f o r    m a n a g i n g    t o m o r r o w
NOV. 19, 2006
 Cover Story
 BT Special
 Back of the Book

Rural-Urban Divide
The rural-urban divide continues despite a high growth rate. According to the 61st round of the National Sample Survey, apart from rural-urban wage differentials, gender differentials are very much a part of the present-day Indian economy. The urban regular wage earner earned Rs 194 a day, which was one-and-a-half times the rural average of Rs 134 a day in 2004-05. Interestingly, the wage gap is most pronounced among graduates. An analysis.

The Asian Agenda
Is a region-wide free-trade area a realistic goal? So far, 183 free trade agreements have either been signed or are being proposed or negotiated across Asia. The share of intra-regional trade has risen to about 55 per cent last year from 40 per cent in the early 1990s. Aside from trade in goods, there is a need to focus on free trade in services. Given the stalled WTO talks, it is vital for Asian countries to pursue further market opening and structural reforms.
More Net Specials
Business Today,  November 5, 2006
Mutual Funds You Can Still Buy Cheap
With stock markets at all-time highs, entering a mutual fund has become an expensive proposition. But here are five funds you can still buy cheaply.

One 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.

Mid-caps For Tomorrow
Stamping Money
Get a Piece of Gold Comapnies
A Part of Art
Tips for Mr Moneybags
Beyond Fixed Deposits

Historic 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 Market Services.

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 per unit.

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
NAV: 9.17

SCHEME: Kotak Lifestyle Fund
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
NAV: 10.03

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
NAV: 9.62

SCHEME: Reliance Equity Fund
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
NAV: 10.87

SCHEME: Prudential ICICI Fusion Fund
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 & Subex Systems
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
» Enter into schemes that have at least six months of performance to show
» Pick up at par or below par schemes of two or more fund houses instead of buying a single expensive scheme
» Check the cash balance if the market is at an unreasonably high level
» Compare the investment objective of the fund with the actual portfolio allocation
» Always buy in lots spread over a year or more simply, go for systematic investment plan in small lots
» Look at the fund house's past performance in equity or debt or diversified; Standard Chartered Mutual Fund, for example, is heavily into debt schemes
» Study 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 for you:

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"
R. Swaminathan
National Head(Mutual Fund), IDBI Capital Market Services
"Investors should look at the track record of the fund house and its investment approach"
Ved Prakash Chaturvedi
CEO, Tata Mutual Fund
"It's advisable to go for a fund that has gone through at least two stock market cycles"
Dhirendra Kumar
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 portfolio.

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 their potential.

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.

Mid-caps For Tomorrow

There 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

A 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.

Stamping Money

Stamp 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"
Madhukar Jhingan
Philatelist, New Delhi

In 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

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 2005*
» Stamp prices have grown by 9.5 per cent per annum over the past 50 years, according to Stanley Gibbons
» Among 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 upside down
*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," says Jhingan.

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."

Get 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

What 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," he adds.

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.

A 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

It 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 option.

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 Karan.

The 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.

ATips for Mr Moneybags
Where should high net worth individuals park their funds?

Realty funds: Building hopes

The 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.

Mutual Funds

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 segment.

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.

Beyond Fixed Deposits
High tax payers would be better off investing in fixed maturity plans than fixed deposits.

Kamath: FMPs are better than FDs

Like 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 per application.

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 per cent.

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 to FMPs.

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.


Lure of the FDs
Fixed deposit rates are hardening, but watch before you invest.

Faced 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 days."

There are some more points that depositors should consider before parking one's money. Here's a quick tip-sheet:

  • 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 penalty.
  • 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 profiles.
  • 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.

No More Listing Gains
The secondary market cheer isn't helping the IPO market.

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.




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