All About Portfolio Management Services (PMS)

Posted on June 2, 2010 by Ranjan

матраци

From the DNA
 
A few days back, I was consulted by a friend on two portfolio management services (PMS) products. One was what is termed a quant-based PMS, while the other had no definite asset allocation, though it claimed to be an equity PMS. As I studied the products, I realised a few home truths about the category:
l PMS is supposed to be meant for high net-worth individuals (HNIs). By definition, this is supposed to imply that from an asset allocation perspective, only that portion of investible surplus allocated to high-risk categories needs be invested in this. However, the minimum investment amount permitted by Sebi is Rs 5 lakh (which, according to many, is too low and will not restrict it to HNIs)
l PMS is meant to provide a lot more freedom to both investors as well as fund managers with wider objectives. This is in sharp contrast to more conservative approaches adopted by mutual-fund managers
l Sebi does not regulate PMS as tightly as mutual funds with regard to disclosures and other standard requirements
l Sebi also does not specify charges that can be levied by PMS providers. It expects customers to exercise their discretion in entering into agreements with service providers
Thus, it is quite apparent that the entire spirit of the PMS is one of freedom for both the investor and the portfolio manager and that it pre-supposes a high degree of financial knowledge on the part of the investor. It is not a product for the risk averse, nor is it for those who cannot strike a good bargain with the service providers. Knowledge of the market and access to information will be very useful for an investor to make the most of a PMS.
However, the PMS is not being pitched as a product to those who have the extra cash. It is now being sold as a product similar to a mutual fund.
The product seems to have become the toast of financial advisers and distributors. It isn't hard to see why — at a time when selling mutual fund schemes has become less lucrative, the lure of the higher upfront commissions on PMS products seems too tough to resist.
In August 2008, Sebi came out with PMS regulations with the intention that portfolio managers should manage PMS activities in a manner which does not partake the character of a mutual fund. Whether this is indeed the case, is a matter of debate.
So if you have decided that PMS is for you, find below a primer to help you make a good decision:
 
l Check the past performance of the fund manager against the stated benchmark. (Unfortunately, I could not find any performance details on websites of service providers). This should be available on request. Demand the same from your distributor
l The service is likely to have upfront fees along with annual management fees with or without a profit-sharing arrangement. Compare this and understand the net yield in various return scenarios
l Expenses in PMS are bound to be higher than those in mutual funds, as Sebi does not permit pooling and the portfolio churn rate is high. Compare this with expenses of equity mutual funds (1.75-2.5% pa for diversified funds and 0.75-1.5% pa for index funds)
l PMS is also likely to have an incidence of higher taxes since short term capital gains will apply for sale of shares by portfolio managers despite the investor staying invested. Hence there could also be a lot of paperwork involved
l A PMS can be either discretionary or non-discretionary in nature. Under non-discretionary PMS, the portfolio manager makes recommendations to the client and investment decisions are at the client's discretion while under the discretionary service, the portfolio manager has a greater degree of freedom and can take investment decisions without explicit approval from the client.
 
Choose what suits your knowledge and on how much you wish to control the portfolio
If you are ready to step into this world, please do so carefully and as they say in Catholic wedding services, "It is therefore, not to be entered into unadvisedly, but reverently, discreetly and in the fear of God".
 

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Investing Guidelines From The Experts

Posted on May 26, 2010 by Ranjan
Nilesh Shah, Deputy Managing Director, ICICI Prudential Asset Management Company, “Investors need to be prepared to burn their fingers in the market. This is the only method by which they can build a good sum in the longterm. Consider this, there are at least 50 plus mutual fund schemes which have given 20% plus return compounded for last 10 years. How many of us have invested in those schemes and generated 20% return on our portfolios? I can bet not even a single person in this group.” He added, “Somewhere investors have developed that apathy of generating better return, of pursuing right process. It is almost like when you go to a doctor, you do not take the guarantee that he will cure you perfectly and then only you will accept his treatment, but when you go to investment, whether it is experience of bank deposits or otherwise, you always want a guarantee that it will be successful.”
An important point retail investors forget and don’t feel the need to realise is: clarity on financial goals. The biggest problem that most investors face is that they do not really spend enough time on writing down what their financial goals are and at what point of time in their life cycle they need money for what kind of purposes. Said Amitabh Chaudhry, Managing Director and CEO at HDFC Standard Life Insurance, “Take for instance insurance, you know, there is a research on the fact that your insurance amount should be to the extent of ten to twelve times your annual income, and that is you know a kind of yardstick a lot of people use and I am sure if we ask ourselves that question, you will realise that maybe we are at best, three to four times on our annual income. Hence, we need to realise why, what and when of the invested money.”
Another point investors need to bear in mind while investing is clarity on returns on investment and its horizon. There are many investors who hardly know or begin with the right notion of achieving returns. Just as greed knows no limits, investors when market go up, need to keep this in mind and keep a sort of range beyond which they would exit even when market would be moving up. If the investor pursues this strategy in the long-term he would be better-off than a trader or a shortterm gainer. Advises Sudhir Kapadia, Tax Markets Leader at Ernst & Young, India “I think if an investor has targeted returns in mind, then the problem is solved. And in this it is important that retail investors should invest for longterm period in order to reap handsome returns on their investment. The reason being this our tax policy which favours long-term investment. Hence investors should prefer equities and mutual funds, which give handsome returns over a longer-term and also because investing in traditional investment avenues like fixed deposits offer negligible post-tax returns.”
Much of the slim participation of retail investors can be attributed to the traditional mindset of investors where one would take minimum risks and secure guaranteed decent returns. Hence, fixed deposits have attracted a huge amount of investment. It is however seen that equity, mutual funds have provided investors far better returns than this traditional investment avenue. The only impending block retail investor faces is willingness to make time to check their investment status and growth. Stressed Manasije Mishra, Managing Director and CEO at HSBC InvestDirect, “Those investors who invest in far better lucrative investments such as equities and mutual funds need to keep a tab on their portfolio. At least 15 to 20 minutes must be dedicated to do a check whether the money invested is generating commensurate returns or not.” He added that for those who cannot do this on a frequent basis should invest in mutual funds where fund manager’s investment acumen would help them get rid of hassle of constantly checking their investment progress.
Mutual funds offer diverse options to retail investors to reduce the risk of losing on the principal capital. Options such as balanced (a combination of debt and equity), pure equity and pure debt funds. Balanced funds suit those investors who intend to diversify well and don’t want to lose their hard earned money. Dhirendra Kumar, CEO, Value Research said, “I think broad diversification can be achieved with one single investment which is a nice balance fund. You get diversification at different levels. With one single balance fund, I can tell you that you get asset allocation in equity and debt. You get a diversified equity portfolio, you get a diversified bond portfolio and you get automatic re-balancing, you get full tax efficiencies, being over 65% invested in.” Besides balanced funds, there are exchange-traded funds, which mirror the benchmark index. Investors who intend to play on pure market movement must invest in these funds. Not always when the index moves, stocks of companies you have invested move and hence investing exchange traded would help to gain from exchange-traded funds. In fact, a combination of a balanced mutual fund and exchange-traded funds must play a crucial role in asset allocation strategy.
With such wide array of investment options it is observed that investors despite following targeted returns still remain discontented. This is because many investors forget the rule of the thumb: are you playing the role of an investor or a trader. It is observed that it is the investor who benefits in the long-term not the trader. A supreme example of this is celebrated investor Warren Buffet, who has advocated investor’s approach to markets. Hence, you would be better-off in the long-term if you play the role of an investor.

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Invest Your Retirement Corpus in MIPs & Senior Citizen Schemes

Posted on May 26, 2010 by Ranjan

Question: I am 61, retired and have paid all loans. I need Rs 40,000 as monthly expenses. I never invested in mutual funds but want to do so now. I have saved Rs 8 lakh. Please suggest some good funds I can invest in. My risk appetite is very low and I want regular returns. – Suvidha Your target seems unachievable. Even if you invest your entire savings in equity diversified funds (risky) that provide high returns against debt instruments, you will fall short of the target. Conservatively assuming equity yields 10-12 per cent yearly, you get only Rs 6700-8000 a month.

Answer: You may invest in monthly income plans (MIPs) – Reliance MIP, DBS Chola MIP – that give income by investing in debt schemes (80 per cent) and rest in equity. They are risky and the returns can be irregular. But, they can return more than debt. In the last 1-, 3-and 5-year, the category average gave 12.19, 8.43, and 9.18 per cent, respectively (as on April 30). Alternatively, you may invest in Senior Citizen Savings Scheme (SCSS) that give an assured annual return of 9 per cent.

Also, you could split your corpus between SCSS and MIP in a ratio of 50:50, or 60:40.

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Tricks of Selling An Endowment Insurance Policy

Posted on May 21, 2010 by Ranjan
From the DNA
 
In an endowment policy, the policyholder is insured for a certain amount, referred to as the sum assured. A portion of the premium goes towards this insurance cover. Another portion helps meet the administrative expenses of the insurer. And a third portion is invested by the insurance company on behalf of the policyholder. The return the insurance company makes on the invested portion is distributed to policyholders as an annual bonus. The annual bonus is declared as a proportion of the sum assured. So if sum assured is Rs 10 lakh and a bonus of Rs 5 per Rs 100 sum assured or 5% is declared, the insurer is effectively declaring a bonus of Rs 50,000 (5% of Rs 10 lakh). The bonuses rarely go beyond 5-6% primarily because the investments are made in relatively safe debt securities. Since the risk taken is low, the return generated is also low.
How agents mis-sell it?
Let us consider an endowment policy of 25 years, with a sum assured of Rs 10 lakh, taken by 30-year-old individual. The annual premium on such a policy will work out to around Rs 40,000. So if an insurance company declares a bonus of 5% on the sum assured, it would mean a bonus of Rs 50,000. Now, Rs 50,000 is greater than the annual premium of Rs 40,000. And if a company continues to pay a bonus of greater than Rs 40,000 every year, the bonus being paid will be greater than the annual premium. This feature of the endowment plan it what the agents turn into a marketing gimmick. A typical agent is likely to tell you, "Sir, the insurance company always declares a bonus of more than 4% (Rs 40,000) every year. So the bonus you get every year will be more than the annual premium you pay to the company. Isn't that marvellous?"
Here's what the agent does not tell you
The agent works for the insurance company and not you. Hence, he does not tell you the real thing. What you, as policyholder, do not know is that the bonus, unlike a dividend, is not paid out every year. The bonus accumulates and the policyholder gets it along with the sum assured at the maturity of the insurance policy. So let's extend the example above. Assuming the policy declares a bonus of 5% every year, over 25 years, you will get a bonus of Rs 50,000 every year. So at the end of 25 years, you will get Rs 12.5 lakh as bonus (Rs 50,000 x 25). You will also get the Rs 10 lakh sum assured as well, for a total of Rs 22.5 lakh (Rs 12.5 lakh + Rs 10 lakh).
So what is the problem?
The biggest problem with the bonus is that it does not compound, and is merely an accounting entry that accumulates. What this means is that in the above example, the bonus of Rs 50,000 would stay at Rs 50,000 till the 25th year, when the policy matures. This would be true of all bonuses declared during the term of the policy (if they are declared). So if you survive the policy period, the insurance company would give you Rs 22.5 lakh in total.
What are the returns you can expect?
A payout of Rs 22.5 lakh at the end of 25 years, would imply a return of 5.78% per year, which isn't great shakes by any stretch of imagination. Even if we were to assume an average bonus of 6% every year, the total amount paid at maturity would amount to Rs 25 lakh (Rs 10 lakh as sum assured + Rs 15 lakh as bonus) with a return of 6.48% per year.
Is there a better way to go about it?
The moral of the story is that the point about bonus paid out during a given year being greater than the premium paid, isn't really relevant. It is just a mis-selling trick.
A better way to go about would be to take a term insurance policy of Rs 10 lakh and invest the remain-ing money (i.e. the difference between the premium being paid in case of the endowment policy and the premium paid on the term policy) into the Public Provident Fund (PPF), which guarantees an interest of 8% per annum. A term insurance cover of Rs 10 lakh in this case will cost around Rs 3,200. If the remaining Rs 36,800 is invested in the PPF account earn-ing 8% every year, at the end of 25 years, a corpus of Rs 27 lakh will accumulate. This is Rs 4.5 lakh or 20.5% more than Rs 22.5 lakh.
Of course, the advantage of taking on term insurance is that by paying a little more money you can also increase the amount of life cover. By paying around Rs 4,600 per year, the policyholder can get a term insurance with a cover of Rs 15 lakh. This is Rs 1,400 more than the premium for a cover of Rs 10 lakh. An endowment insurance plan will require a premium of Rs 15,000-20,000 more over and above, the annual premium of Rs 40,000.
 

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IRDA Cracking The Whip

Posted on May 19, 2010 by Ranjan
There is a clear upside to the fight between regulators Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Author­ity (Irda) to regulate Unit Linked Insurance Plan (Ulip) —a life insur­ance product that invests money in stocks and debt instruments. What will prove to be a game-changer for the industry, a fort­night ago Irda tightened the screws on the norms for Ulips and pension plans, while increasing the risk cover they offer. A slew of measures have been introduced to make these products more investor-friendly.
The timing of the move is significant as it came when Irda is fighting Sebi to retain its independent jurisdiction over Ulips. For a period of six months now, the two regu­lators have been involved in a tussle over the control of Ulips. Sebi has termed Ulips as investment schemes like mutual funds, and thus wanted to control them. The spat surfaced in January this year, when Sebi is­sued a notice to 14 insurance companies seeking an explanation as to why Ulips were launched without its approval and why appropriate action should not be tak­en against them.
It went on to become a full-blown war when on April 9 2010, Sebi banned 14 in­surance companies from selling Lllips. The matter has since gone to the Supreme Court which would decide who will control Ulips after heating the case from July 2010. But that has not stopped Irda from making some major changes in the rules that gov­ern Ulips.
 
Look at the changes brought in by the regulator that will kick in from July 1. In the case of Ulips, investors now cannot surrender a policy before the completion of five years. In addition, partial withdrawal on all Ulips, except pension plans, can be made only after the fifth year, which was earlier permitted after three years.
Longer commitment
The industry has welcomed this move as it is expected to prove beneficial to investors due to the nature of the product. Ulips are front-loaded products, that is, a large por­tion of the premium goes into meeting var­ious charges initially, leaving very little to be invested. So they begin to give returns only after four to five years, faking tliis into ac­count, this move of a lock-in period of five years is expected be a pro-investor move by the regulator.
Apart from this, the move is expected to give Ulips a long-term character and to curb mis-selling. As the front-loaded struc­ture implies high commissions initially. customers were often encouraged by agents to churn their products either by surrendering or making partial with­drawals. In fact, with numerous complaints coming in, Irda had recently asked insur­ance companies to disclose the commission paid to the agents.
Retirement benefits
Another change the regulator has called for is diat now, a part of the top-up premi­um (additional premium) should be used for the purchase of risk cover. Earlier, any top-up invesnnents up to 25 per cent of the annual premium were not required to have any insurance component. This is also seen to be a good move as top-ups now will have a component of insurance which will en­hance the life cover of the investor which was not the case earlier.
 
As Life Insurance Council (a body rep­resenting life insurance compamies in In­dia) Secretary General SB Matlutr said, "This move will bring in discipline which will help people to save for their retire­ment." In addition to this, if an investor surrenders the policy before maturity, he will get only one-third of the surrender value as lumpsum payment; with the re­maining he would have to buy an annuity, or a pension product.
While the advantage of this is that it helps policyholders build a large corpus, what has to be taken into account is that withdrawal will not be allowed even in the case of an emergency or exringency. Another big change brought in by Irda is the mandator,' insurance cover for pen­sion plans. 
More expensive
The flip side to this is that now the pension plans will become costlier, as there is a compulsory mortality charge which will be deducted from the premium amount, reducing the investible money. (Mortality charges for a 50 year old person will be around Rs 400 for a cover of Rs 1 lakh.) This means there will be less money left for pension.
 
These changes seem to be brought in both to address the complaints against the product (Ulips), and as an attempt to si­lence Irda's ctitics. If more such issues are addressed, the tussle between Irda and Sebi may lead to a much-improved prod­uct.
As Mathur summarised it, "Irda has said that while savings cannot he de-linked from insurance, certain products where the investment component was higher like cer­tain pension products and top-up portion of Ulips, have been tine-tuned."

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Stocks Give The Best Returns

Posted on May 14, 2010 by Ranjan

The Indian stock markets have given the highest returns compared to any other asset class over the past decade, according to a new study.

According to a recent study, the Indian stock markets have given the highest returns compared to any other asset class over the past decade, provided you adopted a long term approach.

The research conducted, by value-based investment firm, FAMS analyzed long term investments in real estate, stock markets, commodities, Mutual Funds, art and ULIPS over the past decade.

According to the findings stock markets outperformed other assets classes on an average by 60%. The outperformance in certain cases was as high as 3000%. For instance an investment in Bank of India's FD (Fixed Deposit) would have given you a return of around 8% per year, while on the other hand investing in Bank of India's stock would have given you a return of around 3300% from 2001 to 2007. The stock rose from Rs. 12 to Rs. 410 in that period.

The study further added that the high returns and transparency due to electronic systems have attracted several new investors both local and international; over two lakh new Demat accounts are opened every month. There is a potential for this number to easily double or even triple in coming years.

Speaking about the research, Yogesh Chabria, investor and bestselling author said, "The irony is that even though stock markets as a long term asset class have given the highest returns, short term trading in futures and options has also caused the maximum losses. Our study showed that the maximum numbers of bankruptcies were caused during to the stock market crash in 2008-2009 amongst high risk speculative traders."

Indians continue to be underinvested and less than 3% of the Indian population directly invests in stocks. The main reasons for this is a lack of knowledge, awareness as well as unethical practices by a small minority of participants who encourage regular churning based on tips and rumours.

"The study proves that investing in the stock market can be profitable if you have knowledge, experience and above all patience on your side," Chabria added.

Ranjan Varma
http://ranjanvarma.com
http://personalfinance201.com
http://rupeemanager.com

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NPS Updates

Posted on May 10, 2010 by Ranjan
Pension Fund Regulatory & Development Authority (PFRDA), the pension fund regulatory body, is planning a massive marketing campaign to revive the New Pension System (NPS) for the unorganisedsector.TheCentre had recently announced the appointment of Yo gesh AgarwalasPFRDAchairman.
A committee has already finalised the details of the Rs 10 crore marketing campaign and it would be launched after the new chairman approves it, PFRDA sources said. A PFRDA team is also meeting private corporates to facilitate their pension funds to be channelised through the PFRDA selected pension fund managers.

While the NPS was supposed to tap massive 80% of the unorganised working population, who don't have the access to any kind of pensions,six fund managers-SBI Pension Funds,UTI Retirement Solutions,I CICI Prudential Pension Funds Management Company, Kotak Mahindra Pension Fund, IDFC Pension Fund Management Company, Reliance Capital Pension Fund—have mobilised just Rs 10 crore from 5,000 accountsinlastoneyear.

UTI Retirement Solutions CEO Balram Bhagat said, "With the response in the last one year, we can certainly say that the NPS has not taken off rightly .
There has been no investor awareness to promote the NPS whichisalsoonereasonthatthe scheme is way below the expectations."Headded,thereshould beaseparatecommittee formed to look into the failure of the scheme.Alsofinancialintermediaries should be roped in to sell NPS. The way the NPS system is works currently only Central Recordkeeping Agency (CRA) owned by National Securities Depository Ltd (NSDL) is benefitingasitreceivesRs500-600per accounttomaintainthem.

"The government and the pension regulator will have to spend generously to popularise and raise awareness about pension schemes,'' said LIC PensionFundsCEOHSadhak.

It was expected that low fund management charges,Rs 9 for Rs 10 lakh each, would make more money available for investments and will be an incentive for the NPS investors,butithasnotproduced thedesiredeffects.

Rather the 21 life insurers, which have pension products on both unit linked and traditional platforms and were expecting competition from new pension fundmanagers,havebeenableto mobilise substantial amount of premium by selling these products in 2009-10. The state-owned Life Insurance Corporation (LIC) has mopped up around Rs 7,500 crore from one of its pension product Market Plus.

 
Even the three pension fund managers—SBI Pension Funds Private ,UTI Retirement Solutions, LIC Pension Fund—which are currently managing the Rs 4000 crore of pension funds of government of India are finding tough to manage their expenses as the fund management charges are low. “Going by the existing system of operations,it would be long way to reach profitability in this way where our current income is much less thantheexpenses,”saidSadhak.
Fund managers feel that marketing, portability (investors can change fund manager at no cost), a wide choice available in selecting where the money is invested and transparency should help in the product finding favour in due course.According to a Ficci-KPMG study, the reform of the pension system in India wouldhelpincreasethemarket size to Rs 4,06,400 crore by 2025 from Rs 56,100 crore estimated in 2002. Tthe overall economic gains would be substantial as the mobilisation of assets would lead to effective investments in the stock, bond and mortgage markets,t hereby supplying capital to finance corporate growth and government,saidthereport.

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