Which is a riskier investment— stocks or fixed deposits (FDs)? While the answer seems to be obvious, with the stock market down -26.7% since January this year, did you know that currently, even your “safe” instruments are yielding negative returns? You thought you were safeguarding your money by skirting the stock market to settle for “guaranteed” returns of 7-9% with FDs, but the risk you did not factor in was inflation.
“For every entrepreneur willing to take a risk, there should be a banker on the other side of the table willing to take that risk (in lending credit)”
— P. Chidambaram, Union finance minister
— C. Rangarajan, chairman, PM’s Economic Advisory Council
— U.K. Sinha, CEO, UTI Mutual Fund
“If the world’s capital market regulators are comfortable with each other, companies should be able to list on any exchange in the world”
— C.B. Bhave, Sebi chief
The latest inflation figure of 11.05% has already shrunk your wealth, but things are going to get worse. Given that the recent fuel price hike is yet to be fully factored into the calculation, experts say inflation can go up even further. This means that instruments like bank deposits, which are already posting negative returns, will only get worse (see figures). Anyway you look at it, Indian investors are caught between the devil and the deep sea. Between a yo-yoing Sensex and spiralling inflation, there is no instrument yielding even moderate returns in real terms.
So what are your options as an investor? The smartest thing to do is to adopt a staggered investment approach, be it in debt instruments or traditional hedge investments like gold or commodity funds. With interest rates likely to go up in a bid to control inflation, opting for a fixed rate of interest over a long time-frame may bind you in lowyield instruments.
Hence, the idea is to keep maturities short so that you have money to roll over to a better rate as and when a hike is announced. Liquid funds offer another option for short-term investments. These funds invest mainly in money market instruments and short-term corporate debt. They score over FDs as they can be easily redeemed at any point without any penalty. Their entry and exit loads are usually nil and expense ratios are very low. Should you have cash in hand but are not sure where to invest it, use it to prepay debts before an interest rate hike.
If you must make lumpsum investments, try to limit yourself to a three-month lock-in period. A fixed maturity plan (FMP) could be a good bet. While FMPs are similar to FDs as far as the predictability of returns is concerned, they score better in terms of tax treatment because of the indexation benefit.
However, FMPs are low-cost products only if held till maturity. Says Amar Pandit, a financial planner: “FMPs and liquid funds can be an option for the short term, and when there are signs of inflation plateauing, you can easily shift to better, long-term instruments.”
The other rule of thumb is to diversify your portfolio. This means that you should not rule out the Dalal Street. Also, in the long run, the stock market is the instrument that beats inflation by the widest margin. With stock prices hitting rock bottom, investing in a systematic investment plan is a good move. When we compare the real rate of returns of fixed plans with the potential upside to stock prices, they become even more attractive.
However, though the investment scenario seems gloomy, it is important to remember that inflation also depends on the investment horizon. “We should not look at individual inflation figures but at the the average inflation rate over the period of investment and then look at beating it,” says financial planner Rohit Sarin. Hopefully, inflation will not last at the current levels for longer than six months.
Some figures that have immediate or long-term personal finance implications
9,014 cr rupees was paid as direct tax refund between April and May 2008; the figure for April-May 2007 was Rs 5,037 crore
1,000 rupees is the hike in the basic fares for up to 750 km by Jet Airways, the country’s largest private airline, and Air India following the recent hike in jet fuel prices
If you’ve ever lost your credit card and suffered the subsequent panic attacks, this one is for you. Most credit card companies compensate you for fraudulent transactions only if you report it missing immediately. More often than not, you don’t realise it till much later. Now, Standard Chartered Bank has launched a “Plus Extended Protection Plan” to provide card customers lost card insurance for the period prior to reporting the loss. Launched in association with Tata AIG General Insurance, it will reimburse up to Rs 50,000 every time the card is misused up to 12 hours before its reported loss.
Any payment card, debit or credit, can be registered under this annual policy. While it is not an innovation—most cards with an annual fee offer this as a complimentary facility—the new plan includes all types of cards. Says R.L. Prasad, head of credit cards, Standard Chartered Bank: “This is a comprehensive insurance cover with a wide range of benefits, including other industry firsts like lost wallet, ATM assault and robbery, and home away protection.” The premium depends on the benefit suite chosen by the customer and starts from Rs 1,500 a month.
Sensex will have new members starting July 28 after BSE decided to include Sterlite Industries and Tata Power in place of Cipla and Ambuja Cements in the benchmark index. Tata Power was part of the Sensex stocks till June 11, 2006, after which it was excluded in favour of Reliance Communications. Volumes, momentum and the performance of the industry plays an important role in deciding which stocks are included.
This also gives an idea of the sectors that are doing well now. “In the past stocks which have been excluded from the Sensex have lost out on visibility as well as performance in most cases,” says Ranjit Kapadia of Prabhudas Lilladher. This will also change the weightage assigned to the Sensex scrips though heavyweights like Reliance and ICICI Bank would not be impacted much.
The weightage given to the Sensex scrips is proportional to their free-float market capitalisation. This means they either have more shares that can be freely traded in the market, or are quoting a higher price, or enjoying both situations.
|Company||Price (Rs)||YTD (%)||1 yr (%)|
|Tata Power Co.||1276.3||-17.62%||113.71%|
|Price as on 19 June 2008|
Just as each player has his task cut out, each stock has a defined role to play in the portfolio. Some are dependable— like ITC and Rahul Dravid—and are expected to hold steady when the whole team (or portfolio) is falling apart. Others perform well under all conditions—like Reliance Industries and Sachin Tendulkar. See how other players measure up on Dalal Street.
If you have waited endlessly for refunds after non-allotment of shares, the wait may finally be over. Market regulator Sebi has proposed an alternative mode of payment for public issues to eliminate the process of refunding. According to the proposed method, called ASBA (applications supported by blocked amount), the application money shall remain in the investors’ account till the finalisation of the basis of allotment.
The retail investors would have to submit bids at the cut-off price through self-certified syndicate banks (SCSBs) in which they have accounts. The banks would accept the applications, block the funds to the extent of bid payment amount, upload the details in the electronic bidding system of BSE or NSE, unblock the money once the basis of allotment is settled and transfer the amount for allotted shares to the issuer.
Only those retail investors will be eligible who bid at the cut-off price as a single option and agree not to revise their bids. If sufficient balance for blocking the amount is not available in the applicant’s account, the application shall be rejected. This process will co-exist with the current procedure of applying through sub syndicate/ syndicate members with cheque as a payment instrument.
How the ASBA process works
1. Investors bid at cut-off price, agree not to revise bids, apply through designated SCSB branches in which they have accounts
2. SCSB blocks fund to the extent of bid payment amount. In case of insufficient amount in applicant’s account, application is rejected
3. SCSB uploads details in the electronic bidding system of BSE or NSE by the end of the day
4. Registrar gets electronic bid file from NSE/ BSE after bid closure, validates with the depository’s data base for correct information
5. After approval from stock exchange, registrar sends SCSB details on allotment and money to move to escrow public issue account
6. SCSB unblocks the amount once basis of allotment is finalised and transfers the amount for allotted shares to the issuer
7. After confirmation from SCSB, issuer makes the allotment and subsequently shares are credited to the investors’ DP account
The ace factor
|Post-tax yield (%)|
|Assumptions: MF returns 22.54% annualised; deposit rate is 9.18%; interest payment subject to 11.33% TDS; equity fund investments carry entry load of 2.25%, are not redeemed before a year; investor in 33% tax bracket|
Wouldn’t you want a product that combines the safety of a fixed deposit with the returns of an equity fund? The recently launched Ace Deposit by Kotak Mahindra Bank promises to do just that. If you invest in the bank’s monthly interest term deposit, the interest from the deposit is invested systematically in an equity mutual fund. You can choose from the Kotak Opportunities Fund, or other schemes in the market. The interest rate is 9% for term deposits, but Ace Deposit offers a higher return, depending on the performance of the mutual fund.
Ace Deposit should appeal to equity-shy investors for two reasons: the principal remains untouched, so you are only risking the interest amount, and rupee cost averaging evens out the volatility in the stock market in the long run. This product is meant for long-term investors looking at a timeline of over three years. Those who have trusted a cumulative deposit stand to gain as Ace Deposit is likely to generate higher returns (see table). The product also allows overdraft facilities against the deposit.
A Ulip with a guaranteed loyalty bonus is more an investment product than insurance. Now, Reliance Super InvestAssure Plan (RSIP) covers both. The biggest difference is the 8-fund option it offers, including Gilt and sectoral funds, which provide higher returns. It even has a Shariahcompliant fund.
The guaranteed contributions add 50 per cent of the first year’s basic premium to the fund value on the tenth policy anniversary and every fifth anniversary after that till the policy is in force. So a policyholder can earn over 250% of the first year’s basic premium (excluding rider premium) for a 30-year policy. With a minimum annual premium of Rs 5,000, the policy is affordable and offers ample scope for gains. If one includes term life, major surgical benefits, critical illness, accidental death and permanent disablement riders, the policy is packed with value, offering both protection and investment.
— Narayan Krishnamurthy
Do you know why you’ve invested and what you’re invested in? You can check your financial quotient here.
1. Term plans are the cheapest form of insurance
2. The amount paid as expense ratio for a fund changes over the years that you stay invested in it
3. The interest earned in NSCs does not qualify for deduction under Section 80C in the year of maturity
4. A sector fund is more risky than an equity-diversified fund
Give yourself 1 for every Yes and 0 for every No
0-1: Better luck next time (and do take the time to read this magazine. There’s plenty of information that could prove useful)
2-3: You’ll do—your grasp of your finances seems pretty good, though, of course, it could be better!
4: Obviously a know-it-all. Just make sure to keep reading and keeping your knowledge up-to-date