The last couple of years have seen a flurry of regulatory changes affecting the various Indian investment products. These changes are sure to impact all of us. So it is essential for you to understand what these regulatory changes mean for you. Here are some of the major changes impacting various investment products.
Regularization of ULIPs
- Reduction of charges: Before the ULIP charges were capped, the insurers charged exorbitant charges on these products. Hence it took a long time for the recovery of these charges. But now IRDA has put a limit on these charges. This means you can recover your charges more quickly.
- Spreading out of charges over the policy term: Previously these charges were deducted during the initial 3-5 years of the product. As a result, your corpus decreased significantly. But now, the final amount goes up significantly, as more amount is invested initially.
- Hike in lock-in period: The the lock-in period for these products has gone up to 5 years from the earlier 3 years. This is a very important change as equities tend to give better returns over a long period, and most ULIPs are equity-based products. So you tend to get higher returns.
- Guaranteed return on pension scheme: The pension schemes from insurance companies are now set to offer you a guaranteed return of 4.5%.
- Limitation on surrender charges: With this move, you will get higher amount, if you decide to surrender your policy prematurely.
Revised guidelines for PMS
- Minimum investment for PMS to be fixed at 5 lakhs: Previously, PMS managers would accept clients even though they couldn’t invest Rs 5 lakhs. But with this new SEBI circular, the minimum amount for PMS account has been fixed at Rs 5 lakhs.
- PMS Managers to charge fee only on the excess profit generated: SEBI has said that the PMS Manager can charge their fee only on the excess profit generated over the previous year. E.g. if you invest Rs 5 lakhs, which after a year becomes Rs 8 lakhs, then you pay fee only on Rs 3 lakhs and not on the entire corpus. This saves you money in the long run. Moreover this fee will be levied at interval exceeding a quarter. This will safeguard your returns.
Abolishment of entry loads in mutual funds
- This means lesser churning, fewer NFOs and no mis-selling. It means investors gain.
It has become common nowadays for mutual fund industry to lure gullible investors by giving star ratings to their funds. Gullible investors who don’t know better fall prey to these ratings and end up investing in these funds, only to regret later on. This is because star ratings have no meaning when it comes to investing. Here are the drawbacks of star ratings for the funds.
- Variations in rating system: The rating agencies use different rating parameters to rate the funds. This can create inconsistency in the rankings of the funds. So a fund may get higher ranking in the ratings but may give poorer returns than its peers. Also just insisting on the ratings will make the investor ignore the consistent performers.
- Expensive proposal: Fund ratings keep on changing. Now if you keep on focusing only on the star ratings then, you will end up churning your mutual fund portfolio regularly, thus making you pay STT and other duties. Besides you also end up losing the appreciation of your investment amount.
- Suitability: While funds across all categories do get five star ratings, all of them may not be suitable for everybody. E.g. if you have a low risk appetite, then mid-cap funds are a strict no-no for you. So even if these funds do have five star rating, they will not be suitable for you.
So instead of concentrating on the ratings, it is advisable to focus more on the fund performance, your risk appetite, time horizon and fund management. This will help you earn substantial returns over a long time.
Financial advisors are harping on the importance of Systematic Investment Plan (SIP). But what is SIP and how does it benefit you? Should you opt for it?
The term SIP stands for Systematic Investment Plan. In this you invest a particular sum at regular intervals. This interval can be daily, monthly quarterly or half-yearly. This sum can be as low as Rs 100.
Why opt for SIP? SIP lets you balance out the no of share or mutual fund units that you purchase. E.g. if your Rs 100 lets you buy 2 units of a mutual fund when the markets are high, you can get 3 units when the markets fall. This means you even out your investments.
Studies have shown that those who opt for SIP earn far higher returns than those who make lump sum investments. Also since you are investing small sums, you are not taking a major risk if the markets crash.
However SIPs don’t work in rising markets. If the NAV or share price keeps on increasing, you will not get any substantial returns.
SIP is suitable for those who have a steady source of income. If your income flow is irregular, then go for lump sum option, to prevent being charged for SIP bounce.
Mutual fund houses are quite adept at catching latest fad in the market and launching new funds based on the fad. Once such fad they have capitalized on is the government’s plan to divest its stake in government-owned companies or PSUs, and introduced mutual funds, called as PSU funds.
PSU funds are those mutual funds that invest in scrips of government-owned companies. These include companies like BHEL, NTPC, IOC, SBI etc. Many fund houses mislead customers by telling them that they will be filthy rich by investing in these companies. But is it true? Will the customer benefit from investing in these funds?
The answer – no. When choosing a company for investment, you have to look at its merits. You need to consider its present and past performance, its growth prospects, its comparison with peers, dividend payout etc. This is applicable even for PSUs. All of them are not gems. You should be able to separate wheat from chaff.
While PSU companies do have an edge when it comes to policy making, there is a major drawback as the government holds a dominant stake, and so can force these companies to bend to the whims of the ministers and MPs and MLAs. Moreover some companies do not have quality customer service, slow decision making etc. All these will impact the functioning of these companies.
Hence it is advisable to give these funds a miss. Instead go for pure diversified fund that will help you get higher returns.
Exchange-traded funds (ETFs) are a type of mutual fund that works like shares, as they can be traded on the stock exchange. Just like stocks, their prices are affected by the trading that takes place on the stock exchange. However they do offer some tactics to help you safeguard your investments. So what are they?
- Proper timing: Proper timing is the key to maximizing your returns. You should have proper timing for both buying and selling the stocks, as you won’t gain anything by holding on to the stocks by hoping that the situation will improve. Instead it is advisable to exit the stocks if there is a decline of 8% in the value of the stock from its highest price. Then once the market has stabilized, you can again buy the stock. It will help you in saving some amount of capital.
- Stop orders: Place a stop loss on your stocks so that if their prices go below this figure, you can sell them. It will help you in protecting your downsides and lower your losses.
- Selling: Sell your ETF to raise cash if you are in desperate need of money, as it will help you in getting necessary cash for your needs. Alternately you can invest that money in some low-risk investment avenue like bank FD or government bonds, to protect your money.
- Rebalance your portfolio: Divide your portfolio amongst stocks, bonds, gold and mutual funds. This means if the stocks are not doing well, you always have other investments to fall back on. Similarly divide your stocks amongst those belonging to different sectors. So if one sector like IT is not doing well, it will be offset by good performance of another sector like FMCG.
Follow these tactics and protect your wealth even during the downtimes.
Sometime back, international or global funds were a rage. Many investors were heavily seduced by these funds. This is because they could get international exposure at a nominal sum. They did not have to get RBI permission to invest abroad. They did not have to face the hassle of foreign currency conversion as the fund house took care of all these formalities.
However it was observed that these funds underperformed local mutual funds. In fact, in many instances, investors have seen the value of their investment eroding. Why is that? Why did these funds fail to deliver?
Well, here are some of the of the reasons while global funds failed to deliver.
- As global funds invest their corpus abroad, effect of economic crisis in the country in which they have invested, will end up eroding the value of the investment.
- Foreign currency exchange will affect the value of the investment. If the foreign currency is stronger than Indian rupee, the value of your investment will increase and vice versa.
- Taxation will differ from country to country. Taxes will affect the value of your investment. Besides you’ll end up paying taxes in India as well, since unlike normal mutual funds, these funds are taxable.
So what should you do? Well, as far as possible, avoid these funds. However if you choose to do so, just invest a small portion (not more than 5%) in such funds. But this should be done only after building up a robust portfolio of domestic funds. This will help you withstand the shocks in the international markets
Recently ULIPs were in the news when SEBI had directed 14 insurance companies not to issue any new ULIPs. SEBI contended that despite being an insurance product, ULIP had a high proportion of investment and thus should be regulated by SEBI. However in reality IRDA regulates the insurance products including ULIPs.
The case went to the court and the government had to step in and hand over the jurisdiction of ULIPs to IRDA. But in this war, it is ultimately you the customer has lost. Wondering why? Here is why.
This is because mutual funds and ULIPs do not have level playing field. While mutual funds are not allowed o pay upfront commission to its agents, ULIP agents can pay commission as high as 40% to its agents. As a result, many financial advisors tend to push ULIPs on their unsuspecting clients. Now remember, this commission comes from your investment.
The drawback of ULIP is that you need to keep your investment for at least 10 years to recover this upfront commission. This despite what many insurance agents tell you that you can keep on investing only for 3 years. Also the insurance cover is very low than what you would get for half the investment had you opted for term plan.
Moreover returns from ULIPs are not guaranteed as it is a market-linked product. Thus looking at drawbacks of ULIPs it is advisable to stay away from ULIPs. But with IRDA winning the battle against SEBI, it is the customer who has lost.
Manish was advised by his mutual fund advisor to invest in a mutual fund that had just announced a dividend of 10%. Accordingly, Manish invested in the fund only to find that the value of the fund had decreased. Manish was shocked with this development as he considered the dividend from the mutual fund same as that of the dividend from the stock.
Manish is not alone. There are many such gullible investors who are taken for a ride by unscrupulous financial advisors. Also sheer ignorance makes people think dividends from mutual funds are the same as the dividends from stocks. But this is not true. Here are the differences between both of them.
When a company declares a dividend, it does so from its income. But when a mutual fund declares a dividend, it does so from the capital appreciation of its NAV. Now the money with the mutual fund is your money as the fund’s job is to collect money from multiple investors and invest in different companies on your behalf. When the share prices of the underlying companies go up, it will push up the NAV of the find, which the fund will then give as a dividend.
The share price of the company is decided by the market and not by the dividend. But in case of a mutual fund, the NAV of the fund decreases by the value of the dividend declared. E.g if the NAV of the fund is Rs. 20 and the fund declares a dividend of Rs 4, the NAV of the fund after the dividend would be Rs. 16.
Also unlike shares, opting for dividend will help in growth of your investment. Hence if you are looking to save for any long-term goal like retirement or children’s education, go for the growth option. So next time your mutual fund broker advises you to invest in a mutual fund just because it is giving a dividend, ignore it.
Want to invest for high returns but also want to reduce risk? Then opt for ETFs. While ETFs are not popular in India, they are very much in demand in the US.
Now you may be wondering, what are ETFs and why have I not heard about them before. For one, they are a new entry in India and another is that you can invest in them through brokers who are more interested in making money though trading than marketing the ETFs.
Here let us take a look at what is an ETF and how does it work
What is an ETF?
ETF is also called as an exchange traded fund and is a type mutual fund. However it differs from a traditional mutual fund in that it simply tracks the underlying index. This means unlike a normal mutual fund, an ETF is passively managed. There is no frequent buying and selling of securities as it normally occurs with a traditional mutual fund. This reduces the chances of fund manager making mistake while selecting securities. Moreover an ETF can invest in shares , gold silver or even debt. It can also invest in a certain sector.
When an ETF is first launched, it is offered by the fund house. But after the ETF opens for subscription, it is listed on the stock exchange just like shares of a company. You then have to approach a broker to trade in the ETF. Just like shares, units of an ETF can be traded during the market hours, thus letting you benefit from market movement.
An ETF invests in the stocks of the companies included in the underlying index in the same proportion as is present in the benchmark index. E.g. if RIL, ICICI Bank and ONGC constitute 8%, 5% and 3% of the benchmark index, then the ETF will invest in these stocks in the same proportion. In this respect, it is similar to an index fund. However unlike index funds, ETFs don’t need a lot of investment and have a lower expense ratio.
How to benefit from ETF?
Go to a broker and open a demat account. Then start buying units of an ETF with an amount as small as Rs. 1000. However as they are mutual fund, do watch out for expense ratio, as expenses can erode the returns of the fund. Keep on investing by taking benefit of the market movements. With low expense ratio, low chance of error and superior performance, ETFs are the winner all the way.
There are numerous mutual funds available in the Indian market. All this can be very confusing to an ordinary investor. So if you are looking to invest in a mutual fund but are confused as to how to go about selecting them, here are some tips that will help you in choosing a good mutual fund.
- Long-term consistent performance: Has the fund been a consistent performer over a long term? By long-term I mean we are looking at a time horizon of 10-15 years. Has it managed to deliver good returns during good and bad times consistently? If yes, then this fund should be considered. HDFC Top 200, Franklin Taxshield are some such funds.
- Fund management: Is the fund management headed by a reputed company? Has the company been in business for a long time? AMCs like Reliance, Franklin Templeton, HDFC and SBI have been in business for a long time. They have the necessary expertise to run the mutual fund business. So you know you are in safe hands.
- Portfolio allocation: Does the fund have a higher mid-cap and small-cap bias? If yes, then these funds have higher risk than the funds with large cap bias. Funds like Reliance Growth and Franklin Prima have mid-cap bias and so are riskier than funds like Reliance Vision and Franklin Prima Plus.
- Your risk profile: Can you withstand the risk associated with imid-cap and small-cap funds? If no, then stay away from such funds. If you cannot bear any type of risk then avoid equity fundgs completely.