All you wanted to know about Public Provident Fund

A Guest asked :

Can i open a PPF account for me and my minor daughter (i will be the guardian) at the same time? This is just for investment purposes and not for any tax rebates.

REPLY :
Dear Friend, u can open PPF account for you as well as your Daughter. Even if you want to claim Tax benefit you can claim a maximum of  Rs.70K between these 2 accounts.

In fact you can open total 3 PPF accounts.
1 for yourself
1 for your wife
1 for your Daughter
Try to Avoid Investment in PPF.

Start SIP of Rs.1000 P.M.or more in any Equity / Balance Fund like DSPBR Balance Fund/Religare Business Leaders Fund/HDFC Prudence Fund.


Best of luck,
Srikanth  Matrubai


LET US STUDY IN DETAIL ABOUT PPF:

Conservative investor’s first choice has been the Bank Deposits and the Public Provident Fund (PPF). This is due to their guaranteed returns even though these are lower than Mutual funds.
PPF is the most risk free form of investment in India and is quite tax efficient too. And, so, it is not surprising that this is the most popular investment option across the earning class.
Self employed persons who are not covered by Employee Provident Fund should seriously look at PPF as a retirement planning option.

PPF can be opened in any Post Office or with any branch of the State Bank of India and its associates.

The Effective duration of a PPF account is 15 years plus the year of Account opening, so 16 years.


Tax Angle:
1)All investments in PPF (subject a ceiling of Rs.70000) is eligible for Tax Rebate under Sec80c
Contribution to non-earning spouse and/or minor child will be clubbed as your contribution under Sec 64.

2)Though the term of PPF account is 15 years, the contribution made in 16th year (even on the last day) also qualifies for section 80C tax benefit

3)The New Direct Tax Code has recommended that PPF withdrawal on maturity will attract Tax. Not sure, whether this will be recommended. If yes, returns will be drastically affected. But thankfully, the Tax Code has also clarified that only new contributions made on or after the commencement of the code will be subject to tax. So, those withdrawing before 31March 2011 stand to gain.
4) The interest earned in the PPF is exempt from Tax.



Who can invest?
PPF can be opened in your name, your spouse and even children. It can be opened by an individual on behalf of a HUF. Bachelor or married, dependent or otherwise. The only restriction is that total aggregate contribution in all the PPF accounts should not exceed Rs 70,000 in a financial year (i.e. 1st April to 31st March)(The limit of 70k is applicable to individual and minor combined together. Spouse and children who have attained majority are excluded from the 70k limit.

Non Resident Indians may also open a PPF account out of the funds in the applicant's non-resident account in India in banks subject to the following conditions -

The account is marked as non-resident account
All credits therein or debits thereto are made subject to the same regulations as are applicable to non-resident accoun

How to operate?

The maximum you can invest in the PPF in a financial year is fixed at Rs.70000/-. You can contribute as many times you want in a year. The minimum is Rs.500 and the amount need not be fixed and can vary. It must be ensured that your instalments does not exceed 12 in a year.

A minimum of Rs.500 must be compulsory be invested/contributed to keep the PPF account active.


ON MATURITY :
If you do NOT require the PPF money immediately after the mandatory 15 years, you have 3 options :
1)Close the PPF account and withdraw the entire amount
2)Continue the PPF account with fresh subscription. This however, compulsory extends the PPF for another 5 years. Note, you can still have access to 60% of the accout balance at the commencement of each year during this 5 years. And most importantly, you will continue to get 80c benefits.
3) Continue the PPF account without making any further contribution and continue to earn the same of interest. This can be carried for a indefinitely.
If you choose this option, you can withdraw the entire PPF amount either in a lump sum or in installments. However, you’re not allowed more than one withdrawal in a financial year and the balance will continue to earn interest.
4)At the time of withdrawal, if the PPF account holder has become a major, then the proceeds will be deemed as his income and taxed accordingly.







Points to Note :
1) Never forget to appoint a nominee. This applies to all your financial investments, let it be PPF, Mutual Funds, etc.

2).Invest regularly (if possible, monthly) and do not wait for the year end to invest in the PPF.

3) Invest before 5th of every month. Interest is calculated on the lowest balance between the close of the 5th day and the end of the month.

4) Let the money grow. Even though PPF allows Partial Withdrawal from the 7th year and also facility of loan from the 3rd-6th year, try to avoid this unless it is inevitable.

5) A monthly contribution of 5000 in the PPF account for the period of 35 years, will get you 1, 07, 87, 000. Yes, you will become a crorepati.


For calculation of interest and maturity value of PPF click here """""http://www.themoneyquest.com/2009/09/ppf-calculator-interest-maturity-value.html"""

6) PPF ACCOUNT CANNOT BE ATTACHED BY COURTS EVEN IN CASE OF DEFAULT/BANKRUPTCY. Your PPF is always for YOU.

7) Interest on the PPF is currently @ 8%. This is compounded annually. Interest is calculated on the Lowest Balance between the 5th day and the last day of the Calendar month and is credited on 31st March every day.


LOOK AT OTHER OPTIONS TOO:

But, whichever investor you are, if the real returns post inflation is a pittance than it makes little sense to invest in PPFs or FDs.Liquidity is severally affected in PPFs as your money is blocked virtually for 15 years.If you are very conservative investor and do not want even a iota of risk and prepared to forgo returns for sake of safety, you can also look at NSCs as NSCs have a lower lock in period(6 years)  and interest is compounded half yearly increasing the effective yield. However, the BIG factor to note is that NSC returns are taxable. If you are in non-tax bracket and very conservative investor, you can go for NSC rather than PPF.
Also, the interest rate on the PPF is NOT FIXED.

Investing through the time tested way of SIP and being patient ensures you excellent real returns.

12% is a very realistic return that one can expect from Mutual Funds. So, if you instead of PPF invest in Safe/Conservative/Defensive Mutual Funds, then @12%, the difference of your PPF investment of Rs.6000pm,will give a huge positive difference of Rs.8,16,917!!!!!!.

PPF = 2,038,671

Mutual Funds = 2,855,588

Moreover, I have assumed Mutual Fund returns at a very conservative 12%.

The Choice is yours.

Regards,
srikanth matrubai
--

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MIRAE ASSET EMERGING BLUECHIP FUND

OLD WINE IN OLD BOTTLE:

Let us today analyze the investment rationale behind the Mirae Asset Emerging Bluechip Fund from the Mirae Asset Mutual Fund.
The fund is primarily a mid-cap fund that invests in Indian equities and equity-related securities of companies that are not a part of the top 100 stocks by market capitalisation, but have a market cap of at least Rs 100 crore at the time of investment.
The NFO is open for subscription and will close on 22 June.
The Fund House has positioned Mirae Asset Emerging Bluechip Fund as primarily a Mid-cap fund which gives investors the opportunity to participate in the growth story of today's relatively medium sized but emerging companies which have the potential to be well-established tomorrow. The Fund will be managed by Gopal Agarwal and Neelesh Surana.
As a Fund House, Mirae has done wonders with its only Domestic Fund offering, Mirae Asset India Opportunities fund which has beaten its Benchmark by a huge margin of 12.6% giving a return of 21.46% compared to 8.86% of BSE 200 since its inception.
The fund manager, Gopal Agarwal, intends to stay fully invested at all times. Gopal explains: “Over the past few years, we have seen that while mid-caps may be more volatile they tend to outperform the broader indices. In this context, a return of about 4-5% higher than broader indices and at around 20% is possible". Very aggressive indication that.
Though the Fund may look similar to Mirae Asset India Opportunities Fund, this Fund is different in the sense, this Fund is more biased towards mid-caps where India Opportunities Fund has a equal weight towards Mid-caps, Small Caps and Large caps.

COMMENTS AND RECOMMENDATION:

The Fund does not try to hide its Mid-cap bias and is very clear about where it will invest its money. There are innumerable mid-cap funds available in the market, so why should you consider Mirae Asset Emerging Bluechip Fund.
You need not.
However, two things are in the favour of those who are inclined towards investing in this Fund.
One, Mirae Asset's only other Domestic fund offering, Mirae Asset India Opportunities Fund has been very very impressive in its performance both during the Bear and Bull periods and thus offers comfort.
Two, Fund Manager Gopal Agarwal. He has been outstanding without being publicity crazy. He does his job quietly and does very well. He had a terrific run in SBI Contra and has been very consistent with Mirae Asset India Opportunities Fund. He has proved his stock picking skills, which is the pillar on which mid-cap funds stand on.
Investors who are willing to ride the volatility associated with mid-caps can consider taking a exposure to the fund. Preferably go for SIP investment. And, of course, those investing would do well to have a time horizon of at least 3 years.
Investors also would do well to have a look at some of the mid-cap funds which have been giving consistently impressive returns., like Reliance Regular Savings Fund - Equity, Birla Sunlife Mid cap Fund, Reliance Growth Fund, Sahara Mid-cap Fund, Sundaram Select Mid cap fund, Sundaram Smile fund.
By the way, I would also like to add here that I had a chat with Mr.Dhirendra Kumar , CEO of Valueresearchonline during the Fund’s launch. I asked him “You are openly against NFOs, so how come you are here speaking under the Mirae Asset Emerging Bluechip Fund NFO banner”?.
He laughed and explained, “I am not here to promote the Fund. But, yes, looking the Fund House’s flagship Mirae Asset India Opportunities Fund’s impressive performance, aggressive investors can look at this fund, if it fits into their risk profile”.

My view is the same. If you are not risk averse and would not mind short term volatility, the Fund can be a good addition to your portfolio if your overall asset allocation allows. Do not forget, SIP should be the route to invest in this Fund.

Regards,
Srikanth Matrubai




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BIRLA SUN LIFE INDIA REFORMS FUND - AN ANALYSIS

50% infra play, 50% PSU play

Birla Sun life Mutual Fund has launched India Reforms Fund which would primarily invest in companies expected to benefit from Reforms initiated by Govt. The scheme will invest across sectors without any market cap or sectoral bias; i.e., a mix of midcap and large-cap opportunities.

Since Reforms are actively interlinked with infrastructure growth, the Fund would act as a proxy to infrastructure play too. Only that this Fund would have more sectors than infrastructure fund would have. Ex: Infrastructure Funds do not buy Fertilizer stocks, this Birla sun life India Reforms Fund would.

Thus, this Fund is a 50% Infra proxy.

Since Reforms make maximum impact on PSUs and mostly initiated by PSU divestments, this Birla Sun life India Reforms Fund would also act as a proxy to PSU play too.

Thus, this Fund is a 50% PSU proxy.

COMMENTS AND RECOMMENDATION:

The reform story is a slow process which will take quite a long time to show results. Thus, this Fund is for investors who are willing to wait for the fruits.

The Fund is managed by Ankit Sancheti who has a good tract record in managing Birla Sunlife Divident Yield Plus Fund and Birla Sunlife Basic Industries Fund.

Though on the face of it, the Fund looks attractive, it should be noted it is always better to invest in a Diversified Fund which would reduce volatility and risk associated with a Thematic Fund like the Birla Sun life India Reforms Fund.

Moreover, it is no secret that a Fund Manager of a Diversified Fund would look at Reforms stocks too, if they look attractive, so a Diversified would always be a better option than a pure thematic fund like Birla sunlife India Reforms Fund because a downturn  or negative news on reforms would be harsh on stocks associated with reforms and thus funds like these would fall the hardest.

Those who are brave enough to ride out the volatility associated with a Theme Fund and bullish on “Reforms” as a story, can look at the fund, preferably through SIPs.

Best of luck,

Srikanth Matrubai

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SBI PSU FUND - ANALYSIS

SBI Mutual Fund has launched a new scheme, SBI PSU Fund. It is an equity diversified fund that mainly invests in stocks of domestic public sector undertakings (PSUs). 

The PSU investment theme looks quite promising as PSUs have strong fundamentals and are generally leading players in their industries. These companies also showed greater resilience than their private sector counterparts during the economic downturn.

Read http://goodfundsadvisor.blogspot.com/2010/06/why-psu-funds.html

While most analysts would blindly recommend SBIPSU Fund over Religare PSU Fund., I would take a contra view and say AVOID SBI PSU FUND AND INVEST IN RELIGARE PSU EQUITY FUND.

WHY RELIGARE SCORES OVER SBI

Here are the key reasons for the same :

1. Equities Outside PSUs :

While SBI has the mandate to invest upto 35% outside the PSU basket, Religare does not. While this may ensure diversification, this also means that the PSU THEME IS DILUTED IN SBI PSU FUND.

2. High Exit Load :

While Religare has an Exit Load of 1% only upto 1 year, as with most funds, shockingly, SBI has exit load for 3 years.

3. RELIGARE'S BETTER PERFORMANCE :

Religare has beaten SBI in almost all funds in terms of performance over 1,2,3 year period. It just shows Religare has performance to back up its claim of being a better fund to invest in.

SPECIAL TIP

Religare has already invested its Assets. More buying in the PSU Stocks by the new Funds like Sundaram PSU Fund and SBI PSU Fund will benefit Religare PSU Equity Fund which is already fully invested. The Scope for Value Unlocking of Public Sector Undertakings is huge and PSU funds  are poised to take advantage of these.

If you are convinced about the PSU story, then you know which fund is a better proxy to play on the theme.

Best of luck,

Srikanth Matrubai

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WHY PSU FUNDS????

AMCs seem to have taken a liking for Public Sector Undertaking as a sector and on a NFO launching spree.
PSUs seem to be the flavour of the season. And with divestment inevitable, mutual funds are falling head over heels to launch NFOs to take advantage of the same.

PSUs are virtually in every sector except some select like Pharma, IT, FMCG thus one can be safe PSU funds are NOT Sector Funds in true sense. They are diversified.
And with PSUs being virtually Leaders in all the sectors they are present, you are virtually holding Gaint Cap, Large Cap and Larger Mid caps when you are investing in PSU funds.
PSUs provide both sector diversification as well as market cap diversification.
The Stable UPA Govt in centre is sure to go ahead with its huge disinvestment programme and PSU funds should be in a good position to capture any upside.
The resilience shown by these PSUs compared to their Private Sector counterparts during the recent economic recession also lends credibility to the addition of PSU fund to your portfolio.
ALSO READ :
http://goodfundsadvisor.blogspot.com/2009/12/sundaram-psu-opportunities-fund.html
http://goodfundsadvisor.blogspot.com/2009/10/ride-on-psu-gaints-one-can-consider.html
“PSU stocks are generally available at a discount as compared with other companies. So, there is clearly an opportunity for mutual fund investments,” said Dhirendra Kumar, CEO, Value Research India Pvt. Ltd, a New-Delhi based mutual fund tracking firm.
PSUs are best proxy play for the Indian Economic Growth story. PSU funds thus make a good addition to an aggressive long term investor's portfolio.
But, do remember, nothing prevents a Diversified Equity Fund to invest in PSUs and thus PSU funds are recommended only to those who are bitten by PSU bug and prefer Companies which are Large, low debt and are virtual monopolies in their field.
The Significant risk attached to these PSU funds are that PSUs are run by Govt policies and any negative Govt decision will affect them too.

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MUTUAL FUNDS FOR A PASSIVE INVESTOR

From: Thamaraikannan

Subject: Pls suggest me: Mutual fund for long term investments

Sir,

  I got your mail id from your blog http://goodfundadvisor.blogspot.com  I have a query related to my MF investments. I am seeking some advice for creating my retirement corpus. I am 29 years old. I am planning to invest 5000/- per month for creating my retirement corpus.

Since I am a passive investor and the investment period is long, Could you please tell me which type of mutual fund will suite for me. Also please suggest me some funds where I can invest it through SIP.

Last year I started investing in MF through SIP for 1 year.

Following are the MFs I started with .

1. Birla Sun Life Equity Fund - Growth

2. HDFC Growth Fund - Growth

3. ICICI Prudential Infrastructure Fund - Growth

4. Kotak Opportunities - Growth

After 1 year completion, I have continued only the following two funds for next two years.

HDFC Growth Fund - Growth

ICICI Prudential Infrastructure Fund - Growth

I am planning to continue with these two funds for long term (5 - 8 years).

Could you please suggest me these two funds are good to have for long term investments?

Could you please tell, "Birla Sun Life Equity Fund - Growth"  and "Kotak Opportunities - Growth" are good to invest further?

Thanks in advance,

Thamaraikannan

SRIKANTH MATRUBAI advised:

Dear Thamaraikannan,

     Your Portfolio lacks a Good Large Cap Fund and is slightly biased towards Mid-caps.

While your decision to continue your sips is a good one, your choice of funds leaves a lot to be desired.

You should have sticked with Birla Sunlife Equity Fund rather than HDFC Growth Fund. Even though ICICI Infrastructure Fund is a Sector Fund, it has had a good past and continues to promise more with its good Stock Picking and sticking with them through market cycles.

However, you do need to review your investments every year at least. For a period of 5-8 years, it is always advisable to invest in a Diversified Fund rather than a Sector Fund, however promising it may be.

So, stop both the sips for now and instead invest in the following funds:

Birla Sunlife Equity fund

HDFC Top 200 fund

Birla Sunlife Equity Fund :

The Fund follows a Flexi-cap approach and has outperformed its Benchmark over 1, 3, 5 periods and has shown an amazing ability to protect itself even in Sharp Falls, like the one witnessed in 2008. Because of its extreme NAV volatility, the Fund works very well through SIP investment. Hold and continue to add more through SIPs

Kotak Opportunities Fund:

Very volatile and very inconsistent and thus is not for the weak hearted. Only investors with aggressive mind set should consider investing in this Fund. I suggest you to avoid further investment in this fund and Sell on market rises.

Actually, the two funds suggested by me viz.,

HDFC Top 200 fund

Birla Sunlife Equity Fund

are very good funds and you can consider these two funds for your Retirement. Since you are a passive investor, you can also go for Trigger Facility wherein whenever your investment gets you a predefined target of say 50% or 100%, the Profit is automatically is booked and switched into a Debt Fund. This way not only you will be booking regular profit but also protecting your profits by switching them into a Debt Fund. Birla Sun life Mutual Fund has this facility for its Birla Sunlife Frontline Equity Fund right now and very soon it is sure to offered to all its schemes and by all the AMCs for all their funds.

Regarding your retirement corpus, it depends on your lifestyle and other things. You can go to any financial website, and using their "retirement planner" calculator, you can decide your corpus.

Also read this http://goodfundsadvisor.blogspot.com/2009/09/help-me-accumulate-long-term-gains.html

For SIP investment, you can choose funds which have a Good Track record and have a Good Long Term Potential, my choice of funds would be

Birla Sunlife Equity Fund

DSPBR Top 100 Fund

Fidelity Equity Fund

Franklin Templeton PE Ratio Fund of funds

HDFC Prudence Fund

HDFC Top 200 Fund

ICICI Dynamic Fund

Mirae Asset India Opportunities fund

Religare Business Leaders Fund

Reliance Regular Savings Fund - Equity

SBI Magnum Contra Fund

Tata Equity PE Fund

Do review your portfolio and asset allocation at least once every year.

Best of luck,

Srikanth  Matrubai

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SUBSTITE FOR TERM PLAN???

INTELLIGENT(?) INSURANCE INVESTOR

One reader of my blog Raj sent me this letter
Hi Srikanth,

Can you guide me on this ULIP doubt. I am 35yrs of age and I have a ULIP from Metlife(Met Smart Premier) which covers me for 100 yrs with a sum assured of 20 Lacs. My annual premium is one Lac. Minumum premium payment period is 3 yrs as with most ULIP's.
Since the objective is to keep investment and insurance separate, I plan to make premium payments for the first 3 - 4 yrs and leave it to grow till the 5th year. At a very conservative rate I expect a return of 5% p.a at the end of 5 yrs. If I pull out my money leaving back one annualized premium (1 lac), I am still covered till 100 yrs of age without paying any more premium. I expect the amount that I have left behind to suffice the policy expenses till the age of 100. Net to net, what I spend for an insurance cover of 20 lacs till 100 yrs would be far far less than what it would be for a term policy. I guess Metlife has discontinued this policy and no more new policies are opened under this scheme. I am not sure if there are other ULIPS that give 20 times cover. If there are I would be interested in opening another one. How is my idea???

Raj




SRIKANTH MATRUBAI replies :

Dear Raj,
You are playing with fire. Already you are on the wrong side of the age. As the policy in question is Type - 1 ULIP, & as per your own admission, you are planning to withdraw money after completing 5Y up to the extent that fund value equal to 1Y premium remains there.
The basic problem is with your thinking................................................
The moment fund value decreases below the 1L figure, the policy will be terminated with immediate effect.
Now let us see how this will happen - As there is no more extra money so the sum at risk is always around 19L Rs. for the ins. co. (20L basic sum assured - 1L fund value) now as the person ages, his mortality charges 'll keep on increasing & in case the market is not favorable, the fund value 'll come down below the 1L figure very easily. Rest you can guess!!!!

From the query, it seems you want to run this policy as a substitute of Term plan. Well well well. Even in this case, there are too many problems. I don't see any merit to run a cover for age 100. While you are comparing the non productive term cover premium (as per your own admission) to your own calculation that keeping 1L fund value in this ULIP is a better option, you are missing the point, that you are paying upfront 1L Rs.

In my view if you are opting Aegon Religare I-term plan for maxium possible term of 25Y, the annual premium will be around 5K Rs. for 20L cover from now onwards & invest remaining 95K rupees in a good funds like HDFC top 200/DSP Eq., Reliance Growth Fund, etc (you can go through the list in other articles in this site) the final outcome will be far far better than what you are planning to opt for at present.

Regarding the non issue of new policies of this class, the same are banned due to IRDA's guidelines of capping of charges.


Regards,
Srikanth Matrubai

P.S.
Dear Raj,
You need to read your Policy Document, in the case of premium holiday.........
Premium Holiday
The Policyholder is however entitled to submit a written notice to the Company within the period allowed for the reinstatement of the Policy opting to continue the Policy provided 5 full years premiums have been paid. The Company will continue deduction of applicable Policy Charges and keep the Policy in force until the Fund Value does not fall below the amount equivalent to the Sum of 120% of Annualized Regular Premium of the Basic Plan and applicable Surrender Charge. Switches and Partial Withdrawals are allowed during this period, subject to satisfying the applicable criteria for the same.
Where the Fund Value falls to the level of an amount equal to the sum of the 120% of Annualized First Year Regular Premium of the Basic Plan and applicable Surrender Charge or the Fund Value is inadequate for the deduction of the applicable Policy Charges whichever is earlier, the Policy shall stand Terminated and the Surrender Value, if any, shall be paid.

Either you hasn't read your policy document or you are an another victim of MIS SELLING.




thanks to dear Ashalanshu for invaluable inputs.

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