Thursday, August 25, 2011

Prajna Capital

Prajna Capital

How to select a mutual fund?

Posted: 25 Aug 2011 06:01 AM PDT

Mutual funds offer the most convenient way of investing in equity, debt and money markets. The increased participation of Indian investors bears testimony to the fact that there is a widespread realisation of the same. Also over the years, the Indian mutual fund industry has grown manifolds, not only in terms of size but also in terms of offerings. While on one hand that is good; the increased number of offerings has also given rise to a state of dilemma in the mind of investors. They often get confused when it comes to selecting the right Mutual fund from the plethora of funds available. And even worse, many investors think that 'any' mutual fund can help them achieve their desired goals.

 

The fact is, not all funds are the same. There are various aspects within a fund that an investor must carefully consider before short-listing it for making investments. In this article we highlight some of those aspects.  

 

1) Comparisons: A fund's performance in isolation does not indicate anything. Hence, it becomes crucial to compare the fund with its benchmark index and its peers, so as to deduce a meaningful inference. Again, one must be careful while selecting the peers for comparison. For instance, it doesn't make sense comparing the performance of a midcap fund to that of a largecap.

Don't compare apples with oranges'  

 

2) Time period: It's pertinent for investors to have a long term (atleast 3-5 years) horizon if they wish to invest in equity oriented funds. Hence, it becomes important for them to evaluate the long term performance of the funds. This does not imply that the short term performance be ignored. Performance over the short term should also be evaluated; however, the focus should be more on the long term performance. Besides, it is equally important to evaluate how a fund has performed over different market cycles (especially during the downturn). During a rally it is easy for a fund to deliver above-average returns; but the true measure of its performance is when it posts superior returns than its benchmark and peers during the downturn.    

Choose a fund like you choose a wife - one that will stand by you in sickness and in health

 

3) Returns: Returns are obviously one of the important parameters that one must look at while evaluating a fund. But remember, although it is one of the most important, it is not the only parameter. Many investors simply invest in a fund because it has given higher returns. In our opinion, such an approach for making investments is flawed. In addition to the returns, investors must also look at the risk parameters, which in-turn explain how much risk the fund has taken to clock higher returns.

 

4) Risk: Risk is normally measured by Standard Deviation. It signifies the degree of risk the fund has exposed its investors to. Higher the Standard Deviation, higher the risk taken by the fund to clock returns. From an investor's perspective, evaluating a fund on risk parameters is important because it will help them to check whether the fund's risk profile is in line with their risk profile or not. For example, if two funds have delivered similar returns, then a prudent investor will invest in the fund which has taken less risk.

 

5) Risk-adjusted return: This is normally measured by Sharpe Ratio. It signifies how much return a fund has delivered vis-à-vis the risk taken. Higher the Sharpe Ratio, better is the fund's performance. From an investor's perspective it is important because they should choose a fund which has delivered higher risk-adjusted returns. Infact, this ratio tells us whether the high returns of a fund are attributed to good investment decisions, or to higher risk..

 

6) Portfolio Concentration: Funds that have a high concentration in particular stocks or sectors tend to be very risky and volatile. Hence, investors should invest in these funds only if they have a high risk appetite. Ideally, a well diversified fund should hold no more than 40% of its assets in its top 10 stock holdings.

Make sure your fund does not put all its eggs in one basket

Invest in funds with a low turnover rate

 

The two main costs incurred are:

1) Expense Ratio: Annual expenses involved in running the mutual fund include administrative costs, management salary, overheads etc. Expense Ratio is the percentage of assets that go towards these expenses. Every time the fund manager churns his portfolio, he pays a brokerage fee, which is ultimately borne by investors in the form of an Expense Ratio. Therefore, higher churning not only leads to higher risk but also higher cost for the investor.

 

2) Exit Load: Due to SEBI's recent ban on entry loads, investors now have only exit loads to worry about. An exit load is charged to investors when they sell units of a mutual fund within a particular tenure; most funds charge if the units are sold before a year. As exit load is a fraction of the NAV, it eats into your investment.

 

Try investing in a fund with a low expense ratio and stay invested in them for longer duration.

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Also, know how to buy mutual funds online:

 

Invest in DSP BlackRock Mutual Funds Online

 

Invest in Reliance Mutual Funds Online

 

Invest in HDFC Mutual Funds Online

 

Invest in Sundaram Mutual Funds Online

 

Invest in Birla Sunlife Mutual Funds Online

 

Invest in UTI Mutual Funds Online

  

Invest in SBI Mutual Funds Online

 

Invest in Edelweiss Mutual Funds Online

 

Invest in IDFC Mutual Funds Online

 

 

Things to Watch Out for When Investing in the Stock Market

Posted: 25 Aug 2011 05:17 AM PDT

 

Equity investments are touted as the best form of long-term investments. But the twists and turns on the route to the stock market are sure to put off many a lay investor. Interesting trading patterns tell a story to an experienced hand, but it may all be Latin and Greek for a newcomer. He may learn only by making mistakes, some of them costly.



1 The Big Public Offer Impact

What is common to Reliance Power, Coal India, Reliance Petroleum and DLF other than the fact that they were the four biggest IPOs to hit the Indian stock market? The answer lies in what happened after these offers. All four IPOs were followed by a correction in the overall stock market. Coincidence? A strong one, if at all it was that.


Though the Reliance Power IPO mess is well-known, not many would have linked the corrections that followed the other three IPOs. The BSE Sensex corrected 9% post the Coal India IPO, 7% after the DLF offer and 16% after Reliance Petroleum's IPO. (See chart: The Great Fall).


These facts lead us to believe that there is a link between overall market performance and a large public offer. One thing is certain that these IPOs, when over-subscribed several times, suck out the liquidity from markets. For example, Coal India's IPO was over-subscribed 15.2 times. This locked up nearly 2.34 lakh crore for over two weeks till allotments were made and shares started trading. Such a huge strain on the liquidity front is bound to result in markets going down. Many back the view that big IPOs come typically when the market valuation of the company is at a peak, and hence a correction is only natural. At the same time, there is no dearth of people who deny any linkage between the two and calling these instances as pure coincidence.


Nevertheless, one cannot deny empirical evidence that a correction follows a large IPO. The next big public offer expected to hit the market is ONGC's follow on public offer or FPO of around 11,500 crore. Once the FPO dates are announced, an investor may go short in index futures to benefit from a possible correction.

2 Insider Selling

If you had not figured out the last one, try this. What is common to GTL, Satyam and Orchid Chemicals? Company insiders sold stock in large quantities in the open market before the share price crashed. The trend was visible in all four companies.


Promoters and key employees have access to information that an ordinary retail shareholder may not have. When such investor groups start selling their shares, it should send an alert signal. Don't be surprised if a company's stock falls sharply after they have offloaded a large chunk of their stake in the company

3 Share Buybacks

Announcing a share buyback from the open market is one way a company tries to protect its share price in a weak market. These open market share buybacks are typically open for a long time, give a ceiling price below which the company would buy shares and earmark a specific sum to be expended for the purpose. This sends a signal to the market that the company would be ready to buy if the price falls below a certain level, thereby helping the share price. For example, Reliance Infrastructure has completed three such buyback schemes and is now in the midst of a fourth one. Similarly, Sasken Communications carried out a buyback in 2010 after a not-too-impressive performance for a few quarters and couldn't succeed in gaining investors attention.


However, this is entirely a voluntary exercise and there is no compulsion on the company to buy shares if the price falls below the acceptable limit. Also, the company can discontinue the scheme at any point in time. Thus, in practice the buyback offer wouldn't do anything more than boosting shareholder sentiment. In fact, the practice has already lost its sheen and fewer companies are taking this route to protect their market value

4 Delisting Trick

When it comes to the game of buying low and selling high, one can't blame the promoters if they wish that the value of their companies falls before they move to buy it out. What typically happens is the exact opposite. A delisting or buyback rumour could drive the share price skywards. Still, seen in retrospect, there appears to be a trend that immediately before going in for a delisting the quarterly earnings numbers start to deteriorate.

 
This trend was visible in companies such as Binani Cement, Sulzer India, Parry Agro, GE Capital Transportation Financial Services and Rayban Sun Optic that have delisted in last couple of years. Even in the case of Nirma, which got delisted in May 2011, the FY11 profits were down 69% yo-y, when other FMCG players showed a decent profit growth.


There are notable exceptions. Atlas Copco and Micro Inks continued to give substantially strong earnings growth numbers till their delisting. Of course, they had to pay dearly to convince retail shareholders to tender their shares.

5 Timing The Bad News

"All publicity is good publicity" may be the motto for a few, but there are others who would use every possible way to stay out of the public eye when things are bad. This becomes evident if one closely follows the results calendar. A vast majority of corporate results that are published on the weekend or on the last day of the results season are typically bad. On the contrary, the initial results of a season are invariably good.


The inverse of this fact infers that companies about to report bad earnings tend to announce them late on Friday evenings, weekends or towards the end of the results season. Why would they do that? To avoid media attention and a negative impact on their share prices.


Not that it helps their valuations when the markets open next. However, the cooling off period of a couple of days certainly helps in muting the impact.
One classic example of this is HUL. In 2009, the company posted three out of four results on weekends. The ones posted on weekends were perceived to be very disappointing, while the one, which was perceived to be good, came out on a Tuesday. Another example of this is ICICI Bank. Its December 2008 result was perceived to be bad with a 35% decline in its earnings. This result was released on Saturday evening, the first day of a long weekend. A recent example is Reliance Communications. Its financial performance was perceived to be below expectation for the previous three quarters and each time, whether it was a coincidence or not, results were declared on a Saturday evening. While one shouldn't take it for granted, a company scheduling its results board meeting on a weekend or delaying it for no apparent reason could be a hint of insipid earnings performance

6 Holding Companies Theory

Traders and analysts often recommend stocks of holding companies or of companies with assets such as land, property etc. The rationale is that the value of these assets is much higher than the market capitalisation of these companies. But to what extent does that impact how the market values such companies.
Not much if the value remains locked up. A number of holding companies are traded in the stock market — UB Holding, JSW Holding, Bajaj Holding, Kalyani Investments etc. These are companies from different business houses and hold stakes in various group companies. If one were to value their investments at current market prices, their market capitalisation appears to be extremely cheap. However, this is natural as the companies being part of the respective promoter groups are highly unlikely to sell any part of their investments. Therefore, due to this lack of marketability these holding companies will always trade at a substantial discount to their net asset value.


At the same time, a company like Tata Capital, which is in the investment business, but holds investments in varied listed companies outside the Tata Group, tends to attract a lesser discount, as it sells its investments from time to time.

7 Seasonal Flavours

Some sectors gain more market attention in certain seasons like agrochem before monsoon or fertliser and education etc before the Budget.


The volatility in equity markets, which might appear chaotic, has some method to it. Just like the weather, equity markets and various stocks have seasons of their own. Knowing that a January or September is typically good for the markets and March and May are bad is a helpful piece of information.


January and February typically see Budget-sensitive companies garnering market attention. This includes names like Navneet Publication, Educomp, Jain Irrigation and the fertiliser sector. Companies working for the railways sector — Kalindee Rail, Texmaco, Titagarh Wagon etc - are also in the limelight ahead of the Railway Budget.


The summer season with all its load shedding finds the power industry attractive, which can charge higher rates for merchant sales. As summer ends and monsoon is about to start, the agro-input sectors such as fertiliser, agrochemicals and seeds gain market favour. The post-monsoon harvest season, which is full of festivities and increased consumer spending, finds cement, construction, paints, consumer durables, retail etc sectors gaining currency.


An investor can benefit from these trends if he can invest in companies sufficiently before they become the market flavour and exit when they are at top of their valuations. This investment strategy is also known as 'Tactical Asset Allocation'.

8 Big IPOs: The Feel-good Factor

Initial public offers (IPOs) are much-publicised affairs for any company seeking funds from the market for the first time. Of course, the hullabaloo is much more when the IPO is from a large company. It is interesting to note that such large IPOs almost always help improve the valuation of the entire sector. DLF is a classic example. Its IPO was preceded by a rally in all real estate stocks. Gitanjali Gems' IPO in February 2006 also had improved the valuations of gems & jewellery firms. Cox & Kings IPO in December 2009 had pushed up Thomas Cook's market value.


When hydropower major SJVN's IPO came in May 2010, its peers NHPC and JP Power Ventures witnessed renewed investor interest. Similarly, the recent IPO of Orient Green Power helped valuation of its peer Indowind Energy.


   A large company would always like to charge a premium for its IPO from investors looking to participate in its growth story. This has a rub-on effect on the already listed companies in the sector, which see their valuations improve. In such scenarios, staying invested in companies from industries that are likely to see major IPOs coming in near future could be a good idea. Of course, one can limit the applicability of this observation to bull rallies.

9 Dividend March

Once the March quarter kicks in, it is common to see a flurry of advertisements relating to equity-linked savings schemes or ELSS. This is a typical gimmick adopted by the mutual fund industry to attract new customers looking for avenues to save tax. An investor would be attracted by schemes that give out maximum dividends.


However, unlike companies, where dividend implies a share in the profits of the company, a dividend payout in the case of mutual funds is simply a portion of capital appreciation returned back to the investor. There is thus a corresponding decline in the value of the investment (net asset value) in the mutual fund scheme equivalent to the value of the dividend declared by the scheme.

10 Small Wonders

When a company is about to raise funds from capital markets for the first time, the only information potential investors have is through its prospectus. Many a time one finds that financial numbers of such companies have suddenly improved in the financial year prior to the IPO. Unfortunately, this growth trajectory fails post the IPO.


Surely any company would like to list when the going is not just good but great so as to get the best valuation possible. However, the additional capacities for which the IPO funds are raised take time to materialise. This could be a possible explanation of this trend.


On the other hand, there are companies that try to push up sales by extending excessive credit to pump up the pre-IPO profit numbers. A check of the cash flows and working capital can reveal the reality.

 

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Also, know how to buy mutual funds online:

 

Invest in DSP BlackRock Mutual Funds Online

 

Invest in Reliance Mutual Funds Online

 

Invest in HDFC Mutual Funds Online

 

Invest in Sundaram Mutual Funds Online

 

Invest in Birla Sunlife Mutual Funds Online

 

Invest in UTI Mutual Funds Online

  

Invest in SBI Mutual Funds Online

 

Invest in Edelweiss Mutual Funds Online

 

Invest in IDFC Mutual Funds Online

Mutual Fund Review: Birla Sunlife Frontline Equity Fund

Posted: 25 Aug 2011 04:20 AM PDT

Name: Birla Sunlife Frontline Equity Fund-Growth
Type: Open-Ended Equity Diversified
Fund Manager: Mr. Mahesh Patil & Mr. Nimesh Chandan
Inception Date: August 30, 2002


Birla Sunlife Frontline Equity Fund is an open-end growth scheme from Birla Mutual Fund and seeks to achieve long-term growth of capital, through a portfolio with a target allocation of 100% equity by aiming at being as diversified across various industries and or sectors as its chosen benchmark index, BSE 200. The secondary objective is income generation and distribution of dividend.

It invests in handpicked frontline stocks i.e. stocks which have the potential of providing superior growth opportunities ensuring all leading sectors of its chosen benchmark, thus resulting in a highly diversified portfolio. The scheme targets the same sectoral eights within its portfolio as the benchmark, the BSE 200. However, the fund actively manages the portfolio and has not always limited its choice of stocks to the benchmark providing a wider universe of investible stocks.
 

Though the scheme primarily focuses on top 200 corporates that comprise the benchmark the scheme has managed to deliver the superior performance over its benchmark. Its stock selection along with the momentum picks and rally in largecap stocks has aided the returns. The scheme has posted one year return of 37.5% and has consistently outperformed its benchmark. Its performance has been equally good in last six months and has returned 7.57% while peers lost 1.05%.

 

The scheme has witnessed tremendous growth in its assets under management from Rs 7.8 cr in July 2005 to Rs 81.95 crore as of now. However it has gone down by 50% in last six months. As per stated guidelines it could invest upto100% of its net assets in equity and equity related instruments and as on July 2006, the scheme has allocated 88.63% of its assets in equities and rest in cash and equivalent. Average equity allocation in last one year has been at 91.11% of assets under management of the scheme. However cash exposure of the scheme has gone up in last few months seeing the volatility in the equity markets. It went as high as 22.68% in the month of May when equity markets witnessed sharp correction of 13.6% and again went down to 9.81% when markets showed some signs of recovery in June.
 
 
 
As on July 2006 the scheme has a well diversified spread across 36 stocks and exposure to any single stock is restricted to less than 7%. Top 10 holdings constitute 40.41% of the equity portfolio with Infosys in top place. Other than Infosys top holdings are SBI, Crompton Greaves, Mc Dowell & Company and Syndicate Bank. This month it made fresh exposure to McDowell& Company and Taj GVK Hotels while exited from the stocks of Reliance Energy, IDBI and M&M. Top 5 sectors account for less than half of the equity portfolio and over a period of one year it has further hiked exposure in Diversified, Electrical and Auto sector while trimmed in IT and Banking sector. BHEL, Reliance, Bharti and Infosys has been the fund's top choice in last one year and exposure to Infosys went upto 9% of net assets in equity.
 
Minimum investment required to enter the scheme is Rs 5000 and offers both dividend and growth options. The fund charges an entry load of 2.25% for investment amount less than Rs.5 crore, while no entry load is charged for investment amount equal to or greater Rs.5 crore. The scheme charges an exit load of 1% if redeemed within 6 months from the date of allotment. Expense ratio of the scheme is 2.5% as on June 2006 and is higher than the category average of 2.22%.

The scheme has primarily seen Bull Run but its performance in these three years has been impressive enough. Focussed investment strategy of investing in quality stocks across the leading sectors of the economy makes it a suitable choice for the conservative investors.
 

Mutual Fund Review: DSP BlackRock Short Term Fund

Posted: 25 Aug 2011 03:50 AM PDT

Name: DSP BlackRock Short Term Fund-G
Type: Open Ended Debt Short -Term
Fund Manager: Mr. Sujoy Kr. Das
Inception Date: September 04, 2002

Short Term Debt Funds are the investment option to park money for a short period of time, typically less than a year. These are relatively safer investment avenue and provide stable returns along with the preservation of capital. DSP ML Short Term Fund is an open-ended debt scheme and seeks to generate income commensurate with prudent risk, from a portfolio constituting of money market securities, floating rate debt securities and debt securities.

It is mandated to invest 50%-100% of its assets in debt & money market instruments having average maturity upto a year and floating rate debt securities whose coupons are reset at least once a year and 0-50% in debt instruments having average maturity greater than a year and floating-rate debt security where the next reset date is more than 367 days from the date of purchase. As per its latest disclosed portfolio, the scheme has allotted 19.4% of its assets in debt instruments and rest in cash and equivalent.
 
The scheme has acquired an impressive track record over the years and has comfortably outperformed its benchmark and peers during selected time period. Its focus on active duration management and credit calls helped it to deliver compounded annualized returns of 5.84% since its inception. Also over a short period of six months it has posted annualized return of 6.60 % while its benchmark and peers trailed with the returns of 5.96% and 5.51% respectively. Expense Ratio of the scheme is 0.84% as on May 31, 2006 which is lower than the category average of 0.88%.
 
The corpus of the scheme has grown 41% over a period of one year and stands at Rs 134 crore as on May 2006. The scheme has invested 39.7% of its assets in commercial paper, 18.56% in bonds and 24.74% in securitised debt comprising of good quality rated papers such as AAA and P1+. It has allocated 38% to P1+ rated papers, 14.86% in AA+ rated papers and almost 24.74% in AAA (SO) rated papers. Portfolio modified duration is 148 days as on May 2006. The fund has actively moved its assets between debt and liquid instruments over the last one year with average allocation in debt instruments at 36%.
 

Minimum investment amount is Rs 25000 and offers both growth and dividend options. The scheme is benchmarked against Crisil Liquid Fund index. It charges no entry and exit load.

DSP BlackRock Short Term Fund has been a consistent performer and is suitable for the investors who are looking for a safety of debt instruments with short term horizon.
 

Mutual Fund Review: HDFC Index Fund - Sensex Plan

Posted: 25 Aug 2011 03:20 AM PDT

Objective
To generate returns that are commensurate with the performance of the SENSEX, subject to tracking errors.

Option/Plan
Growth Plan,Dividend Plan. The Dividend Plan offers Dividend Payout and Reinvestment Facility.

Entry Load (as a % of the Applicable NAV)
In respect of each purchase / switch-in of units less than Rs. 5 crore in value, an Entry Load of 2.25% is payable.
In respect of each purchase / switch-in of Units equal to or greater than Rs. 5 crore in value, no Entry Load is payable.

Exit Load (as a % of the Applicable NAV)
In respect of each purchase / switch-in of Units less than Rs. 5 Crore in value, an Exit Load of 1% is payable if units are redeemed / switched-out within 1 year from the date of allotment.
In respect of each purchase / switch-in of Units equal to or greater than Rs. 5 Crore in value, no Exit Load is payable.

Minimum Application Amount
For new investors :Rs.5000 and any amount thereafter.

 

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Also, know how to buy mutual funds online:

 

Invest in DSP BlackRock Mutual Funds Online

 

Invest in Reliance Mutual Funds Online

 

Invest in HDFC Mutual Funds Online

 

Invest in Sundaram Mutual Funds Online

 

Invest in Birla Sunlife Mutual Funds Online

 

Invest in UTI Mutual Funds Online

  

Invest in SBI Mutual Funds Online

 

Invest in Edelweiss Mutual Funds Online

 

Invest in IDFC Mutual Funds Online

Mutual Fund Review: LIC Nomura MF Govt Securities Fund

Posted: 25 Aug 2011 02:47 AM PDT

Options:
There are three plans to choose from

a). Dividend Plan for investors desiring regular income and
b). Dividend Reinvestment Plan for investors desiring accumulation of Income
c). Growth Plan for investors opting for growth

Liquidity:
The Scheme is Open-Ended. Unitholders can redeem their units on an on going basis on any business day.

Entry/Exit Load:
The scheme has no entry load at present. Exit load of 0.50% is applicable within three months from the date of invesment for investment upto 50 lacs. This will be effective w.e.f 01/02/2003 to 31/03/2003. For investments above 50 lacs, no exit load is applicable.

-----------------------------------------------------------------

 

Also, know how to buy mutual funds online:

 

Invest in DSP BlackRock Mutual Funds Online

 

Invest in Reliance Mutual Funds Online

 

Invest in HDFC Mutual Funds Online

 

Invest in Sundaram Mutual Funds Online

 

Invest in Birla Sunlife Mutual Funds Online

 

Invest in UTI Mutual Funds Online

  

Invest in SBI Mutual Funds Online

 

Invest in Edelweiss Mutual Funds Online

 

Invest in IDFC Mutual Funds Online


Minimum Subscription:
Rs. 10000/-

Stock Review: HDFC BANK

Posted: 25 Aug 2011 12:21 AM PDT



Indian banks may be bracing for a slowdown in lending, but that does not appear to be reflected in any way on HDFC Bank, the country's most premium bank in terms of market valuation. It is now passe for the bank as well as for the financial services industry, analysts and investors to settle for consistent profit growth numbers that the bank reports quarter after quarter. This time, HDFC Bank clocked a year-on-year growth of 33.7% in its profit in the quarter to June '11, with profit growth mainly driven by strong loan growth and low provision coverage.


The bank grew its loan book 29% — way ahead of the industry average of 21%. Even on a sequential basis, advances growth was strong at 10.3%. Over the years, HDFC Bank's loan book has undergone a clear shift from being corporate-dominated to a balanced portfolio between retail and corporate loans. The retail book is primarily driven by auto loans. Home loans, which were once a major component of HDFC's loan book portfolio, have been stagnant this quarter. What has actually helped the private bank improve profit margins and disburse loans at a much faster rate than peers is its superior asset quality. At 0.2% of its advances, HDFC Bank's bad loans or net non-performing assets (NPAs) are the lowest in the industry. On top of it, its provision coverage at 83% is in excess of the minimum 70% mandated by the Reserve Bank.


Deposit growth of 13.3% was lower than the industry average but it does not appear to be detrimental to its cost of funds. Current account deposits fell 16.5% sequentially. The bank recently raised . 3,600 crore of Tier-II capital at almost the same interest rate to substitute its low-deposit growth.


There have been concerns relating to the bank's ability to maintain its net interest margin (NIM). But HDFC Bank has surprised again by maintaining its NIM at 4.2% for the fifth consecutive quarter. However, the bank will have to shift its focus again on boosting its low-cost current account and saving account (CASA) deposit, which fell below 50% for the first time during the last four quarters.


At a price-to-earnings (P/E) ratio of 28.4, the HDFC Bank stock looks overpriced compared to its peer Axis Bank, which trades at a P/E of around 15-16. However, given its consistent performance, it is but natural for the bank to command such a high premium.

Shifting your loan? Here are some pointers

Posted: 25 Aug 2011 12:20 AM PDT

A home loan transfer (also known as refinancing or balance transfer) is an option that most individuals opt for to avail the benefit from lower interest rates prevalent in the market.

Usually the existing borrower of a bank who is about 2 or more years into his loan tenure does not get the benefit of reducing interest rates in the market. RBI has been insisting on lower interest benefits to be passed on to the existing borrowers as well but it seldom happens but is expected to become a reality in the base rate regime. Individuals looking for better interest rates could discuss with their bank on re-negotiating the interest rates based on the good repayment track record etc. If the bank is not amenable, then they could shift to another bank which offers a lower interest rate prevalent in the market.

How does the process work?

You will need to submit a letter to the existing lender requesting a loan transfer. Based on your request, the bank will give a consent letter / NOC and a statement mentioning the outstanding amount. This needs to be provided to the new lender who then sanctions your loan amount to the old lender for an account closure. Once the transaction is over, your property documents will be handed over to the new lender, the remaining post dated cheques / ECS will be cancelled.

The bank you are shifting to will offer you a loan based on the current home loan rates they are offering to their home loan applicants.

A prepayment penalty will be levied by your existing lender which can vary anywhere between 2%-5% of the principal outstanding of the loan at the time of refinance. SBI recently has done away with prepayment penalty charges, it remains to be seen if other banks will follow suit!

Also, remember that you will also need to pay a processing fee to the new lender.
This can range anywhere between 0.5% and 1% of the loan applied, most banks restrict this amount to Rs.5000.

Another important aspect is the timing of your loan switch. If you are planning to switch your loan after most of your interest has been repaid, it will not make money sense as you will be shelling out more with the switch!

Factor in all these costs when comparing the total loan cost between the two offers. If you feel there is a significant amount of interest to be saved from the move, then you can make a profitable switch.

Recently SBI hiked its base rate by 0.25%. More hikes are expected from other banks soon. SBI has also withdrawn its teaser loan schemes from the market. On the positive side as mentioned earlier it has also dropped prepayment penalty charges in line with RBI expectations. If your bank (if it's not SBI that is) also decides to drop prepayment penalty charges, it will augur well for you! Hence it would be in the borrower's best interest to wait it out till rates stabilise to choose an ideal deal for a switch.

Remember that for a home loan switch you need go through all the procedures involved afresh. These include a credit appraisal, legal verification of property documents and technical evaluation with the new bank etc. and a loan will be approved only when conditions are met.

Apart from saving on interest there are a few other reasons as well to switch a home loan, these include:

Bank is not agreeable to change loan terms: You might want to re-negotiate certain terms and conditions with your bank. For example, you might wish to extend the tenure of your loan to lower your EMI, your bank might not be ready for this change and hence prompt a shift.

Top up loan: The property value might have climbed much higher from its original price. On the basis of this you might want a top up loan to meet a money requirement or for a home renovation perhaps. If your lender is not open to finance this you might opt for a new lender.

Service issues: Sometimes you might just be unhappy with your bank's service and accessibility, which might prompt a change.

Things to watch out for:

- It is always better to switch the loan early on during the tenure as you would have already paid out a substantial amount of the interest due initially.

    In the recent past a loan transfer was the most sought after when teaser- loan schemes hit the market. However one should keep in mind that the teaser rate will contractually rise after a stipulated time frame.

     Get statements from your current lender stating that property documents- will be dispatched within a certain time frame to avoid hassles on this front.

    Remember that a loan switch will not be possible if you have been- irregular with your loan repayment with your current lender.

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Also, know how to buy mutual funds online:

 

Invest in DSP BlackRock Mutual Funds Online

 

Invest in Reliance Mutual Funds Online

 

Invest in HDFC Mutual Funds Online

 

Invest in Sundaram Mutual Funds Online

 

Invest in Birla Sunlife Mutual Funds Online

 

Invest in UTI Mutual Funds Online

  

Invest in SBI Mutual Funds Online

 

Invest in Edelweiss Mutual Funds Online

 

Invest in IDFC Mutual Funds Online

How to choose Home Loans?

Posted: 24 Aug 2011 11:02 PM PDT

Although there are many distinctly different innovative home loan products in the market, the answer to the above question lies in the fundamentals of personal finance and most of these answers are applicable to all kinds of loans.

1. Rule 1: Look at net cash out flow

Irrespective of the type of loan, the most important factor to be looked at, is, what will be the net outflow from our pockets in terms of interest and other costs. The best way to do this is to draw a hypothetical timetable for the entire home loan period. Tabulate the repayments in terms of month number, EMI amount, Interest paid, Principal paid, Charges/Refunds and Other costs. The other costs could include charges for making modifications to your repayment, maintaining a savings account with the same bank etc. The value for this can be calculated by calculating the opportunity cost of such parked funds. Ask yourself, what if I put the same amount in an investment?

When calculating the charges, clearly look at all types of hypothetical situations like
prepayment, daily interest calculation and foreclosure.

Once you are able to enter all the values (approximately), add the total outflow (interest + charges + other costs) and compare this with a similarly created table for a no-frills home loan or any other loan.

Your decision should be based on the fact that, your "innovative home loan" should give you a savings of at least 10% over the "other loan options". The reason for the 10% margin is that most of the future calculations are very hypothetical and hence need a margin of error.

2. Rule 2: Don't fall for the "buzz words"

Most of the innovative products are pushed to the top of the mind by using catchy phrases. Like, in the interest pay back loans, although 50% of interest component is paid for a couple of EMIs, the promotions talk create an instant impression that a customer can get half of his interest back. Textbook marketing stuff! Of course there's the customary asterix hovering around with several conditions that need to be met to become eligible. As a customer we need to be clear in our minds not to control our urge to take a decision based on such good marketing tactics.

3. The bigger picture in the small print

Always be sure to read each and every detail of your home loan agreement especially when taking an innovative product before signing on the dotted lines. Brilliant drafters combined with ultra fine print can make it a boring read and you might end up accepting to terms that might put you at a disadvantageous position later on. Be sure to read and understand everything before you decide to take the loan. At times the facilities you may get for being a buyer of an innovative product may result in loss of other facilities given to no frills loan buyers from the same lender.

4. There's nothing called as a free lunch

Every lender is in the business for making its share of business profits. If a product is offered at a discount or with special offers, there is always the chance that it will be collected back in some other form. The most common form is by cross selling other products or be incorporated by offering a higher rate of interest during rate revisions. To be sure that your decision is right, always follow rule no 3

5. Taxation clarity

Since a major percentage of Indian home loan buyers take a home loan for the sake of saving taxes, we also need to be sure of the tax implications of such innovative offers. Especially in the future! The tax man could come up with multiple complicated queries. Get the answers from your loan provider/Auditor before taking the loan.

6. Rule 6: Never ever forget rule no 1

Innovation drives businesses and it should rightly do so. Make informed decisions while buying innovative financial products; else the innovation could become a maze of confusion for you!

 

Incomes that are not taxed

Posted: 24 Aug 2011 07:47 PM PDT

Although the tax man has been vested with the task of collecting taxes on the incomes of the citizens, he has deemed certain kinds of incomes as "not included in total income". Thus if any earning that you receive which falls under these incomes you don't have to treat it as income or pay tax on it! Let's take a look at the different incomes that are not incomes!

Agricultural Income: Any income which you receive as income from any agricultural activity is deemed as not included in total income. If your father is into agriculture and he gives you a part of the income as a gift, then you don't need to pay tax on it, provided, your father files his tax returns.

Income for being partner in a firm: If you receive any income for being a partner of a firm which has already been assessed separately then the income need not be included in total income. Thus any share in the profits that you have in a firm according to the partnership deed is not taxable.

Rs 5000: An amount of Upto Rs. 5000 which you receive for any reason other than as prize money and are not a recurring amount can be excluded from your total income. It seems to be a very small amount but sometimes this could be the difference between being in a higher slab or a lower slab.

Travel concession/assistance: Any monies that you receive from your company for the purpose of travel to any place in India along with your family for the purpose of leave. The claim can be made two times in a bucket of 4 years. Family includes Wife and children and also parents, brothers or sisters if they are dependent on you. The only check being that you have to maintain original bills to prove travel if the IT department asks for it.

Retirement/Death gratuity: Any payment received under a pension or death cum retirement gratuity scheme by an individual or his widow, children or dependents. The gratuity should not be more than the number of years in service multiplied by half months salary based on a ten month average. For example if the average salary for the previous ten months prior to receiving gratuity is 10000 and years in service is 15, then 15×5000=75000/- would be not included in total income.

Leave Salary: Any cash amount received as compensation for earned leave which is en-cashed at the time of retirement. (This applies only to employees of Central/State government). For employees other than government employees, the Leave salary can be en-cashed up to a limit of ten months worth of earned leave. It also specifies that the entitlement to earned leave should not exceed 30 days for each year of service. For example if you have 76 days of earned leave and total years of service is 2 years, then, only the cash equivalent of 60 days of earned leave is not added to income.

Retrenchment: Any compensation received by a workman due to the closure of his company or change in the management of the company if new terms are less favorable than what was previously applicable.

Voluntary retirement: Any amount up to a maximum of Rs 5 lakh paid at the time of voluntary retirement in accordance with and scheme of voluntary retirement of the company. But, the company paying the VRS should have a framework for VRS as prescribed by the government.

Life Insurance Policy: Any amount received as benefit from a life insurance policy including bonus payment is not included in total income. The only exception is the amounts paid as part of Key-man policies.

Provident Fund: All payment which is received from a provident fund to which the PF act applies or any PF fund of the Government is not included in total income.

Superannuation: Any payment made from a superannuation fund on the death of the beneficiary or as a refund of contributions or if the employee becomes incapacitated before retirement.

Payment of Rent: Any allowance paid by an employer to an employee to meet expenditure actually incurred on the payment of rent for accommodation. But this is not allowed if the house is owned by the employee or he has not incurred the rental.

Income from Government securities: Any earnings from interest, premium on redemption or other payment on securities, bonds, annuity certificates, savings certificates and other instruments issued by the central government and also deposits taken by the central government.

In case of non-residents if the bond have come to us by virtue of being a nominee or survivor on the non-resident or if they have been gifted to us by a non-resident Indian who have purchased the instrument in foreign exchange and the principal and interest will not be taken out of India by the recipient of the gift, the amounts will not be added to income.

Scholarships for Education are not included in total Income.

Awards and Rewards: All payments receive in cash or kind as an award given by the Central or State Government or by a body recognized by the central government to give such awards will not be included in the total income.

Relief funds: Any amounts which are received by an individual as part of the Prime minister's national relief fund or the promotion of folk art fund or students fund or foundation for communal harmony will be treated as not included in income.

Thus we see that although the tax man is mostly portrayed as a villain in many media, he has been liberal enough to give us the benefit of income tax free income from so many sources.

The above learnings can be applied to our personal lives in two ways. 1. Try to increase the income if any coming under any of the above heads. 2. Invest in any of the tax free avenues given above so that we may get the benefit of the investment as well as tax free income when it comes to our hands later on.

 

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Also, know how to buy mutual funds online:

 

Invest in DSP BlackRock Mutual Funds Online

 

Invest in Reliance Mutual Funds Online

 

Invest in HDFC Mutual Funds Online

 

Invest in Sundaram Mutual Funds Online

 

Invest in Birla Sunlife Mutual Funds Online

 

Invest in UTI Mutual Funds Online

  

Invest in SBI Mutual Funds Online

 

Invest in Edelweiss Mutual Funds Online

 

Invest in IDFC Mutual Funds Online
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