Book profits - The new mantra of mutual fund industry May 15, 2009

Book profits - The new mantra of mutual fund industry

May 15, 2009

Weekly Facts
	Close	Change	%Change
BSE Sensex	11,872.9	244.0	2.0%
Re/US$	49.8	0.5	1.1%
Gold Rs/10g	14,890.0	270.0	1.8%
Crude ($/barrel)	56.2	1.3	2.3%

Weekly change as on May14, 2009

Floating rate home loans-Mystery to be decoded

Impact

Home loan borrowers have been complaining about Housing Finance Companies (HFC) not passing on the benefits of decline in interest rates to them. However, the same is being provided to new customers. This leaves existing borrowers perplexed as to why they are being charged high interest rates. Taking note of this issue, Banking Codes and Standards Board of India (BCSBI), an arm of RBI, will now ask banks to give more details (such as how the interest liability is calculated as per the rates prevailing in the market) regarding the borrower’s home loans.

Floating rate home loans from some of the leading HFCs

(Source: Websites of respective HFCs.)
(The rates are for the loan of upto Rs 20 lacs and tenure of 20 years. The rates are indicative in nature.
Individuals would do well to check the same with respective HFCs before taking a final decision.)

This move is directed towards bringing more transparency in the pricing method of home loans. Moreover, this may also end the confusion that has engrossed the minds of existing floating rate home loan borrowers, that whether the floating rate loans are actually floating in nature. On your part, you should get in touch with your HFC and enquire; if you find them offering new loans at rates lower than what is being charged to you.

FD rates slashed - Is the instrument becoming unattractive?

Impact

Due to the sharp fall in the equity markets last year, assured return schemes such as Fixed Deposits (FD) gained lot of prominence. At a time when equity-oriented investments were reeling in negative zone, assured returns from FDs (that to around 10%-11%) was just what investors needed. But now, given the interest rates have fallen, rates offered by FDs have also come down. Many banks have recently slashed the interest rates offered on their FDs.

Fixed Deposit rates from some of the leading banks

BANKS	1-Yr		2-Yr		3-Yr		5-Yr
BANKS	Previous	Present	Previous	Present	Previous	Present	Previous	Present
SBI	7.75	7.50	8.00	7.75	8.00	7.75	8.25	8.00
ICICI	8.25	7.50	8.25	8.00	8.25	8.00	8.25	8.25
HDFC	7.25	6.75	7.75	7.50	8.00	7.75	8.00	7.75
IDBI	8.25	8.00	8.25	8.00	8.25	8.00	8.25	8.25
BOB	7.25	7.00	7.50	7.25	7.50	7.25	7.50	7.25
BOI	7.25	7.00	7.25	7.00	7.25	7.00	7.25	7.00

(Source: Website of respective banks. The table is only for representation purpose and in no way should be considered as recommendation from Personalfn.)

But does this mean that FDs have lost their sheen? We don’t think so. The most important feature of FD is that it offers assured return. However it should be well understood that while FDs give assured returns, they are taxable and hence the net yeild is low.

Average of the previous and present FD rates

Book profits - The new mantra of mutual fund industry

Impact

Mutual fund industry is back at what it does the best - creating and then following trends. The aim has always been to capitalise on the ongoing investor sentiment. This time around it’s the issue of booking profits at regular intervals that is catching fund houses fancy. Many experts have already concluded that if investors would have booked profit at regular intervals, their loss in the stock market crash would have been much less. Then what! which allow investors to book profits at regular interval. Following suit is Reliance Mutual Fund, which is ready with a similar offering and waiting for SEBI’s approval.

In our view booking profit is a matter of discipline, that investors should be able to manage themselves. Though such offerings may appear to be enticing and unique on the surface, in reality they may be like any other fund. Investments should not be made in them only on the basis of their uniqueness. Rather, a new fund should be added to the portfolio only if it adds value to it. Also, booking profits at regular intervals may also result in a reinvestment risk. What you do with your booked profits is very important to achieve your long-term objectives.

Look at your cell phone bill carefully

Impact

It’s not uncommon for cell-phone companies to charge customers extra fee, in the name of some value added services (VAS). Many a times, customer unintentionally accepts an offer (by pressing certain keys on his handset) of a VAS. With no further verification procedure in place, he is billed with the charges of the service. Acting upon complains from many subscribers, Telecom Regulatory Authority of India (TRAI) has issued a directive to bring more transparency to the activation of VAS. As per the new directive, the service provider must obtain an explicit consent from the consumer if he chooses to opt for a VAS. Besides, all the details related to the opted service must be properly conveyed to him.

This cross verification system will ensure that these value added services are activated only for those customers who want them. By this, customers who have accidentally accepted the offer will be saved from being charged for the service.

Life Insurance charges simplified - IRDA to put a cap

Impact

Life insurance companies have always been blamed for charging excessive charges on certain products (such as ULIPs - Unit Linked Insurance Plans). To curb this, Insurance Regulatory and Development Authority (IRDA) has come up with a simple approach which would appease both insurance companies and the investors. Instead of fixing the charges, they will now be looking at the net present value of all the charges spread over the life of the policy, and put a cap to it. So, while insurance companies can decide upon the charges they want to charge, IRDA will ensure that they do not exceed the over-all ceiling. This will ensure that policyholders need not have to shell out more than what is required.

For sometime now, IRDA is making efforts to bring more transparency into the insurance industry, and streamlining the way industry used to work. This move will help policyholders to understand the ever complicated charge structure of their policy better. Now the question for you is - do you know the charges for the insurance you took? If the answer is NO, then you should immediately call your agent and get the clarity on the same.