Tips to ensure your child becomes a financially savvy adult (ET 22 Oct 2012)

Here's how to hold your child's hand through the various monetary milestones in his life in order to ensure that he grows up into a financially savvy adult:

1) 5-6 years:

Kid's milestone: > Understand the concept of money.

> Know that money buys things, services.

Parent's role: > Help the child identify various denominations, sort coins by sizes, play money-based games.

> Take him shopping, make him pay for small things.

Pitfall: The child has a very small attention span. So if money learning is not made fun, he will switch off instantly.

2) 7-9 years

Kid's milestone: > Start the saving habit.

> Shoulder fiscal responsibility and make spending decisions.

> Set short-term goals.

Parent's role: > Buy him a piggy bank to collect change. Open a bank account for depositing monetary gifts.

> Start a weekly allowance. Fix the things you will not buy for him like candy, ice cream, etc. Give him the freedom to decide what he wants to buy.

> Explain how he can buy an expensive toy by saving as opposed to spending it on snacks on the first day.

Pitfall: If the kid finishes his allowance before the stipulated time, do not offer him an advance or pay for things he needs. He will never learn fiscal discipline.

3) 10-12 years

Kid's milestone: > Carry out financial transactions.

> Learn the value of money.

> Set medium-term goals.

Parent's role: > Open a bank account that allows your child actual transactions like signing a cheque or making deposits.

> Pay the child for minor errands such as washing a car or taking care of a younger sibling.

> Ask the child to buy shoes or gizmos fro savings.

Pitfall: The child is likely to lend money to his friends. Stress the importance of getting it back.

How earnest money impacts your tax (ET Wealth 8th Oct 2012)

You don’t have to pay income tax on earnest money received from a failed deal, but there are other tax implications you should be familiar with says M K Agarwal

When you buy or sell a tangible asset, there is usually some earnest money given by the buyer before he arranges for the full payment. This can range from 5,000-10,000 for a used car to a couple of lakhs of rupees for a real estate transaction. The payment is meant to seal the deal and the rules of arrangement are simple. If the buyer backs out, the earnest money given to the seller is forfeited. If the seller changes his mind, he gives back double the amount to the buyer. To ensure that both the parties play fair, there is typically an intermediary who is known to both. 
In normal circumstances, any amount received as advance for the purchase of an asset is a revenue receipt and is taxed in the year that it is received. What happens if the money is received from a buyer who fails to keep his commitment and the deal falls through? Will the forfeited amount become the income of the seller and will he have to pay tax on it? Under which income head will the amount have to be declared in the tax return form? 
As per Section 51 of the Income Tax Act, 1961, if the owner of an asset has received money by forfeiting any advance money for the asset, this amount will be deducted from the purchase price of the asset. This is the cost for which the asset was acquired or its fair market value (if the property was purchased before 1 April 1981). Suppose you bought a property for 10 lakh about 15 years ago, and two years ago, you decided to sell it for 40 lakh. The deal was struck and the buyer gave you earnest money of 2 lakh, but later backed out. The 2 lakh will be treated as capital receipt and you will not be taxed in that year, but the amount will be deducted from the purchase price of your property when you sell it in the future. In this case, the purchase price will be taken as 8 lakh ( 10 lakh— 2 lakh). 
In some cases, the deduction of earnest money from the cost price of the asset pushes up the capital gains tax of the owner substantially. In the example (How much tax...), the owner would not have had to pay any tax had he not forfeited the earnest money. The indexed cost of acquisition without deducting 50,000 from the cost price would have been 8.3 lakh. One would be better off including the earnest money in one’s income from other sources and paying tax on it. Is this possible? The law is silent on this because the earnest money is a capital receipt, not income. 
Also, the seller must know that this is a one-way street. If you backed out of the deal and paid the buyer 2 lakh compensation, it would be treated as a capital loss and not added to the purchase price of the property. You can claim tax benefit on this only if you were in the business of sale and purchase of the property. In such a case, the loss due to forfeiture would be treated as a revenue loss. 
Earnest money is usually a very small percentage of the total value of the transaction, but sometimes it can be higher than the cost price of the asset. Under Section 48 (read with Section 51), if the amount forfeited is greater than or equal to the cost of acquisition, the cost of the asset will be taken as nil. In one such case involving Sunita N Shah (2005) 94 ITD 492 (Mumbai), the forfeited amount was higher than the cost of acquisition. In such cases, the excess amount is considered capital receipt and is not chargeable to tax. The same ruling was given in the case of Travancore Rubber & Tea Co. Ltd (2000) 243 ITR 158, wherein the Supreme Court ruled in favour of the assessee. 
Tax impact on buyer In case the buyer defaults and the earnest money is forfeited, he will not be allowed to show it as a capital loss. This was the verdict in the case of CIT vs Sterling Investment Corporation Ltd (1980) 123 ITR 441. However, if the seller fails to honour the deal and pays the buyer double the compensation, this will be treated as capital gain because it amounts to relinquishment of a right by the buyer. In the case of CIT vs Vijay Flexible Container (1990) 186 ITR 693, it was held that giving up the right to obtain conveyance of immovable property amounts to transfer of a capital asset. 
What happens if the advance money was for the purchase of a commercial property? Can the loss be treated as business expenditure incurred by the purchaser? The amount cannot be claimed as revenue expenditure. In CIT vs Jaipur Mineral Develop Syndicate (1995) 216 ITR 469 (Raj), it was held that if the payment is made for the pupose of acquiring a capital asset, the amount lost upon forfeiture will not be considered as revenue loss though the amount may not have the same consequence or character in the hands of the recipient or beneficiary. 
How much tax does a seller pay? Mr X bought land in January 1987 for 2 lakh. He agreed to sell it to Mr Y in January 1998 and received 50,000 as earnest money. However, Mr Y backed out and his 50,000 was forfeited. Mr X sold the land on 1 January 2009 for 8 lakh to Mr Z. Here’s how his gains will be taxed: 
Purchase price: 2 lakh 
Earnest money received: 50,000 
Deemed purchase price: 1.5 lakh 
Indexed cost (in 2008-9): 6.23 lakh 
Selling price: 8 lakh 
Capital gain: 1.77 lakh 
Tax payable: 35,400 (20%)

The author is a chartered accountant and senior partner at Mahesh K Agarwal & Co and can be reached at mkcacs@gmail.com.

Fidelity Unitholders Get 30 Days to Redeem Holdings without a Fee (ET 10 Oct 2012)

SHAILESH MENON, MUMBAI 

Fidelity Mutual Fund, which sold its Indian assets under management to L&T Mutual Fund in March, will open a 30-day window from October 15 to allow unitholders to redeem their holdings without a fee. The Securities and Exchange Board of India (Sebi) mandates that mutual funds which have been acquired should give unitholders uncomfortable with a new fund management team the option to pull out without an exit load.

L&T Mutual Fund, part of the engineering-to-construction conglomerate Larsen & Toubro, had acquired Fidelity’s assets under management but did not rope in the fund management team. Now, a big worry for L&T Mutual Fund is that unitholders, who are clients of large foreign banks — big distributors of mutual fund products — may pull out money from Fidelity schemes during the 30-day period. 

Top officials of two leading foreign banks said L&T Mutual Fund is yet to garner support from foreign distributors. “We’ve not taken the mandate to sell L&T Mutual Funds as yet. Our audit offices are reviewing the fund house, their processes and performance track record,” said the distribution head of a foreign bank on condition of anonymity. 

Foreign banks sell only funds that are approved by their global audit committees, which usually prefer mutual fund schemes with a good track record or those belonging to Indian arms of international mutual funds. While Fidelity Funds appear on the distribution list of most foreign banks, L&T Mutual is a relatively new and ‘undertracked’ fund house. 

L&T Mutual officials, however, brushed aside these concerns. Speaking about distribution tie-ups with foreign banks, N Sivaraman, president & wholetime director, L&T Finance Holdings, said, “Revised empanelment process is on. I don’t see why foreign distributors would not want to sell L&T funds.” 

The fund management team and risk management of L&T MF have been beefed up to handle large investment inflows, he said. L&T Mutual recently hired Soumendra Nath Lahiri and Shriram Ramanathan as heads of equities and fixed income, respectively. “We’ve a good equities team now... Fixed income vertical has also been structured well,” Sivaraman said. “Critical segments like risk management and processes will be manned by the Fidelity team. There’s no need for investors to worry. Their money is in good hands.” 

Some distributors looking to make a quick buck could push clients to redeem during ‘no-load period’ and shift the proceeds to schemes of other fund houses. Rival fund houses are also looking at the ‘no-load’ window closely as fishing out Fidelity’s assets could be a cheaper way for them to acquire some assets. 

Fidelity Funds have returned well over the past 10 months and better still after the announcement of asset sale to L&T Mutual Fund. Equity funds like Fidelity Equity, Fidelity India Growth, Fidelity India Special Situations and Fidelity India Value have returned 20-30% since January, Value Research data show.

SEBI gives MFs time till October 31st for discontinuing SIPs, STPs under single plan structure (Cafe Mutual 3rd Oct 2012)

Ravi Samalad

AMCs get time till October 31^st to inform all their investors who will get affected due to SEBI regulation on implementing single plan structure. 

SEBI has acceded to AMFI’s request to allow fund houses to implement discontinuance of existing SIPs, STPs and dividend reinvestments under schemes which run separate plans for retail and institutional clients from November 01, 2012 instead of 01 October, 2012.

As per SEBI’s September 16, 2012 circular, AMCs are supposed to accept subscriptions only in one plan – either retail or institutional from 01 October 2012. The AMC has a choice to choose which plan they wish to continue. Take for instance, an AMC wants to accept subscriptions only under institutional plan. Thus, the retail plan needs to stop accepting fresh money or add units from 1^st October. However, the retail plan could have existing SIPs, STPs and dividend reinvestment mandates from investors. In this case, AMCs need to discontinue such SIPs, STPs and dividend reinvestments which would add units. However, implementing this rule was a tall order for AMCs in such a short span of time.

Institutional plans usually have a higher minimum application size. Thus, retail investors are not be able to invest in such schemes. In case an AMC wants to discontinue retail plan, they may lower the minimum investment size of institutional plan in a bid to attract retail investors.

From today onwards, AMCs have stopped accepting fresh subscriptions under the plans which they want to discontinue. These plans will never accept fresh inflows till the last investor redeems. These schemes would cease to exist thereafter. Now AMCs have one month’s time to inform all their investors about the new rule.

My Comments : It seems that our regulator has no other work other than increasing work of the Investors, Distributors and AMCs. After major changes in the KYC process, this step will lead to substantial increase in unproductive paperwork for all the entities involved in the process.

Explore loan against collateral like gold, shares to raise money at softer interest rates (ET 2nd Oct 2012)

Many of us opt for personal loans — when we can't (or don't want to) turn to friends or relatives for a soft loan — to tide over unseen shortfall in funds.

Sadly, most of us don't even consider other options available like loan against assets, shares, gold, property and so on. It is strange considering goldfinance companies have been on an overdrive in the last few years. Even moneywise, it makes perfect sense to take a close look at asset-backed loans.

Compared to the interest rate of 16% to 24% on personal loans, loans against assets come much cheaper at 12% to 14.5%. But the problem is you can't club all these asset-backed loans in one bracket. "Each one of these asset-backed loan has its own advantages and disadvantages.

You have to choose one of them only after analysing your needs in detail," says Satish Mehta, co-founder and director, Credexpert, a credit counselling entity. And the needs could be — the purpose of the loan, documentation requirement, time you have and how much money you want to raise.

PURPOSE OF THE LOAN

Loan against gold and securities work for relatively smaller amounts that you would like to pay off within a short timeframe. For example, if you are keen on a loan to fund your holiday, you may be better off borrowing against gold or securities.

But for larger expenditures, like a marriage, loan against property works better. Typically, repayment tenure is longer for a loan against property compared to a loan against gold, which helps fund larger expenditures.

For an average individual, market value of movable assets such as gold and securities is generally lower than the market value of the property. Hence in most cases large expenses are funded using loans against property. You can choose to take an overdraft facility against your house, where the bank approves the borrowing limit against a house.

If you plan it well, you can use this facility to meet any contingency, too. This works for those who do not have much of free cash flow each month and cannot maintain emergency funds. Though you may not use the overdraft, still you may have to pay the processing fee of around 1% of the overdraft limit.



DOCUMENTATION REQUIRED

Bankers differentiate between loans against movable and easily realisable assets, such as gold and securities, and loans against immovable and illiquid assets, like property. "In case of gold loans, lenders will be keen on 'know your customer' requirements than documentation pertaining to loan repayment ability," says Harsh Roongta, CEO, apanapaisa.com.

Set Financial Goals, For A Prosperous Tomorrow! (Free Press Journal 23 Sep 2012)

FORAM SHAH explains the importance of setting financial goals, with an outcome leads to abetter future.

Everyday we hear people around us saying “ Arre aaj market upar hai shares kharidne chahiye” ( the stock market has gone up and hence we should buy shares) or “ FD ka rate kitna badh gaya hai saare paise FD mein daalne chahiye” ( interest rates have gone up and hence should put money in Fixed Deposits) or that gold prices will increase and hence invest in gold now. But seldom do we ask ourselves why are we saving money? The obvious answer that comes to most of us is – for our future. Have we ever probed a little ahead and asked what is this future or when will the future come? Investing without knowing what we are saving for, leads to anxiety and hence at every increase or decrease in price/ rates we fall prey to the ‘ tips’ we get from our friends, relatives, colleagues. Most of us would react irrationally when it comes to our money. A friend of mine told me an incident where a person boarded a train from Churchgate station without knowing where he wanted to go. And thus at every station he would ask fellow travellers whether he should alight or continue his journey.

One would laugh at him thinking what a foolish person is he. But don’t we do the same with our money? We invest it without knowing our financial needs. Imagine this person had to go to Borivali.

He was atleast in the correct train.

Had his final destination been Dombivali, he was travelling in a wrong train altogether. One can imagine the hassles he will have to undergo to reach his destination.

( Churchgate, Borivali and Dombivali are stations on the western and central railway in Mumbai).

Someone may want to buy a laptop worth Rs. 40,000 for his son’s birthday two months away or accumulate Rs. 5 lakhs for daughters marriage or create a corpus for own retirement a decade away. These are simply nothing but the future events for which we save. In other words they are financial goals one wants to achieve.

Goals can be two months away, 2 years away or maybe a decade away. They are the destination one wants to reach. Defining goals is the first step to deciding where to invest. We understand how much money will be required and when.

Thus with every change in the market condition, there will be less apprehensions as the ultimate destination is known.

Very rarely do we find people who have listed down their financial goals. We always feel that it is at the back of our minds. We don’t realise the importance of actually writing them down. A person who has listed goal of taking parents for a pilgrimage after 8 months is less likely to spend a windfall gain, on any other thing. Thus defining goals also brings in focus.

Goals could be either responsibilities or dreams. While listing the goal if you feel that you have to do this – it becomes a responsibility. E. g. I have to provide for my child’s education.

Likewise if you feel that I wish to do this – it is your dream.

E. g. I wish to own a holiday home.

This exercise will enable you to prioritise among various goals and thus know which to postpone or which to not. We live in a dynamic world where “ Nothing is constant but change”. Our goals will also change with the change in life stage. Let me elaborate this with an example.

Mr. Malhar aged 25 approached us for financial planning. He was doing well in his job. He had already purchased a house by taking a loan. The main focus for him was to plan for his wedding and honeymoon. After his marriage, he was advised to undertake the exercise of goal setting with his wife.

Their combined goals changed and focus shifted to repayment of home loan, retirement, responsibility towards parents, buying a car and regular vacations. Life was running smoothly. Few years later when his wife was pregnant, their goals had to be revised to include corpus for child’s education and marriage.

Slowly the economic conditions changed and recession hit the market. Due to recession, Mr. Malhar had to face pay cut. He was still able to pay the EMI for the home loan. Most of his responsibilities were 10- 15 years away and hence there was no need to change the strategy. His near term goals of vacations and buying a car were affected. He was clear about the priorities assigned to goals and hence decided not to take a vacation or buy a car. These were postponed for a later date.

It is thus seen that goals should be revised with the change in life stage, birth/ death of family member, marriage, etc. Goals also need to be revisited during recession.

However in such case only the strategy to achieve the goals will change. Changes in economic conditions will lead to anxiety; however, one should keep in mind the duration after which the goal needs to be fulfilled before taking any corrective action. Finally to conclude, we all set goals for us in different walks of life so why not set our financial goals? 

Ms. Foram Shah is a Certified Financial Planner.

foramrs@ gmail. com

Ulips with health benefits are a costly affair (BS 25 Sep 2012)

YOGINI JOGLEKAR Wealth creation plus medical cover – the new theme of Tata AIA Life Insurance ‘Suraksha Kosh’ – tries to attract customers with twin covers through a unit-linked insurance plan (Ulip) and health benefits. But in its attempt to offer too many things, it ends up being more expensive, even if one were to buy both the covers separately. The premium of Tata AIA’s ‘Suraksha Kosh’, is ~25,000 for a40-year term. This product will pay a sum assured (SA) of ~10 lakh each for death benefit, critical illness and accidental benefit. Additionally, it also offers to pay a sum assured of ~3.5 lakh for surgical benefits. In total, it covers an individual for ~33.5 lakh, provided you pay the stipulated premium every year for 40 continuous years. Suresh Sadagopan of Ladder 7 Financial Advisory Services says such plans turn out to be expensive instead. “One should rather buy a pure protection plan and a medical policy, which will offer other benefits at a lower cost, too. If one wants to create wealth, investing in Ulips is not the only way.” One can save as much as up to ~10,000, if the benefits are bought separately from specialists. Taking a similar example mentioned above, one has to pay ~3,540 towards alife cover (for SA of ~30 lakh), ~3,052 for accidental benefit (for SA of ~25 lakh), ~2,809 for critical illness (for SA of ~10 lakh) and ~800 for surgical benefits (for SA of ~3 lakh). In total, one pays ~10,000 approximately for the same benefits with an equivalent or more sum assured/cover. There are others such as ICICI Prudential Life Insurance which has a similar product ‘ICICI Pru Health Saver’ which gives hospitalisation benefit as well. Whereas HDFC Life and Kotak Life Insurance are among few other life insurers who offer similar Ulips but benefits have to be bought in the form of a rider unlike in Tata AIA where the benefits are in-built. Also, HDFC’s ‘SL ProGrowth Super II’ doesn’t give surgical benefits. Some also offer waiver of premium and hospital cash. In other words, these are savings and wealth creating plans built on protection products. One has the option to choose from these plans. That is, death benefit remaining constant in such products, one can choose to combine it by adding one or all of these benefits (surgical, accidental and critical illness). These benefits in Tata AIA are in-built in the product and are not sold separately as riders. Suresh Mahalingam, managing director, Tata AIA Life, says, “Our new product gives people an opportunity to get the best from their investments on a marketlinked platform, without worrying about the risk of death, dismemberment and onslaught of medical exigency like a critical illness.” Experts say, investing in such wealth creating products has its flip side, too. They require a long-term commitment as compared to yearly renewals required in aterm and a medical policy. For instance, your Ulip policy gets lapsed, there are chances you will lose out on all the benefits you paid for in the previous years. However, the new rule now enables policyholders to revive a lapsed Ulip policy within two years from its premium due date. However, these policies offer a term, which is usually from 15 to 40 years and is available to individuals from the age 18 to 50 years with maximum maturity age of 65. Premiums paid under such plans are eligible for tax benefits under Section 80C, 80 D and 10(10D) of the Income Tax Act, 1961. Buy health and life policies separately

Investment ideas for the home maker (Yahoo.com : By BankBazaar.com | Strategic Moves – Wed 22 Aug, 2012 8:58 AM IST)

It is essential for women, be it working women or homemakers to keep themselves and their family financially secure. In the olden days, women generally had a habit of keeping savings in containers in their kitchen, but today that is not going to get our savings anywhere when confronted with ever-growing inflation. It is wise to choose to invest and wiser to choose the best investment in order to keep our family and ourselves financially secure. A good investment gives you better returns than merely saving in a bank deposit or in our piggy bank and helps us to cope up with inflationary pressures.

Homemaker and Investments?

Not a good combination, most people would say. Many people think homemakers make very bad investors, as they do not have knowledge about the share markets and the technical aspects of investing. That's completely false notion. Looking from a fundamental analysis point of view, they are the ones who could be good investors as they make all purchase decisions for the entire family and they are aware which company performs better for what reason.

They may not have to make a decision by looking at the balance sheet of the company; they are the main consumers of most of the products around. This is a strength, which can help them analyze stocks and invest in shares and equity. They are uniquely qualified to buy and sell shares.

How does a homemaker choose appropriate investment options?

The best way to plan your investment is to know your goals. Try to take a piece of paper and write down what you would like to achieve in your life time, you might want to have a house of your own, probably a luxurious car, a world tour etc. These are your long-term goals.

There may be a few other things that you need to achieve in the next two to three years or more, for example higher studies, marriage, purchase a two wheeler etc., these are your short term goals. Remember, your short term goals keep changing as you move on in your life. Your short-term goals today are not going to be the same when you become a mother. The article discusses in detail about the investment options for homemakers at different stages of life.

Where to invest in your 20s

In your 20s, you are likely to be in your college or at your first job, so your income is definitely going to be very less. You can choose to invest them in a recurring saving deposit or bank deposits where you can earn low but regular and fixed returns. You can also choose to invest your money in mutual funds because the risk involved is lesser and you can invest very small amounts of money. Once you have started earning good money in your late 20s you can start investing your money in equities where the risk and returns are higher.

Where to invest in your 30s

In your 30s as homemakers, you might not have plenty of money to invest in, but make sure you have a term insurance for yourselves and your family. A health insurance will help keep you more secure during times of emergency. Try to cut down unwanted expenses and invest in education funds for your childrens' higher education, take up a suitable retirement plan for yourselves and your spouse. Avoid endowment plans; they carry higher charges and may not give high returns.

Avoid buying gold ornaments, they are only going to eat away your money in the form of wastage and making charges. Instead, invest in gold-based funds and buy gold in the form of coins/bars.

Where to invest in your 40s

In your 40s, you need to boost your children's education and wedding investments and your investment for retirement. If you are planning to build a house for 1500 Square feet, take only 1000 Square feet for your accommodation, rent the 500sq feet space, and use the money for investments. You can also take in a paying guest and use the rental and food charges for your short-term investments avenues.

Where to invest in your 50s

In your 50s you should invest in risk free investments. If you need to withdraw your long-term investment for your son's higher education, withdraw it or switch it to a debt fund at least a year before he gets the admission. Do not wait until the last minute, as you will be at risk if there is a sudden fall in the market.

In the 60s and beyond

Transfer the amount of money you have into bank deposits or into a recurring deposit (RD) so that you will receive good returns and your money will be safe. Avoid risky investments in your 60s.

Can an equity fund really make money in a flat market? (Wealth-Forum e-zine)

Kenneth Andrade, CIO, IDFC MF

In March 2008, the Sensex was hovering around the 17,000 levels. The next 12 months can only be described as a bloodbath, with the Sensex dipping to a sub-9000 level. We then saw a sharp recovery in the second half of 2009, with the Sensex clawing back to around 16,000 levels. Since then, we have had a flat market - and even today - the Sensex is still hovering around the 17,000 levels. The last 4-5 years has been quite a forgettable period for equity markets and most equity funds. 

Here is a story of one fund which bucked this trend - and has delivered significant alpha in a flat market. It was launched in March 2008 - just before mayhem hit the markets - and in what has been one of the most difficult periods for equity investing, has done a commendable job of actually delivering wealth creation over the last 4 + years of its existence. And, in its performance, lies an important story - about what really helps a fund manager deliver alpha even in tough times.

Large Caps , Mid Caps or Simply Good Businesses ?

Here is what Kenneth Andrade has to say on this key issue :

The investor today has this question: Which fund to buy Large Cap vs. Mid cap, and are midcaps such a relevant play in the entire environment, if the large caps tend to remain sticky?

Our answer to it has been that whenever we have put a portfolio together, our starting line has always been good businesses and good visibility.

Since 2008 there has been a fairly good cycle of market trenching into 2009, and post that moving up. Our Sterling Equity Fund has been around since the beginning of 2008. It's been through a cycle where valuations were extremely cheap, moved into a cycle where markets went flat and then moved to a cycle where some part of the markets have got very expensive and that essentially is the scenario we have been in, 2008 and till date markets have been virtually flat, 2008 we launched Sterling Equity at a 17k index and the market is still hovering a little below that no, though the fund has generated significant alpha. And in that entire context there has been a huge reshuffling of the environment around us, we moved away from the investment economy, we became a pretty large consumer economy. We moved from distressed corporate balance sheets to stressed balance sheets and we have got into a very interesting cycle of how consumer leverage has started to pick up. In context of that over the next couple of years we will see consumer leverage being one of the key driver to where the environment will essentially lead and consumers or any part of the market which will receive significant amount of money from the system will continue to tier upwards in terms of growth and that should reflect in the underlying market cap.

Sterling's positioning essentially is that we try to buy growth businesses in the mid cap space. The fund actively builds a portfolio of companies with proven business model. The focus is on identifying structural changes in the environment and align companies based on how their valuations stack up within their respective industries.

We try to buy good businesses. The way to effectively do that is to make sure that the companies we are buying are not financially leveraged. The underlying portfolio will be completely diversified, we have our fair share of every other business that forms part of the benchmark index. And we would like to participate over the next cycle.

So we are not really looking at, where in the entire system the environment is placed or whether the FIIs are putting money in the system or not. If the company grows profitability it will attract its entire market and capital into it all. That's the space we operate in, and that's how we would like to grow the entire opportunity.

Disclaimer:

The Disclosures of opinions/in house views incorporated in this document is provided solely to enhance the transparency and should not be treated as endorsement of the views expressed in the report. This information is subject to change without any prior notice. The Company reserves the right to make modifications and alterations to this statement as may be required from time to time. The recipient should take this into account before interpreting the document. This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through analysis of IDFC Mutual Fund. Neither the IDFC Mutual Fund / Board of Trustee/ IDFC Asset Management Co. Pvt. Ltd nor IDFC, its Directors or representatives shall be liable for any damages whether direct or indirect, incidental, special or consequential including lost revenue or lost profits that may arise from or in connection with the use of the information.

Mutual fund investments are subject to market risks, read all scheme related documents carefully.

For any specific questions on the fund pls get in touch with local IDFC Relationship Manager or mail at gamechangers@idfc.com

BREAK FREE FROM MONEY MYTHS (ET Wealth 13th Aug 2012)

Investment decisions based on flawed assumptions could result in suboptimal returns. Here are some widely held misconceptions you should break free from.

Anybody who invests in a basket of blue-chip stocks and holds it for 29 years is bound to be a billionaire, right? Not in Japan. With the Nikkei index at the same level as it was in 1983, the value of the investment would be the same as it was 29 years ago. The Japanese aren’t alone. Stock indices of the European markets are down to 14-15-year lows. Investors in the US and India are a tad better with benchmark indices at their 2007 levels. 

With zero returns after all these years, the cult of long-term investing is almost dead. Yet, financial experts and investment advisers don’t tire of preaching that holding stocks for the long term will make you rich. They profer carefully selected data to show how stocks have made mounds of money for investors over different periods of time. 
Many more such money myths have been perpetuated by investment professionals. Stocks have the potential to earn high returns, but investors should not wait endlessly to book those profits. Over the next few pages, we have examined seven such money myths, which can work against you in certain situations. For instance, it is not always better to buy a house. A young investor should not allocate too much to an illiquid asset like a house too early in life. Also, if the property market is overheated and interest rates are high, it is better to live on rent. 
The mutual fund space is a minefield of myths. Read the reality behind these misconceptions. SIP investments are considered safe and almost a guarantee for better returns. But as we will illustrate, the SIP is just a mode of investment and does not hold out any guarantee of better returns. Buying too many funds with a similar investment mandate only clutters your portfolio without diversifying the risk. Top rated funds are not always the best performing funds. 
Another major misconception relates to the Indian investors’ obsession with assured returns and tax-free income. This makes them invest in tax-inefficient bank deposits and low-yield life insurance policies. We explain how debt mutual funds will be a better option even though you might have to pay a 10% tax on the income. 
Then there is the problem with interest rates on loans. A lay person will obviously choose a loan that comes at the lowest rate of interest, but this can be misleading if you don’t check how the rate has been computed. A flat rate of interest may seem low, but actually works out to be costlier than a reducing rate loan. 
As the country celebrates its 65th Independence day, it’s time for you to break free from the shackles of these ill-conceived notions. ET Wealth will give you all the support you need in your bid for financial emancipation.

MYTH 1 STOCKS GIVE GOOD RETURNS IN THE LONG TERM Indian markets have not generated any returns in the past five years. 
Financial planners like to parrot the widely held notion that stocks give high returns in the long term. The catch is that ‘long term’ is not defined. The Indian markets have not generated any returns in the past five years, but some developed markets are worse. Japan’s Nikkei, for instance, is at the same level as it was 29 years ago. British, German, French, Spanish and Italian markets are where they were 13-15 years ago. There has been some recovery in the US, but the Dow Jones is still at its 2007 level. So, ‘long term’ can be extended as per the convenience of the financial adviser. If his clients don’t get the desired result in three years, he extends the horizon to five years, or even further to 7-10 years. 
Does this mean investors should desert equities and concentrate their investments in the assurance of debt, gold and immoveable property? Certainly not. The journey for the Indian and most other markets has not been flat. There have been bullish phases and bearish periods, each bringing with it an opportunity to book fantastic profits or enter at unbelievably low prices. 
Most planners frown upon the small investor’s attempts to get in when the prices are low and exit when they are high. “Never try to time the market,” they tell him. We agree that you cannot always hope to buy low and sell high. We are not espousing intra-day trading and short-term punting. But booking profits periodically is perhaps the only way to make serious money from a volatile stock market. 
Markets tend to go through mood swings. There are periods of extreme pessimism, when market participants behave as if the stock market is going to close down. We witnessed this in 2008-9. Then there are periods of extreme euphoria, when they think stock prices can only go up. We saw this in 2007 and again in 2010. Smart investors who move against the crowd during these extreme situations, buying during a downturn and selling in a rally, make good money 
How does one spot these entry and exit points? One simple way is to look at the valuation of the broader market as defined by its PE. We examined the PE and Sensex movement in the past 15 years (see graph). On the few occasions that it moved below 12 (1998, 2002 and 2008), it offered great buying opportunities. Similarly, when it moved above 24 (2000, 2007 and 2010), these were signals for exiting. 
This strategy of buying only below a PE of 12 and selling when it is above 24 requires tons of patience. You may have to sit on cash for a very long time. Also, there is a possibility that you might miss some rallies in the interim. “Since we are the second fastest growing major economy in the world, India doesn’t deserve to go below a forward PE of 12,” says Chokkalingam C, group CIO, Centrum Wealth. 
Another strategy is for investors to keep building their positions when the PE is ruling at low levels and start exiting when they have reached higher levels. It should not matter whether this happens in a span of five months or five years.

MYTH 2 TAX-FREE OPTIONS ARE GOOD INVESTMENTS A tax-efficient option will yield higher returns than a tax-free one. 
Bank deposits and insurance policies are the two most popular investments in India. Almost 45% of the total financial savings of households go into bank deposits, while life insurance accounts for nearly 22%. The concern for most investors is the safety of capital offered by bank deposits and tax-free income offered by insurance policies. They don’t realise, however, that bank deposits are not very taxefficient because interest is fully taxable. In the 30% tax bracket, the post-tax return of a 9% fixed deposit is pared down to 6.3%. 
Insurance policies are no better. They offer taxfree income, but the buyer ends up sacrificing too much. The returns from a traditional endowment or moneyback plan is barely 5.5-6%. Instead, it’s better to invest in the PPF, which also offers tax-free income. The current interest rate is 8.8%, but this is linked to the market and could change in the coming years. Also, there is an annual ceiling of 1 lakh on investments in the PPF. 
Debt funds offer investor tax efficiency as well as higher returns. After one year, the income is treated as long-term capital gain and taxed at 10%. Yet, small investors account for barely 1-2% of the total investment in debt funds.

MYTH 3 
DIVERSIFICATION GUARDS AGAINST VOLATILITY Buying too many similar mutual funds does not really diversify your investments. 

One of the biggest advantages of a mutual fund is that it spreads the risk across a basket of stocks. With 30-40 stocks in the portfolio, an investor can be sure that his fund won’t suddenly crash. Though a large number of stocks in a fund’s portfolio diversifies the risk, the same cannot be said for an investor who packs his portfolio with too many funds. If he invests in 10 funds that have a similar investment mandate, he is not really diversifying his portfolio. Rather, he is buying the same basket of stocks through 10 different funds. 
Most diversified equity funds follow roughly the same pattern of investment. The portfolios of the two largest diversified equity funds, HDFC Top 200 and HDFC Equity, are almost photocopies of each other (see table). The pattern gets repeated with minor alterations in other funds as well. ICICI Bank, SBI, ITC and Infosys figure in the top 10 holdings of nearly all large-cap funds. The sectoral allocation is also similar, with the banking sector being the favourite of most diversified equity funds. So there is hardly any diversification if you invest in 5-6 different funds. 
To be fair, you cannot fault the funds for following the herd. A fund has to invest in certain stocks if they are in its benchmark index. The large-cap funds that track the Nifty or the Sensex will necessarily invest in index stocks. It’s only that the percentage allocation to individual stocks will depend on the fund manager’s reading of the market. It is for an investor to look up the fund’s investment mandate before he puts in his money. He should avoid duplicating his investments by buying too many similar funds. 
For instance, a well-diversified portfolio can be a mix of large-cap, mid-cap and multi-cap schemes. Add a dash of sectoral funds if you want a focused exposure to a particular sector or theme. You will have to do a lot more research than a cursory look at the fund’s category and its index. HDFC Equity is categorised as a multi-cap fund and tracks the S&P CNX 500, while HDFC Top 200 is a largeand mid-cap fund with the BSE-200 as its benchmark. But don’t invest in more than 6-8 equity funds, because monitoring them will be a challenge. As investment guru Peter Lynch said, too many funds will only ‘diworsify’ your portfolio.

MYTH 4 SIP INVESTMENTS ENSURE BETTER RETURNS SIPs are not a guarantee against loss and don’t always yield higher returns. 
    You will not lose money by investing through an SIP.’ Mutual fund investors have been sold this story for years. The systematic investment plan is packaged as a panacea to all their investing problems. Don’t fall for it. While SIP investors stand a better chance of getting average returns, it is hardly a fool-proof strategy. Neeraj Chauhan, CEO, Financial Mall, says, “SIP is only a mode of investing, a mechanism that helps you average out your costs over a period of time. They do not not guarantee anything.” 
    The stock indices are almost at the same level as they were five years ago. If you had invested 1.2 lakh as a lump sum in the HDFC Equity fund in August 2007, your investment would now be worth 1.8 lakh. But if you had invested 2,000 a month through SIPs, your total investment of 1.2 lakh would have grown to 1.58 lakh. Unfortunately, this comparison can only be made in hindsight and there is no way to tell the direction of the markets. 
    When the markets are in a downtrend (see case A), a lump-sum investment at the beginning of the period will lose more than the SIP investment. However, if there is a sustained rally in stock prices, the SIP investor will not gain as much as the lump-sum investor (see case B). The real benefit of the SIP investment kicks in when it is continued over a long period of time and across market cycles (see case C). 
    However, SIPs involve investing on a predetermined day of the month. This means you lose out if the market slips during the month, offering a good investment opportunity. They are useful because they match the cash flow of the small investor, especially the salaried individual. He allocates a predetermined sum from his monthly income to the investment. A lumpsum investment is not an option he can consider because he doesn’t have a large investible surplus. Therefore, the SIP route suits him best. 
    Another problem associated with SIP investing is that the small investor often loses his nerve when the markets go into a tailspin. Under the SIP route, by investing at different points of time, you get the benefit of cost averaging, wherein you purchase units in the scheme at different NAVs at each interval. This can theoretically allow you to reduce your purchase cost over time. If you stop investing when the markets are going down, you forego the advantage of buying low and averaging out your purchase price. This can be disastrous for your returns.

MYTH 5 FUNDS WITH HIGHER RATING PERFORM BETTER Ratings are based on past performance and don’t guarantee future returns as well.
Investors in mutual funds often use the fund ratings to decide which schemes to choose from among the hundreds available. Though the rankings are based on robust statistical analyses and widely used methods of assessment, many investors read too much into these. This can lead to suboptimal investment decisions. 
It’s important to note that ratings are based on the past performance of schemes. They do not serve to make a judgement about their future performance. Also, they are based on the percentile score of the schemes. A scheme’s performance is not seen in isolation but is rated on the basis of how it performed relative to the other funds in the category. For instance, the top 10% funds are assigned a five-star rating, while the bottom 10% funds are branded one starrers. 
Market regulator Sebi has acknowledged how the ratings can be used to misguide investors. In February this year, it banned fund houses from mentioning ratings in their advertisements. Only certain funds, including capital protection funds, which require Sebimandated ratings, are allowed to mention these in ads. 
Secondly, ratings can change over time. A five-star fund’s performance may decline, turning it into a four-star or even a threestar fund. An investor who goes strictly by the rating may then have to rejig his portfolio and shift to a five-star fund. Investors should also note that fund ratings work on a ‘one size fits all’ rule. They don’t tell whether the scheme is suitable for different types of investors. So a multi-cap equity fund with an aggressive mid-cap orientation may have a very high rating, but it will not suit a conservative investor seeking low but stable returns. 
A fund’s rating, by itself, does not tell you whether it is a good investment or not. So investing in a fund based solely on its rating would be inappropriate. At best, fund ratings can serve as a starting point, says Dhruva Raj Chatterji, senior analyst at Morningstar India. “These fund ratings can be used for initial screening to identify a broader set of funds, but the investor should also look at other factors before choosing a particular fund.” 
We looked up the performance of diversified equity funds between September 2007 and August 2011. The results were surprising as well as instructive. Four-star rated funds, on an average, were the best performers during this period. The bigger surprise was that even the average two-star and three-star funds did better than the average five-star fund. However, this is based on the ratings assigned in 2007. They may have changed over the years. A five-star fund in 2007 may not have retained such a high rating or a two-star fund might have risen in rank.

MYTH 6 BUYING A HOUSE IS BETTER THAN RENTING Not when real estate prices are overheated and interest rates are high. 
Almost everybody dreams of owning a house. No more pushy landlords, poor maintenance and annual rental hikes. Plus, there is always a feeling of uncertainty when the lease is due for renewal. Owning a house frees you from a lot of worries. 
Or so you think. Being a home owner has its own sets of problems. It might seem counterintuitive, but experts say that one should not invest in real estate too early in life. It’s a bigticket investment that ties you down to a location and prevents you from investing in other, perhaps more lucrative, avenues. If your career is on the fast track, anchoring yourself to a particular city might mean forgoing emerging job opportunities in other locations. A big EMI can become an albatross around your neck just when you are finding your feet in the corporate world. 
Even older and deep-pocketed buyers need to rethink before they take the plunge. Real estate is an illiquid investment that doesn’t allow partial withdrawals. The entry load is very high and disposing of the property can take several weeks, even months. If your job involves a lot of mobility, it may not be a good idea to block your money in immoveable property. If you choose not to sell the property, you will end up servicing an EMI as well as paying rent for the house in the new location. “If one doesn’t plan to stay in one location for 4-5 years, I will not suggest he buy a house. Leasing is a better option for him,” says Pankaj Kapoor, managing director of real estate research firm Liases Foras. 
Buying a house makes sense if property prices are low but are expected to rise soon and capital is cheap. Right now, all three conditions have crosses against them. Property prices are high, especially in some overheated pockets in the metros, and there are indications that the real estate market is likely to stagnate in the coming months. “If you are undecided about the location or the price, renting a property would probably be a better option,” says Badal Yagnik, managing director, Chennai & Coimbatore, Jones Lang LaSalle India. 
Many home buyers are encouraged by the prospect of not having to pay rent, but keep in mind that bidding rent payments goodbye also means saying hello to home loan EMIs. Home loan interest rates are ruling above 12% right now. Remember that unlike landlords, banks can’t be cajoled in case your rent is late. If you miss the EMI, there’s a double penalty slapped on you—from the lender as well as your bank. The rental market, on the other hand, offers a better deal. You can rent a house for a fraction of what you will have to shell out as an EMI. In Noida, a suburb of Delhi, a 2-BHK house can be rented for 15,000-20,000 a month. The price tag of the same property can be as high as 80-90 lakh. If you take a loan of 50 lakh at 12% for 20 years to buy a house, you have to pay an EMI of 55,000. 
The case against buying becomes even more compelling if you are an investor, not an end user. The rental yield, which is the annual rent of a property as a percentage of its market price, has steadily dipped in urban areas. In overheated markets, it works out to merely 1-1.25%. In other words, a 1 crore property will fetch a monthly rent of only 8,000-10,000. Experts say that if the rental yield is below 4%, the investment is not worthwhile. This is especially true if the cost of capital is high. What you pay as interest on the loan will neutralise any gain from the property.

MYTH 7 TAKE A LOAN WITH THE LOWEST INTEREST RATE Flat rate of interest may appear low but works out to be costlier than a normal loan. 
Planning to buy a car? When you take a loan, make sure you understand how the interest rate on the loan is calculated. Lenders offer loans with different terms and conditions and the lowest interest rate may not always be the best deal. 
The flat rate of interest is a widely used trick that creates a financial illusion in the mind of the borrower. The flat rate is arrived at by dividing the total interest paid on the loan by the number of years. It will obviously appear lower than the interest rate calculated on a reducing balance basis. What the borrower does not realise is that he is being charged for the entire loan amount even though the outstanding amount reduces progressively with every EMI. As the graphic shows, a flat rate of 10% is a lot more expensive than a normal reducing rate of 12%. 
Another trick is to ask for one or two EMIs in advance. This seemingly innocuous clause pushes up the effective interest cost for the borrower. This is because the actual loan disbursed is reduced by the amount of these advance payments even though the borrower is charged for the full amount. As the graphic shows, a loan at 9% with one advance EMI will actually cost the borrower more than 18%. Similarly, two advance EMIs will push up the effective cost of a three-year loan to a prohibitively high 20%. In a new trend, some banks are insisting on the borrower parking some money in a fixed deposit with them. The rate of interest offered on these deposits is not very attractive but some borrowers have no choice. They are forced to agree to the terms and conditions laid down by the lender. This also pushes up the effective interest on the borrowing, though the difference is not as significant as in the case of loans with advance EMIs. It’s best to stick to the normal reducing balance calculation when comparing interest rates. To avoid confusion, ask the agent to quote the EMI per 1 lakh. This normalisation of quotes will help you compare the offers of other lenders. Home loan borrowers should also watch out for certain misleading tactics used by lenders. They are enticing new borrowers with lower rates, but don’t get carried away by these special offers. The catch is that instead of bringing down the base rate, to which all home loans are linked, they just bring down the spread between the base rate and the rate charged to the customer. Turn to page 21 for a detailed story on how this could affect your home loan.