The Securities and Exchange Board of India (SEBI) has opened a new window of opportunities for the Indian mutual fund industry by allowing online trading of MF units through stock exchanges. This move is intended to offer both investors and mutual fund houses a cost-effective and convenient way to trade in mutual funds. But this is not all; there are some questions that have cropped up regarding the usage of this facility. Let us deal with them one by one:

What is this trading facility?

The online mutual fund trading facility comes in the form of an electronic platform that acts as a transaction point for MF unit trading, now available at both the Indian stock exchanges – BSE and NSE. The important thing is it will exist along side the existing facility where one invests in MFs through distributors or fund houses directly.

How will trading of MF units take place?

It is important to note that trading in MF units will not be similar to that in stocks. In fact, there will be no trading or listing of units.  Investors can just place an order or submit application forms online to buy or sell MF units. Only exceptions are exchange traded funds (ETFs) and some close-ended schemes that are listed and traded based on real time quotes.

There is a lock-in period for fresh subscription. The lock-in period is equal to the time taken for the physical application to reach the back office of the asset management company. But there is no lock in in case of investors with demat accounts. The allotment and redemption of units would be determined by the NAV of the day concerned.

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What is the application process?

Firstly, investors need to open a client account with a stock exchange broker. They can then submit an application for buying or selling MF units with this broker. They do not need a demat account to use this facility, instead they can fill up the application form for the scheme they want to invest in and get units created in folio. Old investors can have their new unit purchases credited under their existing folio.

Is this platform open to all schemes?

All open-ended equity schemes (except index funds) and debt schemes wherein the investment is less than Rs. 1 crore can be traded on this platform while fixed monthly plans (FMPs), interval schemes and liquid schemes are kept out. Moreover, investors can only make amount-based purchases and not unit-based purchases.

What are the transaction features?

• Investors can apply for fresh subscriptions, additional subscriptions and redemptions through this platform.
• Systematic Investment Plans (SIPs) and switches from one scheme to another are not allowed.
• In case of a dividend-based scheme, investors have to choose from dividend payout and dividend reinvestment options only. There is no dividend sweep option.
• Transfer of funds or payment should be done in favour of the stock exchange broker an investor is registered with.

Also Read: SIPs – made simple!

How to apply for redemption?

In case of investors with demat accounts, redemption application has to be made in the format prescribed by the Depository Participant (DP).  Investors with no demat accounts need to submit the preprinted transaction slip that is provided with the account statement.

Since amount-based redemptions are not possible in this case, investors can apply for only unit-based redemptions. After redemption, the amount is credited directly to investors’ account – an account provided in the bank mandate or the one linked to the demat account.

How cost-efficient is this facility?

Investors purchasing MF units through the exchange-based platform will have to bear high costs due to the additional outlay of brokerage and demat fees. This could be particularly expensive for those who don’t have a demat account. They will have to shell out close to Rs. 800 for opening a trading account with the broker and starting a depository folio, besides a brokerage of 0.25-0.5 per cent.

Also Read: I want to open a Demat Account

On the other hand, investors investing directly through mutual fund web site will not incur any costs as entry load on MFs has been abolished. Brokerage in such transactions is on an average 0.5 per cent and demat account fee is around Rs. 500. In case they already have a demat account, there will be only brokerage charges.

In conclusion

Exchange-based trading platform is a facilitating mechanism aimed at expanding the reach of mutual fund houses. It is just an alternate avenue for allowing mutual fund transactions. As of now, the mechanism is not as versatile in terms of the actions that investors can take but enables them to perform the basic transactions. Moreover, the cost considerations also favour direct investing through investment portals of mutual funds. We expect improvements and modifications in the system with time and increase in popularity.

Endowment plans were the darling of insurance companies, before ULIPs came into the picture. Over the years they might have lost their top slot but are not out of demand; conservative investors still prefer them for their survival benefits, which are missing in term plans. ‘LIC Jeevan Anand’ is one such popular endowment assurance plan which also comes with whole life benefits.

Product highlights/benefits

• An endowment assurance cum whole-life plan that provides survival benefits in the form of a lump sum at the end of term and also pays an additional sum assured to the nominee on the death of insured till the end of life
• In addition to sum assured, it pays simple reversionary bonuses and terminal bonus, if any

Highlights

It’s a unique endowment plan that offers whole life benefits at a little extra cost Whole life risk cover continues even after the premium paying term is over, till the death of the insured Double accident benefit is available during the premium paying term and thereafter up to age 70

• An additional accidental cover (up to Rs. 5 lakh) is paid as a lump sum on death due to accident, up to the age of 70. No additional premium required.
• Option to get extra protection at a very nominal cost
• Guaranteed surrender value up to 30 per cent of the total premium paid, excluding first-year premium and other riders’ premium after 3 policy years
• Policy available to people in the age group of 18-65 years. Premium paying term is 5-57 years.

Analysis

LIC Jeevan Anand provides the dual benefit of endowment and whole life plans, for a little extra premium. A 30-year-old individual will have to pay an annual premium of Rs. 20,978 for Rs. 5-lakh cover with a term of 25 years. Let’s see what benefits he will receive. LIC Jeevan Anand has a good bonus history since its inception in Feb. 2002. On an average, it has declared an annual bonus of Rs. 46.5 per thousand. For our calculation, we will take the average bonus at Rs. 45 per thousand (refer Table 1). Considering that LIC has distributed Final (Additional) Bonus (FAB) in its other schemes consistently, we assume an FAB of Rs. 550 per thousand in Jeevan Anand (in line with other schemes under similar conditions) at the end of term. As per Table 1, net return in this case comes to 6.60 per cent (approx.). Besides, the policyholder enjoys an accidental benefit of Rs. 5 lakh till the age of 70 and death benefit of Rs. 5 lakh (similar to the initial cover) till the end of his life. If we take into account these benefits, the return (gross of charges) will further increase for the policyholder.

Now take a look at Table 2. It presents endowment plans by other insurers. These plans are cheaper than LIC Jeevan Anand and have similar benefits. But they do not offer the whole life benefit.  Moreover, the bonus rates announced in these products are not at par with LIC Jeevan Anand.

Thus, at the outset, LIC Jeevan Anand looks a little expensive than plain vanilla endowment plans but given the benefits in later years, the additional cost is justified.

Equating with other products

We always advise against mixing insurance with investment. As there are no similar products available in the market, we will compare LIC Jeevan Anand with a combination of a term plan and PPF (based on their benefits). But the term plan will provide cover till the age of 65 only, unlike in Jeevan Anand where whole life benefits continue till the end of the individual’s life. One can also combine a whole life policy with PPF. But again the policyholder will need to pay premium till the end of his/her life. This sets LIC Jeevan Anand apart from other non-ulip policies. Now, let us turn to Table 3 for a comparative analysis between Jeevan Anand and other asset classes. The term plan (SBI Life Shield) has been taken for an individual of 30 years for a period of 25 years for a sum of Rs. 5 lakh at an annual premium of Rs. 1,632. An additional accident cum disability benefit (Royal Sundaram Accident Shield) for Rs. 5 lakh has been taken at Rs. 589 per year. The remaining amount of Rs. 18,757 has been invested in other asset classes for a period of 25 years as mentioned in the table 3.

Tax benefits

• Premium paid up to Rs. 1 lakh is tax exempt under Section 80C.
• Maturity or death proceeds are tax free under Sec 10(10D).

Things to look into

• The additional whole life benefit comes at an inflated price (refer Table 2).
• Reversionary bonus, though announced regularly, is not guaranteed. Moreover, Final Additional Bonus (FAB) is also not guaranteed.

Recommendations

• For whom: Conservative investors willing to put money for a longer period
• Risk: Capital safe, but loyalty benefits are linked to performance of the company in future
• Investment horizon: 5-57 years
• Returns (post tax): Moderate in line with debt funds at different conditions. But unlike debt funds, it provides tax benefits under Sec 80C in addition.
• Beats inflation: No, it won’t be able to beat inflation even in case of a longer term
• Tax bracket: Preferable for all tax brackets
• Alternatives: Whole life plan, PPF plus term plan, mutual fund (through SIPs) plus term plan, etc.

Bonanza year 2009 ended on a happy note and would be remembered for many reasons. Indian stock markets recovered remarkably from their March 2009 lows and went on to register the best year-to-date (YTD) performance in the history of Indian stock market since 1991, with more than 80 per cent return in 2009 and above 110 per cent from their March lows. But it was not all rosy for the investor community, especially for retail investors, with some of them managing the bull ride and a majority missing it.

Indian key benchmark indices, BSE’s Sensex and NSE’s S&P CNX Nifty, moved northward from a low of 9,647.31 and 2,959.15 as on Dec. 31, 2008 to 17,464.81 and 5,201.05 as on Dec. 31, 2009 respectively, a splendid gain of more than 75 per cent for both bourses. Similarly, stock prices too multiplied; some stock prices tripled or even more. The ‘double dhamaka’ was common among all stocks. The fundamentally-strong stocks did exceptionally well, beating their own all-time highs of 2007-08 boom. However, the rally was driven by foreign inflows rather than domestic inflows. The foreign investments touched $17 billion – an all-time high – in 2009, thanks to the continued low interest rate regime in the developed economies which prompted FIIs to invest in the developing countries. Despite India ranks among the countries with high domestic savings rates in the world, Indian stock markets remain largely dependant on foreign inflows. Indians are still not taking to stock trading in a big way, either directly or through mutual funds. Currently, only 7 per cent of the total savings goes into mutual funds and the rest into other non-equity instruments; bank fixed deposits lap up a major share.

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Now let’s check out the performance of stocks listed on NSE’s index S&P CNX Nifty – one of the highly-traded indices in India – which comprises 50 well diversified stocks from 22 sectors of the Indian economy.

The list of top performers comes as a surprise. The auto sector which was on the verge of collapse in 2008 revived dramatically in 2009, thanks to the government’s active support in the form of allowing increased depreciation and other policies. Tata Motors and Mahindra & Mahindra clocked the highest returns of 395.18 per cent and 293.75 per cent, each. Though Tata Motors is still reeling under the debt of Jaguar Deal it hopes to avert debt crisis with the help of increased sales activity and ‘Nano’ magic, surpassing the last boom period. The steel sector too made a dramatic turnaround. SAIL and Tata Steel gained 211.87 per cent and 184.39 per cent, respectively. Moreover, these two emerged as the largest in the world in terms of profit, leaving behind steel giant Mittal Steel. IT stocks too gave a decent return. In comparison, IT-dominated mutual funds have provided the highest return in the same year. However, telecom stocks are bleeding as companies are facing an added revenue pressure due to one-second billing.

Read: 7 tips for investing in stocks

But as we always advise, investors should not take into account only the past year’s performance to select stocks. The other factors they need to look at are Price/Earnings ratio (PE), Price/Book value (PBV), Return on Equity (RoE) and other fundamentals of a company. Though the current valuations may not look cheap and attractive enough, the growth saga will continue for the domestic markets. So if you are looking at a long-term investment, equity investment will serve your purpose.  Happy Investing!

Mutual funds are an ideal product for the retail investors who do not have the required knowledge or time to invest in stocks. They have become an effective means to create wealth by maximising returns and minimising risks.

Indian mutual fund industry experienced a bad patch in 2008 when it was hit by liquidity crunch coupled with the global liquidity crisis. The industry, which was growing at 30-50 per cent in terms of AUM on year-to-year basis, plummeted to an AUM of Rs. 4.02 lakh crore in Nov. 2008 from a high of almost Rs. 6 lakh crore in May 2008, a substantial fall of 33 per cent in just six months. The SEBI and RBI acted swiftly and opened a new lending window for all mutual fund players.

Monetisation of the economy by the government along with the improved economic sentiments lifted the ailing Indian mutual fund industry in 2009. In addition, SEBI announced a series of investor-friendly regulations – from no-entry loads to online trading of mutual fund units on stock exchanges – which made it difficult for small distributors and Independent Financial Advisors (IFAs) to earn commissions. The average AUMs touched a new high crossing Rs. 8 lakh crore in Nov. 2009; it was mainly driven by corporate money which flowed in Liquid Funds, Liquid Plus Funds along with Income Funds. However, Equity Funds witnessed continuous outflows month-after-month indicating no major resurgence of confidence among retail investors albeit the markets gained renewed confidence. One of the reasons is said to be the IFAs that have switched their loyalties to insurance companies selling ulips. They have not fallen for the bait of extra bucks that fund houses are ready to shell out to bring them back.

Now coming to the performance, mid- and small-cap funds – which bore the maximum brunt during 2008 downturn – emerged as the best performer in 2009. In the diversified equity category, the top ten performing funds are as given below:

The above table presents the best performing diversified equity funds, picked from large cap funds, mid-cap funds and small-cap funds, including thematic funds. We have taken into consideration the fund performance in 2009 only.

Readers should not consider the list as a criterion to select a mutual fund scheme as there are other important factors that they need to take into account. So how to choose a mutual fund scheme? Check performance record of a scheme, preferably over 3 years and 5 years, along with its risk-adjusted returns. Go for the schemes that have consistently beaten their benchmark over a longer period, looking at Jensen’s Alpha will help.

Year 2009 turned out to be a significant year for many reasons. The Indian investor ushered in the year with the country’s economy still reeling under the effects of sub-prime crisis that engulfed global economies and led to the fall of giants like Lehman Brothers. At home front too the signs were not positive. Satyam fraud scandal shocked everyone, putting a question mark on the credibility of the country’s tech services industry. But slowly and steadily, things changed for the better. The government along with the Reserve Bank of India helped with their monetary and fiscal policies. The faith in Satyam was somewhat restored by employing some tough measures, including a gradual leadership change. The result: a major stock price boom. The markets rebounded and touched a new high (for majority of the stocks). However, the benefits did not trickle down to retail investors who suffered major losses due to volatility of markets.

During the year, various investment products performed differently; some assets such as gold touched new highs despite a downturn. In this three-part series, we will pick ten schemes in a product category that have not only survived the year but performed superbly to beat others. In the first article, let us get a rundown on unit-linked investment products, ulips.

Unit-linked Investment Products (Ulips)

Ulips are investment-cum-insurance products that involve high investment costs in terms of premium allocation charges, policy administration charges, fund management charges and other miscellaneous charges. However, investment funds under all ulip products provide returns that are largely unaffected by investment costs. To some extent, fund management charges can mar their performance. The top ten performing ulips across categories (in terms of absolute returns) in the last one year are presented below:

The returns do not represent the overall performance of ulips as there are various costs, as discussed above that can affect the performance in terms of net returns. Also, investors should not get swayed by the one-year return only as there are other factors that help in deciding the best ulip. However, there is a New Year bonanza waiting for all new and existing ulip investors in the form of less total charges. With the new guidelines in place, ulips with a term up to 10 years and more than 10 years will have a total charge of only 3 per cent and 2.25 per cent, respectively.