It's biz as usual for MFs despite load ban

MUMBAI: Indian fund houses, reeling under the impact of a ban on entry load or an upfront fee that they collected from investors to pay distributors, may have something to cheer about, with a majority of these intermediaries saying that they expect the ban to either have a positive or no impact on the future of the industry. A survey of 622 distributors in Mumbai and Delhi by Cafemutual, a Mumbai-based mutual fund industry tracker, shows that 57% of the participants expect the ban on entry load to have positive or no impact on the future of the mutual fund industry.

The , imposed by capital market regulator the Securities and Exchange Board of India (Sebi) and that came into force in August 2009 to prevent distributors from pushing clients to switch across products in shorter durations for fees, has prompted 31% of the IFAs or distributors surveyed to ‘try charging’ fees to their clients, Cafemutual said. Significantly, 79% of those who tried were successful, the survey said.

Prior to this ban, distributors of mutual fund products got their upfront fee of 2.25% money they brought in from the AMCs, which deducted the commission from the investments.. Sebi felt the routing of commissions through AMCs resulted in distributors pitching for products that were not in the best interests of investors.

The regulator said that investors needed to pay distributors directly for selling a product rather than obtain the fee through AMCs. According to wealth managers, most investors, who put money in mutual funds, refuse to pay fees for advice, leading to many distributors shifting to selling other products, including insurance. But even distributors are getting more comfortable with the role of advisors, they said.

“There are fewer distributors and IFAs which are selling mutual funds after the ban on entry loads, but some, including us, are focusing on the advisory business. As long as the investor is ready to pay us for our advice, we will give advice and this can be a product that suits his needs...not necessarily a mutual fund or insurance product,” said Om Ahuja, head-wealth management, Emkay Global Financial Services .

The Cafemutual survey said that according to 63% of the IFAs, Ulip sales rose due to the entry load ban, while 15% said sales of structured products to the wealthy went up.

29 Sep, 2010, 03.38AM IST,ET Bureau

SBI’s FD floating rate plan may hurt elders

NEW DELHI: Senior citizens, looking for assured returns, may be left in the lurch with the country’s largest lender, the State Bank of India , announcing a new floating interest rate regime for fixed deposits.

Going by the new ‘floating’ rate regime, parking money in bank fixed deposits may not be a simple affair any more, as the return on the fixed deposits would be linked to the base rate. Going by the volatile interest rate scenario in India, the rate is expected to change quarterly or half yearly.

“Retired people do not need uncertainty but certainty. It doesn’t matter if returns are a little lesser, all they require is assured returns,” said SB Mathur, former chairman of public life insurer Life Insurance Corporation. In case of floating products, people would find it difficult to plan their future income, he added.

The attractiveness of FDs among senior citizens was risk-free assured returns and easy liquidity. The new regime would inject an element of risk as returns would become a function of the base rate, which itself would change according to RBI’s policy rates, macro-economic conditions and banks’ other statutory fund costs that could fluctuate nearly every quarter.

The base rate, introduced from July 1, serves as the minimum floor rate, below which banks cannot fix interest rates from any class of their borrowers. In order to mitigate the risk, SBI has now launched base rate fixed deposit schemes, which is expected to gather momentum in the coming days, feel bankers.

“As long as these products are optional, it’s fine. Consumers should have the maturity to choose what they want,” said Allen Pereira, CMD of Bank of Maharashtra .

“People will have to learn to live on market-driven returns unlike the current scenario of assured returns. Since the base rate is linked to inflation, it’s a double-edged sword. Income may go up if prices firm up. But there are chances that they may go down if prices start easing,” said Union Bank CMD MV Nair.

In almost all the developed markets, returns on FDs are linked to the market. In India, it is currently an optional proposition. However, if this product becomes popular, it is quite possible that plans with assured returns may be driven out, said a senior banker on condition of anonymity. “Fixed-rate returns may become history over the next few years as banks are likely to focus more on market-linked deposit rates to reduce the risk of asset-liability mismatch,” he said.

Currently, total deposit in banks in the domestic market stands at Rs 46 lakh crore, of which 65-70% comprises fixed deposits, as per industry estimates.

20 Aug, 2010, 05.10AM IST, Paramita Chatterjee,ET Bureau

How is a fixed maturity plan different from a fixed deposit?

Fixed maturity plans, or FMPs, are schemes floated by mutual funds and they work almost like a bank (FD). They come with different maturities like three months, six months, one and two years and rarely for three years.

FMPs invest in instruments of matching maturity and this gives investors a rough idea about the likely returns you can hope to pocket at the time of subscription. Since the portfolio is locked, investors are also shielded against interest-rate risks.

Also, FMPs with a maturity of over one year have a tax advantage over fixed deposits. Investors in FMPs have an option to pay tax on long-term at 10% without applying indexation or 20% after applying indexation to the cost of acquisition.

Interest from FDs is taxed according to the tax bracket applicable to the person. However, don’t go by the post-tax returns alone, as unlike bank FDs, FMPs do not offer assured return or capital protection.

If you plan to invest in FMPs, always look at the reputation of the fund house. This is very important because during the economic downturn two years ago, many fund houses got into trouble as they invested in low-rated papers from dubious companies, especially in the real estate sector. They just about managed to come out unscathed because of timely regulatory intervention and support.

However, the tricky thing about investing FMPs these days is you neither have an indicative portfolio nor return. So everything hinges on the integrity of the fund house.

Though an investor is supposed to stay invested till maturity in FMPs, fund houses also list FMP on stock exchanges so that investors can exit if they need money urgently. However, this does not guarantee enough liquidity and attractive price.

In short, consider investing in FMPs if you are comfortable with the concept and want to take a little risk to make superior tax-efficient returns.

7 Sep, 2010, 05.54AM IST,ET Bureau

Some solace: Fixed deposits to fetch more

You must have resigned to your fate by now if you have a floating interest rate loan. It is only a matter of time when the rates go up. More so, if persists with its policy tightening measures. However , the happy news is that your bank fixed deposits will give you more.

The banking regulator surprised the market with a half a percent hike in reverse repo rate, at which it absorbs excess cash, and repo rate, at which it lends to banks, by a quarter percent. Most analysts were expecting a hike of just a quarter percent. However , the small solace is that most observers believe the central bank may be nearing the end of its current monetary tightening measures.

“We are not expecting a significant increase (in interest rates) as a big chunk of it (rate hike) has already been discounted by the market,” said Lakshmi Iyer, head, fixed income and products, Kotak Mahindra MF. However, there would be pressure on banks to raise deposit rates and certificate of deposit rates would also go up, she said.

Moving on to the happier side, your fixed deposits (FDs) are likely to fetch a little better soon. What’s more? The real returns (actual returns minus inflation) are set to enter positive territory after several months. Real rates would become positive soon. The drop in inflation and the firming up of interest rates would work well (for investors), said Nilesh Shah, deputy MD, .

A rising interest rate scenario is definitely not music to the stock market. Higher interest rates can always eat into the profit margins of companies. However, most industry players are playing down the threat at the moment.

Most of them are sure the economic growth and consumer spending would continue to fill their coffers. The operating word is to be cautious while dealing with stocks. Always, place emphasis on valuation. With deposit growth lagging credit growth by as much as 6%, deposit and lending rates in the economy will go up even more, a market participant said. There would be at least 0.25% increase in rates, but this would start kicking in only gradually, he said.

17 Sep, 2010, 10.28AM IST,TNN

Tips to grow your money the safe way

Plain-vanilla fixed income assets can pump up the savings of not only the retired, but also those of young professionals.

You won’t catch them dead near the stock market. They are very happy putting away their hard-earned savings in fixed deposits, public provident funds, company deposits and so on. And not all of them are retired individuals who do not want the uncertainty of stocks ruining the fun of their sunset years.

There are many young executives, who don’t want to take the extra risk of investing in stocks. While a retired individual wants a monthly income to meet his day-to-day expenses, the working individual looks at building a fixed-income corpus to save for a rainy day or emergencies which may come his way. According to an India Wealth Report 2010 by Karvy Private Wealth, as much as 66% of Indian wealth, which is around Rs 48 lakh crore, is in fixed income assets.

Compared to this, global investors invested only 58% of their individual wealth in debt instruments during the same period.

Fixed income investors are generally risk-averse, want safety of principal and do not believe in churning their portfolios too much. They also want their investments to be as simple as possible.

There was a time when fixed-income investors earned as high as 12% by investing in bonds of reputed companies such as Tata Capital and or fixed deposits (FDs) of companies like Telco (now Tata Motors) and Mahindra Finance. However, that was during the global financial crisis in 2008-2009. With the crisis receding, earning double-digit interest on FDs is no longer possible.

No wonder, 2010 has been a tough year so far for fixed income investors. Inflation has sky-rocketed and remained in double digits for a major part of the year. The raised rates five times during the year, in a bid to rein in rising inflation. However, banks were flush with liquidity and did not raise interest rates.

So, while inflation was close to 10%, interest rates were in the range of 6-7% per annum. As a result, investors got negative real returns from their fixed income investments. Simply put, when an investor gets 7% from his FD while the inflation rate is 10%, he actually earns negative returns.

Typically, fixed income investors have choices such as FDs (bank and company FDs), debt mutual funds (liquid funds, income funds, gilt funds, fixed maturity plans) and post office investments like National Savings Certificates and 8% (GoI) bonds. Fixed deposits account for 30% of the overall individual wealth in India, while small savings constitute around 7% of the estimated wealth in India. Here, we take a look at some solutions for retired and working individuals:

Retired Individuals: Typically, an individual, who has worked during his active years, receives a lump sum on his retirement. Safety of capital is of prime importance to him. His objective is to generate a monthly income out of this corpus to sustain his lifestyle, some lump sum money for his children’s wedding or education and some surplus money to take care of medical emergencies or to go for a dream vacation as the case may be.

Safety is one of the biggest priorities for retired individuals. The Senior Citizens Savings Scheme, which gives 9% per annum payable quarterly, meets this important need. Individuals, aged 60 and above, and retiring employees, aged 55 and above, can invest in the scheme. The scheme has a five-year tenure and can be extended further for a period of three years.

“This is the highest return that a retired individual can get with the highest degree of safety from the central government,” says Uttam Agarwal, executive vice-president, , who advises retired individuals to invest in this scheme. However, one must note that premature closure is possible only after one year, with a nominal penalty.

If individuals want a monthly income, they can opt for a post office monthly income scheme (MIS), which gives a return of 8% per annum. Here, the maximum limit is Rs 4.50 lakh in a single account and Rs 9 lakh in a joint account. Here, too, premature closure after one year attracts a penalty of 2% while closure after three years attracts a penalty of 1%.

Investors can also look at company FDs, where in some cases the returns can be as high as 9.5-11%, though they do carry a higher risk compared to government schemes. “We advise senior citizens to invest in companies with AA or AAA rating and spread their investments across a number of companies,” says Anup Bhaiya, managing director, Money Honey Financial Services.

Remember, don’t go by returns alone while zeroing on company FDs, as many retired people often fall victim to bogus companies offering high interest rates. However, when it comes to getting the capital back, they realise that the company has folded up.

When it comes to mutual funds for retired investors, fixed maturity plans (FMPs) and short-term income funds are considered the best bet.

“FMPs give you the benefit of indexation and returns could be in the range of 8-8.5% for a 1-3 year tenure,” says Ramanathan K, chief investment officer, ING Mutual Fund.

Working Individuals: We are assuming that you are averse to taking risks and, hence, do not want to invest any money in equity. Also, you may have some loans, like home and car loans, to repay. So, liquidity will be of prime importance to you, as the accumulated surplus money can be used in times of emergencies or fulfil short-term goals like a vacation.

So, what kind of strategy should such young risk-averse people adopt in a rising-interest rate scenario? “He could invest some amount in a post-office MIP, and if he does not want the monthly income, he could further invest it in a post-office time deposit,” says Anup Bhaiya. In addition to this, he recommends company fixed deposits, as they give a slightly higher return than other products.

“He can invest in short-term income funds, as they offer ample liquidity, are tax-efficient and could give returns of around 7-7.5%,” adds Ramanathan K. “Such investors should invest in a combination of FMPs (fixed maturity plans) and short-term income funds. The duration risk in short-term income funds is low as they have a maturity of 1-2 years,” adds Pankaj Jain, fund manager, .

However, experts believe that younger people should invest at least a small portion of their corpus in equities, as they can add sheen to their wealth. They suggest individuals to take small exposure in equity via monthly income plans to test the market and later increase their exposure if they can stomach the risk.

Short ‘N’ Sweet

Here are some ways to grow your money without investing in equities

If you have an investment horizon of 6-12 months, then you should opt for short-term income funds that give 6-7% returns

Go for fixed maturity plans (FMPs) of 370 days and reap the benefit of indexation for up to 8%

Invest a part of your money in company deposits for three years and earn returns as high as 10%. However, don’t get swayed by the promise of returns alone. Always stick to a company with an AAA or AA rating

You can switch from short-term income funds or liquid-plus funds to income or gilt funds, depending on the prevailing interest rates

Senior citizens can invest up to Rs 15 lakh in 9% Government Savings Scheme. They can also go for post office monthly income plans that give 8% returns per annum

Do not make the mistake of keeping too much cash in your savings account as that will earn the lowest interest. For greater liquidity, you could invest in liquid funds

28 Sep, 2010, 03.34AM IST, Prashant Mahesh,ET Bureau

Car loans get costlier, hit double-digit mark

CHENNAI: have raised the interest rates in the past couple of days by anything between 50 basis points and 100 basis points (100 bps = 1%). Notably, the rates have touched the double-digit mark after a long gap.

Dealer sources said that all private lenders have effected the hike late last week. "The increase differs for every model. For instance, rack rate on loans for a B segment (compact car) will now be 12% while a C segment (sedan) would be charged 11.5% for loans ranging from three to five years. Except for PSU banks, almost all lenders, including Kotak, and HDFC Bank, have informed us about the hike," a dealer said.

"We have increased loan rates for new and used cars. Our net rate to customer would range between 10.5% and 11.25% depending on the tenor and model," said Sumit Bali, CEO of Car Insurance.

Though some dealers believe the increase in rate might dampen car sales, manufacturers maintain that the current hike would be absorbed by the market. "The growth momentum is strong and this hike may not impact sales. However, another hike might spook the sentiment and potentially dampen new car sales," P Balendran, vice president, General Motors said.

Bali of Kotak said the industry will continue to grow as the undercurrent remains bullish and strong. "With the festive season round the corner manufacturers are looking at robust sales. We hope there aren't further interest rate shocks from lenders which could affect sales. For now, we feel sales momentum would be maintained," Arvind Saxena, director, (sales and marketing), Hyundai Motor India told TOI.

The increase is also applicable to used car loans. "The new rates for used car loans, depending on the age and model of the car will now be 16% (indicative), which is a 50 basis points increase. We effected these hikes on August 23," Bali said.

HDFC Bank has raised rates for new cars to 11.25-12% from 10.5-11% effective August 20, other private lenders have followed suit. "As of now, we still lend at old rates, while there are talks of a hike anytime," a Maruti dealer in Chennai said. Passenger car sales are up. The industry witnessed 37.95% growth in July.

1 Sep, 2010, 08.50AM IST, Rajesh Chandramouli,TNN

Avoid loan defaults to save your credit record

The perception regarding taking loans has gone a sea change these days. The market has opened up significantly in the past two decades. Home loans have been around for long. It is a secure and attracts the lowest interest. Vehicle loan, too, is a secure loan and is available at comparatively low rates. Many times, car manufacturers themselves subsidise the loan to sweeten the deal. Delinquency in the home segment is lower than the vehicle segment due to the Indian consumers’ penchant for treating the home as a sacred investment.

But, personal and credit card loans are different. They are both unsecured loans. What’s more, these days personal loans are available without collateral or guarantors and require minimum documentation. With rising consumerism and aspirations, personal loans and credit card spends are increasingly the poison of choice. Add to that, cut-throat competition, which pushes the lenders to dive deep into the city’s unseen folds to source customers. The cream has long gone. Apparently, people earning as low as `3,000 per month, can now get a personal loan. By its very nature, people who have to take recourse to personal loans may not be financially very sound. Moreover, there are no guarantors

or collateral, and loans are being offered increasingly to segments even below the lower middle class. Also, recovery agents have now been restrained and banks have to go through the legal redressal mechanisms, which is notoriously slow. The upshot — rising defaults.

Credit card debt is similar. It is very easy to get carried away by the plastic sliver in one’s hands. Since, one does not count out the money and just needs to swipe, one does not realise the outgo. When it comes to payment, many times, there isn’t enough money to settle the outstanding in one shot. Hence, people go on revolving credit. That works for some time, till more goods have been bought and the revolving credit payable every month grows into a huge figure. Then defaults happen. Credit cards are also easy to come by. Customers are serenaded with offers of lifetime free credit cards and sugary sweet offers. Even here, the penetration has gone all the way down to those who may not be eligible for a credit card in the first place.

By stretching themselves and defaulting on loans, customers are doing untold damage to their credit-worthiness as everything is being captured today and is being reported in one’s credit history. Defaults damage one’s credibility, making it difficult or more expensive to get loans in future. This could bar defaulters from any access to capital, should they require it, anytime in future.

The previous generation can teach us a thing or two here. Living within one’s means is something that today’s senior citizens vouch by. No holidays on EMIs or fancy white goods on easy loans for them. While enjoying the good things in life, we all need to watch out and make sure we don’t cross the line. Once we are on the other side, we are damaged goods... forever condemned by these institutions which will not extend their line of credit. If that sounds like Armageddon, it is!

16 Sep, 2010, 02.01AM IST,ET Bureau