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| July 10, 2015 |
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| Weekly Facts | | | Close | Change | %Change | | S&P BSE Sensex* | 27,661.40 | -431.39 | -1.54% | | Re/US $ | 63.39 | 0.12 | 0.19% | | Gold Rs/10g | 26,250.00 | -100.00 | -0.38% | | Crude ($/barrel) | 56.29 | -4.59 | -7.54% | | F.D. Rates (1-Yr) | 6.75% - 8.50% | Weekly changes as on July 09, 2015
*BSE Sensex as on July 10, 2015 |
Impact 
If you fall in a 30% tax slab, you might be finding most of fixed income bearing products unattractive. They generate low post-tax yields and sometimes also fetch a negative real rate of return when inflation is high.
So, if you are looking out for some investment avenue in the fixed income space which generates attractive post-tax returns, tax-free bonds may be an option for you. With an aim of kick-starting infrastructure development, the Government recently, gave nod to 7 Public Sector Undertakings (PSUs) to raise Rs 40,000 crore by issuing tax-free bonds.
But would the offer be attractive?
Tax-free bonds issued in Financial Year (FY) 2013-14 offered attractive interest rates of 8.75%-9.0% p.a. However, if you expect companies to pay you similar coupons this time, you might be expecting slightly too much.
You may expect coupons to range from 7.2%-7.5% this time around. A bond with AAA or equivalent rating can be offered at a rate lower than 55 bps (0.55 percentage points) than that offered on Government Security (G-Sec) with comparable maturity. However, institutional investors would be paid even lower rates (80bps lower than the yield of comparable G-Sec bond). AA+ or equivalent rated securities may offer over and above 10 bps than those with AAA and equivalents; while AA- may offer 20bps more than what the top rated bonds offer.
There are certain features that are likely to remain common for all. They include...
- Retail investors (i.e. those investing up to Rs 10 lakh) will have 40% quota in the public issue
- Non-Resident Indians (NRIs) and Hindu Undivided Families (HUFs) would also get a chance to subscribe issues
- There is a binding on issuers to collect at least 70% of the amount proposed to be raised through public issue
Where are interest rates headed?
At present bond yield on 10-Year G-Sec is quoting near the lowest level witnessed in last one year. Over the last one year, the 10-year G-sec benchmark bond yield has remained in the range of 7.60% to 8.85%. Reserve Bank of India (RBI) has cut policy rates thrice over the year and quantum of it has been 75 bps. This has reduced the borrowing cost of the Government substantially. Since the interest rates on tax-free bonds are linked to the G-sec yields, it remains to be seen where interest rates may head in future.
Considering the moderation in inflation over last one year and remote chances of it going to double-digit levels again, the central bank is unlikely to hike the policy rates this fiscal. Nevertheless, expecting RBI to reduce rates in the ensuing policy review meetings would contingent to the progress of monsoon and its impact on inflation.
RBI has adopted the inflation targeting approach which aims to contain inflation below 6% till January 2016. Given a weak monsoon thus far and implications on inflation, further rate cuts seem unlikely. Possibility of deficient monsoon threatens to escalate the food prices.
PersonalFN is of the view that, considering all possibilities, you should wait until picture becomes clearer on the interest rate front. It has been decided that companies will have to consider 14-day average of G-Secs yields with comparable maturity ending on Friday that precedes filing of the prospectus. If you see G-Sec yields going up, you may consider investing in tax-free bonds after analysing on a case to case basis. It is vital to adopt caution as these bonds are for very long maturity of 10 years and above. Therefore invest in them only if you have such a long time horizon; as liquidity in the secondary market is usually low for tax-free bonds.
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Impact
Technology is gaining importance in every-day life. Even people in their 60s are using social networking apps these days and are shopping online. Prudent use of technology makes human life better. Taking cues from these changing trends in preferences of people, even mutual funds are adopting new strategies to promote their products.
Direct plans offered by the mutual funds are slowly but surely gaining popularity. At present, 13% of the sales of mutual funds garnered from individual investors come through direct route. Access to internet, availability of online literature on mutual funds, free advice given on some websites and e-learning courses along with investor modules launched by the fund houses are making it possible for individual investors to skip the age-old practice of investing through a broker.
Investing directly has certain advantages.
- Direct plans are cost effective as expense ratios of direct plans are much lower than those of regular plans
- Small savings happening due to lower expense ratios every year make a noticeable difference in the returns generated by the fund over years
- Investors don't come in contact with brokers; which is why chances of mis-selling are lower
- Since there is no help of brokers and agents once you opt for direct plans; you develop a habit of keeping a track of your own investments and start maintain records
Mutual funds are promoting use of modern technology at each level of your engagement with them. Online ads, online investors' education tools, tech-driven sales support and customer grievance redressal system help fund houses eliminate the middleman at each stage. Having said this, they also try to aggressively push their products through agents and brokers by paying them high commissions to promote New Fund Products (NFOs).
PersonalFN believes, before you opt for the direct route, you should ensure that, you are investing in a right fund, and your investments are consistent with your financial goals. Please don't forget to check your risk profile before investing. Also, be wary of sales driven advices given on the online platforms. Not everything that is available online, especially for free, is dependable. The best way is to do your own research to choose a good fund for your portfolio. If you don't have time to do so or you feel you don't have expertise carry out research on your own, opt for unbiased research services.
Do you think direct plans offered by mutual funds are worth trying? Share your views here.
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Impact
A mutual fund pools assets and invests on behalf of investors having common objectives and similar risk profile. Therefore, it becomes a fiduciary responsibility of fund managers to be fair to all investors. Mutual trust is the essence of relationship between an investor and the asset management company. If wellbeing of investors is compromised anywhere, market regulator ticks off fund houses for their misdeeds. Considering comments recently made by the chief of Securities and Exchange Board of India (SEBI), Mr U.K. Sinha, it seems that mutual funds houses have taken investors for granted and have shown little concern for them.
What SEBI Chief has to say?
Speaking at the mutual fund summit of Confederation of Indian Industry (CII), SEBI chief expressed a few concerns. They ranged from noncompliance of mutual funds to role of distributors in development of mutual fund industry.
And the issues are...
He brought to the notice of the industry that, the regulator is well aware of malpractices followed by a few fund houses while performing inter-scheme transfers. It seems that, some fund houses are not complying with the valuation norms set by SEBI. Inter scheme transfers often happen when a scheme faces liquidity issues while honouring redemption requests. In such a case, it transfers illiquid assets to other schemes. This happens especially in case of bond funds; where offloading bonds in the open market becomes little tough for a number of reasons.
Off-market transactions on a rise...
(Data as on July 06, 2015)
(Source: Business Standard dated, PersonalFN Research)
Table given above shows that, inter-scheme transactions by mutual funds have steeply increased from Financial Year (FY) 2012-13 onwards. As against Rs 64,500 crore in FY14, inter-scheme transactions went up to 70,701 crore in FY15. Although there is not much a problem with transfers per say, there is definitely a problem when valuation guidelines are disregarded and assets are transferred.
To know more about this and PersonalFN's views over it, please click here.
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Impact
Having a health insurance is absolutely pivotal in today's world as healthcare cost is on a rise and turning quite expensive for many. For those who just meet their means, footing medical bills can be a big challenge. We have seen that quite a number of individuals do not opt for an individual health insurance policy if their employer provides the same. And those who have do opt for in individual capacity, have time and again are sub-optimally insured.
At the time of claim settlement while there exceptions, many policyholders have had a harrowing experience with Third Party Administrators (TPAs). They have rejected claims or paid them only partially on unjust reasons. TPAs have also been found asking for documents repetitively instead of demanding them once and for all, causing inconvenience to the policyholders and their families. There are many Public Interest Litigations (PILs) pending in the honourable Courts already since disputes between policyholders, insurance companies and TPAs are frequent.
To read more about this news and our views, please click here.
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- Cancer cases are on rise nowadays. Treating cancer is expensive and not all can afford the treatment. It has been found that, 75% of the cancer patients pay from their own pocket. Cancer is one of the top five diseases on account of which insurance companies receive most of the claims. Considering the fact that, anyone can become a cancer victim, having adequate health insurance is important. Cover available under normal policies might be too low to fund the bill of cancer treatment.
To allow policyholders reduce their financial burden, health insurance providers have come up with specific policies exclusively covering cancer. They cover you for an amount as high as Rs 25 lakh; and pay you a significant chunk say 25% on initial diagnosis. A few of them provide regular income as well. At present there are only a few companies that provide such type of a cover but, going forward, more companies will start offering similar policies.
PersonalFN believes, while it's a good idea to opt for cancer specific health insurance policies; you shouldn't forget to read the fine print. It shouldn't happen that, you overlooked some important disclaimers.
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Real Rate Of Return: "The annual percentage return realized on an investment, which is adjusted for changes in prices due to inflation or other external effects. This method expresses the nominal rate of return in real terms, which keeps the purchasing power of a given level of capital constant over time."
(Source: Investopedia)
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Quote : "You must gain control over your money or the lack of it will forever control you." - Dave Ramsey
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