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.