Saturday, December 8, 2012

How to secure your child's future?

How to secure your child's future?
On at least one aspect, I think several of the insurance company advertisements have got it spot on. The initial celebrations on the arrival of the child gradually leads to a more sober reflection on how best to ensure his / her comfortable upbringing and education. Doubtless, finances are but one aspect of this concern; but they are an important one! Moreover, they are probably much easier addressed than some of the softer and other cultural aspects of parenting.


Investment is distinct from Savings
Savings simply mean you set aside a portion of your income for future use. Yet, it is (careful and planned) investing that makes maximum use of these savings and optimizes your portfolio in later years. This is especially important since inflation tends to erode the purchasing power of money over a period of time. A headline inflation of 6%-7%, actually translates into a lifestyle inflation of 10%. Thus, if your money is lying in a deposit fetching 7% interest rate, you are actually eroding wealth!

India is the best growth story to invest in
In contrast, with the medium to long-term prospects of Indias growth being as strong as they are, the long-term returns on equity can be assumed to be 15%. Thus, this provides an effective way to not get left behind the growth story that is India. In addition, investing in equity as an asset class, if well researched and carefully done, enjoys various benefits, such as:

    High liquidity, to withdraw money in desired quantity whenever needed
    High flexibility in terms of investing as and when funds are available
    Favourable tax treatment (especially compared to real estate and fixed deposits)
    Low transaction costs
    High degree of transparency in knowing how your corpus grows

The power of compounding
Returns on investments exhibit the effect of compounding. Very simply put, it means that the returns earned on the investment in the first year, gets added to the corpus in subsequent years and fetches its own returns. Thus, in the illustrative returns shown above, if you invest Rs. 1 crore today in equity @15%, the corpus would grow to Rs 4 crore in 10 years time. In contrast, in a fixed deposit @7%, the corpus would only be Rs 2 crore in 10 years time.

Index investing
Investing in the index is possibly the best long-term way to benefit from the India growth story. You can invest in the index either one-time, or systematically as you earn more, or a combination of these. The benefit of index investing is the low transaction cost and low need for research involved. Thus, for those not very comfortable with the markets, or with those having no time to do extensive research, it is also a good starting point to gain familiarity with the working of equity markets.

Once you are more comfortable with equity markets and with how an investment portfolio works, you can consider allocating funds to more actively managed portfolios as well. These require much more research and active management, but at the same time have the potential to generate higher returns than the index by leveraging existing market conditions.

Trust formation
Very often we come across customers desirous of making a trust in each of their childrens names. In India, unlike in some other countries, such trusts by themselves have no special tax benefits. Yet, they often have softer benefits such as helping mentally allocate resources for each childs milestones, monitor each set of investments clearly, etc. Given the formalities and procedures around trust formation, maintenance and reporting, we would recommend this to people having a large corpus only. With most others, the money may be managed through mental accounting alone, without going through the legal procedures around trust creation.

The concept of life insurance is to secure the lifestyle and indeed the financial well being of the family in the unfortunate event of the breadwinner not being around. Due to cultural reasons, this often brings unpleasant thoughts, and hence the subject of insurance gets pushed under the carpet.

However, we would rather look at it as a means to lead a more secure and worry-free life. While the emotional trauma of loss of a family member is unavoidable, insurance atleast spares the financial burden that this could bring. Thus, an insurance of five to seven times annual earnings is a useful benchmark to have as amount of life insurance.

A term plan is a simple and effective life insurance policy. Very roughly, the annual premium for a healthy 35-year old, for a life cover of Rs. 1 crore, should amount to about Rs. 45,000. There are two important points to note here: the earlier you start the life cover, the lower the premium rate you can lock-in (once locked-in, the premium does not ever change). Secondly, it is a huge benefit to start life insurance when one is healthy and unaffected by any chronic ailments. This ensures much lower premiums, and a hassle-free claims process.

We would, at this stage, advise against the more complicated unit linked products; or the typically low yielding traditional insurance products. These are useful for investors only in very specific cases, and only when the investors have understood the cost-benefit equations of these plans very carefully. The insurance agents very seldom do such elucidation; and hence it may be useful to stay away from these for a while.


Just as it is impossible to learn swimming without jumping into the pool, we believe a start has to be made sometime along both these dimensions. And there is no better time than today!

Thus, we would recommend a simple starting point for parents thinking about their childs future:

Invest a lump sum in an index fund, and plan to systematically build this through authorising smaller additional investments monthly. You can look at research to see which are the good funds, and keep your portfolio under periodic monitoring.
Insure your life, for atleast five times your annual earnings. Again, a simple shopping expedition should get you the best term insurance cover applicable for your age and health.

- Ramganesh Iyer

Om Namah Shivaya

Jai Shri Eklingnath Ji Ki

Saturday, April 14, 2012

इन 5 बड़ी भूलों से बचें तो 60 साल की उम्र में आप भी बन सकते हैं करोड़पति

इन 5 बड़ी भूलों से बचें तो 60 साल की उम्र में आप भी बन सकते हैं करोड़पति

क्या आप जहां पैसा लगा रहे हैं वह आपके लिए सबसे बेहतर विकल्प है? अपने पैसे का सही निवेश न कर अधिकतर लोग नुकसान उठा रहे हैं। मीडिया में सिर्फ बड़े घोटालों की खबरें आती हैं। लेकिन इन्वेस्टमेंट में चूक हो जाने से हर रोज जो पैसा डूब जाता है, वह इन घोटालों से कई गुना बड़ा है। हम गलत बीमा पॉलिसी ले रहे हैं, बचत खातों में बड़ी रकम पड़ी रहने देते हैं, छोटी-छोटी लापरवाही के कारण कर्ज, क्रेडिट कार्ड और बचत खातों में जुर्माना भर रहे हैं, गलत स्टॉक में पैसा लगा रहे हैं और अपनी जरूरत को नजरअंदाज कर निवेश कर रहे हैं। भास्कर बता रहा है कि कौन सी हैं निवेश में पांच सबसे ज्यादा होने वाली गलतियां? और कैसे सही समय पर सही जगह पैसा लगाकर हम बन सकते हैं करोड़पति....

उम्र और जरूरत का ध्यान रखे बिना निवेश करना

क्या आपने कभी ऐसा कोई प्लान बनाया कि आपकी और परिवार की जरूरतें क्या हैं - वर्तमान की ही नहीं, भविष्य की भी? आज आय कितनी है और आगे कितनी हो सकती है? अभी कितनी बचत है और पांच या दस साल बाद कितनी होगी? इस बचत का आप आज क्या इस्तेमाल कर रहे हैं और आगे कैसे करेंगे? पहले कार खरीदेंगे या मकान? टीवी-फ्रिज खरीदेंगे या बीमा पॉलिसी? क्या कम जरूरी है और क्या ज्यादा? क्या तुरंत चाहिए और क्या कुछ सालों बाद? ये सोचे बिना निवेश यानी नुकसान को दावत।

महज टैक्स बचाने के लिए जीवन बीमा पॉलिसी लेना

अगर आपकी शर्ट का साइज 42 है तो क्या आप 38 नंबर की शर्ट खरीदेंगे? नहीं? तो फिर गैरजरूरी पॉलिसी क्यों? जीवन बीमा होता है मृत्यु के बाद परिवार के पोषण के लिए। इसके लिए टर्म पॉलिसी है चूंकि वह कम प्रीमियम पर ऊंचा रिस्क कवर देती है। रिटर्न नहीं देती। लेकिन अधिकतर लोग इनकम टैक्स बचाने के लिए या निवेश के लिए ही बीमा कराते हैं। एंडाउमेंट और मनीबैक पॉलिसी पर रिटर्न केवल 6 फीसदी मिलता है और लाइफ कवर बेहद कम। ये हाई कॉस्ट और लो रिटर्न इनवेस्टमेंट हैं।

योजना और लक्ष्य तय किए बगैर पैसे लगाना

अगले तीन साल में आप घर खरीदने की योजना बनाते हैं। इसके लिए अगर आप फिक्स्ड डिपॉजिट में पैसा इन्वेस्ट करें, तो रिटर्न केवल आठ-नौ फीसदी मिलेगा। लेकिन अगर किसी म्यूचुअल फंड में निवेश करें, तो रिटर्न दोगुना तक मिल सकता है। वह भी टैक्स फ्री। हर जरूरत पूरी करने के लिए अलग योजना बनाएं। किस चीज को पाने में कितना समय लगेगा, उसके लिए कितने पैसे की जरूरत होगी और कहां इन्वेस्ट करने पर फायदा होगा, इन सभी बातों को ध्यान में रखें।

जिम्मेदारियों के मुताबिक निवेश न बदलना

उम्र बढऩे के साथ ही जिम्मेदारियां और जरूरतें बदलती हैं। साथ ही बदलती हैं इन्वेस्टमेंट स्कीम। कॅरियर की शुरूआत में आप वल्र्ड टूर पर जाना चाहते थे, लेकिन दस साल बाद आप अपने बच्चों की पढ़ाई के लिए इन्वेस्ट करेंगे। या फिर घर खरीदना चाहते हैं। ऐसे में जरूरी नहीं कि आपने दस साल पहले जिस योजना में पैसा जमा कर मुनाफा कमाया था, वही आज भी उतना ही लाभ दे। अलग अलग लक्ष्य के लिए इन्वेस्टमेंट योजना में भी बदलाव लाना जरूरी है।

रिटायरमेंट के बाद की योजना समय से न बनाना

क्या आपने रिटायरमेंट के बाद के खर्चों के लिए निवेश कर दिया है? यदि कर भी दिया है तो क्या सही समय पर? अधिकतर का जवाब होगा, नहीं। कॅरियर की शुरुआत में जिम्मेदारियां कम होती हैं। तब बचत और इन्वेस्टमेंट का विचार नहीं आता। अगर 30 की उम्र से भी इन्वेस्ट करना शुरू करें, तो रिटायरमेंट के समय आपके हाथ एक बड़ी रकम होगी। अगर 55 साल की उम्र में निवेश करते हैं तो रिटायरमेंट से पहले रकम बढऩे के लिए सिर्फ 5 ही साल हैं। ज्यादा निवेश पर भी रिटर्न कम ही रहेगा।

Sunday, March 25, 2012

Liquid funds – quick money when needed!

Liquid funds – quick money when needed!

Liquid funds invest in money market instruments. Money market is a market for short term borrowing and lending. This market deals with debt instruments such as certificate of deposits, commercial paper and treasury bills.

While searching for different investment options, you might have come across the term ‘Liquid Funds’. There are many of us who might have wondered what these funds are and more so after the news articles popped up telling everyone that investing in these funds is not a smart choice. However, before we make a decision, let’s discuss what Liquid Funds are.

What are Liquid Funds?

When we try and understand the term ‘liquid’ in financial terms, it means an asset which is as good as hard cash. Real estate is the least ‘liquid’ of all assets and a savings deposit is the most ‘liquid’ of all. Similarly, Liquid Funds are a kind of mutual fund or debt fund which can be redeemed in as less as 24 hours.

What are Liquid Funds invested in?

Liquid funds invest in money market instruments. Money market is a market for short term borrowing and lending. This market deals with debt instruments such as certificate of deposits, commercial paper and treasury bills.

What is the ‘lock in’ period for Liquid Funds?

Most funds have a lock-in period of a maximum of three days to protect against procedural (primarily banking) glitches, and offer redemption proceeds within 24 hours. However, some funds may even have a lock in period of a week or a month or more. However, the tenure is always far less than a normal mutual fund.

What are its features?

Here are some of the features of Liquid funds:

  • No Entry and Exit load (sometimes exit load is charged if redeemed before the lock in period)
  • Low annual fee 0.30 to 0.70%
  • Variable Minimum investment amount according to scheme
  • Great tax benefit
  • Easy liquidation, hence the name
  • An average 8% p.a return on liquid funds
  • Liquid funds have the restriction that they can only have 10 per cent or less mark-to-market component, indicating a lower interest rate risk.

What are the tax benefits?

If you invest in a short-term fixed deposit, the returns are taxable as per the investor’s tax bracket. Therefore, if you are in the highest tax bracket most of your returns from the fixed deposit would be wiped out.

On the other hand with liquid funds, as mentioned before, if the dividend option is taken, the returns are tax-free in the investor’s hand!

Has the past performance been good?

In the last one year, liquid funds have returned between 7.7 per cent and 8.85 per cent. Recent data shows that banks are taking fresh exposures in liquid funds which indicates a high degree of safety and confidence in liquid funds. This shows that liquid funds are a good product to invest in if you are looking to fulfill some short-term goals.

How does it compare to a short-term fixed deposit?

Fixed Deposit

Liquid Funds

Returns on investments range between 4-5%

Returns on investments range between 5-8%

The interest on Fixed deposit is taxed by adding it to the assessee’s income.

If you opt for a dividend option the dividend is tax free in the hands of the investor

Long Tenure

Very short tenure

Returns are fixed

Returns are not fixed

Not dependent on market performance

Dependant on market performance

Tuesday, March 13, 2012

Knowledge Tips

Knowledge Tips

Total Returns in Debt Funds

A debt fund earns its returns from two sources: Interest income and capital gains/losses from change in the value of the securities. The value of a debt security changes with changes in interest rate, in inverse proportion. When interest rates move up, they loose value and vice versa. How much the value would change depends, pre-dominantly, on the tenure (period to maturity) of the security. Therefore an investment in debt funds is subject to the risk of change in the value of the investment, from changes in interest rates. By the same count, it can be rewarding when total returns far exceed the interest income.

Rupee Cost Averaging

When an investment is made, the cost incurred is the price times the number of units purchased. If investors buy their units at various points in time, they pay the price prevailing at each of those points in time. Their cost of investment for all such units acquired over time is obviously the average of all the purchase transactions. If the same amount is invested across time, as is the case in a Systematic Investment Plan (SIP), the number of units purchased each time varies depending on the price. At a higher price, less units are purchased; at a lower price more units are purchased. This results in the average cost in a SIP averaging down. This is called rupee cost averaging.

Equity Style Matrix

Building and managing an investment portfolio is not just about selecting the correct stocks and sectors. It is also about choosing a set of strategies that will underlie the selection and management process. The investment strategy that a fund manager chooses is represented in a style matrix. An equity fund’s style matrix features large medium and small cap on one side, and growth, value and blended on the other. Style indicates the factors that dominate the portfolio construction strategy.

Indexation of Capital Gains

When an investor holds a mutual fund investment for a period longer than 12 months and sells it at a profit, the gains to the investor are called as long term capital gains (LTCG). However, LTCG, having accrued over a long period of time, is likely to be higher not merely from appreciation in the value of the investment, but also an increase in the rate of inflation. In order to nullify the effect of inflation on LTCG, the income tax laws allow an investor to index the LTCG, before subjecting it to tax.

Dividend Distribution Tax

Mutual fund dividends are fully exempt from tax. This means the investor does not pay any tax on the dividends received from a mutual fund. Mutual funds however may receive their income either as dividends or as interest income (from the debt securities that they hold). Therefore dividends paid out by funds that are not equity-oriented, is subject to dividend distribution tax (DDT). DDT is paid directly by the mutual fund, before the dividend is distributed to investors, on all schemes where the equity holding is less than 65% of net assets.

Cash Reserve Ratio

Cash reserve ratio (CRR) represents the amount of cash banks have to keep with the Reserve Bank of India (RBI) out of the deposits that they hold. CRR is stipulated to ensure that at least some portion of the bank’s assets are held in cash, to be available for meeting any sudden need. The CRR is determined by the RBI and is subject to change by RBI. It is stipulated as a percentage of net demand and time liabilities of a bank.

Repo-based Borrowings

Short-term markets enable borrowing and lending money, to meet liquidity needs. Mutual funds usually do not indulge in borrowing, but are only lenders in the short term markets. When they are faced with short-term liquidity needs, they can borrow by providing the government securities that they hold in their portfolios as collateral. Such borrowings are called repos.


EET stands for ‘exempt-exempt-taxable’ regime. Several times, when the Income Tax authorities provide a tax deduction at the time of making an investment, they indicate how the subsequent incomes and the redemption proceeds will be taxed. EEE means, the investment enjoys deduction, the interest earned is exempt, and the redemption proceeds will not be added to taxable income in the year of receipt. EET means, investment and income are exempt, but redemption proceeds will be taxable. This regime is also called as ‘deferred taxation’ where saving is encouraged by exemption during high-tax earning years, and subject to tax in the los-tax retirement years.

Time Value of Money

Time value of money refers to the potential that money has to change in value over a period of time. The change in the value is due to the re-investment of returns over time. This ability of money to earn makes the money in hand today more valuable than the same amount of money received on a future date. Inflation has the opposite effect on the time value of money. Money left idle loses value over time. The purchasing power of a sum of money reduces over time because inflation makes goods and services more expensive.

Credit Spread

Credit spread is the difference between the yield on a corporate bond and a government bond. The government is the lowest risk borrower in the economy, since it is not expected to default. Therefore the lowest interest rates are offered on government bonds. Any other borrower will have to borrow at a rate higher than this rate, reflecting the fact that they are risky as compared to the government. The most significant risk for non-government borrowers is that they may default on the repayment of interest or principal or both. This risk is also known as credit risk. The difference in the borrowing rate of other non-government borrowers and the government bond rates is called credit spread.

Term Structure of Interest Rates

The term structure of interest rates is the relationship between interest rates and term to maturity of bonds. The graphical representation of this relationship is commonly called the yield curve. The term structure or yield curve represents the yield that the market is willing to pay for different maturities of bonds. The yield of government securities is used to draw the yield curve. This is because there is no credit risk associated with such securities and the yield reflects no other risk except the cost of borrowing. All other bonds are traded at a spread to the yield of the government security of similar maturity. The yield curve normally slopes upwards, from left to right, to indicate that the yield goes up with the term to maturity though at a diminishing marginal rate.

Understanding Alpha

In order to earn higher returns, investors tend to invest in high beta funds/ stocks. High beta Funds/ stocks are those that have greater sensitivity than the index (which represents market). Market sensitivity is taken as 1. In light of above, if an investor wishes to know if the returns generated by high beta funds are sufficient or not, Alpha comes in the picture. Alpha tells you whether that fund has produced returns justifying the risks it is taking by comparing its actual return to the one predicted by the beta.

Market Capitalization

The "cap" part means ‘Capitalization’, which is a measure by which one can have an idea of the size of the company. It is the market value of a company's outstanding shares. This figure is found by multiplying stock price with the total number of shares outstanding.

Open Market Operations

OMO is a measure by which a central bank controls the nation’s money supply by buying and selling Government Securities. It helps regulate interest rates and foreign exchange rates. RBI acts according to the liquidity available in the market. When there is surplus liquidity in the market, RBI intervenes and absorbs the liquidity by issuing bonds and when there is liquidity crunch in the markets, the RBI intervenes and infuses liquidity by buying back the bonds that are with the investors.

Purchasing Managers Index

The Purchasing Managers Index or PMI, as it is more commonly called, is a composite measure of a range of industrial indicators in an economy. Jointly released by Economic Research Agencies and mostly by some of the banks, the PMI is closely watched by economists to discern the trends in different sectors.

Net Asset Value

Also known as NAV, this is the unit price (or rupee value) of one unit of a mutual fund. NAV is calculated at the end of every business day. It is calculated by adding up the value of all the securities and cash in the mutual fund's portfolio (its assets), subtracting the fund's liabilities, and dividing that number by the number of units that the fund has issued. It does not include a sales charge. The NAV increases (or decreases) when the value of the mutual fund's holdings increase (or decrease).

Ex-Dividend Date

The date on which a fund's Net Asset Value (NAV) will incorporate the effect of dividend. Only those investors who have invested before this date will be eligible for dividends. All those who buy after this date are buying on an 'ex' basis, i.e on the understanding that the dividend payout will not be made to them. The price at which they buy the units, will therefore be reduced by the extent of dividend that was announced. This adjustment is made to the NAV on the ex-dividend date. Dividend re-investment will also happen at the ex-dividend NAV.

Face Value

The face value is the term used to describe the value of a unit in the books of the mutual fund. If a mutual fund issues 1000 units in a IPO at Rs. 10 each, it collects Rs. 10000. If subsequently the value of the Rs. 10000 invested goes up to Rs. 12,000, the value of 1 unit is Rs. 12. New investors will pay Rs. 12 to buy the units, Rs.2 being the premium over the face value of Rs. 10. In order to keep a count of the number of units, it is important to assign a face value to a unit.

Systematic Investment Plan

Many mutual funds offer investment programs whereby unitholders can invest. The Unitholders of the scheme can benefit by investing specific Rupee amounts periodically, for a continuous period. The SIP allows the investors to invest a fixed amount of Rupees every month for purchasing additional units of the scheme at NAV based prices.

Portfolio Disclosure

According to the SEBI (Mutual Funds) Regulation, mutual funds have to disclose their portfolios to investors only once in six months. The monthly fact sheet that discloses the portfolio to investors is a voluntary disclosure undertaken by mutual funds.

Account Statements

Until 1995, mutual fund investors were issued certificates when they invested in an NFO. Most funds were closed end and had to be sold in the stock markets, if the investors needed to liquidate them. In 1995, a set of new open ended funds began the practice of issuing account statements and agreeing to repurchase the units at their own offices. Soon the industry shifted completely to account statements.

Option and Portfolio

Mutual funds offer various options such as dividend payout, dividend reinvestment and growth, within a particular product. These also feature different NAVs. However, the underlying portfolio may not be different. For example, the portfolio for a growth option and a dividend option within a product, are not different. Since dividend has been paid out in one, the amount of funds being managed under that option is lower. Therefore, the NAV is different.


The offer document that a mutual fund files with SEBI has now been split into Statement of additional information (SAI) and Scheme information document (SID). The common information about organisation, sponsors, financial information about schemes in operations, valuation norms and such is published in SAI. It need not be updated for every scheme, but only once a year. The SID contains information specific to a scheme, and needs to be filed for every scheme that needs approval.


Trustees are expected to do a due diligence of practices adopted by the AMCs. Among the many things that they check is whether the agreements with sponsors or other related entities are not on preferential terms as compared to other vendors. Checks and balances are part of the routine diligence structure in a mutual fund.

Automatic Reinvestment

A service offered by most mutual funds whereby income, dividends and capital gain distributions are automatically invested into the fund by buying additional shares and thus building up holdings through the effects of compounding.

Bond/Income Fund

A closed-end fund that invests in debt and money market instruments of the same maturity as the stated maturity of the plan. The focus of a fixed maturity plan is to provide a stream of income through interest payments, while exposing the investor to a lower level of risk.

Expense Ratio

The ratio of total expenses to net assets of the fund. Expenses include management fees, the cost of shareholder mailings and other administrative expenses. The ratio is listed in a fund's prospectus. Expense ratios may be a function of a fund's size rather than of its success in controlling expenses.

Sector Weighting

When an equity portfolio is disclosed, it is normal practice to show the weights for each sector. This indicates the industry exposure of the portfolio. In order to ensure that the industry classification is uniform across funds, AMFI has prescribed a 4-level industry classification of equity stocks. Mutual funds classify their stocks according to these standard sector classes. This makes the sector weightings across funds, comparable.

Annualised Yield

In the money markets, all return is from interest income. There is really no capital gain or loss to be made on very short term securities. Therefore it is customary to quote yields as an annualised number. The same applies for liquid funds that invest in very short term money market instruments. If a liquid fund earns 0.50% in a month, this means, its annualised yield is 0.50 x 12 = 6%. Changes in NAV for liquid funds are very small, due to this annualisation factor,

Fund Managers

Fund managers who manage the various schemes of a fund house, are key employees of the fund. If any of them were to leave the fund, such change is notified to investors through an advertisement in a national newspaper, and by issuing an addendum to the offer document.

International Funds

If a mutual fund launches an international fund, that makes overseas investments, it must designate a specific fund manager responsible for managing the global assets. This is part of the regulation that applies to international funds.


Investors who buy an ETF, do so on the stock exchange, through their trading platforms or brokers. Such investments do not require filling up an application form, or getting an updated statement of account. The settlement of such purchases is through the normal cycle of the exchange, and units are credited to the demat account of the investor.

Foreign Remittance

An NRI investor can invest in a mutual fund by directly remitting the funds from his overseas account, to the collecting bank of the mutual fund scheme. Such remittance however, has to be accompanied by a foreign inward remittance certificate (FIRC) given by the collecting bank, certifying that the remittance was in foreign currency. Otherwise such investments may not be repatriable.

Active Portfolio Management

Is a systematic and proactive approach to investment with the goal of beating the market. This strategy is based on the premise that markets are not efficient and that there is scope to earn abnormal profits through an active investment strategy.

Money Market Fund

A mutual fund that aims to pay money market interest rates. This is accomplished by investing in safe, highly liquid securities, including certificates of deposit, commercial paper, and Government securities. Money funds make these high interest securities available to the average investor seeking immediate income and high investment safety.

Gold ETFs

A gold ETF will hold gold and its equivalent, to the extent of its corpus. The buying and selling of ETFs in the market do not impact this holding. However, if new units have to be created, they are done by the ETF in bulk, and backed up by holding of physical gold.

Liquid Fund NAV

Liquid funds invest in short term instruments and earn most or all of their incomes from interest. Therefore the change in their NAV is small on an everyday basis. To estimate the yield on the liquid fund, is therefore necessary to annualise the changes in NAV.

Contingent Deferred Sales Charge (CDSC)

A fee (or back-end load) imposed by certain funds on shares redeemed within a specific period following their purchase. These charges are usually assessed on a sliding scale, such as four percent to one percent of the amounts redeemed, with the fee reduced each year the units are held.

Market risk

The danger that overall stock markets could fall. Fund managers may try to deal with this risk by moving a larger percent of their portfolios into cash or by hedging with futures and options. However, market risk is not a one-way street; it's also the peril of being on the sidelines when the stock prices surge.

Portfolio Turnover Rate

The rate at which the fund's portfolio securities are changed each year. If a fund's assets total $100 million and the fund bought and sold $100 million worth of securities that year, its portfolio turnover rate would be 100%. Aggressively managed funds generally have higher portfolio turnover rates than do conservative funds that invest for the long term. High portfolio turnover rates generally add to the expenses of a fund.

Applicable NAV

SEBI has now clarified that for all investments in debt and liquid funds, for values above Rs.1 crore, the applicable NAV will depend on the realisation of funds. The NAV on the date on which the funds actually were realised will apply, irrespective of when the application was handed in.

Overseas Investments

When mutual funds invest in overseas securities, the permitted class of debt securities should all be of investment grade or above. All equity investments should only be in regulated entities abroad. The guidelines provide a base level of safety in the choice of investments that international funds can make.

Annual Reports

The time available to mutual funds to send an abridged annual report of their schemes, has been reduced from six months from the date of closure of accounts, to four months. Investors can obtain an unabridged version of the report, from the AMC offices, after paying a fee for the same.

Average Maturity

Average Maturity as per definition is the average time to maturity for all Debt securities held in a portfolio. It is an important consideration for investors in Debt Funds and Money Market funds. The significance of Average Maturity lies in the fact that it shows the sensitivity of a Debt Fund to change in interest rates.

Bond Rating

System of evaluating the probability of whether a bond issuer will default. CRISIL, ICRA, CARE and other rating agencies, analyze the financial stability of both corporate and state government debt issuers. Ratings range from AAA (extremely unlikely to default) to D (likely to default). Mutual funds generally restrict their bond purchases to issues of certain quality ratings, which are specified in their prospectuses.

Capital Gains

When the fund sells a stock, it incurs short-term and long-term capital gains or losses. Unlike a corporation, a mutual fund does not itself pay income taxes. By law, each year the fund must distribute that year's net investment income (the total of dividends and interest received less fund expenses) and net realized gain (gains less losses on securities sales) to the fund's shareholders. That means that you get to foot the taxes due on those gain.

Credit risk

The danger that the issuer of a corporate or municipal bond will experience financial difficulties causing deterioration in credit worthiness, perhaps even a default. Treasury securities are considered free of this risk.

Treasury Bills

Treasury Bills are Short Term Money Market instruments issued by RBI on behalf of the Government of India. Treasury Bills or T-Bills as they are called are issued only by the Central Government and unlike Government Securities State Governments cannot issue T-Bills. T-Bills are issued in the form of a zero coupon instrument at a discount to face value, redeemable at par on maturity. The return to the investor is thus the difference between the maturity value and the issue price.


When a fund is taken-over or the AMC sells its stake to another sponsor, investors in the fund being taken over, have the option to exit the schemes they have invested in, within a stipulated period, at no exit load. This option is not available to investors in ELSS whose funds are locked in for 3 years.


The facility to nominate a person in whom the units will vest in the event of the death of the investor is a facility that is available only to individual investors in a mutual fund. Non- individual investors, including corporates, HUFs, trusts, societies and partnership firms, can neither nominate nor be a nominee.

Assets under Management (AUM)

The current value of the portfolio of the mutual fund is the AUM of the fund. The fund manager’s fees and fund running expenses are charged to the AUM. Net assets refer to the value that remain after charging such fee.

Debt Portfolio

The limits on investments in a debt instrument are defined in terms of the issuer. Therefore a mutual fund factsheet discloses debt instruments issuer-wise and not instrument-wise, unlike equity shares.

Close ended schemes

Schemes have a pre-specified maturity period and investments in these schemes can be made at the time of the IPO and thereafter at market price through the stock exchange on which the same is listed. The market price is generally at a discount to the NAV depending upon market perception and expectations of the scheme. The Fund may also offer an exit route by offering to repurchase at NAV related prices.

Cutoff time

Investments and redemptions are processed at a particular NAV. This NAV is a function of the cutoff times specified by the fund. For example a fund may 10.00 am as the cutoff time in the Liquid Fund for previous day NAV. Investment Applications received after the cutoff time of 10.00 am will get same day NAV, while applications received before 10 am will get previous day NAV, assuming that there are no holidays/Sundays involved in between.

Gilt Funds

Gilt Funds are those schemes, which as per their offer document can invest only in government securities of different maturities. They offer lower returns as the credit risk is virtually absent and there are no chances of government defaulting on its payment obligations. This effectively reduces the yield on them. They are still subject to the interest rate risk.


The capital gains arising out of selling mutual fund units are taxed at Long Term Capital Gains rate if they are held for more than one year. The Long term capital gains rate can be computed either as 10 % flat or 20 % with indexation benefit. For this the government has specified an index linked to the wholesale price index. The indices of two years (year of purchase and the year of sale) are used for the purpose of computing capital gains tax. The purchase price is multiplied by the index of the year of sale and the product is divided by the index of the year of purchase. This indexed purchase price is deducted from the sale price to calculate the indexed capital gains. The tax rate of 20 % is applied to the indexed capital gains.

Risk Adjusted Returns

For the purpose of comparing returns across schemes involving varying levels of risk, the returns are adjusted for the level of risk before comparison. Such returns (reduced for the level of risk involved) are called risk-adjusted returns.

Annualised Return

This is the hypothetical rate of return that, if the fund achieved it over a year's time, would produce the same cumulative total return if the fund performed consistently over the entire period. A total return is expressed in a percentage and tells you how much money you have earned or lost on an investment over time, assuming that all dividends and capital gains are reinvested.

Capital Appreciation Fund

A mutual fund that seeks maximum capital appreciation through the use of investment techniques involving greater than ordinary risk, such as borrowing money in order to provide leverage and high portfolio turnover.

Credit Rating

The responsibility of a credit rating agency assigned to rate a debt instrument extends over the life of the bond. If there is any change in the circumstances leading to a change in the credit quality of the bond, the rating of the bond will have to be upgraded or downgraded. The rating assigned to a bond will have to be re-affirmed every year even if there is no change in the rating of the bond.

Set-off Rules

The capital loss incurred on the sale of mutual fund units can be set-off against capital gains thus reducing the gains that will be subject to tax. Capital loss can be carried forward for eight years and set-off. Short-term capital losses can be set-off against short-term and long-term capital gains. Long-term capital loss can be set-off against only against long-term capital gains. If the long-term capital loss is on the sale of an asset whose long-term capital gains is exempt from tax, such as an equity-oriented mutual fund, there will be no set-off benefits available on this loss.

Total Returns

The returns from a bond fund comprises of both coupon income from the bonds held as well as an increase or decrease in the value of the bond because of a change in interest rates. The contribution of each of these components varies. In situations where interest rates are going down, the gains from an increase in the price will be the greater contributor to total returns while in times of rising interest rates, coupon income will make a positive contribution to total income while the loss from a fall in the value of the bonds erode the total returns.

Interest Rate Risk

The change in the price of a debt security due to changes in the market interest rates is the interest rate risk. For debt oriented mutual fund schemes, this interest rate risk affects the NAV of the fund. A rise in the interest rates leads to a fall in the price of a fixed income security.


The ease with which an investment can be bought or sold. A person should be able to buy or sell a liquid asset quickly with virtually no adverse price impact.

Yield Curve

The relationship at a given point in time between yields on fixed-income securities with varying maturities – commonly, treasury bills, notes and bonds. The curve typically slopes upward because longer maturities normally have higher yields, although it can be flat or even “inverted” or downward sloping.

Wednesday, March 7, 2012

Types of Mutual Funds – Debt Funds

Types of Mutual Funds – Debt Funds

A Debt fund is a type of mutual fund that invests in bonds and other debt related investments. The primary goal of a debt fund is to preserve the original amount invested and to generate a steady flow of income.

A bond is purchased for a fixed period of time – during this time, the investor is paid a monthly amount, called the coupon amount. At the end of the fixed time period, the bond holder will receive the original amount invested.

2. What are the advantages of investing in debt funds?

Steady flow of income: Debt funds invest in bonds that pay a monthly coupon amount for all investments. A debt fund will usually pay back this money to its investors in the form of dividends. This produces a steady income for the investors of the debt fund.

Low management fee: Debt funds usually have a lower management fee than equity funds.

Low risk of capital Loss: Debt funds invest in bonds and the risk of losing the amount invested in a bond is quite low.

3. Are there risks involved in debt fund investing?

Yes. As with any investment, there are risks involved in investing in debt funds.

Credit Risk: For example, the bond in which the fund has invested can default – this means that the bond issuer will fail to pay back the money that was invested in the bond. However, debt investments are usually made in low risk bonds such as government issued bonds, and therefore the risk of default is quite low.

Interest Rate Risk: Interest rate changes will impact the price of the bond. Long term bonds are affected more by interest rate changes than short-term bonds.

4. What are the different types of debt funds?

Liquid Funds:

These funds are meant for investors who need to cash their investments fairly quickly, say, 3 months or less. These are low risk investments and offer returns that are slightly higher than deposit schemes.

Income Funds:

These funds will provide a steady flow of income either monthly or quarterly. Income funds are meant for investors who desire a steady flow of income.

Gilt Funds:

These funds invest in bonds issued by the Government of India. These funds are therefore very low risk in terms of credit default since the government will almost never fail to repay its debt. These funds however, carry an interest rate risk.

Floater Funds:

These funds make a majority of their investments in variable rate (or floater) bonds. These funds will therefore be affected either positively or negatively by interest rate changes.


These funds provide a monthly income to its investors on the form of dividends. These funds are recommended for investors who are looking to invest a large amount of money and would like a steady flow of income.

Types of Mutual Funds – Equity Funds

Types of Mutual Funds – Equity Funds.

1. What is an equity fund?

An equity fund is a mutual fund that invests primarily in stocks. Stocks are high risk investments, therefore equity funds carry a relatively higher risk. However, there is also a possibility of a higher return than other types of funds.

2. What are the advantages of investing in equity funds?

Diversification: An equity fund invests in multiple stocks and the fund manager creates and manages a well diversified stock portfolio. By investing in an equity fund, you will receive the benefits of this diversification. If one stock in the fund goes down, another may go up - this is how diversification reduces the overall risk of a portfolio.

Liquidity: Equity funds can be sold and converted to cash easily.

Professional Management: Equity funds are managed by professionals who analyze various aspects of a stock prior to making an investment. Investors in equity funds automatically receive this benefit of professional stock picking.

3. Are there risks involved in equity fund investing?

Yes. As with any investment, there are risks involved in investing in equity funds. Stocks are high risk investments and therefore equity funds carry a high risk of price changes of underlying stocks. The reason to invest in equity funds is because there is also a possibility of stock prices rising in which case investors can make handsome profits.

4. What are the different types of equity funds?

Growth Funds: These funds are meant for investors who are looking to grow their capital at a rate higher than other investments like deposits and who have a longer time horizon. These funds invest in companies that have high growth potential. Since high growth companies could also be newer and more riskier, these funds are higher risk investments.

Sectoral Funds: These funds will focus on companies in a specific sector like energy, technology etc. These funds carry a risk since they have zero sector diversification; they place all their eggs in one basket/sector. These funds are normally preferred by investors who are interested in specific sectors and are looking to diversify among companies in the same sector.

Liquid Funds: These funds invest in dividend stocks. They are meant for investors who have a lumpsum to invest and are looking to have a steady flow of income from the investment.

Fund by size: These funds invest in companies of a certain size, eg. small cap, medium cap, large cap etc. Investments are typically made in different sectors, but in companies of a certain size.

Index Funds: These funds invest in the same stocks and in the same ratio as the underlying index. These funds are considered a relatively safe bet amongst the more riskier equity funds.

Tuesday, March 6, 2012

7 mistakes to avoid when investing!

7 mistakes to avoid when investing!

- Confusing between trading and investing
Trading is something that you do without much planning or research that is you are said to be trading when you buy and sell stocks and mutual funds at will.
Investing takes a lot more research and well-thought planning in the different avenues of the investment.

- Taking a very conservative stand
A good investment is not only about guaranteed returns but about returns post inflation

- Taking a very aggressive stand
The middle path is always better so that you can always make changes to your investment basket according to market conditions.

- Holding on to the dud stocks
A dud stocks need not necessarily mean only non-performing stocks; it could also mean purchasing stocks of unheard companies.

- Asset allocation holds the key
Your investment basket should be filled with the right type of assets for good long term returns.

- Timing the market
Though there are some parameters to predict the market like the changes to the country’s socio, economic, political and business spectrums, there is no fixed rule to say how markets would react to these turn of events.

- Overconfidence
Ask the long term players in the markets and they will perhaps warn you against being overconfident with recent successes.

Saturday, March 3, 2012

Birla Sun Life Gold Fund NFO Closes on 15 March 2012 is an easy way to accumulate gold through SIP Route.

Birla Sun Life Gold Fund NFO Closes on 15 March 2012 is an easy way to accumulate gold through SIP Route. Contact Now- Jinendra 9829353219

Birla Sun Life Gold Fund new fund offer closes 15 March 2012.

Birla Sun Life Mutual Fund has launched Birla Sun Life Gold Fund, an open-ended scheme.

The investment objective of the scheme is to provide returns that tracks returns provided by Birla Sun Life Gold ETF (BSL Gold ETF). It is a domestic fund of funds.

The new fund offer closes on 15 March 2012. The minimum investment amount is Rs5000.

The Scheme's performance will be benchmarked against the domestic price of physical gold. Satyabrata Mohanty is the designated fund manager of the scheme.

Saturday, February 25, 2012

Tips to Save Money

"I don't have money to save". That is probably the most common and most dangerous excuse ever. Truth is, it's never too late to start saving.

If you don't save now, you'll probably never have enough money to save in the future.

Savings is the most important aspect for money management. If you have understood the basics of money management, you must have got the importance of saving money.

If you can save more money, you can invest more and pay-off your loans and other liabilities in time and without much hassles. There are various ways by which you can save significant amount of money, but in order to accomplish your goals and save money, it requires some hard work and commitment from your side. If you will not try, you can not save any money. So first thing is you must start and try to be consistent.

When you plan to save money, you need to start from today. If you will plan to do it from next week or from a particular date, you will always postpone it and eventually will not be able to save any money. Saving money is within your control, what you need is to just change some of your spending habits.

To start saving money, Save for Future first you need to check your monthly expenses and see where your money is going. Download a copy of budget planner to check your expenses.. From the expense list, try to figure out which expenses can be minimized. Suppose, if you are going out for dinner 3-4 times in a month or more, you can minimize the number of dinner outings and prepare food at home, it can save you a good amount of money every month.