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!!!

HDFC Platinum Deposits @10% pa

HDFC Platinum Deposits – 3 Decades of excellence

Team CrawFin/Harshal Jawale, CFP^CM

With consistent performance for over three decades, HDFC Ltd. has earned its credibility from over 10 lakh depositors.

Interest Rates – 9.5 -10% for Individuals, 0.25% extra for Senior Citizens

Minimum Amount – INR 20,000

Duration – 15, 33, 60 months

Options ---

1. Monthly Income Plan - monthly interest payout
2. Non-Cumulative Plan – quarterly/ half yearly
3. Annual Income Plan – yearly
4. Cumulative Plan – lump sum

Best Option – Platinum Cumulative option for 15 months with 10%/pa Interest rate.

Depositor can benefit from -

1.             Highest Safety - AAA rating from both CRISIL and ICRA for 17 consecutive years
2.             Attractive & Assured Returns
3.             A wide range of deposits products to choose from
4.             Quick Loan against Deposit facility

Resident Individual Investors ---

Depositors can choose from a wide range of deposit products with maturities ranging from 12 to 60 months at competitive rates of interest and with different features to suit the investment needs of individuals. Senior citizens who are 60 years and above are offered an additional 0.25% p.a. on all deposit products

NRIs ---

Deposits from Non-Resident Indians and Persons of Indian Origin resident outside India holding PIO Card are accepted in accordance with the regulations governing the acceptance of deposits from NRIs. Depositors can choose from a wide range of deposit products with maturities ranging from 12 to 36 months at competitive rates of interest and with different features to suit investment needs of individuals. Senior citizens who are 60 years and above are offered an additional interest of 0.25% p.a. on all deposit products

Our Assessment –

With HDFC Ltd track record, its rating and interest offering at 10% is very attractive as against any bank deposit (9.25-9.6%) as on date. Only Company Fixed deposits are offering higher interest in the range of 10.75-12%/pa today with higher interest with high risks.

We recommend strong buy on HDFC Platinum deposits instead of any bank FD or PPF investments for some time i.e. as long as high interest remains.

NRIs and residents can ‘exchange' more now

Source – Business Line

In a move that might make life a little easier for Non-Resident Indians (NRIs), the RBI, in September, announced a series of liberalisation policies with respect to foreign exchange transactions. Here are a few such changes that will simplify the process of remittances both in and out of the country.

Convenience of joint holding

Resident Indians were earlier not allowed to hold a joint local savings bank account with their NRI relatives. A savings account holder in India, for instance, was not allowed to have his/her NRI spouse as a joint account holder. This has changed now. A resident individual is now permitted to include close NRI relatives as joint holders on a ‘former' or ‘survivor' basis. This is applicable for Exchange Earners' Foreign currency (EEFC) accounts and Resident Foreign Currency (RFC) accounts of the local resident, as well. However, the former or survivor clause means that the NRI joint account holder cannot operate the account during the lifetime of the local resident. The move, nevertheless, helps secure another person to immediately operate the account in the event of sudden demise of the local account-holder.

Another, more significant, move by the RBI is to allow a local resident to be a joint holder for NRE/FCNR accounts held by NRIs/ Persons of Indian Origin (PIO). For instance, your son living in the US will now be able to include you as a joint account holder, on a ‘former' or survivor' basis for his NRE account. You can continue to operate the account with a power of attorney, even during the lifetime of the NRI. Before this change, NRE accounts could have a local resident power of attorney holder but not a local joint account-holder.

Gift liberally

Are you a savvy investor, wanting to give away wealth-building gifts? You can now do it more liberally. A person resident in India can now transfer securities such as shares/convertible debentures, by way of gift, to any person outside India, up to $50,000 in a financial year. This limit was earlier $25,000 in a calendar year. Note the difference here - the transfer period will be a12-month period from April to March and not January to December.

If you do not care much for shares, fret not, for you can gift in Indian rupees too. A resident Indian can now make a rupee gift to NRI/PIO who is a close relative, provided it is within the overall limit of $200,000 of outward remittance permitted in a financial year under the Liberalised Remittance Scheme of the RBI. The change here is that such gift can be made through a crossed rupee cheque or an electronic transfer to the Non-Resident Ordinary Rupee account (NRO account) of the NRI/PIO. Earlier, such a credit was not possible in rupee terms in to an NRO account.

Lend in rupees

You can now also lend to your NRI/PIO relative in rupees within the overall limit of $200,000 an annum. This however, comes with a few strings. One, the loan shall be interest-free and have a repayment schedule of not less than one year. Two, the loan shall be utilised only for the borrower's (an NRI/PIO) personal requirements for his own business purpose in India. Such business shall not include any activities related to chit fund/ Nidhi company, agriculture or plantation activities or trading in transferable development rights.

Such loan can be credited to the borrower's NRO account in India and the loan amount shall not be remitted outside India. Repayment can be made through normal banking channels or through the borrower's NRO/NRE/FCNR account. The borrower can also sell shares or securities or any immovable property (against which loan was granted) to repay the loan.

Zero-interest need not be zero-cost

Source – Business Line

With Diwali just ten days away, marketers of all hues will soon step on the gas. Discount sales, easy repayment options and a host of special offers will be unleashed to entice customers to loosen their purse strings.

The time-tested (but frowned upon by the RBI) ‘zero per cent interest schemes' may also make a comeback. This sales promotion technique allows customers to pay for their big-ticket purchases in instalments, with no interest being charged for the staggered payments.

For instance, a customer buying a consumer durable costing Rs 24,000 may be allowed to settle dues in 6 instalments of Rs 4,000 each. Sounds good, right?

Pay easy with no additional interest cost. This unique selling proposition of zero-interest schemes has for long managed to draw crowds to the stores. At face value, such schemes do seem quite attractive from the perspective of potential customers. For one, there is no need to pay the entire amount upfront. This makes the purchase seem within reach of even those who otherwise can't afford it.

Besides, unlike normal financing schemes, there is (supposedly) no extra cost charged to the customer in ‘zero per cent' interest schemes. But should customers bite the bait, without testing the waters?

HIDDEN COSTS

As the cliché goes, if it's too good to be true, it probably is. And like many seemingly good things in life, ‘zero-interest schemes' too may have their stings in the tails. Sure, interest cost may be ‘zero'. However, there is often a ‘processing fee' to be borne by customers, which puts to naught the hard-sell of ‘no additional cost'.

Let's assume a processing fee of Rs 1,000 in the case above. This works out to 4.2 per cent on the financed amount of Rs 24,000 for 6 months and 8.4 per cent on an annualised basis. That's not all. Those choosing zero-interest schemes are often not allowed other discounts offered by sellers.

Suppose, in the case above, customers making an up-front payment are allowed a discount of Rs 1,500, which is not extended to those going in for zero-interest schemes. Foregoing the discount is in effect an additional cost, which on Rs 24,000 works out to 6.25 per cent for six months, and 12.5 per cent on an annualised basis. Combined, the processing fee and the discount foregone would have added a cost of around 21 per cent (annualised) for those choosing the zero-interest scheme. Not such a ‘great deal' anymore?

The picture could get even more discouraging, if customers are required to pay some instalments upfront. Say, in the case above, two instalments adding up to Rs 8,000 need to be paid at the time of signing up for the zero-interest scheme.

The customer is effectively being financed only for the balance amount (Rs 16,000). Now, the processing fee of Rs 1,000 and discount foregone of Rs 1,500 add up to a total cost of 15.6 per cent on a six-month basis and 31.3 per cent on an annualised basis.

DO THE MATH

Given that zero per cent interest schemes may lack transparency and may distort pricing, the RBI had, in as early as 2002, issued a circular advising banks to refrain from offering such schemes for consumer durables.

So, over the last few years, the incidence of banks offering zero-interest schemes has declined. However, many non-banking finance companies (NBFCs) continue to tie up with manufacturers and dealers to provide such offers, especially in the festival season.

Before signing up, customers would do well to read the fine print, and do the math (processing fees and their reasonableness, discounts foregone and effective amount of financing) to ensure that they are indeed getting a good deal.

Finally, it's advisable not give in to impulsive buying urges in the festival season, merely because there are ‘discounts' and ‘schemes' to boot.

Remember, you finally need to settle the bill, even under the best offer.