Budget 2011: a first cut Analysis and Summary

The D-day has come and it has gone. Sensex has gone up by more than 500 points & at the time of writing this article has come down to an increase of 122 odd points. So why did the market react this way.

Well the stock market was expecting some negative news from the FM in the form of higher excise duty, increase in service tax rates etc. that did not materialize. Not much was expected on the Income Tax front but FM was kind enough to extend the basic exemption limit. This caused an over positive reaction by the stock market in the earlier part of the day by over 500 points. But later, as analysts started analyzing the budget & reading the fine print, they realized that this is a very very balanced budget & nothing extra ordinary has been promised in the budget yet. The FM might take some drastic steps later to which he has just provided indications in his budget for now. 

Some Highlights of the Budget relevant for the Indian Investor:

A. Direct Taxes

1.     Basic exemption limit for retail Investor increased from current Rs. 1.60 lac to Rs. 1.80 lacs wef April 1, 2011; this shall result in savings of Rs. 2,000 per annum for all assesses.

2.     Basic exemption limit for Senior Citizens increased from current Rs. 2.40 lacs to Rs. 2.50 lacs wef April 1, 2011; not only that, the definition of Senior Citizen has been changed to include assesses above Rs. 60 years of age (this was 65 years earlier); a very positive step..

3.     A new category of assesses has been created, Very Senior Citizens > 80 years and a basic exemption limit of Rs. 500,000 has been granted to them. Again, a very positive step that finally recognises Senior citizens..

4.     Surcharge on income tax for Corporate has been brought down from 7.5% to 5.0%. Good  for corporates as it will reduce there tax burden, though nominally. 
5.     Minimum Alternate Tax (MAT) on Companies has been marginally increased from 18% currently to 18.5% wef April 1, 2011.

So, in all, the Income tax changes, though nominal, are on the positive side. The reason only nominal changes are made is because the FM has promised to stick to the April 1, 2012 deadline of bringing in the Direct Tax Code.

B. Indirect Taxes

1.    Excise Duty rates have been kept unchanged for most products barring a few exceptions

2.     Peak Customs duty rates are also kept unchanged

3.     Even Service tax rates are kept unchanged @ 10%

(the above means that the taxes on most  goods & services, barring few, have not changed; again good for the layman)

4.     However, airline travel cost will increase as service tax will now be levied on air tickets…

Again, just like Direct Taxes, no major change on the Indirect taxes front. The reason only nominal changes are made is because the FM has promised to usher in the GST regime in the current session of the parliament. So it is wait & watch on both the direct taxes & indirect taxes front & big moves will only be made later...

Two Noteworthy changes in the budget:

1. One Major change that might have got unnoticed by many is that FM has allowed Foreign Citizens, who fulfill the KYC norms, to invest in Mutual Funds in India. The good part is that this will bring in more inflows in the ailing MF Industry & to our stock market which is good for the Indian investor… Indeed one bold step by the FM in the budget...

2. FM has allowed govt. infrastructure companies to bring out Infrastructure bonds worth Rs. 30,000 crore that retail investors can also invest in. This is a great way of using Investors money to invest in the country’s Infrastructure sector. A win-win situation for both…

Besides the above two remarkable changes, all other bold steps have been postponed to posterity. For now, to sum up, a very very balanced but uneventful budget by a mellow but highly experienced Finance Minister. 

(keep visiting this space for much more detailed analysis of the budget tomorrow once I get the budget doc in my hand)

The Citibank fraud and the curse of the RM

Most of us by know have heard of & are aware of “The Citibank fraud” case. For those who have either not heard of it yet or are not fully aware of what it is all about, let me summarise the case for them; as it is of primary importance that all investors, present as well as future, make themselves aware of this case and learn from it.

It is alleged that, Shivraj Puri, a Relationship Manager (RM) of Citibank’s’ Gurgaon branch, allegedly defrauded prospective Investors for a staggering sum of Rs. 400 crores, most of whom are High Net Worth Individuals (HNIs) by promising them returns to the tune of 24% to 36% per annum from a new investment product that Citibank had allegedly launched. In order to convince these investors, he also forged a document from market regulator SEBI saying that the scheme was approved by Sebi. The money was not collected in the name of any scheme but was pooled into a common bank account of shivraj purl’s accomplice and then they diverted this money to various brokers who invested the same in the stock market on their behalf.

Now what is surprising is the list of people who got fooled by this smart RM of Citibank. More than 40 HNI’s were duped by Citibank’s Relationship Manager (RM) and amongst the list of gullible investors are included the following:

1.     More than 16 corporate including high profile executives from a Delhi based auto major

2.     The MD of a well known venture capital firm

3.     Certain members of the a major auto company’s promoter family

4.     40+ High Net Worth Individuals’

The estimated size of the scam is Rs. 400 crores.

The modus operandi of the fraud was as follows:

Allegedly, the RM had access to High Net Worth Individual (HNI) clients of the bank and was serving in a role which involved servicing their requirements for investment products. Citibank’s relationship manager Shivraj puri and his accomplice, are said to have committed the fraud with the help of an external party, most likely a brokerage house that distributes investment products.

To quote a leading personal finance magazine, The Citi and other similar frauds share some common features.

1. First, there is the use of forged documents to fool customers. Given that there is a growing market for fake PAN cards, driving licences, income tax returns, and so on, a healthy dose of scepticism is required if one is to base an investment decision on a piece of paper. 2. Investors also place undue reliance on relationship managers of banks especially MNC banks. 3. It is hard to believe that a set of businessmen did not question Mr Puri’s promise of a 24% to 36% annual return on what was portrayed as a SEBI-approved scheme.

Who is this RM ?

It is very important that one understands the concept of the RELATIONSHIP MANAGER (RM) in order to understand the Citibank fraud and how this guy was able to dupe HNI’s of Rs. 400 crores. Almost all big MNC banks in India (like Citibank) have the concept of a RELATIONSHIP MANAGER in their banks. The concept of Relationship Managers is more prevalent in these banks Wealth Management divisions. The RM is supposed to be a one stop shop for all queries of the clients that he is assigned. So if I am a client of a bank’s wealth management division and Mr. X is my RM, he will be my single point contact with the bank. From basic paper work to strategic advice, everything is taken care of by Mr. X.

Now, Mr. X typically is an MBA hired from top notch b-school at fat salary and on day one of joining he is given hefty ambitious targets of gathering business for the MNC bank. His variable salary, (which generally is many times his fixed salary) is a function of how much business he can bring for the firm. So Mr. X, a highly motivated RM of MNC bank, sets out to bring new business for his bank on which shall depend his variable pay. Mr. X will greet me and my family on our birthdays and anniversaries, will give jazzy presentations to me, will pay personal visits to me and my family, do practically anything to gain my confidence and eventually my money.

Mr. X is trained to talk smooth, speak high profile finance terminology, promise very high returns and display glamour of the MNC bank to convince me to loosen my purse string. He will also give names/references of other high profile clients to convince me, if nothing else works. Now this RM is typically a marketing guy with basic minimal knowledge of financial products. Mr. X is NOT a finance EXPERT and is not in position to devise an investment plan for you or your family. Second, he is only interested in his commissions and typically changes his job every 2 to 3 years in search of a better salary. So if MNC Bank B gives him better pay then MNC Bank A, he will leave immediately.

Now why is MNC Bank B willing to offer a hefty salary to Mr. X who is not a finance expert ? The answer is pretty simple. Bank B is eying Mr. X’s relationships i.e.: the reason Mr. X is being hired by Bank B is not for his expertise but his list of HNI clients. So Mr. X now joins Bank B and immediately doubles or triples his pay package. Now he approaches me and convinces me to switch my investments to Bank B from Bank A and in the process pockets hefty commissions once gain. In both cases, earlier when he made me invest in products of Bank A and later when he made me switch my investments to Bank B, I was made to pay hefty commissions which went straight to X’s pocket.

Profile of M. X

1.     People associate RM of an MNC bank with an expert. This is completely mistaken concept

2.     People associate a big MNC bank to have checks and balances at place. Another myth...

3.     RMs are generally marketing agents without adequate knowledge of investment products and are generally interested in gathering business for their employers & in return earn hefty commissions

4.     RM’s are generally marketing people and not finance experts.

5.     They are prone to change jobs frequently and usually do not bother to intimate their clients who would have invested for long term based on his/her advice.

Now nowhere am I saying that all RM's of all banks are on the wrong side and that they should not be trusted. In fact some MNC banks have wonderfull fund managers and have vast experience and knowledge base but the question is do we  have acces to their services. It always pays & make sense to do a double check and be a bit skeptical especially when the question is of assigning somebody to manage your life's saving, one has to be a bit more cautious and carefull.

 Lessons learnt:  PRECAUTIONS to be taken

1.     NEVER EVER fall  prey to the lure of hefty returns. Any return over and above 9% per annum in India cannot be 8guaranteed. It can only be indicated. More so if there is a stock or commodity market exposure involved.

2.     SEBI will never promote the investment product of a particular entity or a particular scheme

3.     Schemes promising extraordinary returns should be viewed with suspicion and are in the nature of ponzi schemes

4.     Never give a blank cheque to the RM or even to your your wealth manager

5.     Always write the chq in the name of the Investment product or scheme, never leave the chq blank

6.     Never trust anybody blindly with your hard earned money; try to have access to the Investment professionals and fund managers of the bank. If that access is not granted, it should raise suspicion.

7.     Do a background check of the Wealth Manager or agent.; ask for references

9.     Start initially with a small amount and after having gained confidence, invest further amount.

10.   Learn to differentiate between a Marketing guy and a finance expert.

11.   Do not fall for the lure of big name. The biggest names are known to commit the biggest frauds and are usually not aware of what is happening at the ground level like in the case of the Citibank fraud.

12.   Avoid commission agents . Prefer advisors /financial planners who charge fees for their advice.

Wealth Management is an extremely complex activity involving very high level of education, experience and skillets. Always make it a practice to ask the educational qualification of your Wealth Manager & enquire about his experience in the field.

WHEN IN DOUBT, ASK, SEEK REFERENCES, DO A BACKGROUND CHECK, RESEARCH & IF NOT CONVINVED, POSTPONE YOUR INVESTING DECISIONS.

Good Investment products and opportunities will keep coming your way......

SOUND INVESTING...............

It's not whether you're right or wrong that's important, but how much money you make when you're right and how much you lose when you're wrong." - George Soros

2 promising NFOs on the horizon

Normally, as a matter of practice, we at AUM Financial Advisors do not recommend Mutual Fund New Fund Offers or NFOs.

There are a couple of reasons for the same. First and foremost, when there are existing mutual fund schemes with proven track record, why should I take the risk and invest in a new mutual fund scheme without any track record. Second, the initial expenses in an NFO are generally higher as the investor base is small compared to an existing scheme where the expenses are divided amongst a wider investor base.

However, 2 new NFOs running currently have forced me to make an exception.

NFO I: The first NFO that I am recommending to my client is the IDFC Infrastructure Fund.  (www.idfcinfrafund.co.in ). By the way please do not confuse IDFC Infrastructure Fund, which is essentially a Sectoral Mutual Fund that shall invest in the Infrastructure based companies with IDFC Infra Bonds (http://niravpanchmatia.blogspot.com/search/label/IDFC%20Infrastructure%20Bonds ) which is essentially a debt product offering fixed rate of return and not a mutual fund product.

Now, there are a couple of reasons why I am bullish on this fund. First, IDFC, the parent company of IDFC Mutual Fund, is the biggest & most experienced infrastructure finance company in India. Nobody understands the infrastructure space in India better than IDFC. Second, Mr. Kenneth Andrade, the CIO of IDFC Mutual Fund has already proven his mettle with great performance over last 3 years by his funds IDFC Premier Equity Fund & IDFC Small & Midcap Fund. Third, the infrastructure sector is the worst performing sector over the last few years. This coupled with the recent correction in the market has ensured that most infrastructure stocks have corrected by 40 to 50% and are fairly valued today available at great valuations. So the pedigree of the parent company IDFC, the timing of the NFO and beaten down valuations in the infra space, all put together makes IDFC Infrastructure Fund an attractive bet. However, a word of caution here. IDFC Infrastructure Fund is a sectoral fund. A sector based fund is more volatile than equity diversified mutual funds and sometimes takes longer duration to give results. Also, Infrastructure as a theme requires a long gestation period and needs 5 to 7 years to show results. INVEST with a 5 to 7 years investment horizon.

NFO II: The second NFO that I am recommending to my client is the Reliance Gold Savings Fund.  Reliance Mutual Fund, the biggest AMC operating in India, has introduced a new asset class in Mutual Funds, GOLD. Every Indian wishes to buy gold every month but most do not have the wherewithal to do so. However, Reliance has made this possible by bringing Reliance Gold Savings Fund. Until now, either one was forced to buy physical gold (from the local jeweller and worry about its purity or from the bank and pay a premium to the market) or if one needed to buy gold in demat or electronic form, then eGold or Gold ETFs (Exchange Traded Funds) were the only option available wherein one could buy gold electronically using the commodities or trading account and pay brokerage. However, in either of these cases, one could not do a systematic Investment Plan or an SIP in Gold i.e.: buy fixed amount of gold every month. Considering the recent surge in prices of gold, SIP is the best way of buying Gold in these volatile times. Reliance Gold Savings Fund is just like any other mutual fund schemes with zero entry load and 1% exit load for the 1^st year. What more, one can do SIP of as little as Rs. 100 per month in Reliance Gold Savings fund. What this means is that you can now buy as little as Rs. 100 worth of Gold every month. One caveat here. The expense ratio is 1.50% pa. i.e.; this scheme can charge maximum expenses equal to 1.50% pa. However, I believe, this is a small price to pay for the convenience of buying gold every month and not bothering about the purity or the physical security of Gold.

However, expect more such offerings in near future from other mutual fund companies probably at lower expense ratios. Meanwhile, INVEST via SIP and buy at dips in Reliance Gold Savings Fund.

Both the above NFOs are closing on Feb 28^th, 2011.