POWER OF COMPOUNDING

Albert Einstein called "Compounding" as the 8th Wonder of the World.
Let us find out why with another example.

There are 'n' number of stories on the Power of Compounding. But the one which I like the most is this...

You may know the story, but still read it because the twist at the end is not what you expected.
3 persons, Mr.A, Mr.B and Mr.C joined a company. They all were given the option of either taking Rs.10000/- daily for next 30 days or taking 1paisa for Day 1, 2 paise for day 2, 4 paisa for Day 3, 8 paisa for Day 4....wherein double the amount what you got previous day and henceforth for the next 30 days.
Mr.A decided to take Rs.10000/- daily.
Mr.B and Mr.C decided to take 1 paisa and the double the amount every day.
At the end of 20th (twentieth) day, Mr.B badly needed urgent cash and took away Rs.10000/- from his accumulated corpus.
At the end of 30 days,
Mr.A's total amouted to Rs.3 lakhs (Rs.10000 * 30)
Mr.B who took Rs.10000/- on 20th, was however better than Mr.A and had Rs.5 Lakhs at the end of 30 days.
Mr.C who did not withdraw anything, had at end of 30 days, surprise, surprise, left with Rs.1 Crore!!!
Just look at the difference between Mr.B and Mr.C. Both took the same salary of doubling every day but just because Mr.B took a paltry Rs.10000/- only on the 20th, he was left with Rs.95 Lakhs lesser than Mr.C.
Well, then, that is the power of compounding!!!

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RGESS - NEW TAX SAVING BABY

There is a New Baby on the Tax Saving Front.

It is called Rajiv Gandhi Equity Savings Scheme (RGESS).

RGESS was introduced in the last year budget for those who earn Rs.10 lakhs or less and are First Time investors into Equity.

FEATURES :

1.       RGESS gives this First Time Investor a deduction of 50% of his investment into the scheme subject to a ceiling of Rs.50000/- (Maximum deduction hence cannot exceed Rs.25000/-). 

2.       To avail Tax Deduction, annual income should NOT exceed Rs.10 Lakhs.

3.       Should be First Time Investors to Equity. (Surprisingly, the rules says, the investor can own shares but should NOT have them in Demat on or before 23 November 2012).

4.       Can invest only in Stocks listed under BSE100/CNX100, PSUs and ETFs/Mutual Funds which have RGESS eligible securities.

5.       Lock in is for 3 years.

6.       Tax Benefit can be claimed only once (1st time only)

I AM ELIGIBLE FOR RGESS., SHOULD I INVEST?

For investors who are eligible for RGESS, the question is should they invest.

To begin with, the Tax Benefit is not so huge. On a investment of Rs.50000/- you get a deduction of Rs.25000/- enabling you to claim a Tax Benefit of Rs.5150/- if you come under the Top Bracket.

Equties are a MUST for an investor since it is the only proven asset class which has the capacity to beat inflation on a consistent basis. RGESS is the opening that is given to you by the Govt and you should make use of the same.

For a brand new investor, Equities are best invested under the guidance of a expert and hence go through the Mutual Fund route.

RGESS is locked in for 3 years but an investor can switch from one RGESS fund to another RGESS fund after 1 year. But, since Equities work in the Long Term, you are advised to treat RGESS like ELSS and forget your investment for 3 years. No need to churn your funds. Allow the fund to give you the Compounding effect.

Investors could invest either in lump sum or by installments.

CAVEAT : Since most salaried class would have already had their Tax Deduction done with their employers, these investors would have to ask for Tax Refut under Sec 80CCG when they file their returns with the IT. Better check with your employers.

Also, please note, you CAN invest in RGESS scheme even if you do not meet the Eligibility Criteria. But, still the money will be locked in for 3 years. Yes, RGESS is actually open to all investors. But, these investors will NOT get any Tax Benefit.  And it is important to note that whether you claim tax benefit or not, your amount is locked for 3 years.

NEW FEATURES IN LATEST BUDGET :

Effective 1 April 2013, investors with a gross total income of up to Rs.12 lakh can invest in RGESS and also now an RGESS investor can invest for 3 successive years.

So, with the new provisions, an investor can now save upto Rs.7500 and also spread out over 3 years.

Under the tweaked RGESS structure, investors can invest R50,000 for three years, effectively availing of a tax deduction of R75,000 from their taxable income at the end of three years. -

So, should you invest?

I believe in the saying “SOMETHING IS BETTER THAN NOTHING” and if you are eligible for RGESS, go for it!

Best of luck.

Srikanth Shankar Matrubai

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BEST Fund for a Passive Investor

Dear Investors,
There are more than 2000 funds in India and selecting the right one is a daunting task even for 'experts' leave alone lay investors.


It is extremely difficult for investors to pick the BEST funds and track them regularly and make the right rebalancing whenever required. Here's where FUND OF FUNDS come to the rescue of the investors.

What is FUND OF FUNDS :
A FUND OF FUNDS is mutual fund which invests in other funds. In other words, it creates a portfolio of funds and provides the investors with a huge diversification by spreading risk across a larger universe.
The question which every mutual fund investor finds difficult to answer (even the experts) is when to 'change' a fund.............here I am not talking about rebalancing a portfolio by increasing/decreasing equity/debt but actual replacement of a fund either due to underperformance/change in strategy of fund/etc.
Mutual Fund investing is not a easy task. You not only have to pick the 'right' fund, but also keep a track of them and should consider exiting a fund if it underperforms and find the right replacement. FUND OF FUNDS eliminates the need for frequent switchings.

PROS :
1. Diversification :
As FOF like the ING Financial Planning Fund invest in more than 1 mutual fund, the investment portfolio is broadened.
2. Investor need not worry about moving from equity to debt or vice versa as the Fund Manager will do the same.
3. FOFs are proven to give superior risk adjusted returns.
4.  Convenience :
An investor in fund like ING financial Planning Fund is spared from the bother of tracking the performances of various schemes and also he need not worry about churning his portfolio.
5. FOFs eliminates the cost and hassle of investing, maintaining and tracking multiple mutual fund schemes



CONS :
1. Costs : Since the FOF keeps regularly replacing funds, this involves transaction cost to the fund and thus expense ratio could be high because of this constant churning.
However, SEBI has put a cap on Expense Ratio and costs should be reasonable.

2. Tax Treatment : Even if the FOF is fully invested in Equity, the FOF is treated as Debt funds and thus they are liable for Dividend Distribution Tax and Long Term Capital Gains tax.

One Caveat would be, that in case of a prolonged Bull run, ING FINANCIAL PLANNING FUND would give less return than Pure Equity FUND(they will be having typically more than 95% exposure to equity) as the ING FINANCIAL PLANNING FUND would be forced to sell equities at every rise and would thus lose out on compounding.

Srikanth Matrubai's take : Yes, the cost are on the higher side but you are paying for expertise. Selecting a Good Fund is highly difficult task in the Indian context due to the vast gulf which separates the Best Performing Equity Funds from the really bad ones.
The Monthly re-balancing and inputs received from meeting various fund managers are value addition provided by FOFs like ING Financial Planning Fund which a lay investor would find it difficult to replicate.



WHICH FOF?
Though there are quite a number of Fund of Funds in India, almost all of them invest in their respective Fund House schemes and thus do not give benefit of different style of investment and could be baised.
So, you should consider investing in that Fund of fund which aims to pick the BEST fund from which Fund House it belongs to, without any bais.
There are few funds which do this job namely Kotak FOF,  ING Financial Planning Fund among others. 
I would prefer ING Financial Planning Fund as the Fund House is highly experienced in this segment and is in this FOF business since more than 7 years now., (2006).


WHY ING FINANCIAL PLANNING FUND ?
ING FINANCIAL PLANNING FUND is a rare Fund of Fund which actually invests in Fund of OTHER Fund Houses. It aims to pick the BEST of Funds from across Different fund Houses and put them together into one.
ING FINANCIAL PLANNING FUND is a asset allocation fund which provides you the opportunity to spread your money among asset classes with one single investment.
ING FINANCIAL PLANNING FUND FOR WHOM??
One reasont to invest in ING Financial Planning Fund is 'simplicity'. You can simply invest in ING Financial Planning Fund instead of bothering which fund to buy, which one to hold, which one to replace as this Fund does all this 'headache' job for you.

Why invest in Fund of Funds?

Compared To Investing In Several Mutual Funds Separately, A Multi Manager
Fund of Funds Brings Unique Advantages

1. ING FINANCIAL PLANNING FUND are ideally suited for investors who are not looking at actively managing their asset allocation.
2. ING FINANCIAL PLANNING FUND can be considered to newcomers to Mutual FUND as the Fund has Debt exposure which provide cover in case of a bear run.
3. Investors who want to eliminate the cost incurred on research and advise on investment cam also consider investing in ING FINANCIAL PLANNING FUND.

ING FINANCIAL PLANNING FUND ensure automatic asset allocation.
ING FINANCIAL PLANNING FUND too are Diversfied Equtiy FUND with a lesser exposure to Equities!!
Go for it.
ING Financial Planning Fund takes Diversification to a new level. The Fund invests in Diversified Funds across Fund Houses and across themes/sectors and ensures wide diversified portfolio with just 1 single fund!!


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The "TRAP" of going Direct

 
SEBI has allowed Mutual Funds to have a Separate NAV for investors investing Directly. This Separate NAV will have a lower expense ratio and is expected to benefit for "very long term " investors.

As usual, the "experts" have started advocating of going direct to Mutual Funds bypassing the Advisors.
 Was in ICICI AMC office the other day regarding a query.
A walk in customer comes in and asks for "Direct Plan Details".
The clerk at the Reception said "yes sir, Direct is good, NAV is very cheap and you will make huge profit".
Customer : "I want to invest in International Fund, which is the Best"?
The Clerk "sir, ICICI is the BEST in the industry. You can blindly go for the same. Come sir, I will help you fill the application".
I could only laugh at the ignorance of both the clerk and the customer.
ICICI Indo Asia Fund which the clerk was referring to.......is not even in the list of Top International funds according to Valueresearch list and the Fund has been, in fact, listed under EQUITY - LARGE CAP and the clerk had the audacity to recommend this Fund as a International Fund.
Of course, the Clerk obviously will not recommend his rivals fund such as L&T Global Real Assets fund or the DSP BLACKROCK Natural Resources and New Energy Fund.
Expect more of such Non-sense recommendations when you go DIRECT!!
 you should avail of the Direct Plan only if you have the expertise to choose the best funds for your portfolio. The difference between the best and worst performing funds in India can be quite large.

Therefore, it would be quite unwise to avoid an advisor just to cut corners on expenses. This could you cost you quite a bit in terms of sacrifice on long-term returns. 

 After a deluge of statements, scattered investments, and ad-hoc decisions later, investors will realize that going cheap was not worth it.

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Timing the Market

Recently I came across this honest confession from a Expert in Mutual Funds.
Yes, I repeat, this person is a "Expert" and this was what he had to confess........
 """I know it is impossible to time the market.Last year when the sensex was around 20500 I made lumpsum investments in HDFC Equity Fund,HDFC Top 200 Fund,Birla Sunlife Frontline Equity Fund and UTI Opportunities Fund.My returns from these funds are still negative.On the other hand I am getting decent returns from my investments in Kotak Mutual Fund and ICICI Prrudential Fund where I am investing through monthly SIPs for the last three years.The lesson which I have learnt is that long term monthly SIPs even in average funds are much better than lumpsum investments even in the best performing funds."""
 SIP is the best route for investment in mutual funds to meet your long term goals.
The greatest advantage is that once you start a SIP you can remain invested for a long time without bothering about the short term ups and downs of the market.
The greatest disadvantage of lump sum investment is that you become a hostage of market timing.While it will be foolish to invest lump sum when the sensex is at around 22000,it makes sense to invest at a level of around 17000.You can always invest some lump sum whenever there is a sharp correction in the market.
All mutual fund investments are subject to market risks.
In the short term you may see a lot of volatility and returns from your investments may even be negative. But if you remain invested for a longer period of more than five years in equity mutual funds, there is a potential of creating wealth.
SIP is the best mode of investment as you don’t have to bother about market timing.In lump sum investments you become a hostage of market timing.Yes, you can do some lump sum investment when you see the market correcting substantially.You can combine both modes of investment.
You can select any tenure for your SIP and you can increase or decrease it as per your requirement.You can also redeem whenever you need money.You have to only see exit load and tax implications.

My take is :
IF YOU HAVE A LUMPSUM AMOUNT TO INVEST., THEN GO FOR A DEBT FUND AND OPT FOR A SYSTEMATIC TRANSFER PLAN. THIS IS THE BEST OPTION.

 Regards,
Srikanth Shankar Matrubai

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Index Funds or Active Funds???

 
 Index Funds mirror their respective Benchmark Indices and Diversified Equity Funds follow Active Investment strategy and are in constant search of stocks to generate Alpha returns in respect of their benchmark indices.

The management of Index Funds is easy as no decision is needed on stocks to buy, sell, hold as the Fund just tracks its Benchmark accurately.

Since, the Index Funds just mirrors the Index, there is no chance of it beating the Index. Sure, it can't do bad either.

Of course, some Index Funds deviate here too. For ex :
For 1 year period, ICICI Pru Spice Plan gave a return of 20.4%, in the same period, the Franklin India Index- BSE gave a return of only 17.5%
For a index fund, doing better or worse than its Benchmark Index is a sign of Bad Management.





Active funds

If an investor had invested Rs.1 Lakh 5 years ago in IDFC Premier Equity Fund, the value would have been Rs.1,63,808.

If the same investor had invested his Rs.1 Lakh in Franklin India Index Fund - BSE Sensex Plan, the value would have been Rs.99,773.

Clear indication that Active Managed Funds fare better, much much better than Indicies over a long time frame.

CASE FOR INDEX FUNDS :
1. Since no research is involved and no active trading is involved, the charges are low.
Yes, Active Funds do have higher expenses, but they also have consistently delivered higher returns.
Give me fund which delivers higher returns with higher costs any day over the fund which delivers lower returns with lower costs.

2. Since the Funds mirror the Index, the level of risk is low
CASE AGAINST INDEX FUNDS :
1. Most Index Funds invest in  Large Large Caps and typically these stocks tend to be very expensive stocks.

2. In Index, stocks are taken out when it is nearly near its downward spiral (business wise and stock price wise), thus the Index Funds are forced to stay with the stock inspite of knowing that the stock will go only way - down. Ex : Reliance Comm was exited by Majority of Active funds before it was taken out from Index, but Index Funds were forced to stay put in the Stock.

3. Index fund managers also don’t start buying the newly added companies until they’re officially added while active managers already have the new (and better) stocks in hand.


CASE AGAINST ACTIVE FUNDS :
1. The Fund Manager could pack his bags and leave the Fund and its investors high and dry.
This, however, is mitigated in most fund houses, as they believe in "process and system" rather than in genius of Star Fund Manager.
2. The level of risk is higher.

FINALLY,
The primary difference between passive funds and active funds; one is content at giving index-linked returns, while the other consciously tries to outperform it.

The past records have proved that Active Funds have consistently outperformed Index Funds by a fair margin. In fact, Active Funds have beaten the broader indices like the BSE 200.
As they say, Be ACTIVE, enjoy life.
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Avoid Jewellers Gold Savings Scheme.... Here's why

Indians Love Gold!
Jewellery Houses like Tanishq, PC Jewellers and GRT Jewellers have been quick to latch on to this craze of Indians and have launched innovative Gold Savings Schemes to lure buyers. With as little as Rs.1000/- per month, you can save systematically with the jeweller for 11 months and the Jeweller will usually add a month's instalment FREE (some jeweller even pay two instalments) at the end of the saving period.
Yes, depending on Jeweller and scheme, these schemes offer returns in the range of 8% to 18%.
So, in essence, these Jeweller Gold Saving Schemes are EMI in Reverse. They help you buy Jewellery at a Future Date by saving and accumalating.
Sounds good. Then, what's the catch? Why are Financial Experts suggesting you to avoid these Jeweller Gold Saving Schemes?
REASONS TO AVOID JEWELLERS GOLD SAVINGS SCHEME
There are several reasons and let us look at them one by one and see the reasoning.
1. Almost every Jeweller offers you Gold only at the end of the Term and at that days price. This means you are more likely to get less Gold because of the Appreciation Factor.
Ex : If you are investing Rs.3000 on the 10th of every month to buy 10 grams of Gold at the end of the year and if the Gold price steadily goes up, then obviously you will left with less Gold and you will be forced to put extra money to buy your 10 gms Gold.
So, if say you started your instalments in January and the Gold price was 2800 per gram and at the completion of your instalments in November, the December price of Gold is 3000 per gram then you are forced to pay Rs.3000 per gram whereas the Jeweller would have bought at Rs.2800 per gram.
This drawback could be avoided if you investing through Gold Savings Schemes by Mutual Fund as the averaging works better.
		2. Almost every Jeweller forces you to buy Gold Jewellery and does not give you Cash in return. Now, what this makes you, you are forced to pay Making Charges fo Jewellery and either you pay extra cash or buy less Gold.
In Mutual Fund gold Savings Schemes you are getting CASH and thus saved the igomy of paying Making Charges, etc.
3. The Gold Savings scheme by Jewellers do have SEBI approval and thus there is no monitoring of the cash you pay. These Jewellers may be using your fund for Working Capital, business, etc and nobody checks their books. So, if tomorrow, suddenly Gold price crashes and all Investors stop their instalments and ask for Gold, then you never know how many of these Jewellers would be able to keep their word.
In Mutual Fund Gold Savings Schemes, SEBI is mandatory. Their books are mandatory checked. All your funds/investments are backed by Physical Gold.
4. Very few Jewellers offer 24 Karat Gold. Almost every jeweller offers only 22k gold. So, since you will not get cash from the Jeweller, you are buying Gold which is not 100% pure.
In Mutual Fund Gold Savings Scheme, your funds are backed by 24k Pure Gold.
5. Resale value of Jewellery is lesser. Jewellery is not made of 24 Carat Gold and also carries making charges, resale value of Jewellery is much less compared to Gold coin/biscuits/Gold bars. Since you are forced to buy Jewellery and do get cash/gold coins from the Jewellery, you are again losing.
In Mutual Fund Gold Savings Scheme, since you paid cash, you can either reinvest or buy Gold Coins instead of Jewellery.
6. You have to buy from the Same Jeweller even if the Jeweller does not have designs of your choice.
In Mutual fund Gold Savings scheme, since you are paid cash in lieu of Gold, you can buy from Jeweller of your choice.
7. If at the end of the Instalment period, if you are in need of Cash for emergency, you wont be able to use this money as you are given only Jewellery. The best you can do is to sell the piece of Jewellery and forgo the making charges.
In Mutual Fund Gold Savings Scheme, you are paid cash always.
8. In Jeweller Gold Saving Scheme your Gold purchase attracts Wealth Tax and also Capital Gain Tax (if you sell within 3 years).
In Mutual Fund Gold Savings Scheme, there is no Wealth Tax and you are taxed for Long Term Capital Gains just after 1 year (in physical gold, you have to wait for 3 years).
IN A NUTSHELL :
Jewelers not only earn interest on the buyer's installment but also sell the jewelry after earning a handsome margin. For 20 grams gold jewelry, he earns Rs 600 making charge and sells 22 carat gold at rate of 24 carat gold. So he earns approx 8% extra by selling gold of 22 carat purity.
For jewelers, this scheme is a win-win situation as he gets the chance to sell his product, and at the same time he earns interest on the customer’s installment.
Some jewellers do offer "zero wastage" to lure gullible investors, but do note that these "zero" wastage if only for few select designs/pieces. INtricate desingner Jewellery could still see a higher levy.
For lower middle class people, and for people who want to accumulate Gold for marriage or other purposes in near future, the Jeweller Gold Saving Scheme looks okay, but for all other purposes, Mutual Gold Saving Scheme is the BEST.
If you are hell bent on investing in these schemes of Jewellers, then I feel that PC Jewellers and GRT are better among the Worst.
While you may argue, that since the Jeweller gives me 1 month instalment FREE and the returns works out to 15%, do note that the same investment in Gold Saving Scheme via SIP would have given you 27% return. Jewellers are not here for charity, they give FREE last instalment with money made from your previous instalments!
Purity is another matter of seriuos concern. Though the use of "hallmark" has reduced this malice, still it persists.
Indian households predominantly purchase gold in the form of jewellery. Gold Jewellery has aesthetic appeal and is widely used for ornamentation. Besides, investment in gold jewellery is also done for a special occasion such as a marriage, birth of a child etc. However, jewellery by itself has a major drawback - there is a loss of around 30% due to making and melting charges when you buy and sell.
WHAT I FEEL.................
Gold continues to be a non-productive asset and over long periods of time, returns from gold seldom beat returns from productive assets classes like equities. Unless you are an active investor who can spend a lot of time rebalancing your portfolio, I recommend an exposure of anywhere between 5 to 15% of your total assets in gold.
GOLD ETFs:
Gold ETFs or Gold Saving Schemes by Mutual Funds offer you the option of buying in monthly instalments which ensures that you buy Gold at various Price points thus averaging out your Purchase price.
If you really want to accumulate Gold through monthly instalments, the BEST option would be invest through Gold Savings scheme offered by Mutual Funds. This will also help you in averaging your instalments.
BUT I STILL MAINTAIN, IF YOU WANT TO BE WEALTHY, THEN EQUITY IS THE BEST INVESTMENT. NOT GOLD, NOT DEBT, NOT FDs, NOT EVEN REAL ESTATE.
If you had invested Rs.100 in 1980 in both Gold and Equity (Sensex), the value of gold now would be Rs.1314 and that of Equity (Sensex) would be Rs.15600/-
The most important thing is the proper asset allocation.Both equity and gold mutual funds have a place in a portfolio.For long term investment equity mutual funds should form core of the portfolio with gold funds acting as a hedge to balance and add stability to the overall portfolio.So, invest in a gold fund once you have built a well diversified portfolio of equity mutual funds with 5 to 10% portfolio allocation to gold.
As has been pointed out often, gold is an unproductive asset. Unlike stocks or bonds, it's a type of asset where value depends on nothing but a shared belief that the value will rise and keep rising.
ANOTHER POINT TO NOTE :
Most investors invest in Bank Recurring Deposits to buy Gold at a future date. This is not a good idea since Interest Rates may not keep pace with the rise in Gold price and they will not be able to achieve their objective.
FINAL WORD :
Gold Jewellery Schemes aim is to give you Gold/Jewellery whereas gold Savings Funds/Gold ETFs aim to give you Cash.
So, if you want to buy Jewellery in the near future (say 1 year), then go for Jewellery Gold Savings Schemes, but if you want to buy Gold as an Investment or if your Gold usage is at a later date (say your daughter's marriage, which is several years away) , then its Gold Savings Fund/Gold ETF blindly.
Caveat, if it is for consumption, then unless you have a very trusted and reliable Jeweller (ready to buy back from you), dont think of these Gold Savings Schemes by Jewellery Stores.
Buy Gold ETF , Sell the Units when you want gold and from the money you get , go buy gold !
Happy Diwali and best of luck,
Srikanth Matrubai

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