When to sell?

Investors in the equity market, have always had this question when to sell-off a stock. The investors want some kind of indicator to say whether the stock has reached its ( almost ) maximum and the only movement in its price henceforth will be downwards.

I'm not talking about Technical analysis here and I can't give you a formula to analyse an individual stock but this graph on Sanjay Bakshi's blog could give you an indication whether the equity market as a whole has become over-heated and it is time to sell-off.

( Image Copyright owned by Sanjay Bakshi )

The above graph has been created by plotting the Nifty dividend yield against the returns generated by Nifty over the next 3 years.
Thus, all an investor has to do is monitor the Nifty dividend yield and sell-off if it falls below 1.2% ( or whatever threshold you would like to set based on the above graph ).
However, there are few thing you need to keep in mind:
1. The above graph was based on historical values of Nifty and individual stocks may not follow a similar pattern. Thus this graph is more helpful to those who invest in index funds but can also be used as a reference by other investors.

2. The above graph considers returns generated over the subsequent 3 years, but the graph for investors with a different time horizon may look slightly different.

Please read this complete article by Sanjay Bakshi to know why he has made use of Dividend yield instead of P/E or P/B to plot this graph and also his view on the current market run-up.

PAN no longer mandatory for SIP transactions in Mutual Fund

From August 1, 2009 providing a copy of your PAN ( Permanent Account Number ) Card is not mandatory for investing in Mutual Funds ( MF ) if you are investing via the SIP ( Systematic Investment Plan ) route ( and do not invest more than Rs. 50,000 in a year ).

Instead of the PAN card you will have to provide another identity proof like Driving License, Voter's Id or any other government-issued id card. Complete details can be found in this guideline issued by SBI Mutual Fund.

An investment limit of Rs. 50,000 per year means a maximum of Rs. 4000/- monthly SIP ( or Rs. 12000/- quarterly SIP ) which you can invest via the Micro SIP in a rolling 12-month period or in a financial year.

So whats the catch? Although PAN card is not required for investment via Micro SIP but if you plan to do one-time transaction in the same mutual fund folio/account you would be required to supply a PAN card. This means that you cannot do one-time transactions in a Micro SIP folio.

Overall, a very positive move, as I always recommend SIP as the preferred mode of investment.

To understand SIP, read this.

You can now get your Credit Report from CIBIL - An important step in empowering borrowers

CIBIL, the only operational Credit Bureau in India, has rolled out a mechanism wherein a borrower can request his/her credit report from CIBIL and dispute any incorrect entries made.

In this article on Apnapaisa.com, the author has detailed the procedure to be followed to obtain one's credit report. I will summarize it below for the benefit of the readers:

1. Fill out this form and send to CIBIL along with (self-attested) Id & address proof and a DD of Rs. 142/- as non-refundable charges. The address to send the forms is:
Credit Information Bureau (India) Limted
P.O. Box 17
Millennium Business Park
Navi Mumbai - 400 710


2. If you find any errors in the report, complaint to CIBIL. The CIBIL will inform the concerned bank and the bank will have to respond within 30 days, otherwise the disputed entry in the borrower's credit report will be deleted.


How the borrowers benefit from this:
1. You can monitor your credit report for any erroneous entries, which up till now wasn't an easy task. Now there is a mechanism also to address the borrowers' concerns regarding erroneous entries.

2. If you plan to apply for a loan and have a very good credit report/rating you can negotiate a lower interest rate.

Link via Apnapaisa.com
Form downloaded from here.
I had previously written about credit reports & CIBIL here.

How to keep your accounts operative?

Some of my friends have faced this problem and you might also have experienced it. When you are away from your home-town say been abroad for a long duration or due to work you shift to a different city but still want to keep your bank account at your home town, the banks may classify your account as inoperative or dormant if there have been no withdrawals/deposits into your account for a specified period.
Sunil has pointed out this RBI Notification which clearly specifies the criteria for classifying an account as inoperative or dormant. I am reproducing the list here for the reader's benefit:

1. Issue of cheque against available balance in the account.
2. Deposit of cheques / demand drafts into the account for clearing.
3. Deposit or withdrawal of cash from the account.
4. Issue of demand drafts by debit to the account.
5. Credits by ECS into the account. Account holder may receive credits from sources like dividend from shares, interest from bonds, deposits, debentures or other securities that may be credited directly to his account by the payer.
6. Credit of interest from any other deposits in force with the same bank or branch.
   
7. Debits against standing instructions.

Please visit Sunil's blog to read this complete blog post where he gives a little background and also suggests ways in which you can prevent your account from becoming dormant.

There is just one more point that I would like to add here in addition to debit to recurring deposits, SIP ( Systematic Investment Plan ) by ECS/Direct Debit in a mutual fund is also one of the ways in which you can keep your account active.

New tax code means bad news for the mutual fund industry

The new tax code proposed by the Finance Ministry would lead to withdrawal of several tax-benefits currently on offer to mutual fund investors. This may mean bad news for the asset management companies, since fewer people may be interested to invest in mutual funds now.

1. No more tax-savings through ELSS: The new tax code does not list Equity-linked savings scheme ( commonly known as tax-savings mutual funds ) in section 66 ( the replacement of section 80c ). This means that ELSS would no longer be tax-savings instruments under the new tax regime.

2. Pay tax on dividends: The dividends paid by mutual funds ( even, equity mutual funds ) would be taxable in the hands of the investors under the proposed law.

3. Capital gains are taxed: Previously investors in equity mutual funds used to benefit from tax-free long term capital gains ( holding period more than a year ). Debt fund investors also used to pay long-term capital gains tax at a lower rate than the personal income tax rate. Now capital gains will be clubbed to your income and taxed as per the applicable tax rates of income tax. For holding period greater than a year the capital gains can be adjusted for the cost of inflation.

4. Pay tax even on Switch: Previously, investors in equity schemes could easily switch over to other schemes after one year without any tax-liability. This was widely recommended by financial advisors as part of portfolio re-allocation or when the investor is nearing his goals like "buying a house". But the new tax code proposes to tax all gains hence any switch between mutual funds will also be taxed since a mutual fund switch is technically nothing but a redemption followed by a purchase into the fund you wish to enter.

The new tax code - what goes and what remains?

As you may be already aware the government has released a new tax code which it proposes to bring into effect from April 1st, 2011. Its stated goal is to reduce complexity and simplify the tax-process.

If they really wanted to simplify the process, then one of my suggestions to them would be to make the financial year same as the calendar year. I fail to understand why do we need to have FY 2008-09, why it can't be just FY 2008 , FY 2009 and so on like in few other countries. This was established by the British, and we have kept on following the same.

Let me first start with what has been taken away from you:
1. No more tax-free allowances like HRA ( house rent allowance ) , LTA ( leave travel allowance ) and medical allowance. All allowances and perks will be considered as part of your salary income. Gratuity is also taxable. Transport Allowance and travel allowance continue to be tax-free upto the limits prescribed.

2. Section 66 replaces section 80C. Only four kinds of tax-saving instruments are allowed:
- Pension fund
- Provident fund
- Life Insurance
- Superannuation fund
All withdrawals from the above funds are taxed even at retirement.
The only silver lining is that the accumulated balance in provident fund accounts upto March 31st, 2011 would continue to be tax-free.

ELSS mutual funds, NSC and 5-year fixed deposits would no longer be tax-savings instruments if the new tax code comes into effect.

3. Capital gains are fully-taxed. Gains can be indexed to the cost of inflation if the holding period is more than one year. This means that the tax-free long term capital gains offered by equity mutual would be history.

4. Dividends from equity mutual funds would also be taxable in the hands of the investors. Although DNA reports that the mutual fund dividends will continue to be tax-free under the new tax code, but as per my understanding the dividend received from mutual fund will be taxable because:
- Dividend is tax-free only if dividend distribution tax (DDT) has been paid.
- Equity mutual funds are not required to pay DDT ( only companies are required as per section 99 ), hence mutual fund dividends would be taxable.

5. No tax-benefit for interest on home-loan

Although, the govt has taken away so many benefits from you, they have also increased the tax slabs which means that for an income upto Rs. 10 Lacs you may pay a tax of 10% only ( will this also have education cess? ). The tax-savings limit has also been increased to Rs. 3 lakhs from the present Rs. 1 lakh, but where will you invest so much money since so many tax-savings instruments have been withdrawn. The only option is to spend it on health insurance or on your child's education. But if you are not married then how do you save tax? lock up your money in a EET plan?
The limit for wealth tax has also been increased to Rs. 50 crore but this will also include mutual fund & equity investments ( this means that Gold ETFs would also be counted as wealth ).

Overall, I feel the new tax code will not increase/decrease your annual tax outflow but it will affect the way in which you save. With many tax-savings instruments (like NSC) being withdrawn and the remaining ones being made EET ( exempt-exempt-tax ), the focus is reallly on building long term savings.

Some tips which I believe would be useful in the new tax-regime:
1. Since long-term capital gains are being removed, book all your long-term gains on March 31st, 2011. Then re-purchase the same on or after April 1, 2011. This way you can book tax-free profits if you have been holding a stock/equity mutual fund for long time.

2. The amounts deposited upto March 31st, 2011 in PPF are tax-free ( as also the interest earned on such amount ) and you still have two financial years, hence accumulate as much as you can in your PPF ( maximum deposit in a single year can be Rs. 70,000/- ). The interest earned on any such amount will continue to be tax-free. But this strategy may back-fire as the interest rates for PPF are controlled by the govt. and it may decide to set the PPF interest rate very low in order to discourage deposits in PPF.

3. In case you are afraid that the insurance companies do not offer good enough interest rates on annuity plans, you can decide to invest in a pension fund which is run by a mutual fund like UTI Retirement Benefit Pension Fund. In such a pension fund the amount is accumulated upto the retirement age and then you can start a SWP ( systematic withdrawal plan ) in order to receive your pension. Hence you are no longer dependent on the annuity rates offered by the insurance companies. Tax-benefits as applicable to other pension funds also apply here.

Off-topic Post: War on terrorism

Warning: This post is off-topic and not related to Personal Finance and Investment. Its contains my personal opinion, not facts.

I was reading this wikipedia article: War on Terrorism

If you go to India section of this article, it lists down the terrorist attacks that have happened in India after 9/11. I am reproducing the list here:

* The 2001 Indian Parliament attack.
* Akshardham Temple attack.
* 29 October 2005 Delhi bombings.
* 2005 Ram Janmabhoomi attack in Ayodhya.
* 2005 Jaunpur train bombing.
* 11 July 2006 Mumbai train bombings.
* 2006 Varanasi bombings.
* The 2007 Samjhauta Express bombings.
* Hyderabad bombings.
* Jaipur bombings.
* Bangalore bombings.
* 2008 Ahemdabad bombings.
* 13 September 2008 Delhi bombings.
* 2008 Assam bombings.
* And the 2008 Mumbai attacks.

If you happen you visit the USA section of this article, one line is sufficient to describe what happened in USA after 9/11
"To date, no attacks by Islamic terrorists on the US homeland have been successful since September 11, 2001."

Okay, I'm not discussing the moral or political aspects of this issue, but in my opinion USA has achieved what it had set out to do very effectively.

Meanwhile for us here in India the clock is ticking. The last attack was on Mumbai and we can't do anything but wait for the next one.

Are they really safe? - Verified by Visa and MasterCard Secure Code.

I have previously blogged about them.
An anonymous reader has commented and raised concerns about these added layer of security for online credit and debit card transactions (collectively known as 3-D secure protocol ).
As you can read on its Wikipedia page, 3-D secure has a long list of criticisms most of them related to its ability to secure online transactions.

I will try to address all of the reader's concern below:

- RBI never sponsored or stated specific systems such as Verified by Visa or Mastercard UCAF/SPA in its directive.
In my article also I did not say that RBI has specified VbyV or Secure Code must be used. RBI article only says that additional info ( apart from what is already present on the card ) is required for online transaction. Since most ( say 95 % ) of the card holders in India have either Visa or Master Card they will have to use either of these two services hence I explained their features from an end-user perspective. For American Express cards they ask for the billing address for verification.


- The anonymous reader has pointed out some security vulnerabilities in 3-D Secure giving some examples like inline frame and activation during shopping.
Although I can't vouch for all banks in India, but I deal with HDFC Bank which does not use inline frame during 3-D secure authorization and it also has PAM ( Personal Assurance Message ).
It does have Activation during shopping but that too:
- is on hdfcbank.com domain with a proper SSL certificate ( no inline frame )
- requires your ATM password for authentication ( I don't know if the number of attempts is unlimited ). This I feel is secure enough.

But, I also know of cases where card issuing companies don't use their own domain during 3-D secure authorization like:
- SBI Card ( uses arcot.com )
- ICICI Bank ( uses payseal.com )
So our anon reader does have a valid point here. These systems are not 100% safe because of some inherent weakness in the Internet protocols.


- Then he raises a concern that the password can be easily phished and used by fraudsters. The transactions can never be disputed by the cardholder.
On this I don't agree with him. If there was no 3-D secure anyone who had physical access to the card even for a minute ( think of the last time you gave it for payment in the restaurant ) could have misused it ( by noting down the card details ). But introduction of 3-D secure had made life more difficult for fraudsters.
If transactions could be disputed without 3-D secure, they can still be disputed with 3-D secure activated as well. 3-D secure is not going to change that.


- A concern about fraudsters misusing this feature to cheat banks
This is a matter between the fraudsters between the banks and the fraudsters and I'm really not too much concerned about it. One thing I would like to point out here is that the act of issuing a card is not a completely online thing ( atleast in India ). There are id and address checks. Credit report is also verified. So if the bank has a diligent process in place before it issues a card, the chances of such cheating are lessened. However if the bank has lax procedures it obviously has to suffer ( that's in its Karma! )


- Be wary of mandated systems. A good security system never needs to be mandated.
If it is not mandated, the banks won't implement any safety feature. Only very few who actually care about customer concerns would be willing to do it on their own, since setting up an IT infrastructure for such a feature costs money and the management of banks is busy improving their profit margins cutting costs wherever they can.

IRDA circular on ULIPs - good enough?

IRDA has issued circular number 20/IRDA/Actl/ULIP/09-10 placing a cap on ULIP charges.

In brief, the circular specifies the following:
- For policies with tenor less than or equal to 10 years the difference between gross and net yield cannot exceed 3 %
- For policies with tenor greater than 10 years the difference between gross and net yield cannot exceed 2.25 %
- At the time of maturity, the insurer must issue a certificate showing charges deducted, fund value and final payment made to the policyholder. The certificate must also contain the gross and net yield.

This does look like a good thing for the investor. But this does leave some unanswered questions :
1. Can this circular mean the death knell for the ignominious Fund Allocation charges, which could go as high as 80% in the first year?

2. Does this circular apply to ULIP retirement plans also?

3. As stated by Dhirendra Kumar in this article:
"It is strange that the most significant improvement in the disclosure has only been done to the statement that the policyholder will receive at maturity. So if your fifteen-year policy starts now, you have to wait only till 2024 to know the full details of what the insurer did with your money in 2009."

4. In the recently introduced "ICICI Prudential LifeStage Assure Pension" the first year premium is not invested in funds (i.e. fund allocation charge of 100% in the first year ). As per the IRDA circular existing schemes have to be modified to comply to these rules by December 31st, 2009. How can this scheme be modified to comply with IRDA regulations? Does that mean it will be wound up? ( I'm have not invested in LifeStage Assure Pension, I'm just curious to know its fate )

We have to wait for ULIPs which comply with these regulations in order to understand the extent to which it would benefit the investors.
One thing I can predict for sure, after this circular comes into effect after after October 1st, 2009, there will be more ULIPs launched with tenor less than 10 years since the insurance companies can charge you 0.75% more than for policies greater than 10 years policy. Also riders to the insurance policy will be pushed aggressively by the Insurance companies since the cost for riders benefits is not included in the calculation of net yield. Something similar was observed in Mutual Funds when SEBI banned NFO expenses for open-ended mutual funds. Large number of closed-ended mutual funds were launched since NFO expenses upto 6% could be recovered from the investor. SEBI ultimately plugged this loophole by banning NFO expenses for closed-ended funds as well.

ICICI can deduct money from your salary - WITHOUT your consent

ICICI Bank has modified the credit card agreement wherein they can deduct credit card dues from your salary directly ( by asking your employer to do so ). Any sort of agreement between your employer and you cannot prevent this deduction from your salary.

Although I don't hold any ICICI credit card, this may start a dangerous trend in the Indian credit card industry which will soon be followed by others also.

Just imagine the following scenario:
- You notice a fraudulent transaction on your card. You dispute it with the Credit card company.
- The Credit card company ( i.e. ICICI Bank ) does not agree with you and decides to charge you.
- They instruct your employer to deduct the money from your salary. You CAN'T stop it.

Or a second scenario:
- Usually private credit card companies delay cheque payments by 4-5 days so that they can charge you for late payments.
- Nowadays you can get these charges reversed after some negotiation with the customer care.
- But after this rule is implemented, the bank can directly deduct such fees ( like late fees ) from your salary. The Bank does not have to negotiate with you.

Remember this clause in the card member agreement has been inserted by a Bank which had introduced a rule in the year 2003 stating that more than 3 cash transactions at the home-branch will be charged. They of course had to take back such restrictions on RBI directions.

If I held an ICICI card, I would have immediately cancelled it citing this change in agreement as the reason. If ICICI card holders cancel their cards in sufficient numbers, other credit card companies won't dare to make such changes to the card agreement. Also, if money is deducted from your salary for wrong reasons by the credit card company, I will suggest you first approach the RBI Ombudsman and then Consumer Courts. Lets see if this rule can stand in a court of law.

New Pension Scheme ( NPS ) - will I invest?

This post is only applicable to private-sector employees since all govt. employees ( who joined in or after 2004 ) are compulsorily part of the NPS.

Although this is old news, NPS is now open for all to invest in it. Being a private sector employee, I have done an analysis whether I will invest in it or not. Hopefully it would be useful to all the readers of my blog as well.

My verdict is I will not invest in it right now. The reasons are explained below:
1. Charges are high: As explained in this livemint article although the fund management charges are very low, the other charges are very high atleast for the initial years. As the number of subscribers grow these fixed charges will also come down and then it will a right opportunity to enter. It is better to invest your retirement money in other avenues until you decide to open a NPS account and later on you can deposit this accumulated sum into your NPS account if you wish. You can check out the NPS welcome kit found here to see the fixed and other charges.

2. No clarity on tax benefits: An explained in this Value Research article, there are no tax-benefits of investing in the NPS. Let the govt come up with proposals on what tax-breaks it is ready to offer to NPS investors. Hopefully they would do it in the budget being presented in July, 2009.

3. The equity part stands limited to Nifty: They should have either allowed the fund manager's discretion in choosing the stocks for equity investments or chosen a broader index like S&P CNX 500. This I suggest for the following 3 reasons:
a) I'm afraid large amounts of NPS money flowing into just 50 stocks would surely create a bubble of sorts for the Nifty stocks ( which will burst one day!).
b) Secondly, the broader indices like S&P CNX 500 although being more volatile over shorter terms have always beaten the Nifty/Nifty junior when compared over a time-period of 10 years or more. Retirement money being (very-)long term money should surely benefit from it.
c) Thirdly, they have appointed several different fund management companies but if all have to invest in the same Nifty-50 stocks in the same proportion ( i.e. follow the index ) then what is the point of having several different fund management companies.

4. Relying on the rating agencies: Remember the rating agencies who had rated the sub-prime CDOs as AAA? As explained by Deepak in this article, the original proposal drafted by committee headed by Deepak Parekh had sought to make the rating agencies irrelevant by putting the onus on the fund manager. But PFRDA decided to reverse it and now atleast 75% of the investments done in corporate bonds must be rated by one of the rating agencies. Is it a wise move considering the present economic crisis, the world is going through, is partly caused by trusting these ratings? Also the rated company pays the rating agency, so if one rating agency refuses to give them a good rating, the company takes their business to another rating agency whoever offers them a better rating for their bonds. This is a conflict which must be resolved before relying on ratings for making investment decisions.

5. EPS 1995: And lastly the most important reason why I will not contribute to NPS is because I ( being a private-sector employee ) am already contributing to this scam known as EPS 1995 ( full details in this article ). The government must scrap the EPS 1995 scheme and all of employee's ( and employer's contribution also ) retirement money ( irrespective of govt. or private-sector ) must go into NPS. All the existing money being held by EPS 1995 scheme should also be transferred to the respective employee's NPS account.

I have adopted a wait-and-watch policy. What about you?

Customer (dis-)service?

Here I list down the kind of customer experience that me and my friends had with different organisations. This list is not comprehensive, do comment about your own experience with different banks/insurance companies and other organisations.

Computer/network is down: The most common excuse in public-sector banks. Many times when you are in a hurry, this excuse pops-up. I'm not saying that the bank personnel are lying or are being lazy. My point is what's the point of computerisation, if they can't get it working? This is a recurring problem. They should better get back to hand-written ledgers if their computers/networks don't work when needed.

You will receive it within stipulated time: This mostly comes from private banks. Say you had requested a cheque book or DD to be delivered to your home address. Usually it arrives in your home with 4 days of submitting the request, but this time has not arrived even after 7 days. If you try to complain to the bank personnel/phone banking, they will give you a blunt reply that you should wait for 15 working days. They won't bother to check with their central processing centre if your request has been processed and the item despatched by courier/post.

Something similar has been my experience with one of the movie rental service. Their customer service desk works from 10 AM to 7 PM. And their official movie delivery timings are from 10 AM to 10 PM, but the delivery boy usually comes to my apartment around 12 PM. Some day when the delivery boy hasn't come even by 2 PM and you try to enquire with the customer care they will give you a blunt reply that the delivery timings are from 10 AM to 10 PM. If you try to complain around 6:30 PM, they give the same 10 AM to 10 PM excuse. But their customer care closes at 7 PM and if you try to complain about the non-delivery of movie the next day they would reply that the door was locked when the delivery boy arrived. Given the fact that movie rental's customer care closes at 7 PM, then how is the customer supposed to prove that the delivery boy infact did not come.

SBI-specific complaints: I believe if we do a survey SBI( plus its associates ) may top the list of number of customer complaints. This may also be due to the fact that it is the largest bank in the country.

State Bank complaint no. 1: If you ever try to open an account in SBI or its associate banks, they would compulsorily give you a Debit card whether you apply for it in the account opening form or not. I mean if somebody has specifically marked in the account opening form that he/she does not need an ATM/Debit card then why is a card issued at all? Does the branch has some targets to achieve regarding the number of debit cards issued? Anyway SBI debit card is not a free service then why is it forced on everyone even though they may not need it.

State Bank complaint no. 2: Fine, you will say it does not matter if you got the card, you can always get it cancelled. Thats what the second complaint is about. You get the SBI debit card cancelled but the charges for the card will continue to be deducted from your account every year. You have to request the branch every year to reverse the debit card charges. If you ask the manager why are the charges being levied inspite of cancellation of card, he would blame it on the software. Being a software engineer myself, I am ashamed of such computer/software engineer who can't configure the system to stop deducting charges for cancelled debit cards. Or is it a ploy by the SBI ( & associates ) management to increase their fee income while taking shelter in the excuse of software limitation.

IOB-specific complaint: Indian Overseas Bank have a partnership with Oriental Insurance for offering personal accident insurance to their customers for which they deduct premium from the customer's account. By default they have made all their customers part of the scheme without the customer's consent. They don't care if the customer already has a personal accident insurance policy and does not need any additional insurance cover. And if you ask the branch personnel to stop this insurance facility and reverse the charges, they would smilingly reply "Its just Rs. 10/-". Rs. 10/- or Rs. 10 Lac whatever it is, it my hard-earned money and if I don't need the facility I don't pay for it. This is another trick by the bank's management to increase their fee income.

ATM usage is free, so now we charge you for Fund transfer

As I had blogged earlier, thanks to a RBI notification transactions done at all ATMs across India are free of charges ( i.e. no charges for using other bank ATMs within India )

But now HDFC Bank has decided to charge for NEFT ( National Electronic Fund Transfer ) henceforth at the rate of Rs. 5 plus taxes for every transaction. This may have something to do with RBI's decision not to waive off charges after March 31,2009. Also Rs. 5 was the upper limit for charges specified by the RBI for transactions not exceeding Rs. 1 Lakh.

Similarly Axis Bank has introduced some security features to use NEFT facility online for which they will charge an annual fees. But most of these security features like code on SMS are offered free of cost by other banks like ICICI & Citibank. Then why does Axis Bank has to charge for a security feature which is provided free of cost by other private banks which have similar AQB requirements? And you can't use NEFT online with Axis Bank without having these security features so there is no other option to the customer than to pay.

Also HDFC Bank by levying charges for NEFT fails to understand that Indian customers are very price sensitive and even if 25% of the transactions which happen on NEFT presently shift to cheques then their work will increase manifold. Since processing of cheques requires human intervention & lot of paper work but NEFT processing is almost completely done by computers.

I believe HDFC Bank is taking a chance here, they are waiting to see the response of their competitors and customers. If their competitor ( read ICICI Bank ) also decides to levy charges for NEFT then all other banks will also follow suite. ICICI Bank also charges for NEFT now i.e. Rs. 5+ tax for less than Rs. 1 lac and Rs. 25 + tax for more than Rs. 1 Lac.The days of no-charges NEFT for bank customers are over :(

Coincidence...???

Have a look at the following screen-shots taken from official websites of 4 private airlines in India ( Indigo, JetLite, Kingfisher Red & SpiceJet) . Noticed something similar in all of them?




All four private airlines which have a direct flight from Delhi to Guwahati on May 5, 2009 have tickets priced at Rs. 5629/- inclusive of all "taxes". Is it just coincidence or shall we call it price fixing? Is MRTPC ( Monopolies and Restrictive Trade Practices Commission ) sleeping?

To know why I have written taxes in quotes above, read this economic times article.
Just some more news related to one of the airlines mentioned above here in this article.

Online transactions now even safer

Traditionally, to transact with a credit card ( either online or over the phone ) all the info required for processing the payment is present on the card.
The info that is usually needed for transacting is:
1. The 16-digit card number
2. Expiry date of the card
3. The CVV ( Credit Verfification Value ) found on the back of the card
4. The card holder's name

Since, all this info is present on the card, the customers always had security concerns related to credit card usage online. To address customers' security concerns Visa and MasterCard came up with initiatives like Verified by Visa and MasterCard SecureCode. Basically both of them worked on the same principle.A separate password, apart from the info already found on the card is required to complete a credit card transaction.

The diagram below will help you understand the "Verified by Visa" or "MasterCard SecureCode" better.


But there are 2 limitations to "Verified by Visa" or "MasterCard SecureCode" which might have hampered its popularity in India.
1. The merchant ( i.e. merchant's payment gateway ) must support these features.
2. Also, the credit card issuing bank must support these security features. Although most large private banks ( like ICICI, HDFC ) support these security features, most of the PSU Banks still do not support "Verified by Visa" or "MasterCard SecureCode" for online transactions.

If either the payment gateway or the bank does not support them, the customer cannot use "Verified by Visa" or "MasterCard SecureCode" for online transactions.

Now RBI has made such authentication, based on info not found on the card( i.e. with a separate password ), mandatory for all online transactions. Also it is mandatory to send SMS and online alerts for online transactions exceeding Rs. 5000. What this means is that all payment gateways and card-issuing banks will have to support authentication by a separate password. Please note that these regulations are applicable only from August 2009.

As per this report, RBI is also working on security features to be employed for credit card transactions over the telephone. These regulations will go a long way in ensuring the safety of your online & IVR transactions. Thanks, RBI.

Why I will continue to invest in equity even at 8K?

Warning: This post is more of personal rant, so that some time in future I can boast of "I-told-you-so". This post contains less of facts and more of personal opinion about the current economic ( and political! ) scenario. Take it all with a pinch of salt.


The Sensex is below the 9K mark and everyday I keep hearing predictions of even lower levels for the Sensex from friends and stock analysts. The US Dow Jones Index is at an 12-year low. All hell has broken loose. The newspapers are busy questioning the very survival of the Tata group companies. Gold is touching new highs and investors are being advised to buy Gold.

I don't care about these stock analysts who were predicting 25K for the Sensex in January 2008 and are now asking investors to stay away. Honestly speaking I don't care about Sensex at all, since I feel that Nifty is much better indicator of the market. I will continue to invest in equity via SIP, since I have been investing since the 18K level. If I was foolish to invest at 18K, I could only be a lesser fool if I invest at 8K. The downside is even lesser!

To quote Warren Buffet: "Be fearful when others are greedy and to be greedy only when others are fearful." Right now everyone is fleeing from the equity markets. MFs are showing a net outflow from equity schemes. All the bloggers I follow are advising people to stay safe ( Gold, debt instruments, cash ). If I ask my friends, whether they are investing in the equity market all I see is a grim face ( and sometimes a frown as well! ). People are frustated about their losses, even I am to a certain extent. But I haven't stopped my SIPs. I put in a small amount every month, in the hope that someday when the market recovers I will get back this invested amount along with good returns. When will the market recover? I don't know! But history tells me that recovery will happen.

Lok Sabha elections will happen in India in the near future, and I expect a sensible Govt to be formed in the Centre which will work to reduce the budget deficit. The present UPA govt has missed the FRBMA targets, and I expect the next government to put in more efforts to control it. But if the left parties come to power any time in future with absolute majority at the Centre, I am selling off all my equity investments ( even at enormous loss ) since I don't see any hopes for the Indian economy then.

Your credit score, CIBIL & getting your credit report

First let's try and understand what's a credit score. Wikipedia has a very technical definition for it:

A credit score is a numerical expression based on a statistical analysis of a person's credit files, to represent the creditworthiness of that person. A credit score is primarily based on credit report information, typically sourced from credit bureaus.

Confused?
In simple terms, the credit score is calculated based upon your history of availing debt/loans/credit from various sources ( like Banks, finance companies, lease companies ), and your history of repaying that debt. The better your credit score, it means less tarnished is your credit history.

In USA if your credit score is very good you can get loans at 1-1.5% lesser than the usual rates. I don't know if that's the case in India as well. I have heard that even telecom companies check your credit score before providing you with an post-paid connection.

Presently there is only one CIC ( Credit Information company ) in India i.e. CIBIL. CRISIL also has plans to enter this business.

All members of a CIC ( like Banks, finance & credit card companies ) submit reports relating to their customers to the CIC. Now when the same subscriber applies for a new loan or credit card to the same or a different bank, they can access his credit report from the CIC and decide whether to issue him a loan or not. Main points they lookout for is amount of credit already availed, plus any history of defaults.

This is just a brief introduction to credit score. You can search on Google to find out more about credit score and its importance. Also another thing you will be interested in is improving your credit score.

Who can access your credit report?
All members of the CIC ( like Banks, finance & credit card companies ) can access your credit report. But RBI has also mandated that an individual must be able to access his/her credit report ( this info sourced from the RTI advocacy group Hum Janenge and this press release found on the CIBIL website ).

But I could not find the exact procedure to get the credit report on the CIBIL website. I believe we have to write to CIBIL to know the exact procedure for obtaining our own credit report.

Here are their contact details:

Email : info@cibil.com

CREDIT INFORMATION BUREAU (INDIA) LIMITED
Hoechst House, 6th Floor,
193 Backbay Reclamation,
Nariman Point,
Mumbai 400 021

Do write to them, and let me and others readers of this blog know, the procedure to obtain the credit report.

The oft ignored fund category

A reader has asked me which is the best SIP, in the present volatile markets. Honestly speaking, I don't know. But this question prompts me to write about the often ignored fund category, balanced mutual funds. Why do I say “ignored”? Have a look at the list of equity-diversified funds or the debt medium term funds. Now compare the number of funds in these lists to the number of hybrid funds of the equity-oriented type or debt-oriented type. Got the idea? Fund companies, investors and mutual fund distributors have kind of ignored this fund category, which ( in my humble opinion ) demonstrates the true benefits of mutual fund investing by protecting investors ( to a certain extent ) from the vagaries of the market.

First let’s try to understand what are hybrid ( or balanced ) funds:
Hybrid equity-oriented: Their fund objective is to invest around 70% in equities and 30% in debt.

Hybrid debt-oriented: They do the opposite of equity-oriented schemes by investing 30% in equities and 70% in the debt market.

Now let’s understand how they act to protect you from the vagaries of the market. Please note that this is possible only if the fund objective is adhered to. There have been cases where fund managers have failed to adhere to the fund objective.

Say for example, you invest Rs. 100 in a hybrid equity oriented fund. The fund manager invests Rs. 70 out of it in the equity market and the rest in debt ( this is just an example!). Because of the phenomenal bull run ( like the one seen in last quarter of 2007 ) the Rs. 70 invested in equity has become Rs. 120. Keeping in line with the fund objective the fund manager will re-allocate the assets so that the 70:30 ratio between equity and debt is maintained, which means Rs. 45 in debt and Rs. 105 in equity. Thus the responsibility of portfolio re-allocation shifts from the investors to the fund manager. When the market crashes ( like in 2008 ), the fund manager can shift assets from debt to equity to keep the ratio intact. This ensures that equities are bought when they fall ( Buy Low ) and sold off when they appreciate substantially ( & sell high ).

Those seeking greater capital protection can opt for debt-oriented hybrid funds which work along similar lines but are less volatile than equity-oriented hybrid funds.

P.S: Any discussion about hybrid funds is incomplete without a mention of Mr. Prashant Jain who has been managing HDFC Prudence fund since the last 15 years, which is a record of sorts in India where fund managers keep changing jobs every 2-3 years. He has not only managed this fund over a vast period of time but also produced excellent returns. His interview was published on the personalfn website in October, 2007. Key takeaways from this interview, he invests his own money in HDFC mutual fund schemes and this gives a huge sense of confidence to the investors in HDFC mutual fund schemes. ( Disclaimer: I am an investor in the HDFC Prudence Fund )

Choosing an international fund for my portfolio

Since quite some time I had been thinking about adding an International fund to my mutual fund portfolio, to give it a global edge :)
An international fund provides the much needed diversification to your portfolio. Just to quote an example say a scam like Satyam need not necessarily have an effect on stock markets in other countries. Also the economic situation may not be equally bad in all countries at the same time. Right now most of the developed world is in recession, but developing countries like India/China are still growing ( albeit, at a slower pace ). This story may reverse in future. So there is a need to diversify globally.

But there are some risks also associated with global funds:
1. Foreign exchange risk: Say Rupee appreciates heavily against the US dollar then the investors may actually end up losing money in this fund, even though their holdings may have appreciated in US dollar terms.
2. Lesser tax-benefits: A mutual fund has to invest 65% or more of its assests in the Indian equity market to qualify as an equity-oriented scheme. Since global mutual funds invest in the international market they are not eligible for tax-benefits offered to equity mutual funds in India ( like tax-free dividends, zero tax on long term capital gains ).
3. Fund-manager risk: The fund manager may not be well-versed with the international markets, which can be a reason of worry for the investors.

When I went about looking for an international mutual fund, the following were my requirements:
1. Well diversified global equity fund
2. No sector or country bias, no developed/developing economy bias.
3. Low fees
4. Minimum exposure to India, as I already have my Indian equity portfolio in place.


Let's see what are the available options and choose the best out of them:

Franklin India International : This is not an equity fund, but a debt fund which invests in US govt. securities. Verdict: NO

Kotak Global Emerging Market : As the name suggests this is a fund that invests in the emerging markets ( India, China, ME, South America ). And also this acts as feeder fund where the money invested is routed into the TRP SICAV Global Emerging Equity Fund, which means two level of fees. Verdict: NO

Principal Global Opportunities : This again is a feeder fund for PGIF Emerging Markets Equity. Same comments as for the above Kotak fund. Verdict: NO

Fidelity International Opportunities : Has very little international exposure. Maybe the fund manager is trying to make this fund get the tax benefits of equity-oriented mutual funds in India by holding atleast 65% assets in Indian stocks. Verdict: NO

ICICI Pru Indo Asia Equity : Fund objective states that it will concentrate on Asia. Its holdings also show that it holds around 65% assets in Indian stocks ( presumably, for tax-benefits ) and the rest in IOF Asian Equity Fund for exposure to Asian stocks. Verdict: NO

Tata Indo Global Infrastructure : The fund objective has a sector-bias and will primarily invest in Infrastructure companies. Just like the ICICI Pru Indo Asia Equity this has too much of India exposure. For global exposure it currently relies on two funds viz, INVESCO Asia Infrastructure and Credit Suisse Emerging Market which displays an Asian/Emerging market bias. Verdict: NO.

Birla Sun Life Commodity Equities : Birla Sun Life has three international commodities fund, but since they have a sector bias my verdict is no. There are three different variants of this fund global agriculture , global multi commodity & global precious metal. Verdict: NO

Kotak Indo World Infrastructure : Sector-bias, plus too much of Indian holdings. Verdict: NO

Birla Sun Life International Equity : This has two plans. Plan A invests upto 100% percent in international equity and has S&P Global 1200 as the benchmark. Plan B invests atleast 65% in Indian markets with the rest going to International markets. Since I am looking only for a global fund, Plan A suits my need. Except for the fact that the fund expenses are a bit on the higher side ( around 2.34% ) everything else is almost perfect. It is well diversified across sectors and countries.

Hence from all the available options presently, I believe Birla Sun Life International Equity Plan A is the only one that suits my need. I wish there are more global funds from other fund houses as well. I don't know if this is the right time to start investing in the international markets, so I am opting for an SIP.

Disclaimer: This is not a mutual fund recommendation service. The above analysis was done only for personal use by the author. Do consult a financial advisor before making any investment decisions.

On Reader's request: Tata Capital NCD and some advice on Insurance

A reader had requested me to post few details about Tata Capital NCD. So here it goes:

1. NCD are being offered in demat format only. Hence you need to have a demat account before you can apply for NCD.
2. The prospectus can be found here.
3. NCD are being offered in four options: Monthly interest, Quarterly , Annual & Cumulative Interest. ( Refer to Page 26 & Page 137 of the prospectus for complete details about these options ).
4. For Annual & Cumulative option, the interest rate is 12% p.a. For monthly option it is 11% p.a. and for quarterly option it is 11.25% p.a.
5. The NCD have a tenor of 5 years from the date of issue. Tata Capital can call for early redemption of NCD after 3 years ( 3.5 years for Quarterly option ). Similarly you can also pre-maturelty withdraw after 3 years ( 3.5 years for Quarterly option ).
6. Minimum investment amount is Rs. 1 Lac for Monthly Interest option. For all other options it is Rs. 10,000/-
7. No TDS on interest, if held in demat form.
8. How to apply: Approach Integrated Enterprises or you can directly contact the registrars Karvy Computerhare to obtain the application form and apply.

Disclaimer: This is not an offer for sale or investment. Please refer to the offer prospectus for complete details.

Chinmay shah has asked me a question related to Insurance. You can read it here. My answer is below.
Generally combining Insurance and Investment is not good. Hence ULIPs are a strict no-no in my opinion. Many good financial advisors have written extensively about the dis-advantages of ULIPs. You can read them here, here and here.

Since you want to invest for your child's education, it means that you need the money atleast 15 years from now. You can use a combination of PPF & SIP (Systematic Investment Plan ) in mutual funds to achive your goals.

1. PPF : You can open a PPF account in the nearest SBI branch or Post Office in your or your child's name. Use an agent to open PPF account, the agents make the job much simpler. PPF offers 8% p.a. ( interest rate may change in future ) which is tax-free. The scheme maturs after 15 years. For more details refer here.

2. Systematic Investment Plan: To understand SIP you can read this article. In simple terms SIP is an investment in mutual funds distributed over a period of time.

Below is a sample calculation, you can adjust it to your needs:
Amount required after 15 years: Rs. 25,00,000/-
Amount you can save every month for your child's future: Rs. 5000/-
Returns offered by PPF: 8% p.a. ( assumed )
Returns offered by SIP in mutual funds: 15% p.a. ( assumed, a conservative estimate ).

Let's allocate your monthly savings of Rs. 5000/- as:
Rs. 2000 for PPF and Rs. 3000 for SIP in mutual funds.

Now let's calculate whether you will be able to achieve your goal of accumulation Rs. 25 Lacs after 15 years.
Go to the recurring deposit calculator.

Calculation for PPF:
Recurring deposit amount: 2000
Frequency of deposit: monthly
Interest rate: 8
Duration: 180 months

Amount on maturity: Rs. 696690.32 ( ~ Rs. 7 Lac )

Calculation for SIP in mutual funds:
Recurring deposit amount: 3000
Frequency of deposit: monthly
Interest rate: 15
Duration: 180 months

Amount on maturity: Rs. 2030589.27 ( ~ Rs. 20 Lac )

After 15 years you must have accumulated around Rs. 27 Lacs ( based on the returns we have assumed ). The actual returns may be higher or lower.

By varying the your monthly contribution and the allocation between PPF & SIP in mutual funds you can achieve your financial goals easily.

Choice of mutual funds for SIP: I would recommend you to invest via the SIP route in 3-4 mutual funds of the equity diversified type. If you are first time investor in mutual funds, you can ask your broker/agent/financial advisor for help. You can also make use of Value Research ratings to choose an equity-diversified mutual fund.

How I chose a Savings Bank account

I had wished to title this post as "The best Savings Bank account", but then I realized one size does not fit all that's why I am going to tell you how I went about choosing a savings bank account for myself. My criterion may or may not suit you.

Well, my search for a Savings Bank account began with 3 criterion in mind:
1. Debit Card: Free for life, specially no annual fees.
2. Debit Card: facility to use at all ATMs without any charges.
3. If possible, payable-at-par cheques all over India.

ICICI was immediately ruled out because at that time they didn't offer any account with zero annual fees for debit card ( except for senior citizens ). Most public sector banks ( except SBI and its associates ) had a non-existent ATM network. SBI and its associates offered ATM cards , but were loaded with annual fees. Axis bank too had annual fees for Debit Card.

But when I had a look at HDFC Savings Plus account, it looked like it was tailor-made for me. No annual fees for Debit Card, plus the facility to use the Debit Card at other bank ATMs without any charges ( 5 times in a month ). Additionally the payable-at-par cheque facility was also there. All I had to do was maintain a AQB of Rs. 10,000/-
And so I chose HDFC Savings Plus account.

After that RBI came out with circulars which made life much easier for me. As per RBI's instructions starting April 2008, there are no charges for balance enquiry at other bank ATMs throughout India and from April 2009 there are no charges for cash withdrawal as well. So if you want to cut down on your Debit card charges just make sure that its annual fees is zero which means:
1. You get your Debit card free for lifetime.
2. Also starting April 2009 you can do balance enquiry and cash withdrawal at all ATMs in India without any charges ( Thank RBI for the circular ).

Nowadays many banks offer savings account with free debit card. Some of them are ICICI Gold and Titanium privilege account, Kotak Mahindra Bank's Ace and Pro accounts, HDFC's Savings Plus and Savings Max account and South Indian Bank's Privilege Savings account.

Savings Tip: Quartelry Income Scheme

Post Office Monthly Income Scheme ( MIS ) is very popular among the masses, especially those retired.

Its features are:
1. Monthly income at the rate of 8% per annum + 5% bonus on maturity (which works out to be an effective yield of 8.9% )
2. Income is taxable, but no TDS.

Some of its disadvantages are:
1. Interest rates are not in-line with the market rates. As recently as October-November 2008 when banks were offering more than 10% on fixed deposits, the MIS interest rate was still 8%
2. There is a ceiling on maximum investment.It is rupees 3 lakhs for a single account.
3. Cumbersome visits to the post office and sometimes you have to face long queues ( although this can be resolved by following one of my previous post )
4. Restrictions on pre-mature withdrawal. You cannnot close an MIS account before 1 year.

All the above disadvantages can be overcome by employing the Quarterly Interest option offered by Bank FDs. Usually when customers open a fixed deposit ( FD ) with a bank they go for the cumulative option where interest keeps on accumulating and is paid out only on maturity. Instead they can go for a quarterly interest option FD where the interest is calculated and paid out quarterly. Most banks ( public & private ) offer this option of quarterly interest payout, which can also be credited to your bank account.

With a litte bit of self-discipline you can use this Quarterly interest option as a replacement for MIS. Some banks also offer the monthly interest payout FDs but the interest rate on such FDs is usually lower ( by around 0.5% ).

Let's see how we have overcome the above disadvantages of PO MIS by replacing them with Bank FDs:
1. The interest rates are in line with the market rates. If the interest rates in Banks are higher than POMIS, it makes sense to go for Bank FDs.
2. No upper limit on investment.
3. Interest can be credited to your bank account directly.
4. No restrictions on pre-mature withdrawal. You can break an FD whenever you wish to.

Tax-treatment is same as MIS, except for the fact that TDS is applicable.

NABARD Bhavishya Nirman Bonds

Bhavishya Nirman Bonds ( BNB) are currently on offer from National Bank for Agricultural and Rural Development ( NABARD ).

In their ads, NABARD are proudly claiming an interest rate of 12.18%, but Investors must keep in mind 12.18% being advertised is the simple rate of interest. The compounded interest rate is 8.93%
This may seem a bit on the lower side ( comparing the high interest rates, currently prevalent for Bank FDs ), but it has some benefits vis-a-vis Bank FDs.

Let analyse BNB features to understand it better:
1. Every BNB has a face value of Rs. 20,000/- and the issue price is Rs. 8500/- which means that one can buy the bond certificate for Rs. 8500/- now and encash it after 10 years for Rs. 20,000/-

2. It is a zero coupon bond ( i.e. interest rate offered is 0%), but all benefits come in terms of capital appreciation ( a bond bought at Rs. 8500/- appreciates to Rs. 20,000/- in one year ). Since the income comes in form of capital gains and not as interest earned on deposit, different tax rules apply. The gains are taxable under long term capital gains which carry a lower tax rate.

3. BNB are tradeable on BSE ( Bombay Stock Exchange ) to provide early exit option for investors.

4. But there are no tax savings available under 80C for investments under this bond.

People in higher tax slabs looking for tax savings in terms of lower tax would like to invest in these. But keep in mind tax laws may change!

The cheapest term life insurance

I often advice people not to combine insurance and investment and the only insurance product which offers such a possibility is term life insurance.
First let's try to find out what's term life insurance. Wikipedia has a very good definition for it.
In simple, term life insurance provides you only insurance and you don't get anything at the end of policy term ( on survival ). Hence those who opt for it treat insurance as a cost ( or expense ) rather than an investment.

Recently I came across this page on the personalfn website. This page lists down the premium charged by different life insurance companies in India for term life insurance. As you would notice the lowest premium is charged by SBI Life Insurance ( which is owned 74% by the State Bank of India ).

An year back, when I was evaluating Indian Life Insurance companies to purchase a term insurance plan, I had chosen SBI Life. In hindsight, that looks like an intelligent decision.
To be precise, I had bought the option under which the "Sum assured increases by 5% annually" so that the Sum assured can atleast keep pace with inflation. But after I had purchased this policy I got a shocker. The 5% increase per annum is not compounded as I had thought, but is rather caluclated as simple interest on the original sum assured. Still SBI Life Shield looks the best that is on offer presently, since no other Inusrance company offers this facility of increase in Sum assured annually.

Disclosure: I am not associated with SBI Life in any way, except for the fact that I have purchased SBI Life Shield, their term insurance plan last year. If you are aware of any other Life insurance company offering a lower premium for term insurance in India, please do comment and I will update this post accordingly.