Whom is this Blog meant for?

This BLOG is meant for those INVESTORS who want to benefit from the India story & are on the look out for expert, unbiased & easy to understand Investment advice about MUTUAL FUNDS & other investment avenues.

Saturday, June 25, 2011

Have you checked your ADVISOR’s credentials?



       Every now and then one comes across a media article that talks about innocent investors being taken for a ride by shrewd, scheming agents or advisors. It is so very unfortunate that because of a few bad apples in the financial services industry, the entire industry gets tainted. But I believe that at some level, even the Investor is to be blamed?

The principle of “BUYERS BEWARE” applies as much to the financial services industry as it applies to any other industry, if not more…

One cannot expect all advisors to be unbiased, free from any wrong intentions. One or two black sheep will always find its way amongst a flock of white sheep’s. It is for the investor to be alert & sharp enough to identify the black sheep amongst a flock of sheep’s.
As I said earlier, partial blame lies with the Investor himself. Why does he/she not do a background check before he/she trusts the agent/advisor with his/her hard earned money?

Yes. I am a financial advisor too. Yet I am asking you to do the following check on your Advisor before you allow him to render any financial advice to you?

Ask following questions with respect to your Financial Advisor...

1.      Is he QUALIFIED enough to give you financial advice?

In the times in which we are living, even the most qualified person finds it difficult to sail through the turbulent world of Investing. In such a scenario, the minimum that one can expect from his/her advisor is that he should have the requisite educational qualification to understand the intricacies of the financial world. A post-graduate degree in finance is a must. Thus, your financial advisor should at least be a CA, MBA (Finance)from a reputed college, a CFP or should hold some other post graduate degree in finance or economics, to say the least. Does holding a post-graduate degree in finance guarantee that your financial advisor is qualified enough to render you financial advice? No. But, if he does not have the bare minimum qualification, then there is a very high chance that he is not fit enough to render financial advice.

By the way, are you aware what is the minimum qualification required to start selling either an Insurance product or a mutual fund product or for that matter any other financial product in India? It is 12th standard pass and a small exam with unlimited attempts. Yes, believe it or not, one need not be a graduate to become an insurance agent or a mutual fund agent? I have always believed that one’s financial advisor should be equally, if not more qualified than oneself. Imagine a non-graduate, recommending you buy a financial product, which even experts take time to understand….

2.      Is he EXPERIENCED enough to give you financial advice?

The 2nd most important credential, besides education, is your Advisors’ work experience. This carries equal weight. What is his career background? How long has he been working in this field? Is it a mere family business that has been handed over to him? Has he had any corporate experience working in a well known financial institution?

I once came across a client who was previously being advised by an insurance agent cum Mutual Fund distributor who was previously a commission agent dealing in food grains. Yes, believe it or not, this guy used to trade in food grains before he started selling insurance and mutual funds, as he found them more remunerative (this was before Aug 1, 2009 when there used to be commissions in Mutual Funds and still fatter commissions in Insurance, although selling insurance products is still highly remunerative). And trust me; he has clientele who are highly qualified and rich businessman. This beats logic, but it’s true. Look around you and you will found more jaw dropping examples of agents with a background that hardly has any co-relation with the financial services industry but are still able to convince people into buying financial products from them, so that the agent can earn hefty commissions.

3.      Is he NEUTRAL enough to offer you advice free from biases?

Let us assume that I am an agent of a particular company, say ABC Insurance Ltd. Now imagine that my company ABC Insurance Ltd comes out with a new insurance product, which though not a very attractive proposition for my clients, yet it offers a great incentive to me to sell it as my company intends to sell it aggressively. Now there is a XYZ Insurance company, my competitor, which has a much better product in existence. Now what is the chance that I will push my company's product? 100%. What is the chance that I will even mention XYZ Insurance Cos. product to my prospect? Almost Nil! Do you get the point here? 

Financial Advisors are supposed to be like doctors writing you a prescription (designing your Investment Strategy) … You are then supposed to buy the medicines (Investment products) from a shop of your choice… now turn this around and imagine you asking the medicine shop owner to write you a prescription and suggest you which medicine to buy…which medicine will he recommend? The ones on which he gets a bigger cut, right…

Look, I have nothing against agents per se. They have worked hard to increase the reach of financial products and to bring them to our door-step . And one does not say that all of them have malafide intentions at all times. However, what one is questioning is their ability to write prescriptions for all patients...

4.      Is he a financial advisor or a mere distributor of a financial product?


Now we are living in times when we suffer from the problem of plenty & not scarcity. 22+ Insurance companies with each offering 10 to 15 different insurance plans, 40+ Mutual Fund companies together offering 1000+ mutual fund schemes, 7000+ listed stocks and not to forget a whole host of traditional financial products offered by the banks & post offices. One needs unbiased, fair & specific advice to help one choose the best, value for money financial product that money can buy. A typical agent, representing a particular organization, and who is driven by his remuneration, will hardly be able to offer a free from bias, best in class advice that fits the investor’s profile.

Today, when there are enough financial products to suit all pockets, age & risk profile, one needs to be extremely choosy while buying a financial product and from whom we are buying that particular product. A wrong advice can land you in trouble. So beware from whom you are taking that financial advice?

5.      Does he do his own research or does he rely on 3

    Well, imagine you being advised by an agent who does not take pains to update himself/herself on the latest happenings in the financial market in particular and economy in general.
     
     It’s a very dynamic investment environment out there, changing at break-neck speed. An investment advice that is proper today might require a re-look tomorrow as circumstances change. Your financial advisor must be a voracious reader and a thorough research oriented personality otherwise he does not stand a chance in today’s volatile investing environment.

6.      Is your advisor transparent enough about his compensation?

It is your right to know what your agent &/or advisor is earning from you and there is absolutely nothing wrong in asking him about his earnings whether in the form of commissions or in any other way. And the agent &/or advisor should be frank enough about his earnings. If you suspect that your agent is hiding any part of his/her earnings from you, then consider changing your agent/advisor as he/she is not being transparent enough.  

7.      Is he here to stay?

How often do you come across an RM/agent who is more than 5 year old with his/her employer? Now imagine buying a financial product that calls for a 10 or even a 15 year commitment from your side and you buying it from an RM who in all likelihood is not expected to remain with his/her employer for even half that tenure. Now, I am not saying that stop buying financial products from them but be aware that in all probabilities, the guy who sold you that product might not be there to service it  a few years down the line. the Institution will stay and you should be taking call on the institution and not the agent.

By the way, do visit this previous article titled “The Citibank fraud and the curse of the RM”, http://niravpanchmatia.blogspot.com/2011/02/citibank-fraud-and-curse-of-rm.html (in case you have not read it earlier)...

8.      Check his integrity?

Well, all the above qualities are not enough if your financial agents/advisors’ integrity is in doubt.  Don’t you think so too?  There is nothing wrong with your financial advisor making some income from you. How will he earn his bread & butter otherwise? However, his income should not be at your expense. No way…

I have always believed that a financial advisor-client relationship should be a WIN-WIN situation for both parties.  The nature of the relationship should be symbiotic and not parasitic.

One cannot earn at the expense of another. If that is the case then the relationship will in all probabilities end in a painful death in which both parties eventually tend to loose from the relationship.

I also believe that an Advisor's job starts and does not end with the money coming in. Unfortunately, for many so called agents, once they have received the investment chq from a prospect & earned their commissions on the same, they are least bothered with what happens to the client’s money. I believe a true financial advisors responsibility increases many-fold after the client has written a cheque and product recommendation is only a first step in the entire wealth management process.

To conclude, if we do as much research while buying a financial product and/or choosing a financial advisor as we do while buying soaps or a White good like a TV or a Laptop or even a mobile phone, we would be much better off. After all, a mobile phone can be replaced in 6 months but one usually gets penalised if one does a premature exit from a financial product that was wrongly bought ….

As always, HAPPY INVESTING…

Sunday, June 12, 2011

The unsung hero of the Indian investment universe


     What if I tell you that there is a investment product in India, that is in existence for more than a decade now, that has given phenomenal double digit returns over the past decade, that offers you ample choice of Investment tenure (ranging from 1 week to 1 decade & beyond), that is either marginally taxed or not taxed at all (irrespective of the quantum of return that you make), that also offers one of the best tax saving avenue u/sec 80C and yet which has given you double digit, post-tax returns, year on year for the past 10 years and that in spite of all these qualities, not more than 5% of the Indian population has invested in this wonderful investment tool as a means to Wealth Creation…

Oh yes, did I mention that , now, you do not pay any commissions to your agent for buying or selling this product & that practically anyone with a PAN card, an address proof & a bank account can buy this humble investment option…

Also, not the least, that this investment tool, offers the widest variety of choices, ample liquidity & if it had been used wisely over the past decade, would have given practically most PMS & Equity gurus, a run for their money. No, it is not a LIC Product, it can never be an insurance product & it is not something exotic that only the select few have access to.

Some of you, who are aware of the Investment world, and have been reading my BLOG regularly, should have guessed by now. Yes, I am talking about the humble, ubiquitous, but often ignored Investment Avenue, MUTUAL FUNDS…

Mutual FUNDS, I believe, is the UNSUNG Hero of Indian Investment universe……..

Now, after making such tall claims, let me substantiate them with raw data...

Claim 1: Mutual Funds in India are in existence for more than a decade now, and well chosen ones have given phenomenal double digit returns over the past decade.

Let us take the 3 most popular Mutual Fund Schemes that I am sure we have all heard the name of:
1.       Franklin India Bluechip Fund ,  HDFC Equity Fund & 3.       HDFC Top 200 Fund

No.
Scheme Name
Date of Inception
10 year cagr return**
Annualised return since inception
1
Franklin India Bluechip Fund
Dec 1, 1993
26.50% per annum
25.51% per annum
2
HDFC Equity Fund
Jan 1, 1995
33.11% per annum
22.80% per annum
3
HDFC Top 200 Fund
Oct 11, 1996
31.57% per annum
25.17% per annum
*Returns as on Mar 31, 2011
**Cagr returns means compounded returns year on year & Data taken from respective fund house fact sheets.

Now let us compare the returns of these top performing schemes to the returns given by the bellwether of Indian stock market, the BSE Sensex.

No.
Scheme Name
10 year cagr return**
Sensex
(Had you bought the Index)
Incremental return from Mutual Fund schemes over BSE Sensex
1
Franklin India Bluechip Fund
26.50% per annum
18.45% per annum
8.05% per annum
2
HDFC Equity Fund
33.11% per annum
18.45% per annum
14.66% per annum
3
HDFC Top 200 Fund
31.57% per annum
18.45% per annum
13.12% per annum

Have a hard look at the graphic above and you realise that while the BSE Sensex itself has done very well over the past decade giving 18.45% per annum compounded return; some of the well performing equity schemes have done much better than the Sensex, and by what margin?
Thus, a Franklin India bluechip fund has beaten the Sensex by 8.05% year on year for the past decade giving a phenomenal return of 26.50% pa... But the 2 HDFC Schemes have done even better and have beaten the Sensex by a good double digit return of 13 to 14% per annum, giving extraordinary compounded return of 31 to 33% per annum….what a show….and we say that equity is risky & that you only lose money in the stock market….

Claim 2: Mutual Funds offer the Indian Investor ample choice of Investment tenure (ranging from 1 week to 1 decade & beyond)

Most investors that I talk to, both during the course of my practice & on my CNBC appearances, tend to equate Mutual Funds with stock market…While, it is true that, Mutual Funds is the best way to take exposure to the Stock Market & that most investors should avoid buying stocks directly and should take the mutual funds route instead, yet, the mutual fund universe is not that narrow. In fact, there is a wide variety of Mutual Fund categories to suit all types of investment tenures…

Investment Tenure
Popular Choice of the uninformed retail investor
Expected return per annum
Taxation
Mutual Fund answer to that
Expected return per annum from Mutual Fund counterpart
Taxation
0 to 3 months
Savings bank a/c
4.0% pa
Tax-free
Liquid plus funds
6.50 % to 7.50% pa
Short Term Capital Gain (if sold within 1 year)** - as per your Income Tax  slab;

Long Term Capital Gain (if sold after  1 year) -  taxed @ 10%**(20% with indexation);

Dividend Income from all mutual fund schemes is tax free

3 to 6 months
Short Term bank FDs
8.50% to 9.5% pa
Taxed as per your Income tax slab
Debt Funds (short term)
8.50% to 10.25% pa annualised
6 months to 1 year
Medium Term bank FDs
9.50% to 10.25% pa
Taxed as per your Income tax slab
Debt Funds (medium term)
9.50% to 10.50 % pa annualised
1 year to 3 years
Longer Duration Bank FDs
9.0% to 10.25% pa
Taxed as per your Income tax slab
Monthly Income Plans or MIPs
9.75% to 11.50 % pa
3 years and beyond
PPF; NSC; KVP; 5 year bank FDs, Insurance Plans etc...
8, 9 or 10% pa
PPF income is tax free & so is maturity amount of some insurance plans; rest are taxed as per your Income Tax slab
Equity Diversified Mutual Funds
Market-linked (one can expect approx. 15.0% pa compounded returns based on past performance)
If equity funds sold within a year (STCG), then taxed @ 15.45%; however if sold after 1 year, ZERO rate of  tax
*highest expected returns from these avenues

For a detailed overview of non-equity based Mutual Funds, please read my previous article titles “The Rich Man’s Bank Accounts by clicking on the following link; 
  http://niravpanchmatia.blogspot.com/2011/03/rich-mans-bank-accounts.html )

Claim 3: Mutual Funds are either marginally taxed or not taxed at all (irrespective of the quantum of return that you make)

Most investors are not aware of the great tax advantage that investing in mutual funds offer…
Now, though a little complex, let me explain mutual fund taxation.

First and foremost, from the taxation point of view, there are 2 broad categories of Mutual Funds, namely;
I.                    Equity Mutual Funds (those that invest at least 65% in equity and includes Equity mutual funds & balanced schemes)
II.                  Almost all other Schemes Mutual Funds (most other mutual fund schemes that are not equity-based fall in this category)

The taxation of both these categories differs, except in case of Dividends.

The dividend receipts, in the hand of the investor, is exempt for all mutual Fund schemes…may it be equity-based or other schemes….(although, in case of the Other schemes, there is a Dividend Distribution Tax (or DDT) that is paid by the Mutual Fund company directly).
Now, comes the treatment of Capital Gains, both Short Term (holding period less than 1 year) & Long Term ((holding period more than 1 year).

The Short Term Capital Gains (in case you sell mutual fund within 1 year of purchase) in case of equity based mutual funds are taxed @ 15.45%...The long Term Capital Gains (if sold after 1 year) is tax-free…yes, you heard it right, even if you double your money in equity mutual funds, but take the precaution of selling them after 1 year, you pay zero taxation……

Now, the treatment of capital gains is slightly different in case of non-equity mutual funds…
The Short Term Capital Gains (in case you sell mutual fund within 1 year of purchase) in case of non-equity based mutual funds are taxed as per your Income Tax slab – (10, 20 or 30%)...The long Term Capital Gains (if sold after 1 year) are taxed either @ 10% (without indexation) or at 20% (with indexation) ……the choice is with the investor

(PN: the above taxation provisions are for Resident Individuals & HUFs, the taxation of Companies is a bit different)

Claim 4: Mutual Funds offer one of the best tax saving avenue u/sec 80C

Tax Saving Mutual Funds or ELSS, are a specific category of Mutual funds that allow deduction u/80 c up to a maximum of Rs. 1 lac per annum and have a minimum lock-in of 3 years amongst other tax saving investment avenues. To read detailed article on Tax Saving Mutual Funds, visit the link below;(http://niravpanchmatia.blogspot.com/search/label/TaxSavingMutualFunds%28ELSS%29 )

Claim 5: Mutual Funds offer one of the cheapest Investment avenues to invest in India today with zero agent commissions

With effect from Aug 1, 2009, after SEBI’s Abolition of entry loads on Mutual Funds, we do not pay any commissions to our agent for buying or selling Mutual Funds…. Nothing whatsoever….Now compare this with double digit commissions that we shell out from our pocket whenever we purchase any Insurance plan….

For detailed explanation on the impact of entry load abolition, do visit the following link;( http://niravpanchmatia.blogspot.com/2010/09/no-entry-load-on-mutual-funds.html).

Claim 6:  If it had been used wisely over the past decade, a portfolio of well chosen Mutual Funds, would have given practically most PMS & Equity gurus, a run for their money……

How many PMS guys, or Wealth Mangers of so called MNC banks, or high profile Stock brokers, have such enviable track record of providing a CAGR return of 18 to 24% per annum, year on year, post expenses & post tax, for the past decade….There are at least 10 Mutual Fund schemes that have given such phenomenal returns over the last 10 years, year on year, post all expenses and post taxes ….
Indian Mutual Fund Industry has some of the best Fund Managers in the country, if not in the world…Their services are available to you and me, at a pittance, via the Mutual Funds route…It is up to us how we make the best use of their services to create WEALTH for us & our family….

INVEST WISELY…