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.

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.

Looking for a Demat Account – Click here

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.

Birla SunLife Dream Plan is a unit-linked insurance plan (ULIP) that provides the double benefit of higher sum assured and guaranteed maturity benefit at a cost lower than the traditional term plan. In addition, it does not carry any premium allocation charges (PAC), probably the only plan in the market with a no-load structure, albeit there is a 2 per cent PAC on top-up premium.

Product highlights

• A ULIP with a term ranging from 5 to 25 years for an individual between 18 to 60 years of age at entry; the maximum age at maturity is 75 years.
• Option to choose Guaranteed Maturity Benefit (GMB) with an upside potential based on the performance of funds chosen. This assures that you will receive no less than the GMB when the plan matures.

Highlights

This is a good alternative for a traditional term plan, and also carries features of a ULIP This is one of the cheapest ULIPs in the market Though it comes with lots of benefits, the charges are a little higher

• Option to choose Guaranteed Maturity Options (GMO), i.e., 100 per cent, 200 per cent and 300 per cent with three separate maturity amount payout schedules
• A minimum guaranteed return of 3 per cent p.a. on the premium paid less other charges
• Partial withdrawals allowed after 3 policy years; it does not affect the GMB.
• Policy surrender allowed after 3 policy years, with maximum payout up to the fund value at that time
• The cheapest ULIP product, with no premium allocation charges

Investment fund options

• The investor has an option to choose from three investment funds – Protector, Builder and Enhancer – as shown in Table 1.

The premium (minus charges) can be invested in any of the fund options or a combination of all three. The three funds follow a balanced approach to investment, and hence can be an ideal choice for investors with low to medium risk appetite.

Charges you pay

• Premium allocation charge

No premium allocation charge is deducted from your premium, except for the 2 per cent charge that is levied on the top-up premium.

• Fund management charge (FMC)

FMC varies from 1 per cent to 1.25 per cent per year with a maximum cap of 1.5 per cent (Table 1).

• Policy administration charge and mortality charge

Policy administration charges are on the higher side. For example, in case of a 20-year policy with a basic sum assured of Rs. 590, the charges will be Rs. 12.91 for the first three years and Rs. 13.23 for the remaining years, compared to the normal charge of Rs. 2 to Rs. 3. Mortality charge is also high as compared to other ULIP plans.

• Surrender and revival charge

Policy revival charge is Rs. 100, which can go up to Rs. 1,000 at the company’s discretion. A surrender charge will be applicable if the policy is returned in the first 3 policy years.

• Other policy charges

Two fund switches, two partial withdrawals and two premium redirections are allowed free per year at an additional cost of Rs. 100, with a maximum cap of Rs. 500 per additional request.

Incentives

1. Maturity benefit

• Guaranteed maturity amount depending upon GMO along with the fund value is paid at the time of maturity.

• A guaranteed return of 3 per cent per annum on net premium is applicable.

2. Death benefit

The nominee will receive basic sum assured, enhanced sum assured plus the higher of Fund Value and Guaranteed Fund Value.

3. The plan offers discounts at higher guaranteed maturity benefit amounts based on different bands.

Performance

Let us find out how this plan fares from its cost-benefit analysis, which is based on certain assumptions. For a 26-year-old male individual with the guaranteed maturity benefit (GMB) of Rs. 75,000, guaranteed maturity option of 300 per cent on GMB and enhanced sum assured of Rs. 50 lakh for a period of 25 years, the net return (gross of mortality charges) comes to 4.25 per cent and 8.24 per cent at an assumed growth rate of 6 per cent and 10 per cent, respectively. These returns are well above the minimum return prescribed by the regulator (i.e., 2.25 per cent for a policy with maturity period of more than 10 years). However, if we exclude the mortality charges, the net return will be negative.

• Table 2 sums up the performance of the three funds as on Sept. 30, 2009.

• In Enhancer fund, 28.44 per cent investment is made in equities. Out of this investment, 25.40 per cent, 13.21 per cent and 11.17 per cent go to banking, oil & gas and capital goods, respectively as the top 3 sectors.
• All three funds (Protector, Builder and Enhancer) have cash allocation, including money market instruments, in the ratio of 18.98 per cent to 11.20 per cent to 17.38 per cent, which may prove to be a boon for the funds in months to come as the market may see some correction in the near term.
• However, the average maturity of debt holdings is 5.14 to 6.72 years which can be fatal in the near term as the market can see unwinding of the monetary policies which will shoot up debt yields, leading to devaluation of the portfolio. Higher the interest rate, lower will be the average duration and debt value, and vice versa.

Equating with other products

A comparative analysis of BSLI Dream Plan with other investment products (Table 3) throws up some interesting facts.

• In case of Dream Plan, for a 30-year-old male individual opting for a GMB of Rs. 75,000 (100 per cent GMO) with an enhanced sum assurance of Rs. 50 lakh, the annual premium comes to Rs. 13,378 for 20 years with a maturity benefit of Rs. 1.82 lakh. The total premium paid in a span of 20 years exceeds the maturity benefit at both assumed interest level of 6 per cent and 10 per cent, thus, giving a net negative return. It happens because most of the premium amount goes in providing insurance cover of Rs 50 lakh. But if he invests in a combination product of PPF and a normal term plan for the same insurance cover of Rs. 50 lakh, his annual premium comes to Rs. 5,200 and the return is 3.39 per cent.
• In BSLI Premium Back Term Plan, the same benefits come at an annual premium of Rs. 42,422 with a maturity benefit of Rs. 8.4 lakh. But the net return is zero.

Tax benefits

• Premium payable under BSLI Dream Plan up to Rs. 1 lakh is eligible for tax benefits under Section 80C.
• Maturity or death proceeds are tax free under Sec 10(10D).

Things to look into

• The plan is preferably for an individual looking for an enhanced basic sum assured.
• The policy administration charge and mortality charge are exorbitantly high.
• Opting for riders will further reduce your return as units will be reduced in proportion to cover the monthly rider premium charge.

Recommendations

• For whom – Conservative investors willing to put money for a longer period
• Risk – Safe capital; maturity benefits linked to market returns
• Investment horizon – 5-25 years
• Returns – More in comparison to customised investment product providing same benefit
• Beats inflation – No, it won’t be able to beat inflation at an assumed growth rate of 6 per cent
• Tax bracket – Preferable for all tax brackets
• Alternatives – Term plan with the return of premium option, PPF with term plan

Summing it up

BSLI Dream Plan is ideal for those who are looking for an enhanced sum assured with moderate maturity benefits (in case of 100 per cent GMO). The other GMOs, i.e., 200 per cent and 300 per cent provide increased maturity benefits but come with high policy administration charges and mortality charges. In our opinion, the overheads are abrupt and the guaranteed 3 per cent return also does not look exciting enough. Moreover, investors can lose the trivial 3 per cent return if premiums are not paid in time.

Being a disciplined investor pays off in the long run. For example, those investing in equity mutual funds through Systematic Investment Plans (SIPs) or debt instruments such as post office or bank deposits through recurring plans reap richer benefits in the form of higher growth and returns. However, maturity benefits in these plans remain limited to the returns assumed and to the total instalments paid in case of the unfortunate event of death. ‘LIC Jeevan Saral’ – an innovative offering by Life Insurance Corporation of India – takes care of this point. The endowment assurance plan provides not only financial protection in terms of death benefit throughout the term but also long-term capital growth. One of the unique features of the scheme is it provides risk coverage to the extent of 250 times the monthly premium. No wonder, it helped LIC win the Golden Peacock Innovative Product/Service Award 2009.

Product highlights/benefits
• An endowment assurance plan that provides death benefit up to 250 times the monthly premium plus loyalty additions, if any
• Flexibility to choose premium amount which will in turn decide maturity sum assured
• Minimum monthly premium of Rs. 250 and Rs. 400 for entry age up to 49 years and 50 years and above, respectively. There is no cap on upper investment limit.
• Option to add Death Accident Benefit rider at a very nominal cost
• Loyalty additions if the policy is in force for a minimum of 10 policy years along with guaranteed maturity benefits
• No surrender penalty after 5 policy years; partial withdrawals allowed
• Premiums are payable yearly, half-yearly, quarterly, or monthly.

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Analysis
LIC Jeevan Saral is a unique investment option which cushions one’s investments against the dual risks of death and volatile market conditions and at the same time provides much-needed liquidity. Let us see how this works for a 35-year-old individual.
Suppose the person buys LIC Jeevan Saral policy for an annual premium of Rs. 4,704 for 25 years, with his basic sum assured coming to Rs. 1 lakh. His guaranteed maturity benefit as per LIC benefit illustration will be Rs. 1,35,296, which will further increase to Rs. 2,00,296 and Rs. 3,46,296 if we include loyalty additions and guaranteed maturity benefit at a projected investment rate of return (PIRR) of 6 per cent and 10 per cent, respectively. The net yields at different projected levels are presented in Table 1.

The net yields under LIC Jeevan Saral at the PIRR of 6 per cent and 10 per cent come to 4.16 per cent and 8.05 per cent, respectively.

Equating with other products
Apart from insurance cover, ‘Jeevan Saral’ provides tax benefits and liquidity, so we will compare it with products like recurring deposits (RDs) by post office/banks or PPF (periodic investments) that offer similar benefits. Table 2 depicts how LIC Jeevan Saral and recurring deposits fare against each other.

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Now, we will turn to Table 3 which analyses the performance of two products, RDs and PPF, in comparison with Jeevan Saral. Here, we have assumed that PPF and RD investments continued for 25 years, i.e., returns reinvested throughout the term.

• In case of Jeevan Saral, a 25-year old with an annual investment of Rs. 4,704 at a projected growth rate of 10 per cent (which may or may not be achievable) will earn a net yield of 8.05 per cent, higher than RD (5.94 per cent) and PPF (8.00 per cent).
• In case of RDs, we have considered investors in the tax bracket of 20 per cent. The returns may come down or go up for those in the 30 per cent or 10 per cent tax bracket.
• For PPF investments, the tax-free return comes to 8 per cent. Nevertheless in terms of death benefit, with its inbuilt risk cover Jeevan Saral scores over the other two.
• If the same individual buys a term plan at a premium of Rs. 4,704 for a period of 25 years, he would get an insurance cover of Rs. 16 lakh. But note that there won’t be any maturity benefit, but only death benefit of Rs. 16 lakh.

Tax benefits
• Premium payable for Jeevan Saral and PPF is eligible for tax benefits under Section 80C.
• Maturity proceeds of Jeevan Saral are tax free under Section 10(10D).
• Investments in RDs are not eligible for tax benefits.

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Things to look into
• Returns in LIC Jeevan Saral as shown in Table 3 are calculated at a projected growth rate of 6 per cent and 10 per cent, which may or may not be achievable.
• Loyalty additions or bonuses are not guaranteed.
• RDs or PPF investments do not provide risk cover.

Recommendations
• For whom: Conservative investors willing to put money for a longer period
• Risk: Capital safe, but loyalty benefits linked to market returns
• Investment horizon: 5 -25 years
• Returns: Moderate in line with FDs/PPF at different conditions
• Beats inflation: No, it won’t be able to beat inflation at assumed growth rate of 6 per cent
• Tax bracket: Preferable for all tax brackets
• Alternatives: Recurring deposits, PPF (periodic investments), mutual funds (SIPs)

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Summing it up
LIC Jeevan Saral will always remain in demand considering that periodic investment schemes have never been out of fashion for small investors. The other draws would be LIC’s proven track record of paying out loyalty bonuses and the decent net return at a projected rate of return of 6 per cent besides the risk cover. However, those looking for a guaranteed return can choose RD or PPF along with a term plan which will provide risk cover at a very nominal premium.

To get a quote for this product please visit our Life Insurance Page.