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Here’s a problem of plenty! What do you do when you find that you have fifty odd Mutual Fund schemes that you have invested in and are not able to keep track.

It must have been really tough to keep track of all these schemes on a weekly or monthly basis.

There was a time when people would throng to NFOs, confusing them with initial public offer (IPOs) of companies. They assumed that since the share which gets listed on IPO price mostly zoom to new highs in no time, the same would happen with mutual fund NFOs, too.

But mostly people have figured out that it wouldn’t happen in the case of mutual fund schemes. This is because the scheme is collecting money to invest and its net asset value (price of a mutual fund unit) will go up only after the appreciation of investments.

However, some of us are quick to clarify that they invest in NFOs mainly because of their interesting themes. For example, we finds global gold scheme or a commodity scheme very attractive. However, this is permitted only if a small percentage of the corpus is used for this purpose. Otherwise, it could lead to complications. 

Also, without realising we take a large exposure to the particular sector, say infrastructure sector.
Our expert was finding it difficult in deciding which schemes to get rid of because of the presence of many schemes with very little track record.

According to financial advisors, this is not a rare problem. To begin with, they say, an investor should try to invest in a diversified scheme with a performance record of at least five years. After that, they can invest a small portion of their corpus to sectors like commodity, infrastructure, pharma and so on. However, they should remember that a sector is a risky investment option as it may go t h ro u g h p h a s e s of high and low. Lastly, under no circumstances you should have more than six schemes in your portfolio.

Otherwise, monitoring them could be a problem.

The area under consideration today is availability of insurance along with mutual funds; and this is likely to remain in the spotlight because of huge attention focused on the area. An investor needs to distinguish the position with respect to other mutual funds that he has experienced. In this entire issue, the question of collection of insurance premium is important and a small distinction can make all the difference.

Regulation In the existing position, the mutual funds cannot collect insurance premium. This, according to many people, puts mutual funds at a disadvantage because unit linked insurance plans (ULIP) offer insurance as well as investment like mutual funds together.

There are schemes that still offer an insurance cover but comply with the main guideline. To understand this one has to look at the fine print of the entire issue.

Offering insurance Presently when a mutual fund offers insurance along with the investment in their specific schemes, the entire situation works in a different way Mutual funds that offer such insurance do not ask the investor to pay the premium.

This means that the funds are offering insurance but are not collecting premium and the later condition is the one that has to be complied with. Currently the funds enter into a tie up with the insurance companies to provide insurance and they pay the cost. This is not collected from the customer. This thus becomes affordable only for those funds that have a strong financial position and this is also the reason why such insurance is offered for specific types of investment.

Collecting premium This can be distinguished from the situation where a mutual fund house collects insurance premium from an individual. This is what has been demanded from several quarters to get the mutual funds back on a level playing field with other instruments in the market.

Once the fund houses start collecting premium, they are effectively giving both the benefits of insurance and investment at a single place and the character of the investment changes. Investors need to look at the fine print because it is this kind of small change that can lead to a different outcome. They need to understand what is happening and how they are getting affected in terms of the benefits received.

PREMIUM DIFFERENCE ¦ Insurance and investments are very popular offer ings in the market ¦ There is a demand for mutual funds to provide insur ance ¦ Currently mutual funds cannot col lect insurance pre mium ¦ So mutual funds offer free insurance to some investors ¦ This is different from a state where they offer insurance too and collect premium for the insurance

Interesting links that caught my attention in the personal finance space are as under:

1. Can we have a Short Fund in India
2. FMP v/s FD: The complete details
3. Glossary of Insurance terms
4. Overview of Indian Markets

As always, feedback is welcome.

Gold, the king of metals, has a stranglehold over our collective psyche which is perhaps unparalleled. It is rare to come across a housewife in India who does not know the current price of gold. Imagine how convenient it would be if you could buy gold (preferably everyday) from home, rather than having to visit a jeweller or a bank!

This write-up presents an efficient way to invest in gold through the stock market. You can invest in gold by buying units of gold exchange traded funds (ETFs).

Bereft of technicalities, gold ETFs are mutual fund schemes that invest in gold. Mutual funds are regulated by the Securities and Exchange Board of India (Sebi) and are not to be confused with the unregulated and unregistered chit funds.

As a retail investor you can peacefully invest in gold through gold ETFs with the full assurance that they are governed by a proven legal framework.

Gold ETFs buy standard gold (99.5% purity) and place it with custodian banks for safekeeping. Against this gold, units are issued, which are equivalent in value to about 1 gram of gold. These units are traded in the stock exchange like any other share.

The value of a unit of a gold ETF [net asset value (NAV)] is the current price of gold, less the scheme?s expenses (explained later on). This is computed daily and published in the web site of the ETF. Accordingly, when the price of gold rises, so does the value of units and vice-versa.
Units of gold ETFs are listed and traded on the National Stock Exchange and you have to buy (or sell) it through a stock broker. However, you do not have to visit the stock broker?s office for this. You can transact from your home through the internet. A computer, broadband connectivity and basic proficiency in using them are all that are necessary.

To begin with, you need to open a ?3-in-1? account. Many of the new private sector banks like ICICI Bank, HDFC Bank, Kotak Mahindra, Axis Bank etc offer ?3-in-1? accounts that can be operated through the internet. Public sector banks do not provide this facility.

The trading mechanism:
Firstly, to buy units of gold ETFs, you have to deposit the requisite amount in your savings bank account. The price of standard gold is now about Rs 12,000 per 10 grams. Say, if you want to buy one unit (i.e. about 1 gram of gold), you need to deposit about Rs 1,250 in your savings bank account.
Secondly, you have to log into your trading account and place your buy order. The trading account will also show the amount available in the savings bank account. For first time users, attending a demonstration of web trading conducted by the service provider is highly recommended.
While placing your order to buy units, you compare the 1) current price of gold (http:www.bombaybullion.com), 2) the value (NAV) of units and 3) the current price of the units in the National Stock Exchange (NSE).

The order book of NSE displays the price and quantity at which people are willing to buy sell units. It can be seen in your trading account as well as the NSE web site. Anybody in India can place orders through their broker and the best five orders, in terms of price and time, are displayed in the order book. When your buy order matches with some other sell order, you would be a proud owner of units of a gold ETF! The next day, your savings bank account will be debited the value of your purchase (+ the brokerage @ 0.75% + service tax @ 12.36%). On the second day, units will be electronically credited to your demat account.

To sell units of a gold ETF, you will do exactly the reverse. You will be able to sell units at approximately the price of gold on that day. Units will be debited from your demat account and the sale value will be credited to your savings bank account.

How to select the ETF:
ETFs recover a portion of their annual expenses from unit holders. The lower the expense charged, the better it is for you - remember, the value of units (NAV) is the current price of gold, less the scheme?s annual expenses. The estimate of expense that will be charged is given in the offer document of the scheme. The offer document gives the contractual the terms and conditions binding the ETF and is available in the web sites of the ETF and Sebi. Therefore, read it before investing (after all, it is your money!).

Liquidity of units, as can be seen from the number of units traded daily, the daily traded value and the size of the ETF scheme, could be another criterion. If you seek dividend income, you can choose the scheme offering a dividend option.

Advantages of Gold ETFs:
You can accumulate gold over a long period by buying say even one unit of a gold ETF (about 1 or ½ gram of gold) every month. At the end of say 10-15 years, you will have sizeable investment in units, which you can readily encash for future needs such as your daughter?s marriage!
You will not incur bank locker vault charges for buying holding units of gold ETFs. However, you will incur charges for your demat account. Unlike physical gold, there is no tension in storage or for safe keeping of units. On the other hand, you can never be 100% sure about the purity of gold, bought from your neighbourhood jeweller. Moreover, there is no loss by way of ?making charges? while selling units.

Income from units of gold ETFs is exempt from tax. Wealth tax (applicable for physical gold) and gift tax for values below Rs 50,000 are not applicable to units. However, depending on your holding period of units, capital gains tax is applicable.

Conclusion:
Despite any problems that you may experience initially due to lack of familiarity, over a period you will gain expertise and enjoy the benefits. Later on you may even pass me investment tips! Here is wishing you many ?golden? investment opportunities!

More posts on Gold here and here

In India, there is less focus on research and more on taking big, macro calls. There is a tendency todepend on market tips.

For this and more insights. Check out Mutual Funds Blog

India’s stock market regulator, the Securities and Exchange Board of India (Sebi), has proposed changes to mutual fund fees that would make it cheaper for investors to own them, depending on who they bought it through. Rachna Monga from Mint has this detailed reportIf Sebi has its way, investors could walk into the office of a mutual fund firm, buy any of its funds and walk out without paying any kind of entry fee (or entry load as companies term this).

As of now there is no incentive for investors to do so as the mutual fund firm charges an entry fee from all investors, irrespective of whether their purchase is direct or routed through a distributor. The entry fee ranges from 2-2.25% of the amount invested and is charged by equity funds. Mutual fund companies waive the charge only for large investors who invest more than Rs5 crore.

Read the full story

I need to go through a financial literacy programme and I am making that effort. So do you, dude.

I’ve hated finance. Maybe because I was not able to understand the jargons and the maths. But I guess ignoring personal finance worsens the situation. And the only way to get maximum out of your personal finance is to look it into its eye and grapple with it. You will come out stronger.

If you think it’s too early for you to bother, let me tell you that the first principle of investing is to start early and see the magic of compounding. College grads, fresh MBAs and guys under 25, the smart thing to do is to start now.

Do you think that you have mastered the basics but are not able to use it to your advantage, it’s time to put your thinking cap on and review your strategies. Learn from your failures. Often we tend to get stricken by some deadly internal enemies which Kartik Jhaveri details here.

Some of you guys would be rich enough not to be bothered about these mundane things. But have you ever given a thought that you are in a position to contribute to the nation’s economy by being more efficient about your finances. Wealth has the unique ability to create more wealth. Are you using that power?

Before I move on, let me articulate the background to this financial literacy programme that I am so smitten about. The following facts and questions keep on humming in my mind:

1. Equities give the best returns and you are putting your money in a professionally managed corporate organisation. Compare this with your insurance products which give much lesser returns and your money is invested in the Government which is inefficient with your money, to say the least.
2. However the total AUM under Mutual Funds is about Rs 3.5 lakh crores while LIC alone manages funds worth more than Rs 6 lakh crore. Yes it’s true that LIC has been there for over 50 years and has a huge distribution reach. But it has hardly tapped the huge insurance potential that India has.
3. Financial experts scoff at ULIP saying that it’s very expensive compared to Mutual Funds. But LIC collected more than Rs 25000 crore in 2006-07 and it’s total fund under ULIP is approx 40000 crore which is more than UTI’s AUM of approx 39000 crore (since existence)

All this and more points to widespread financial illiteracy at all levels. Be it college grads, software geeks, MBAs, Engineers, even CFA/Economists( they are experts at business finance or government finance) and even Financial advisors (they rarely have a holistic view), everyone needs to be literate about his personal finances.

And there are over 700 mutual funds, 5000 stocks, 300 insurance policies and hundreds of other financial products to choose from!!

Interested! And the literacy programme that I have in mind will have the following details:

• Financial planning basics.
• Financial markets.
• Financial products like Mutual Funds, Stocks.
• Research reports, Financial analysis, technical analysis.
• Insurance : Basics, Company review, product review.
• ETF : Basics, Company review, product review.
• Bonds : Basics, Company review, product review.
• Tax Planning : Basics, product review.
• Retirement Planning : Basics, product review.
• Children’s education. : Basics, Company review, product review.
• Calculators :Budgeting, Networth, Loan, Asset allocator, Risk analyser,etc.

Any suggestions. And if you are interested why don’t you subscribe to my RSS feed or by email. And tell your friends too. I’ll cover them one at a time. [ I need to learn them and then only I can share it with you ]

Btw, if your eyebrows are tensed up and you are thinking why I am making so much effort working on this financial literacy programme, I’ll tell you my secret. It’s for the website I dream of every day and night!! The site launches in August’07.

This post links to a treasure trove of information on personal finance. Actually, April was National Financial Literacy Month in the US and JDR (GetRichSlowly) has the ultimate collection of posts covering everything on Personal Finance.

Other than the 20 posts linking to the literacy drive, he also links to his popular articles and the websites which provide such information. Maybe it’s all dry information, but you can do well to bookmark that post and keep coming back to it. It’s dry, but important for you. Why? Look at the following questions and then decide.

How much do you know about money? Have you learned about the power of compounding? Do you know how the stock market works? What is a bond? Can you tell the difference between an Income Statement, a Balance Sheet, and a Cash Flow Statement? Do you even know why you would want to?

Do you know how to keep a budget? Do you understand how your taxes are used and why we pay them? Do you know what it takes to purchase a house? How much insurance do you need?

Head on to this treasure trove. Even though some posts are US specific, the concepts are useful and important to learn.

Open letter to SEBI by Personalfn.com, a financial planning initiative. It can be reached at info@personalfn.com. I have their permission to reproduce the article.

Dear Mr. Chairman:

The fact sheet of a mutual fund scheme that is released by its Asset Management Company (AMC) is a vital source of information for investors. However, in our view, the information provided by AMCs in these fact sheets is often inadequate and/or incoherent.

At Personalfn, we have always championed the cause of investors. To that end, we present a wish list for disclosure of information in mutual fund fact sheets.

1. Expense ratio The ratio represents the expenses charged by the AMC to the mutual fund for various purposes like investment fees, marketing and selling expenses including agents’ commission and transaction costs among others. These expenses eat into the returns clocked by the investor; expenses in fact have a very significant impact on long-term returns of the scheme. Given its importance, the expense ratio should be published in the fact sheet every month. At present only a handful of AMCs follow such a disclosure policy.

2. Portfolio turnover ratio The portfolio turnover ratio is a measure of how frequently stocks have been bought and sold by the fund manager. The same can offer investors an insight into the fund manager’s investment style. Of course, a higher ‘churn’ also has an implication on the expense ratio. There is a need to ensure that AMCs disclose portfolio turnover ratios in the monthly fact sheet. More importantly, the same needs to be computed in a standard manner. Among the AMCs that choose to reveal portfolio turnover ratios, some make use of a rolling 12-Mth period for the computation, while others consider the financial year as the starting point.

3. Average portfolio maturity It is common to find debt fund fact sheets mentioning the portfolio’s average maturity. As the name suggests, the figure denotes the time to maturity for all the debt instruments in the fund’s portfolio expressed as an average. Conversely, there are others which simply mention the duration (the unit for which is a time period i.e. days/months as well). However, duration (albeit vital) is a distinct measure from the average portfolio maturity. Duration is the tenure for which a portfolio of bonds or a bond must be held, for the investor to be immune to interest rate changes. There is a need to ensure that all debt funds disclose both their average maturities and durations in their fact sheets. Also a standard computation method must be followed so that investors can conduct a meaningful comparison between like schemes across fund houses.

4. Fund manager profile The fact sheets should unambiguously declare the fund manager responsible for every mutual fund scheme along with his profile. Similarly, the period for which he has been managing the given scheme should be mentioned as well. This will prove particularly relevant in situations wherein a successful fund manager, who was responsible for an impressive performance, has been replaced by another fund manager. Investors who are about to get invested in the scheme based on its track record, should be made aware that a new fund manager is now in charge.

5. Is the fund manager invested in the scheme? It is always comforting for consumers to know that the “cook eats his own cooking”. Similarly, a fund manager investing in a fund managed by him can be source of confidence for investors. The monthly fact sheet should have a disclosure in terms of whether or not the fund manager is invested in the scheme.

6. Unambiguous investment objectives Investment objectives like “to achieve log-term capital appreciation” are commonplace in the mutual funds segment. Such objectives are inconclusive and offer no aid to a prospective investor who is contemplating investing in the fund. An ideal investment objective must be unambiguous and comprehensive.
For example, the objective could read, “a growth-styled fund, the fund aims to achieve long-term capital appreciation by investing predominantly (at least 70% of assets) in stocks from the large cap segment. Long-term being defined as at least 5 years and companies with a market capitalisation of over Rs 50 bn (Rs 5,000 crores) at the time of investment qualifying as the large cap segment. The fund can also invest upto 30% of its assets in debt/money market instruments for defensive considerations”.

A rigidly defined investment objective ensures that the investor is decidedly aware of the investment proposition offered by the fund and can make an informed investment decision. The regulator should make this mandatory. Furthermore, the Board of Trustees can at preset time intervals (say semi-annually) offer their comments on the AMC’s adherence/success in achieving the stated investment objective.

7. Portfolio disclosure AMCs have increasingly stopped disclosing entire portfolios in their fact sheets (the printed versions, which are sent to investors). For example, in the case of equity funds most fact sheets simply reveal the top 10 stock holdings. So the fact sheet for an equity fund which holds say 50% of net assets in the top 10 stock holdings doesn’t reveal half the portfolio. Similarly there is also a case for more meaningful disclosure. Related sector holdings can be clubbed to reveal the true diversification levels in the fund’s portfolio. For example, holdings in related sectors like Auto and Auto Ancillaries can be clubbed and shown under a common heading i.e. Auto.

The regulator should make it mandatory for schemes to disclose their complete portfolios and also to follow a standardised classification of companies into sectors.

We believe that the inclusion of the aforementioned disclosure norms will go a long way in furthering the cause of investor empowerment.

ULIP is a hot selling insurance product these days. Unit Linked Insurance policy is an insurance policy where the funds are invested in the Capital market and the policyholder bears all the investment risks.

Insurance companies are falling over each other to bring out ULIPs in new and attractive packages, thanks to it being accepted across India in huge numbers. More than 80% of the new premium income of Insurance companies come from ULIPs today.

Advantages:

But shouldn’t this product be left to Mutual Funds who have been dealing with investments in the capital market with much more transparency and disclosures?

Well, the Insurance companies have only added the insurance angle and are charging separately for that too.

Let’s look at the charges for investing in a ULIP. Generally, a Mutual Fund charges 2.5% as entry load and 1-2% as Fund Management charges.

Companies also run schemes where they take high performing advisors to Singapore, Brazil et al.

And the investors will be taken to the cleaners!!

So look befor you leap for a ULIP!!