Archive for January, 2009

Banking Stocks Find Favour With Mutual Funds

Mutual funds (MFs) are showing more confidence in banks and continue to increase their exposure to their stocks. Public and private sectorbanks have attracted the largest exposure from MFs in December, analysis shows. The move has been triggered by better earnings outlook and bond yield movements, according to observers.

Fund houses’ exposure to banking stocks stood at over Rs 17,541 crore in the month with market value growing by 15.4% over the previous month. State Bank of India, ICICI Bank and Axis Bank were among those that witnessed the largest change in market value, growing 29%, 30% and 28% respectively during the period, data compiled by HDFC Securities shows.

The third quarter would see strong earnings growth and “windfall gains’’ for banks driven by bond yield movements, according to Ajay Parmar, head, research, Emkay Global Financial Services. As interest rates continue to fall, bond yields have moved down by 280 bps during the quarter across maturities.

“Earnings of PSU banks could outperform estimates driven by mark-to-market and actual treasury gains,’’ Parmar noted. The volume growth also has remained strong with bank credit for the quarter up to December 19 growing 24.5% on a yearon-year (y-o-y) basis. The credit-deposit ratio too remained stable during the quarter at 74.5% compared to 73% achieved during the second quarter.

However, PSU banks are seeing pressure on net interest margins (NIMs) as they have reduced lending rates by 150 bps while deposit rates have come down only by 50-75 bps. NIMs and asset quality continue to remain key concerns.

“We have to ensure that the quality of assets doesn’t deteriorate. We are focusing on accessing low cost deposits and improving lending,’’ said V A Joseph, MD and CEO of the South Indian Bank.
“The difference in e pace of cut in lending and deposit rates and camouflaging of asset quality behind restructuring are the key problems facing banks,’’ Parmar said in his research note

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What is Equity Linked Saving Scheme (ELSS)?

ELSS is a great way to save tax, boost your portfolio, and invest for the longer term.

January is a month of New Year resolutions – more exercise, better relationships, vacations and sunsets and pledges to reduce spending. For the salaried, January is also synonymous with submission of investment proofs for tax saving to their companies, a process generally accompanied by the realization that the Rs. 1 lakh has not yet been put aside as required, followed by a frenzied anxiety to arrange for the elusive amount to decrease one’s tax liability.

With investors seeking tax saving investments, the national saving certificate, tax saving bank deposits, regular investments in a public provident fund or buying insurance policies are commonly advised as investment avenues. However, one of the best investment options in the tax saving category is often overlooked - Equity Linked Savings Scheme (ELSS).

What is an ELSS?

An ELSS is similar to a diversified equity-oriented scheme, with the additional benefit of saving tax under section 80C.  Structured as an open-ended equity fund with a lock in period of three years, an investor can invest at any time during the year.

The maximum investment in ELSS that can avail of a benefit under section 80C is Rs. 1 lakh. Accordingly, the maximum tax that one can save through these schemes is Rs. 33,990.

Advantages

The three-year lock-in period works in favour of the investor as ELSS tend to have a more stable corpus. This means lower volatility for the ELSS as compared to a diversified equity fund. Depending upon their style of management, fund managers would be able to take long term investment calls without worrying about redemption pressures and can opt to remain fully invested.

Comparative Analysis of ELSS and Other Tax Saving instruments

Particulars

PPF

NSC

ELSS

Unit-linked insurance plans

Lock-in Period

15

6

3

3

Min Investment

Rs.500

Rs.100

Rs.500

May differ from plan to plan

Max Investment qualifying u/s 80C

Rs.70000

Rs.100000

Rs.100000

Rs.100000

Risk Level

Low

Low

Medium-High

Medium-high

Returns

8%*

8%**

Market linked

Market linked

Taxability of Interest/Dividend

Tax free

Taxable #

Tax free

N.A

* Compounded annually

** Compounded half yearly.

# Taxable but accrued interest available for 80C benefits until 5 years

Compared to all other tax planning schemes available today, ELSS has the shortest lock-in period. It also has the potential to give you superior returns over other tax saving instruments.

Suitable for long term goal planning

Though lump sum investments can be made, one can invest through the SIP route as well. Investments of as low as Rs. 500 per month are also possible. As equities are market-linked, investors have the opportunity to benefit from rupee cost-averaging. This, in turn, allows them to lower the average cost of purchase significantly and eventually enables them to reap benefits over the medium to long term.

In conclusion, if you’d like to save tax while giving your portfolio an extra edge while investing for the longer term, ELSS schemes are the way to go for you!

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Check out these weekly updates on Personal Finance News in India:

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News from US: ETF is the way to go

THE exchange-traded funds (ETF) industry has the enemy in its sights: It’s the active manager, who runs a traditional equity mutual fund. When they first appeared in the marketplace, ETFs talked up such virtues as their lower costs, tax advantages and how easy they were to trade. Now, after the worst year for the Dow Jones Industrial Average since 1931, they’re going in for the kill.

“Active managers say they’ll protect you when the market falls by getting ahead of it,” says Lee Kranefuss, chief executive officer of Barclays Global Investors’ iShares business. “That promise is hard to deliver on.” ETFs are not only cheaper, he says, they outperform the managers, too. An ETF is a mutual fund that you buy and sell through a brokerage account, such as an individual stock. Most ETFs are index funds — meaning they track the performance of a particular market, or slice of the market, rather than try to exceed it.

In theory, active managers should beat indices because their funds can build up cash during a market drop. They’re also supposed to be able to pick the stocks that will hold up better during declines. That’s one of the things you pay them for.

They’re not earning their pay. Last year, 58 per cent of all actively managed funds lost more in value than the benchmark they measure themselves against, according to Morningstar. That’s not much better than chance. Small-cap managers, who are supposed to be especially nimble, had a particularly bad year — 72 per cent of them fell behind their benchmarks.

The numbers get worse when you compare the managers’ performance with the Standard & Poor’s 500 Index. Among largecap US funds, 62 per cent lagged behind the S&P in 2008, as did 63 per cent of all US diversified equity funds. Most managed funds trailed the indices in the first phase of a recovery, too. As an example, look at what happened in the 12 months starting in October 2002, the bottom of the last bear market. Seventy-eight per cent of US managed equity funds did worse than the benchmark they measured themselves against. You are paying your managers to miss.

Investors are catching on. They pulled $128.7 billion out of managed equity mutual funds in the first 11 months of 2008, according to the Investment Company Institute in Washi-ngton.

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Mutual Fund News in India Jan,09 Part 2

Mutual Funds News:

  • UTI Mutual Fund on Wednesday launched new features for their customers on the mobile.
  • ING Mutual Fund has revised the minimum application amount of ING Tax Savings Fund.
  • FIDELITY International’s Indian asset management com pany on Wednesday announced the launch of its Fidelity Wealth Builder Fund, an open ended fund offering asset allocation options with three plans. The investment objective of the fund is to seek to generate reasonable returns based on the plan selected with minimum and maximum asset allocation between debt and equity, it said in a statement. This is a zero entry load Fund with free switching between plans permitted. The NFO will be open from January 14 to February 5. The Fund would open for ongoing purchases and redemptions from March 2.
  • HSBC MF has discontinued the daily dividend option under HSBC floating rate long-term plan.
  • DSP BlackRock MF has revised the minimum application amount under liquid and debt categories.
  • Vineet Vohra, MD and CEO, has resigned from the Board of ING Investment Management.
  •  

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    No Load Funds Catching Up?

    Following the Securities and Exchange Board of India (Sebi) announcement to waive entry loads for direct mutual fund (MF) applicants, Bajaj Capital Ltd is working with mutual fund players to provide no-load funds to its high-value and self-directed investors. “We are looking to introduce the product in the market in early February,” said Rajiv Deep Bajaj, managing director of Bajaj Capital, a New Delhi-based non-banking financial advisory firm. “But we want to keep the scheme structure and asset management companies (AMCs) a surprise for now.”

    According to the memo issued by Sebi earlier this month, mutual fund investors will be exempted from payment of entry fee on direct applications received through the Internet, directly submitted to asset management companies (AMC), or to investor service centres.

    “Loads on mutual funds are important, as they act as remuneration for our advisory services to investors,” said Bajaj. “We are working with mutual fund players to provide no-load funds to our investors who need limited or little advice from us.”

    But, the question remains how the new initiative would be of any help to distributors when they are losing out on upfront commissions.

    “Our commissions would be paid through the annual management charges of the mutual funds,” said Bajaj. “This could also put pressure on the profit margins of AMCs.” Not all distributors consider the arrangement with mutual fund players a long-term fix.

    “Although distributors can enter into an arrangements with AMCs, but with hundreds of distributors flourishing in the country, it could be a little difficult to practise. It is also feared that non-retail and informed investors would ask for kickbacks to invest through them,” said a Mumbai-based distributor, who did want to be identified. “In the long run, the practice of no-entry load could go against the investor’s interest. The whole industry would push close-ended funds that have amortization charges as high as 6%.”

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    Financial Success Habits: Put First Things First

    Masteryourcard took the Franklin Covey class, “7 Habits of Highly Effective People,” and is currently in the process of explaining how these habits can benefit us financially. Here’s the link to the third habit

    The third habit, Put First Things First or The Habit of Integrity and Execution, talks about learning to separate the urgent matters in life from the important matters. It also deals extensively with the benefits of planning, particularly by planning your week. The planning phase isn’t just about finances, though it can help with that. It keeps you organized and on track, which keeps you focused on your goals and helps keep you productive. But, specifically planning your week and focusing on one thing you can do to improve your financial situation, be it save some money, spend less, pay a little more towards a debt, or find a way to reduce a utility bill, will lead you to a more successful financial future.

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    Mutual Funds Updates Jan,09 Part-1

    Mutual funds in India saw net inflows into schemes such as income and gilt funds in December after three months of heavy outflows in most categories managed by them, according to data from the Association of Mutual Funds in India (Amfi), an industry trade body.

    Inflows, net of sales, into income funds were Rs4,501 crore in December and Rs988 crore into gilt funds, Amfi data show.

    The net asset value (NAV) of these two categories of funds has been steadily rising, whetting investor appetite, after the Reserve Bank of India (RBI) started lowering policy rates. Taking a cue from other central banks, RBI dropped the repo rate, which it uses to inject liquidity into the system, in phases to 5.5% earlier in January from 9% in October.

    Income funds invest in a mix of government bonds and corporate debt, while gilt funds invest in government bonds. The prices of these debt instruments moves up as interest rates fall, thus increasing the NAV of the mutual fund scheme that invests in them.

    Data provided by Value Research India Pvt. Ltd, a New Delhi-based research service that tracks the performance of mutual fund schemes, shows that in come funds generated one-year average returns of 9.73% and gilt funds 15.91%.

    December did not change much for equity schemes, though. Excluding inflows of Rs186 crore into tax-saving schemes, the equity category saw net outflows of Rs538 crore over the month. Average one-year returns for the category have declined 56.63%.

    Net inflows in December were Rs90 crore across all categories of funds, sharply lower than the Rs13,790 crore in November. But a majority of November’s inflows came from Rs15,143 crore that went into liquid funds, which invest in short-term debt and are used by corporate houses to park surplus money. In December, liquid funds saw net outflows of Rs4,342 crore.

    All categories of schemes, including equity funds, balanced funds, liquid funds, income funds and gilt funds, saw net outflows of Rs624 crore in 2008, as opposed to net inflows of Rs1.38 trillion in 2007.

    Balanced funds invest in a combination of debt and equity.

    Outflows in 2008 were largely on account of about Rs90,000 crore being redeemed by investors from liquid and income funds between September and October, following the liquidity crisis in the aftermath of the collapse of US investment bank Lehman Brothers Holdings Inc.

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    Investing in Debt Funds in India

    Credit risks have increased manifold in the debt market on account of the financial crisis. Many Indian companies have overstretched themselves and they may now have to resort to high leverage to fund expansions and acquisitions.

    In an interview to Vikas Srivastav, Bajaj Allianz Life Insurance chief investment officer Sashi Krishnan says as a debt investor, his company will now exercise extreme caution in the credit market.

    Excerpts: ¦ In the light of the Satyam fiasco, how do you expect the market to react over the next few quarters?

    Market sentiment will take a big hit on account of the fraud. More importantly, this incident raises questions on the level and efficacy of corporate governance in India, specifically the technology sector. Another issue that now comes to the forefront is the role of independent directors on the boards of Indian companies. A lot is going to be written on the Satyam saga over the next few days and months, but one thing is certain — the markets will not forget this very soon.

    Equity markets are jittery also on account of expecta tions of weak GDP growth. While there is little doubt that we will not be able to avoid a slowdown, India will definitely recover ahead of the rest of the world because of a couple of reasons. Our growth is largely a function of domestic consumption, which still remains intact.

    Domestic consumption will get a further boost after the interest rate cuts and injection of fresh liquidity into the system. Large spending on the infrastructure front will also cushion the fall in growth.

    Mutual fund and insurance companies are investing big money in the debt market. Do you see safe and steady return from the debt market?

    Credit risks in the debt market have increased manifold on account of the financial crisis. Many Indian corporates have overstretched themselves and they may now have to resort to high leverage to fund their expansions and acquisitions. As debt investors, we would exercise extreme caution on the credit front. As regards risks, interest rates have fallen significantly, causing yields to fall. This has led existing debt fund investors to see an appreciation in their portfolios. Given that the monetary policy is now biased towards a further drop in interest rates, we can expect yields to soften further. We manage our debt funds with a credit view that is biased towards the ultra conservative and we manage our debt fund portfolio durations after taking an active view on interest rates. 

    Banks in India are now increasingly focussing on HNI wealth management. Is Bajaj Allianz also focussing more on HNI wealth?

    We strongly believe that we need to be with an investor through his life cycle. With this in mind, we offer products that suit various needs within a life cycle and funds that cater to all kinds of requirements for asset allocation. Asset allocation is the primary determinant of risk and return in a portfolio. Portfolio returns are not determined by market timing or security selection, but by asset allocation decisions. Realising the importance of this, we now offer all our retail and HNI investors an Asset Allocation Fund and a Wheel of Life portfolio strategy. Small investors and HNIs then benefit from strategies that take advantage of movement of asset prices, resulting from changing financial and economic conditions. In the Wheel of Life portfolio strategy, assets of every individual policy holder is reallocated among equity, debt and cash assets in a proportion based on the individual’s outstanding years to maturity and the policy term chosen. This ensures that the level of risk that an individual is exposed to is optimised and his return maximised. ¦ How have your funds performed last year? Our cash, debt, equity and asset allocation funds have outperformed the benchmarks and have delivered superior performance for our investors.

    Your advice to investors for this year?

    Long-term investors need to keep a few simple mantras in mind. First, invest for a long haul. An investor who is patient and remains invested over a long period of time will reap the benefits by earning significantly better returns. This will ensure that the power of compounding will help you build your wealth. And last but not the least, start investing early.

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