Mutual Funds: Paperwork - changing bank details

Recently a colleague tried to change his bank details in a mutual fund folio. Not being in touch with the new rules, he was surprised when the request to change bank details in his account was rejected.

Being of vital importance, I wish to share the requirements for successfully registering a new bank account in mutual folios. In addition we will look at the new facility of adding additional bank accounts in your folios.

I. When you give a letter asking for the bank details to be changed:

The below documents are required along with your request letter for BOTH the new bank you wish to enter in the folio as well as the old existing bank account which is already registered:

An original cancelled cheque leaf where the account number and first unit holder’s name is printed on the face of the cheque (for both the old and new bank accounts). 

OR

Since many banks do not print the customer name on the cheque, a copy of the bank pass book or statement having the name and address of the account holder (again for both the old and new account). The copy should be certified by the bank manager with his / her full signature, name and bank seal and contact number.

OR

A letter from the bank on its letterhead certified by the bank manager with his / her full signature, name, employee code, bank seal and contact number certifying that the unit holder maintains/maintained an account with the bank, giving details of the account (When the old bank cheque leaves / recent statements are not available).

If you do not wish to submit the originals, you may also bring a copy of any of the documents mentioned above along with the original documents to the Service Centres of the Fund. These can be verified over the counter and returned.

On checking with the Funds, the executives answering my calls were particular about these details. Explanation was given that avoiding incidences of fraud was the reason these details were required and while investors might be inconvenienced, they should look at these requirements as a means to safeguard their interest. 

II. Register additional bank accounts in your folio

All Funds now offer a facility to register up to 5 bank accounts for individuals in their folios. A form is available at all fund websites for addition / deletion of bank accounts and this is to be filled, signed and submitted with the attachment described above as proof of the additional account(s) (a cancelled cheque leaf with name printed / bank statement attested by the bank manager or by the Fund counter staff). 

Once you have registered additional accounts, if any account is closed at a later date, just fill the same form for deletion of an account. No  attachment would be necessary.

Default Bank Account: Any one bank account should be chosen as a default bank where all dividends would be paid out. You may ask for a redemtpion to be paid to any of the accounts and if you do not mention any bank in the transaction form, it will be paid into the default account. It is recommended that all investors register all their bank accounts in their folios. 

Point to note:

If you submit a change in bank details along with a redemption, it is likely that funds do not process the change in bank details and pay the proceeds to the existing account. 

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Mutual Fund SIPs vs Stock SIPs

While the SIP concept is accepted and popular for Mutual Funds, we find stock SIPs being advocated.

An SIP  in a fund which allows you to invest in a fund through regular installments over a length of time, works well. However, the same concept applied to individual stocks will significantly increase the risks to your portfolio.

Mutual Fund SIPs

The inherent advantages gained by investing in Mutual Funds, along with the advantages of systematic investing have proved beneficial. 

A few relevant advantages you get from a Mutual Fund SIP are highlighted

• No need of market timing and stock selection
• Cost averaging – You get more units when the market is low and similarly buy fewer   mutual fund units when the markets are high.
• Light on the wallet: You can commit small amounts to invest in a larger portfolio
• Risk is spread - you buy into a whole portfolio of stocks across market cap/sectors  depending on the Fund

Most of us invest in equity funds because we believe that they will deliver better returns than most other avenues over the long term.  However, the fact is that individual stocks don't deliver returns in an orderly fashion.

Stock SIPs

With mutual fund SIPs extremely popular, many brokers and trading platforms today offer SIPs in individual stocks. Just like in Mutual Find SIPs, investors can accumulate a stock by buying it based on standing instructions at a frequency of their choice.

However, in the case of individual stock SIP you are exposed to:

·   Concentration risk: SIPs in an individual stock may result in portfolio concentration and large exposures to a single asset. The same in a mutual fund SIP would mean the same amount spread across a diversified portfolio of stocks. If that one stock takes a beating due to company / sector specific factors…

·    Risk in selection of stocks: The second risk arising from stock-specific SIPs is that you could well be accumulating the wrong stock... Since investments are automatic and set, it would mean that while you are accumulating more and more of an asset, you may not monitoring and rebalancing. It is our view that if investors are not well informed and nimble, this could harm investor interest.  Especially, in today's environment, where regulatory changes, fluctuation in the currency value, loss of a big client can cause a drastic shift in a company's fortunes.

Even savvy investors find some choices going horribly wrong. Stock SIPs would mean bigger bets, month after month, on a few stocks of one’s own choice, which can subject one’s portfolio to considerable damage.

In conclusion:

If one chooses to invest in stocks, one can do so based on research and deliberate investing. Automating an investment in stocks will mean automatically investing in an asset even if the situation warrants an exit from a stock.


Investing in an active fund would mean that the fund manager is likely to be closely monitoring the portfolio and replacing stocks at regular intervals to be able to beat the benchmark.  This is the real benefit of an SIP in an equity fund.


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A lighter look at Annual Appraisals!

A friend who recently completed his annual appraisal, commented that the most important financial event in a professional's life is the Annual Performace Appraisal. His take on appraisals is reproduced...

Now, your communication skills are activated. They were always there - but in dormant condition. You are a picture of eloquence, when writing about yourself.....descriptive words, phrases, adjectives and adjectival clauses hitherto never part of your diction now garnish your write-up. Maybe this is the best way to learn to acquire Presentation Ability --- presenting yourself !!!!!!

People are at their creative best now. Suddenly everyone has turned into Merlin the Magician, conjuring up accomplishments out of nowhere.

As one fills in the several columns in the online appraisal form, one  discovers new facets about oneself. Latent talents, skills, abilities all surface during the period of the appraisal - only to become latent again after the 31st!

Self help books become redundant - you already have discovered yourself to be the best and a winner - only the appraisers dont think so! Maybe they need the self help books!

While filling details of 'Performace during the year', why cant they have more than 100% as an option! Not fair to those who score 1000 out of 100.

You rate yourself highly on your ability to train others; only forgetting to mention that your knowledge may be vague - but the ability is there! One is surprised about being asked about one's reliability -  we all experts in relying on our subordinates to complete all tasks. Only, they rely on their subordinates.... and it does not  matter that the final guy is not reliable.

An ex-employee is known to have rated himself "excellent" in his 'Communication Skills'. Whenever words failed him, he used sign language effectively! 

As it comes to a close and one is asked about one's strengths and improvements, as a guy once told me - "There is scope for improvement always - others' improvement!" Strengths fill in a 2 MB word document.

As one ends, one can look back at his/her creation in satisfaction - the place wont run without him, in fact can't run without him.

As they say - 'There is a fine line between fact and fiction'

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First Baby Steps in Investing

You are a working professional and have started your career. Early earnings have been spent buying that iphone, ipad, those special running shoes and in a holiday to Malaysia with friends. But at the back of your mind an alarm starts to ring! 

There is the thought, “I must plan for the future, save and build my assets. But… where do I start… What can I do with the few grand that remains at the end of the month?"

Your initial steps now would go thus:

First you require a PAN. In all probability you already have a PAN which you have submitted to your employers. Here's where you can apply if you do not have one. It is a simple process.

Second, make sure you get yourself KYC Compliant to apply in mutual funds. KYC compliance is necessary to apply in any Fund.

Third, open a demat account with a Depository Participant. It’s not too difficult. Many banks offer the service and check with your banker if you can open a demat account. Having an account is essential to purchase debentures, tax savings bonds and later equity shares.

How much to set aside:

Financial planners recommend setting aside a minimum of 10 to 15 % of your gross income to save or invest systematically at regular intervals for the future.  A systematic investment plan (SIP) in a mutual fund is recommended to start your investing life. SIP is a plan where an investor makes regular, equal payments into a mutual fund. The advantage of an SIP is that you can set aside small amounts – the few grand remaining - to suit your convenience.

Power of compounding:

Check out This SIP Calculator . Even Rs 3000.00 set aside every month from the start of your career for 30 years will amount to > Rs. 1 Crore at a reasonable 12%. Save Rs. 10000 and the amount is 3.5 Crore. Start now!!

Mutual Funds:

Do take the help of a financial advisor and assess your risk profile and decide what percentage of your savings you wish to put in Mutual Funds representing equity and what percentage in FDs etc. representing debt. Having understood what a mutual fund is, you know that investing via an SIP is the best method to avoid timing the market and have a disciplined approach to investing and you can start with small amounts.

You may consider starting with about 3 schemes in different funds.  So, if you are investing Rs 6,000 a month, invest Rs 2,000 each into three different schemes. You could start with one Large cap Equity Scheme, one Multi-cap Equity Scheme and one Balanced Fund.

Even while taking the help of an advisor, it would be good for you to track and check fund performance and reviews. Some websites you can go to for reference on Fund performance are - Mint 50 , Money Control, Value Research. There are many more which offer useful data and review.

While filling in the forms, use the auto-debit option for direct debit of your bank account. This way, the amount is automatically deducted at the beginning of the month itself, preventing you from overdrawing!!! Look here for Hints for filling SIP forms.

Small Saving Schemes:

Investing PPF is a must for tax benefits – Read this comprehensive piece for knowledge on investments in the Small Savings Schemes - Small Savings - Big Benefits

Bank Deposits:

See this article in the Business Line on The Best FD Rates for knowledge of the rates now.

Great!! You’ve now taken your first steps to invest in a financially secure future. Do remember to monitor your investments regularly.

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Small Savings – Big Benefits

Beneficial changes in Small Savings Schemes

Updated: 27th March, 2012 with the new rates announced:

In my earlier post - Rebalancing Portfolio I had mentioned that small savings can be a part of the debt component of one's portfolio.

Several changes, implemented from December 2011 have been announced in small savings schemes. Take a look here at the round-up of what you get from which instrument and make your choice...

To make the return on small savings more realistic, the government had decided to link rates to the average yield on G-Secs of similar maturity during the preceding year. The rate of returns on small savings instruments will be announced every year on or before 1st April. Investors get G-sec rate plus 25-100 basis points (bps) i.e 0.25% to 1% higher, depending on the instrument.

PPF: A must invest

PPF returns are now approximately 25 bps (0.25%) more than the 10-year G-Secs. This means PPF will give 0.25% more than the average yield on 10-year G-secs during the preceding calendar year. For the 2011-12 the rate was set as 8.6% against 8% earlier. For 2012-2013, the rate has been increased to 8.8%. Thus, the contribution you make as well as the entire earlier balance would earn 8.8% interest in 2012-13. Currently PPF has an edge over other small savings instruments because of the tax benefit.

Tax Benefit EEE retained:  Investment in PPF qualifies for a tax deduction up to Rs. 1 lakh u/s 80C of the Income-tax Act. On withdrawal the entire amount is tax exempt. An 8.8% risk free, tax free rate makes PPF extremely attractive as an investment. Even if interest rates go down, the tax incentive makes it very attractive with higher yield than 10 year G-Secs.

Scheme	Earlier	Now
PPF	Interest - 8.6%;  - EEE benefit	Interest - 25 basis points above 10 yr. G-Sec, 8.8 % this year; Investible amount 1,00,000.00; tax benefits EEE retained

Senior Citizens Savings Scheme: Bank tax-saving FDs currently offer higher rates

The rate on Senior Citizen Savings Scheme (SCSS) would be upto 100 bps (1%) more than the G-Sec rate and for the 2011-12 the rate was unchanged at 9%. The same has been increased to 9.3% for 2012-13.   The investment under this scheme, meant for senior citizens (above 60 years) qualifies for a deduction under section 80C and this is a five year scheme. However, the interest is taxable. 

 

Scheme	Earlier	Now
SCSS	Interest - 9%; 5 yr. Scheme;	Interest - 100 basis points above G-Sec; this year 9.3%, dedcution u/s 80 C continues;

PO MIS: Not so attractive

The post office monthly income scheme is a five year scheme and you get 0.25% interest more than the five-year G-Secs. Bonus was done away with. It compares poorly currently with Bank FDs. The interest for 2011-12 was 8.2% . The same has been increased to 8.5% - again not too great in the current scenario. The bonus on maturity was removed earlier!

Scheme	Earlier	Now
PO MIS	Interest - 8.2%	Interest - 25 basis above 10 yr. G-Sec, 8.5 % this year; (maturity 5 years)

NSC:

A new National Savings Certificate (NSC) for 10 years had been introduced. The returns on new 10-year NSC has been benchmarked to 10-year G-secs with positive mark-up of 50 bps (0.50%). For 2011-12, the rate was 8.7% per annum. The same has been increased to 8.9%

The old NSC had been reduced from six years to five years. The returns on the five-year NSC will be approximately 0.25% higher than the 5 year G-Secs and is increased to 8.6% for 2012-13. The investments in NSC qualify for a deduction under section 80C. However, the PPF is more attractive as an investment option due to the EEE tax benefit.

Scheme	Earlier	Now
NSC	5 yr. Scheme - Interest 8.4%, deduction u/s 80C 10 yr shceme - 8.7%	5 yrs scheme 8.6%. 10 yrs scheme - 8.9% this yr;Deduction  retained u/s 80C; interest taxable

Note: The  Kisan Vikas Patra has been discontinued since 2011-12.

PO Time Deposits – also market linked: 

 

Premature withdrawal has now been allowed for PO Time Deposits. The interest paid would be 1% less than the time-deposits of comparable maturity. For premature withdrawals made between 6 and 12 months investors would be paid at the PO Savings Bank rate of 4%. The highest rate for a 5 year deposit currently is 8.5%. 1, 2 and 3 year deposits will fetch 8.2%, 8.3% and 8.4% respectively this year. Banks offer more attractive rates currently.

A five year RD will fetch you 8.4%.

Please note that the interest on PPF will vary on your deposits every year. However, the interest on FDs will be the rate at which you enter. for exmaple if you place an amount in FD for 5 years on 3.4.12, the interest on the FD will fetch you 8.5% throughout and will not change.

The interest rate on these instruments for the current year has thus gone up. Do keep in mind that interest rates would vary in future and look out for the the yearly announcement of the interest rates!


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Financial Resolve 2012 – Tracking & Rebalancing our Portfolio

Most of us, especially working professionals are investors even without our design. We are forced to invest money in PPF, ELSS schemes, bank tax saving fixed deposits for tax-saving and even may buy equity if we find it attractive.

Many others among us invest on impulse - get a ‘tip’, listen to a colleague and invest! Still others - informed investors, make an investment in a product of their liking at random, without sticking to a strategy.

However, randomness would finally end up in investors succumbing to greed - buying high in a bull market - and fear - selling low in a bear market.  Since we can never predict when that unknown torpedo will come out of the dark and smash the price of a stock and some of our investments, the question is: what do we do to build a portfolio systematically, take profits and at the same time reduce risks.

The answer: Have a deliberate tracking and rebalancing strategy – our financial resolve for 2012:

What is this?

A simple rebalancing strategy is explained below

First evaluate your portfolio – how much you have and invested where. If you have not done this evaluation before, you will probably be in for a surprise!!

Next, a decision should be made based on our risk profile and goals as to how much one should invest in equity and how much in debt and investors may take assistance a financial advisor. In equity we include shares, equity mutual funds and we include fixed deposits, NCDs, bond funds, PPF in debt. (Investors can even include other asset classes like gold, real estate etc)

Let us say we have deliberately decided to have a 60-40 equity-debt ratio allocation. Rebalancing is the deliberate, periodic realigning of a portfolio of investments to bring it back to the original target asset allocation. This way we systematically capture returns and reduce unintended risks created by over-exposure to one category.

An example would help us understand rebalancing:

Let us say we have decided to have a 60-40 ratio and have invested Rs. 60000.00 in Equity Mutual Funds and Rs. 40000.00 in Debt – comprising of FDs, Debt Funds etc. on January 01, 2012.

Assuming the debt portion is worth 42000.00 on June 30, 2012. Let us assume that the market was good and the equity portion has gone up to 78000.00. This would mean that the equity to debt ratio in your portfolio is 65-35. Now after taking stock, the investor reduces exposure in equity in  and invests in debt.

If however, equity has gone down, then one should reduce debt and invest in equity to bring the balance back.

So how do I go about this?

For a start 

• Evaluate your current portfolio
• Decide the allocation. Investors may take assistance in this from a financial advisor. 
• Mutual Funds, with the wide range of schemes and advantages for retail investors form a good avenue of investment
• It will be difficult to make an exact ratio and you may allow yourself a small gap -for e.g. equity may go between 57% to 63%
• Follow a policy of checking and rebalancing every 6 months - i.e moving assets to maintain the proportion

Point to note:

Investments  can be made as an SIP to gradually bring up your equity level. Assistance from a financial advisor is recommended for those who don’t have time to construct a portfolio.

For working professionals this would help achieve:

Discipline and awareness of the portfolio and its performance

No random investments made out of fear or greed. Without a well laid-out rebalancing strategy, investors could be driven by greed to buy late into a bull market, or driven by fear to sell late into a market going down.

Risk reduction due to the rebalancing

If one component has deviated away from the originally intended target asset allocation, rebalancing is required



       Happy and profitable investing in 2012!


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Learn and Earn

“Money isn’t the most important thing in life, but it’s reasonably close to oxygen on the “gotta have it scale” and while NOT an end, plays a major part in helping us achieve our goals. Again, we all work at our job, business and earn the bucks, however, what can shoot you upwards is managing the bucks – making money work for us .

Superficial Knowledge, impulsive investments, burnt fingers

Sadly, most of us DO NOT pay much attention to gaining knowledge of products we invest in. Most of the knowledge is superficial – from advertisements, colleagues, tips from uncles and all one ends up doing is investing impulsively. What happens – “When a person with money meets a person with experience, the person with the experience winds up with the money and the person with the money winds up with the experience”.  The only one who ends up making money is the uncle through whom you invested. I was shocked when I recently addressed colleagues at work. Not one approved of the idea of a pure Term Insurance plan. “What!! An insurance policy that will give me nothing!? You must be joking!”

A colleague invested in a policy (through a relative) and later discovered that Rs. 12000.00 first premium was worth only Rs. 4000.00. She discontinued,  not  having understood the product features... Now her only investments are in bank deposits (mostly savings account)! Another acquaintance invested in a ”Superb” investment scheme (MLM) and ended up losing only Rs. 58000.00 but gaining good experience. Well, who said that knowledge is free!

So, what do I do?

Resolve – to gain in-depth knowledge of some financial products

There is good money to be made in the long term provided one knows what he wants, has studied the products and is willing to invest in what one understands for the long term.

Read Debashis Basu's column in the Business Standard – beautifully written; only underscores the need for us to be financially informed.

“Too many companies will design products that are complex, harmful, and sold with high-pressure tactics — after which the customer can run from pillar to post to have his problems redressed. Sounds too bleak and cynical? Well, the faster we wake up to this fact, the better for us.”

“Most savers don’t have the time, interest and skill — and get gypped repeatedly. And after that, disgusted, they conclude that bank deposits, “money-back” insurance policies, and annuities are the safest products, if not the smartest, and thus serve their purpose fine.”

Bank deposits and insurance policies which give us a return of 5-6% wont even cover inflation and I will get gyped investing in products I dont understand!

Suggestion:

As a start, I would suggest that every youngster as a start (and others), equip himself/herself comprehensively about:

• Mutual Funds – including all the products available
• Insurance Policies
• Small savings products
• Tax rates, the tax structure
• Basics of the stock market

First, learn to understand where we must not invest!

Regular reading of good financial publications and a financial daily is a great start. Several web portals give details of products and their performance, product details and you can google what you wish to see.

Use social media and search for what you want - excellent stuff available to give you in-depth knowledge of not only products and importantly, where one should not invest.

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Happy and Profitable Investing!!