jhingan.
Having said that, philately is not the brightest
of investments for novices in India. For one, the Indian market
is not organised like the West where there are stamp investment
funds, and indices (like the sg100 Stamp Price Index) that track
stamp prices. Also, there is baggage from the past-that is, people
invested in rare stamps for reasons other than love for stamps.
"There have been instances when people invested in rare stamps
to fool the taxman. The authorities found it easy to value gold,
stocks and other assets. But how do they judge the value of a
stamp?" says a philatelist who spoke on condition of anonymity.
Philately as a hobby is also yet to attain the critical mass required
to make it a full-fledged investment option as compared to China,
which has 18 million stamp collectors. Overall, philately can
pay but only if you are willing to be patient and wait over a
period of five to 10 years. Like Jhingan says, "In philately,
knowledge is the key. If you know what you are doing, philately
is a very good investment."
a Piece of Gold Companies
DSP Merrill is mulling a gold fund that'll
invest in gold miners.
|DSP's Nagnath: Waiting for SEBI's nod
to roll out the Rs 460-crore gold fund
could be better than investing in gold? Apparently, investing
in the gold companies directly. DSP Merrill Lynch plans to raise
$100 million, or Rs 460 crore, from the Indian market via an open-ended
scheme that will invest in Merrill Lynch's World Gold Fund. Launched
in 1994, the World Gold Fund invests predominantly in global conglomerates
engaged in mining gold and other precious metals. At last count
(August 2006), the Fund had a corpus of $5.19 billion (Rs 23,874
crore). Through the gold fund, DSP Merrill Lynch might pave the
way for high net worth individuals (HNWI) in India to invest in
the global gold market. "There could be a little bit of investment
in metals other than gold-that is, in companies that are into
mining operations," says S. Nagnath, DSP Merrill Lynch's
President & CIO. "While the 'mirror fund' is unique to
the Indian market, it is a first for DSP Merrill Lynch too,"
But there's a catch: DSP Merrill has applied
to SEBI (Securities & Exchange Board of India) for approval,
and the regulator seems wary of such funds. While SEBI allowed
mutual funds to launch gold exchange-traded funds (GETFs) late
last year, the finer operational details are still being worked
out. Therefore, there are some who believe that getting an approval
might not be easy. "Trading in foreign commodities is not
permitted by the Forward Markets Commission (FMC). While SEBI
has allowed mutual funds to invest in gold and gold-related instruments,
there is no mention about investing in a global fund," points
out H. P. Rajdev, a bullion analyst in Ahmedabad. Operational
rules like these have already delayed the launch of gold exchange-traded
funds in India, never mind that UTI Mutual Fund and Benchmark
ETF had announced plans of launching gold mutual fund last year.
So, it may be a while before India's super-rich get to own a piece
of a gold mining company.
Part of Art
If you want to invest in the booming art
market but don't have the expertise, consider art funds.
|Paintings for the vault: Karan (L) and
Vadehra of Crayon Capital
was Indian art's first million-dollar baby. At a Christie's auction
in London last September, Tyeb Mehta's Mahishasura went under
the hammer for $1.6 million (Rs 7 crore)-the first time ever that
an Indian painting breached the million-dollar mark. Since then,
more than half-a-dozen Indian paintings have done that. As the
world wakes up to Indian art, art is becoming a serious investment
And if you are the kind of investor who wants
to tap into the booming $300-400 million (Rs 1,380-1,840 crore)
Indian art market but does not have the expertise to buy paintings,
fret not. You could still own a part of a painting by investing
as little as Rs 10 lakh in an art fund. "For people who do
not know about art but want to invest, art funds are the obvious
choice," says Gaurav Karan, who along with Amit Vadehra plans
to launch the Crayon Capital Art Fund in November. Basically,
the art fund works like a mutual fund-it uses collective purchasing
power of its investors to invest in highly priced works of art.
Vadehra and Karan have roped in Ernst & Young as tax advisors,
PricewaterhouseCoopers as auditors and art critic Ella Datta as
advisor to the fund. "Even people who know about art often
buy paintings and hang them on a wall. Investing in a fund like
ours will help them strategise their art investments," claims
three-year, close-ended fund will open on November 10, and targets
to mop up Rs 40 crore, which will be used to create a diversified
portfolio made up of works of up to 50 artists. About 70 per cent
of the corpus will be invested in the works of leading artists
and the remaining 30 per cent in those of emerging artists. An
investor can be a part of the fund by chipping in with Rs 10 lakh.
"For people looking at alternative investments, the big advantage
of investing in an art fund is that unlike the stock market, which
is volatile, and the real estate market that crashes, the art
market does not have any great slumps. As an investment, art makes
a lot of sense," says Vadehra.
In an attempt to make the fund operations
transparent, the Crayon Capital Art Fund will bring out quarterly
reports that will project new acquisitions and sales, estimated
net asset value statements and information on current holdings,
including images and details of the works.
Other than Crayon Capital Art fund, funds
from Osian's Connoisseurs of Art, Edelweiss Securities' have hit
the market over the past year-and-a-half. With the Indian art
market growing at 35 per cent per annum, it's likely that more
such funds will be launched. "An investor should consider
factors like management fees, expenses by the fund manager, track
record and expertise of the promoters of the fund while differentiating
between the art funds on offer," says Karan. A Rs 10-lakh
entry ticket, of course, immediately limits the number of people
who will be able to invest in them.
for Mr Moneybags
Where should high net worth individuals park
|Realty funds: Building hopes
world over, high net worth individuals (HNWI) are classified as
those with financial and other assets of $1 million (Rs 4.6 crore)
excluding the value of their primary residence. Merrill Lynch
and Capgemini estimate that there are 70,000 such HNWIs in India.
This tribe of rich people are often chased, lured and bombarded
by banks and other financial services companies with all kinds
of investment options. It must be noted here that not all HNWIs
are financially savvy. There may be professionals like doctors,
lawyers, actors and others who may be very good at earning money,
but who may be all at sea when it comes to investing it.
Here, we outline a strategy on how the HNWI
community can get the best deal from the financial services industry.
Bank Fixed Deposits
Banks offer special interest rates and other
facilities like debit cards for large deposits; the exact sum
varies from Rs 15 lakh in some banks to Rs 1 crore or more in
others. B. Sambamurthy, Chairman, Corporation Bank, says: "HNWI
customers get 0.5-1 per cent higher interest rate compared to
other depositors." The trick: check out the rates at three
or four banks and choose the one that offers the best deal.
Liquid or debt funds are now hot as they offer
easy entry and exit options for investors. N. Sethuram, CIO, SBI
Mutual Fund, says: "These funds offer high liquidity and
returns if you have a horizon of a few days to a month."
The Prudential ICICI Sweep Plan has generated 1.74 per cent returns
in just 91 days and returned 6.72 per cent for a year. Ditto for
LIC Liquid Plan, Birla Sun Life Cash Manager and UTI Money Manager.
Check out the best-performing short-term debt plans before investing.
Life Insurance Policy
Single premium unit-linked life insurance
schemes do away with the hassles of having to pay regular premiums.
It is always advisable to opt for schemes with high equity components.
"HNWIs generally look for single premium plans that allow
them the option of switching to another scheme in case of any
reversal," says Pranav Mishra, Head (Products), ICICI Prudential
Life Insurance Company. LIC has two very good products in this
category-Jeevan Shree-I and Jeevan Pramukh. Also check out Bajaj
Allianz Life's products; it is the most aggressive player in this
Real Estate Funds
These are close-ended, long-term plans offering
15-16 per cent annualised returns, and are, arguably, the safest
long-term instruments in the market. The ticket sizes vary between
Rs 25 lakh and Rs 1 crore. Biggies like HDFC, ICICI Venture and
Kotak Reality Fund have already closed their funds, but there
are others, like Dawnay Day's real estate fund, in the pipeline.
Buying gold under a systematic investment
plan (SIP) is the easiest and the safest way for HNWIs to enter
the commodities markets. Kotak Commodity Services and Angel Commodities
encourage investors to make systematic investment in gold. Steer
clear of farm commodities as these tend to be highly volatile.
If you don't have time to run around, just
park your funds under the wealth management scheme run buy a large
bank, but insist that it offers you a diversified portfolio.
High tax payers would be better off investing
in fixed maturity plans than fixed deposits.
|Kamath: FMPs are better than FDs
thousands of other investors who prefer caution over returns,
Mumbai-based Ganesh Anchan (not his real name) was largely a fixed
deposit (FD) man. Whatever savings he managed, this financial
accountant in a construction company would promptly squirrel them
away in investments with assured returns. Anchan was only too
happy to do so until he met Amar Pandit, a financial planner.
Pandit showed Anchan how his high tax outgo of 30 per cent on
the income generated from investments were actually eating into
his returns. "All efforts to convince Anchan to start investing
in equities were in vain, since he had a low risk appetite,"
recalls Pandit. "So, we did the next best thing: We moved
his investments from FDs to fixed maturity plans (FMPs)."
What are FMPs? These are close-ended funds
with a fixed tenure, and invest in a portfolio of debt products,
whose maturity coincides with the maturity of the FMP. As the
securities are held until maturity, they are not affected by movements
in interest rates. Therefore, the actual returns are more or less
close to the indicative returns declared at the scheme's launch.
Most of the fmps are launched for tenures ranging from three months
to 18 months, thus also providing liquidity to investors. Says
Santosh Kamath, Senior Vice President & CIO (Fixed Income),
Franklin Templeton AMC: "If the fund is investing in Triple
A-rated paper on a post-tax basis, FMP is a better product than
a bank FD." Adds Sameer Kamdar, Head (Mutual Fund), Mata
Securities: "Purely from the point of view of tax and investment
planning, it makes no sense to invest in bank FDs, especially
for those tax payers with high income and high rates of income
tax (read: investors who come under 20-30 per cent tax bracket)."
Earlier, FMPs were targeted at corporates
and high net worth individuals (HNWI). However, of late, retail
investors have taken a fancy to FMPs, partly because many funds
have reduced the minimum investment limit to as low as Rs 500
| FMP FAQ
| What are fixed maturity plans?
These are close-ended funds with a fixed tenure that invest
in a portfolio of debt instruments.
Who should invest in them?
Typically, individuals in the high tax bracket of 20-30
Why are FMPs better than FDs?
Because FMPs attract a flat tax of 10 per cent as long-term
capital gains, while FD income gets clubbed with the overall
income and then taxed at the applicable rate.
What's the Catch?
None, except that there might be some hidden expenses
The FMP vs FD Arithmetic
How exactly does an FMP end up yielding higher
returns than an FD? Let's illustrate it with an example. If an
individual invests Rs 10,000 in an FD for one year at the prevailing
interest rate of 8 per cent, he would receive an income of Rs
800 over and above the principal amount of Rs 10,000. However,
if the person's annual income is in excess of Rs 1.5 lakh, he
will have to pay a tax of 22.5 per cent (it includes a 10 per
cent surcharge and an educational cess of 2 per cent) on the income
generated from FDs, or 33.7 per cent if his annual income is over
Rs 2.5 lakh. Therefore, depending on the investor's tax liability,
his effective return after tax range between Rs 530 and Rs 620
on the Rs 10,000 investment.
On the other hand, in the case of FMPs, the
investor only has to pay a flat 10 per cent as long-term capital
gains tax, irrespective of his income. Thus, in the example mentioned
earlier, the individual would earn Rs 720 on the Rs 10,000 invested
in an FMP. "FMP works wonderfully even when it is a short-term
investment," says Hemant Rustagi, CEO, Wiseinvest Advisors.
In the case of short-term tenure (less than one year), he advises
investors to opt for dividend option. Now, dividends are taxable,
but not in the hands of the investor. However, most FMP trusts
would pass on the tax to their investors. Even then, the high
tax-paying investor (20-30 per cent bracket) would be better off,
and save at least 6 per cent in tax.
But investors should not blindly invest in
FMPs, as some might have an annual recurring expense of 1 per
cent plus as the initial new fund offering (NFO) expense. Such
expenses make an FMP less attractive by lowering the effective
yield. Therefore, it's important to look at how much it will yield
after tax and administrative expenses.
Fixed deposit rates are hardening, but watch
before you invest.
with sluggish deposit growth and hardening of interest rates,
banks are now wooing depositors with attractive 8 per cent-plus
interest rates. The deposit period varies from a minimum 270 days
to 365 days. Does it make sense to lock money up for a year when
there is uncertainity over the direction of the interest rates?
"It's a pure risk-reward theory. If somebody is offering
more than the normal interest rates, one should ask his financial
advisor before plunging in," warns a PSU banker. N. Suresh
Pai, Executive Vice President, IndusInd Bank. says, "Interest
rates are not going to go southwards in the short term. But make
sure the bank has no premature withdrawal penalty, and lock your
funds for the minimum period possible-like 8 per cent for 270
There are some more points that depositors
should consider before parking one's money. Here's a quick tip-sheet:
No More Listing Gains
- Wait for the Reserve Bank of India to
announce its credit policy on October 31. If there is a rate
hike, wait for the banks to revise the interest rates upwards.
- If there is no change in interest rates,
lock your money in an FD of the shortest possible tenure instead
of one year or more. IndusInd Bank and YES Bank, for instance,
are offering 8 per cent interest for 270 days.
- Roll over deposit at the newer rate after
the maturity. If your FD has a longer maturity period, then
breaking the deposit mid way will attract a penalty. Check the
penalty for premature withdrawal. Some banks don't levy any
- Also inquire whether any freebies (free
debit card, draft facility etc.) are available with the deposit.
- Never park your money in a co-operative
bank or old private sector banks with weak financials even if
the interest rates are higher. Instead, go for a large PSU or
private sector bank offering the highest rate of interest.
- Interest on short-term deposits (less
than 5 years) is taxable. Keep that in mind.
- If you have a large deposit of over Rs
10 lakh or more to make, break your deposit into two or more
parts and lock it with different bank with different maturity
- Re-invest the interest component regularly
to build a new deposit kitty.
- If you need money regularly, check out
the quarterly interest payout option. Banks like Kotak Mahindra
offer quarterly interest payout option to depositors.
The secondary market cheer isn't helping the
For a diligent
and willing investor, the stock market can be a wonderful university.
On the face of it, there may be no method to its madness, but
scratch the surface and you will discover a pattern that's not
just logical but inexorable. Take the IPO market, for instance.
Between August and October 21, 15 stocks listed on the bourses.
But today, nearly half of them are trading below their offer price.
Before the Sensex hurled itself down to a low of 8,800 in June
this year, investors had been minting money on IPOs. That now
seems like a distant past. "The first-day listing gains are
over. Only long-term investors will make money from IPOs,"
says Gurunath Mudlapur of Atherstone Institute of Research.
What's the lesson here? If you are an IPO
investor, make sure you don't buy a stock that's fully priced.
"Any IPO that is aggressively priced is bound to take a hit
on listing," explains S. Ramesh, Executive Director (Investment
Banking), Kotak Mahindra Capital. The moral of the story is simple:
Everyone loves a discount, including IPO investors.