InfraBees ETF/ CNX Infrastructure derivative – A long term multibagger bet

Team CrawFin/ Harshal Jawale, CFP^CM

Two years back one friend from NITIE pointed out that all so called infrastructure theme based Mutual Funds hold unrelated companies. His question was what is SEBI doing when fund managers launch a particular theme, collects big corpus and invests into something else which was not originally intended by the investor. For Example if we look at HDFC Infra fund today it holds 50% of its portfolio into banks plus oil marketing companies. Of course one may debate that finance is required for any infrastructure project and so inclusion of such companies is justified but then top 5/7 holdings into banks can never be acceptable for an investor who wish to invest into infra as a theme, he would rather buy banking MF then. More or less similar pattern has been followed by all other mutual fund houses ICICI Pru Infra, Tata Infra, UTI infra to name a few.

If you are searching for a product which can offer exposure to pure infra companies, yet do not wanted to take exposure to any one or two companies since the environment for investing into infra is not positive then InfraBees fund who offers exposure to 20-30 infra companies deserves due consideration.

Launched in Sept 2010, InfraBees is currently managed by Goldman Sach AMC. Its asset size it little less than INR 60 Cr and current NAV is 230. It is currently trading at its 52 week low because of negative market movements. One may buy InfraBees units directly through NSE. Usual MF purchase is also possible to accumulate fund units.

Fund includes companies belonging to Engineering, Telecom, Power, Port, Air, Shipping, Roads, Railways and other utility providers. It comprises of 25 such companies who are also traded in F&O segment to ensure liquidity. Top 10 holdings of the fund are as follows, top 7 constitutes 70% of the value out of total 25 companies.

LNT, Bharti Airtel, BHEL, NTPC, Tata Power, Power Grid, JP Assoc, Idea, Mundra Port, Siemens.

Fund has grossly underperformed to other indices but then that’s where risk to reward ratio turns positive. All the bluechip companies like LNT, Bharti, BHEL, NTPC has been underperforming for many years now. One may buy this fund if he/she hopes that cycle will turn positive at some time in next 3-4 years; after all our country needs Infra more than anything else. This fund eliminates the risk of buying one scrip say Tata power who may fail to capitalize on infra boom whenever it comes.

NSE is also launching its derivative twin tomorrow. This will also bring in some more interested money into infra as a sector.

Systematically long term investment is strongly advised into this or any pure infra related fund.

Wealthy Investment needs Healthy Methods!!!

Rupee at 53 – Bonanza to NRI’s

Team CrawFin / Harshal Jawale, CFP^CM

Indian rupee is sliding almost daily these days. Since USD is appreciating against all currencies it is nothing to worry situation yet simply the pace of depreciation of rupee is creating waves. Yesterday Rupee broke its all time low and currently is trading at around 53/USD. RBI and Finance ministry too are not making any encouraging statements. For an import driven country like India (majorly Oil) this is probably the worst news in 4 year long global crisis. Widening fiscal situation will only make things worse.

Still it is definitely great news for another part of India who lives out of India, the NRI community. NRI’s who always look for higher rupees for their hard earned foreign currencies to remit money back to motherland for various reasons; this is one of best times. It is not only on currency front that NRI will benefit but also for making investments, fixed deposits are available at above 10%, equity markets are down by over 30%.

Rupee has fallen by about 16% since Aug 2011 against USD. More importantly it is not only falling only against USD but also against almost all global currencies. Pace of depreciation is so high that it makes Indian Rupee one of the worst currencies in Asia, next being depreciated only by 8%.

Even though some experts predict that Rupee will fall to 54-55 easily, I think it is not time to wait for fractional higher benefits at the cost of opportunity missed. It is not only NRI’s but also foreign investors who put many times large chunk of money into India are waiting at sidelines to enter. Intervention by RBI may also put break on rupee slide.

Every year India receives large money through remittance, about 55 billion USD in 2010 highest in the world. Current situation definitely makes it super attractive to remit more than usual. The moment India starts receiving this money in plenty the rupee will start appreciating probably at similar pace that of depreciation.

This article is dedicated to few of my friends sitting outside of India and holding USD for more than couple of years in anticipation of better cross currency rates. The rate have come, may even move up a bit, still the interest amount lost on deposits in banks is much higher.

Wealthy investment needs healthy methods!!!

LiquidBees ETF

Team CrawFin/ Harshal Jawale, CFP^CM

It is first liquid ETF in the world. It is traded on both BSE & NSE just like a share. Objective of this fund is to provide liquidity in the market with a slice of safety. Fund is managed by Goldman Sachs Asset management private limited. Fund was listed in 2003, with daily NAV set to INR 1000. Fitch has assigned rating of AAA to the fund.

When any investor sell shares the amount stays idle with his broker for some time. This duration can be in months if the investor does not find suitable buy opportunities. So to capitalize on this idle time investor may think of putting this money into Liquidbees where he will get upto 5-6% annual returns with ease. These returns are given on daily dividend basis so one will get fraction of returns even if he keeps this fund for one day. This daily dividend is compulsorily invested into fund and extra units are credited by the end of month. Units are shown upto 3 decimal.

Example – Suppose Mr. Ram sold Infosys shares worth INR 23000. Now Ram does not want to keep it idle till next buy opportunity comes. He will simply buy 23 units of LiquidBees say on date 12^th Nov 2011. He continues to hold this fund till 25^th Nov 2011. Now he will get extra units of Liquidbees for the period of 13 days but at the end of month i.e. 30^th Nov 2011. So on 25^th Nov 2011 he will sell 23 units of Liquidbees. He will continue to accumulate extra units of fund till the fraction becomes 1 and then sell it.

Say new buying opportunity that came on 25^th Nov 2011 was to buy TCS then Ram will sell his 23 units of Liquidbees and buy TCS shares worth INR 23,000. Since the settlement of both is on T+2 basis the settlement takes place automatically on the same day.

This fund mitigates liquidity risk that an investor posses by keeping idle cash with his broker for many days. In old days if investor wants to minimize this risk then he had to request for payout from broker and get money transferred to his saving account to get some returns on saving account. This fund reduces all this trouble and makes money available immediately.

Please note some brokers have given trading into Liquidbees at free of cost, while some still charge normal brokerage on it. It is most important to check with your broker about the charges on it else there is no point in trading this fund for 6% annual return, since the brokerage charges on multiple times transactions will be much higher than expected returns.

Do you know – For a person of age 30, accidental death insurance worth INR 10Lakh costs only INR 500 p.a.  Read more on http://crawfin.blogspot.com/2011/11/estimate-your-life-insurance-need.html

Estimate your Life Insurance need

Team CrawFin/ Harshal Jawale, CFP^CM

Every one of us owns a life insurance policy, thanks to LIC for marketing and government of India for providing tax benefits. Yes our usual idea of purchasing Insurance policy is someone of our relative is LIC agent and we find it difficult to say no to him/her plus tax benefit carrot shown to us is difficult to resist. Although the intent from LIC may attract healthy debate it has done excellent job in creating awareness about Life Insurance need of an individual.

In this article we will focus on how much insurance amount is really required for an individual. Following are some thumb rules followed by us financial planners to estimate life insurance of a person, fine tuning depending on each person’s need needs to be done before reaching to final amount.

• Income Rule –

             Objective of this rule is to provide income support to your family for number of years.  

                   Below Age 35 = 12-15 times of your annual income

                   Age 35-50 = 10-12 times of annual income

                  Above age 50 = 8-10 times of annual income

• Premium as % of Income –

           Objective of this rule is to keep a check on your premium cost, if you are paying lesser premium it is more likely that you are underinsured as against your income levels.

                5% should be premium amount of annual income to replace your income

                1% premium of annual income plus for each dependant

• Human Life Value (HLV) –

                 Find Current Income

                 Deduct Current personal expenses

                 Find earning life remaining

                 Find its present value

This method calculates your actual amount needed. It calculates your potential earning till retirement minus your own expenses equal to amount that you are likely to earn for your family on net basis. Buying insurance meaning you are replacing the loss of that income.

• Need based –

               Calculate immediate cash needs like medical costs, any loans etc

               Net income needs like ongoing family expenses

               Special needs like child’s education, marriage, spouse retirement needs etc.

Addition of all above is your need to amount to earn in future, buying insurance will ensure that you fulfill all financial obligation even after death.

** Please note in method 3 & 4 it is very difficult to estimate future needs so it is best left to financial planners to calculate for you since they will also consider the corpus that is already generated by you till date, else simple methods 1&2 are enough to reach approximate insurance need.

I come across many individuals who claim that they have been cheated by agent by misspelling of product. I believe the bigger onus lies on investors shoulder to understand that when you are paying premium of INR 20,000 for 20 years term for sum assured of less than 5Lakh/pa then you are not buying insurance.

For a person of age 30, term 20 years, Sum assured of 40lakh the annual premium is only INR 6200 (tax benefit extra). Other riders for Sum assured 10lakh the annual premium amount is

Critical Illness rider = INR 1500

Accidental death benefit = INR 500

Permanent Disability Benefit = INR 400

Make sure you have some/ Pref. all riders with your policy. LIC doesn’t offer these riders with pure insurance policy.

Do you know – HDFC Ltd offers platinum fixed deposits at 10% pa. Read more on http://crawfin.blogspot.com/2011/10/hdfc-platinum-deposits-10-pa.html .

Wealthy investments need Healthy methods!!!

Junior Nifty ETF – exceptional Midcap pick

Team CrawFin/ Harshal Jawale, CFP^CM

Goldman Sachs Nifty Junior ETF (Juniorbees) is the first and lone mid cap index ETF launched in India as on date. It closely tracks the junior nifty index with nil entry/exit load for investor. Taxation treatment of it is equivalent to normal equity trading. Expense ratio being 1% for full year it tracks junior nifty index very closely allowing investor to take midcap exposure with ease.

Picking up midcap is most difficult thing for an investor. When it is easy to pick any news in any large cap company, often news reporters are not aware of issues with midcap stocks. Also not all brokers/ fund houses cover all midcaps leading it to confusion in investors mind because of lack of information. Taking exposure to few midcaps may be dangerous in such environment.

Before this ETF launch taking exposure to midcap-small cap mutual fund was one option for an investor. But here also investor has to rely on fund managers’ assessment of picking of any stock. While ETF gives exposure to top 50 midcap companies, diversification is bound to exist. Moreover index itself keep churning companies on regular basis, new good companies replace old non performers.

Junior nifty ETF can be bought on BSE/NSE using dmat account. It currently trades at little above INR 100 which is its minimum amount for investment. Flexibility in purchasing and selling, diversification into various sectors, and quality midcap companies are some of its main advantages over any other midcap offering.

Components of Junior Nifty (50) in alphabetical order –

Aditya Birla Nuvo,     Adani Enterprise,        Andhra Bank,             Ashok Leyland,

Asian paint,                Bank of Baroda,         Bank of India,            BEL,              

Bharat Forge,             Biocon,                      Bosch Ltd,                 Canara Bank,             

Colgate Palmolive,      Concor,                     Crompton Greaves,    Cummins India,         

Dabur,                        Exide Ind,                  Federal Bank,            GlaxoSmithKline,

Glenmark,                  GMR Infra,                 HDIL,                       HPCL,

IDBI,                         Idea,                          IFCI,                         Indian Hotels,

Indus Ind Bank,         IOB,                          JSW Steel,                 LIC Hsg Fin,

Lupin,                        McDowell,                 Mphasis,                    Mundra Port,

Oracle fin serv,          PFC,                          REC Ltd,                   Reliance Capital,

Shreeram transp fin,   Tata Chemical,           Tech Mahindra,          Titan,

Torrent Power,          Ultra Cement,            Union Bank,                United Phosphorous,

Yes Bank,                 Zee Ltd.

As we always advice to take 25-30% exposure to midcaps out of total equity (direct/indirect) investment, I recommend junior nifty ETF should take larger pie of it.     

Wealthy Investments need Healthy Methods!!!

I-Strategy – a No brainer investment idea (ABCIL)

Team CrawFin/ Harshal Jawale, CFP^CM

This article is in response to my previous article “The ABC of SIP” (http://crawfin.blogspot.com/2011/09/abc-of-sip-systematic-investment-plan.html) where I discussed about simple investing strategies with very small sum, including Sachin Tendulkar case study. Feedback that I received was even though it seems interesting but the theory is told when things are already done. Investor cannot rely on making future investments on the basis of such stories when previous data is analyzed.

I am here putting forward my own theory of investment just to check whether such no brainer yet regular investment will yield decent returns or not. I do not advocate investments with the theory mentioned and it should be taken as a test to check if such things work or not.

Theory – We will consider investing a small sum into 5 stocks, each on one day of week for such 10 weeks. In total it will make 10 installments in each stock, 50 in grand total. We will keep purchasing stock at the opening price of the day. This will average our purchase price over 10 weeks. Since it is a no brainer we will not worry about picking smaller companies, no changes in the amount of investment etc. We will pick only domestic stories with strong and clean management record and only from nifty fifty stocks.

My picks for such theory are as follows (ABCIL), you may pick your own. Some negatives are given which your relationship manager must be giving you since index has risen more than 10% in two weeks. When we talk about systematic investment we should not be worried about top-bottom and 5-10% variation in price.

Axis Bank

Saving rate deregulation, increasing NPA, new banking license etc will affect banks

Axis Bank is already up 17% from its 1 month low, results are out

Bajaj Auto

Higher interest rates, lower auto sales, many competitors

Bajaj Auto is already up 14% from its 1 month low, richly valued at 1720. Results out

Coal India

Mining bill affect its profitability, coal supply issues

Coal India is close to its monthly low today, result awaiting

ITC

Rich valuations of the sector, high inflation meaning high raw material costs

ITC already up by 10% from 1 month low, trading at life-time high valuations. Result out

Larsen & Toubro

High interest rates affecting order book, declining sales and profit, down 40% from year peak

Trading at year low, result out

Points to note –

1. Assuming total amount is INR 1lakh, 50 equal installments everyday
2. Stocks are purchased at opening price of the day
3. Investments will start from this week i.e. 31^st Oct 2011; Have no intention to wait for market to find its bottom.
4. One or all stocks may be in loss or profit depending upon the market trend, test is not to counter the trend but to minimize its effect
5. Actual investments into stocks selected is not advisable at current level
6. Stocks are selected largely on the basis of combination of good/bad result, good/bad projected outlook, strong and clean management, long term India shining story.
7. Since it is a no brainer, I am keeping things away from any good/bad news, or any other happenings in the market. Whatever happens I am suppose to follow code of conduct. That’s what a retail investor expected to do without the help of expert.

This article, blog is created and dedicated to creating awareness about financial products/services/ strategies to help individuals manage their personal finance. I do not endorse stock TIP ideas; if only I knew which one would do best today I would have taken a bet in that stock rather than writing a blog. I am simply a strong believer of investment strategies that has earned decent returns over the years. Understanding of equity as a asset class is more important than asking hot tip for the day.

Disclaimer – It is safe to assume that I or my clients may have vested interest into stocks discussed above.

Wealthy investment needs healthy methods!!!

Home Loan EMI

Team CrawFin/ Harshal Jawale, CFP^CM

In my last article I wrote about saving rate deregulation, although it is a bonanza for us depositors, it would also mean high cost of funds for banks resulting into higher EMI’s for loan takers. I had a chance to speak to few worried home loan takers who are facing skyrocketed EMI these days. Obvious question was how much is the increase in EMI is expected and how to bring it down?

Even though there is no choice we have than to pay interest i.e. cost of fund we raised to acquire asset, I felt they were quite unimpressed with the ideology of paying principal upfront to reduce interest burden for future years. Reducing interest rate somehow was predetermined approach they had in mind. In this article I will try to cover similar points with the help of simple calculations to show which option reduces how much amount to be paid.

For simplicity of calculations I will take INR 15Lkh as the current balance Loan amount with interest rate at 14% for 10 years tenure.

	Existing case	Case A – Int rate reduced by 1%	Case B – Pre payment of INR 1Lakh	Case C – Pre pay 1Lakh but keep EMI
Loan Amount	INR 15,00,000	INR 15,00,000	INR 14,00,000	INR 14,00,000
Interest Rate	14%	13%	14%	13%
Tenure	10 years	10 years	10 years	98 months
EMI	23,290	22,397	21,737	23,290
Total Amount Paid	27,94,796	26,87,593	26,08,476	22,76,644
Interest Component	12,94,796	11,87,593	12,08,476	8,76,644
Total Saving	--NA--	1,07,203	1,86,320	5,18,152

Case A – Reducing Interest rate by 1%

You may jump from one lender to another; a chance of reducing interest rate more than 1% in current tight liquidity scenario is not possible. As we can see in table your EMI is reduced to 22397 from 23290 for the same tenure of 10 years. Total saving of 1.07Lkh Approx.

Case B – Pre-Paying INR 1Lkah keeping interest rate same

Pre-paying 1Lakh to current lender will reduce your EMI to 21737 from 23290 with total saving of 1.86Lakh. Please note here we are considering pre-payment of INR 1lakh only once (not yearly).

Case C – Pre-pay 1lakh but keep EMI constant

Assuming we have another lender who is offering 1% less than current lender then why not switch? But still pre-pay principal and keep EMI constant for multifold benefits. Such setup will reduce tenure to 98 months; it will save about 5.18Lakh in total.

As we can see reducing interest rate or pre-paying only once does not reduce our monthly outgo substantially in terms of EMI. Both of them together but keeping EMI constant will reduce total cost of loan by sizeable amount. Most often we try to reduce interest rate with negotiations or pre-pay loan amount somehow but conveniently forget to keep EMI constant, reduced EMI serve no benefit in the longer run.

People make new investments into FD, PF, MF, Shares every year instead of serving home loan with immediate effect. I wonder how 8.5% returns of PF compensate for 14% interest charged on home loan. There is more to retirement than just PF. Asset that you are acquiring from home loan is worth several crore when you retire, mere reverse mortgage or keeping it on rent and shifting to smaller flat will solve your retirement problems.

Why go that far, when you can save substantial amount saved on interest cost (with case C) if invested into PF after serving loan will create large retirement corpus by the time you retire. Also some people think prepayment amount needs to be higher to make any noticeable effect. Please come out of box thinking and pre-pay whatever small cash surplus you have by year end, which will still take compounding effect to your cost of loan.

Tip – In above example if you continue to pre-pay INR 1lkah every year keeping EMI constant then you would close your home loan within 6 years.

Wealthy investment needs healthy methods!!!

Multiple Bank Accounts/Policies – A strict No

Team CrawFin/ Harshal Jawale, CFP^CM

Recently RBI deregulated savings deposit rate and several banks responded to it immediately. Today they offer higher interest rate up to 6% pa for the amount above INR 1Lakh. Anything below INR 1Lakh will receive 5-5.5% pa that is still higher than 3.5% we used to get for many years.

Most of us usually have several Bank accounts, multiple Dmat accounts, Mutual Fund Folios and Insurance policies for the sake of diversification. In this article I will try to cover what are positives and negatives of it.

Multiple Bank saving accounts –

There is minimum account balance with every bank account ranging from INR 1000 to INR 10000. We usually keep more than required money into each of such account. If we can consolidate these accounts into one or two, say one will have most of cash often parked as emergency fund might get 6% pa rate, while second account will have minimum possible cash for our daily usage. Multiple accounts with INR 20-30 thousand in each will get lower interest rate.

Multiple Dmat Accounts –

With every Dmat account there is account maintenance charge of INR 300-500 pa. I have seen people keep opening many Dmat accounts each with INR 20-50,000 because of lack of faith on broker. They simply fail to notice that they are actually paying yearly 3-4% of investment just for maintenance of accounts. Either they need to consolidate accounts or need to invest more, because such charge remains same for INR 1000 or INR 1Lakh or any higher amount.

Multiple Insurance Policies –

Any Insurance policy be it ULIP, Money Back, Endowment, Children’s future plan, Marriage plan or any other fancy name that an insurer may choose in future; if it contains your life cover then it charges you for mortality. Mortality charge is nothing but pure term insurance, but since we are obsessed with return of premium, returns onto it and higher tax saving benefit we are happy to pay higher charges to the insurer. Multiple insurance policies simply mean paying multiple times for ONE single life that you have. Of course it is not exactly 3 times if you have 3 policies but it would still be much higher than what you would have paid with single policy for total sum assured.

On top of it there are admin charges with ULIPs etc that would add substantial cost to your INR 20,000-30,000 premium for the year.

What about diversification? What if my bank/broker/insurer goes bust or falls into some malpractice or does not settle my claim?

Fortunately in Indian financial markets there are enough regulatory systems that control activities of all intermediaries. If you are right in claiming money from your insurer either A, B, or C then you would get it from all of them or else not from anyone. Please don’t fall into such misunderstanding that if insurer A rejects claim then at least insurer B would pay. Process of finding justice is tedious in our country but that remains same even with multiple insurers.

Similarly you cannot take FD with next door co-operative society for higher 1% and hope for RBI to come rescue you in case of any malpractice. You must put your money with large reputed bank for better protective services.

Keeping watch on broker’s activities will solve related issues. You as investor don’t pay attention to SMS/Email sent by BSE/NSE whenever transactions happen in your account, this allows person at lower level dealer to misconduct with your account. When SEBI makes it mandatory for all brokers to send SMS/Email within 24 hours of transaction it is also our responsibility to keep a check. Mere keeping check at times if not all will keep that lower level dealer to stay alert and he will not dare do anything wrong with your account. He just needs to know that you are watching him even if you really don’t. Still in case of any malpractice there are enough systems in place for investor protection.

Wealthy Investments need Healthy Methods!!!