Monday, December 31, 2012

Things to check before subscribing to an IPO

After almost a year of silence, the Primary Market in India has started reviving itself. In the past few months, we have had a few IPO's hit the Market and there are many more that have applied permission from SEBI to go public and issue Equity Shares. With the Stock Market being volatile as well as attractive at the same time, Investors have to be doubly careful while subscribing to IPO's. There was an article that I wrote last month titled List of 87 Companies that have Vanished after raising funds through IPO in India which listed the companies that vanished after their respective IPO's thereby causing significant losses to innocent investors. So, as smart investors, it is our duty or should I say responsibility to thoroughly research the IPO offer and invest only if we are satisfied. Though a detailed technical analysis is out of scope for common layman investors like you and me, there are a few simple tips and tricks that can help us identify the Good Issue and more importantly spot those potential disasters.

Before we begin:

There have been multiple articles in this blog covering the topic if IPO. You can revisit them to brush up your memory if you can’t fully understand the lingo used in this article...

1. Equity Shares
2. IPO Process Explained
3. IPO - Different Types of Issues
4. Intermediaries involved in an IPO Process
5. Different Categories of Investors for an IPO

Now that we have brushed up our memory, let us look at the key factors we must consider before deciding to subscribe for an IPO issue and their respective Weightage in our decision...

Factor 1: Check the Lead Managers and their Credibility - Weightage 10%

The first and foremost thing to check while analyzing an IPO is the credibility and reputation of the Lead Managers of the issue. Remember that the lead managers’ credibility could act only as an indicator to the proposed issue, but does not assure success. There have been poor issues in the recent past from good merchant bankers as well.

Though a good lead manager does not guarantee success, a not so reputable lead manager should raise the Red Flag.

Factor 2: Check the Promoter Holding in the Company - Weightage 10%

Promoter Holding refers to the amount of shares (In %) that the owners of the company will retain. In cases where promoters hold a significant share, say like 70% or 80%, the stock may not be liquid enough. If there are fewer shareholders in the market, it will eventually result in fewer shares available in the Market.

Another aspect to check here is the amount of Preferential Shares that the company has issued till date. If there is a significant % of preferential shareholders, the value of the common stock that you or I will be buying via the IPO is going to be lower.

Check for interest from financial firms or venture capital firms in the organization. If large financial institutions have confidence in the company and have invested huge amounts in it, the chances are that the promoters have a good background and history of profit making.

Factor 3: Check the plans for how the company plans on investing the money gathered via the IPO - Weightage 20%

Most companies go public to raise funds which they intend on utilizing for some purpose. The company has to explain how it plans on using the money in the prospectus. If the company intends on spending the money wisely, then it would obviously be a good idea to invest in it. But, if they are mobilizing funds to let’s say "Invest in Land" or "Construct Buildings" etc., we must be cautious. Remember the Satyam Fiasco? The Chairman of the erstwhile top IT Company had bought land worth thousands of crores while fudging his record books thereby swindling off investor money...

If the company is going to utilize a portion of issue proceeds towards paying off high-cost debts, it would benefit the company in terms of lower interest outflow and therefore higher profitability. Similarly, if they intend on starting out new ventures using the money, it could have a positive effect on the profits as well.

Factor 4: Check the Company's Sector and the Growth Prospects for the Sector - Weightage 10%

A Great company in a badly performing sector cannot give as much returns as it would if the Industry Sector as a whole was performing well. For Ex: The Telecom space in India is under severe stress. Heavy competition, extremely competitive pricing, multi-million-dollar scams and penalties etc. have ripped the Telecom space into shreds. In spite of being extremely profitable, the giants like Airtel and Idea Cellular are still struggling in terms of stock price movement.

Another aspect to look along the same line is the global vs. local demand. If a product has significant demand both locally as well as globally, a slowdown in either the global or local market won’t have as much impact as it would if the company had 90% revenues from either market.

Even the recently completed Bharti Infratel IPO wasn’t fully subscribed from the Retail Investor population. People felt that the Telecom sector as a whole is in trouble and opted to be cautious while subscribing to the IPO. If I were analyzing Bharti Infratel under this factor, I would probably give it a 5 or a max 6 out of the possible 10.

Factor 5: Check the Promoters Experience and History of Profit Making - Weightage 25%

This is probably the second most significant factor to consider while subscribing for an IPO. That is why I have given it a 25% weightage.

No matter how big or small a company is and no matter how much or how little funds they mobilize via IPO, if the Promoters don’t do their jobs properly, there is a 100% guarantee that the money we invested in the company is gonna go down the drain.

Some questions you should ask yourselves are:

1. Do the promoters have previous experience in transforming organizations from the grass root level in the same industry to a successful business?
2. What is the experience they have in the sector the company is operating in or any other sector?
3. What is their profit making history? Have they made profits at least 75-80% of the time in the past?
4. Did the company meet its sales growth targets projected?
5. Is the company growing at the same pace or at a better pace when compared to its peers in the same sector?
6. Is the company making the same profits or better profits when compared to its peers in the same sector?

You can also check out the profitability of any subsidiary or affiliate company in which promoters have a stake. This would help us to ascertain the management’s efficiency in terms of managing multiple organizations. Remember to check for litigations against the promoters, nature of litigation and the promoter’s extent of liability, if any. If there is a multi-million-dollar lawsuit against a company for some reason and they are coming up with an IPO, do you think anybody will subscribe to their IPO?

Factor 6: Is the Issue Price Justified? - Weightage 25%

This is the most important factor while considering an IPO issue. This factor again has a 25% weightage. Every company has a certain value that reflects in its Stock. If investors feel that the price of a share is lower than its value, people buy and if they feel a stock is overpriced, they sell. I don’t intend on getting into the specifics here, but remember this, if the shares of company X is trading at Rs. 100/- per share in the market currently and company Y that is almost similar to X is coming up with an IPO where its shares are priced at Rs. 200/- per share, what would you do?

I would ask myself the question, what is so special about Y that it demands such high valuations?

How to go about analyzing this Factor?

Remember an article titled "Market Ratios" that I had written 2 years ago? It lists down all the various ratios that you can compare for this factor. Search Google or any site like You should be able to find out the numbers for all the companies that are peers to the company coming up with the IPO and are already listed in the stock market. Open up the prospectus of the IPO and gather those numbers for this issue. See if they are comparable.

Again, going back to the Bharti Infratel IPO, the P/E Ratio based on the offer price and the past 1 year's Earnings per Share was 49 while the P/E for other established and listed Telecom majors were much lower. Bharti Airtel and Idea Cellular were trading at around 35 times P/E while Reliance communications was trading at only 19 times P/E. This was one of the reasons why retail investors decided to wait and watch for this issue rather than rush in to subscribe.

Important Financial Aspects to check:

1. Price to Earnings Ratio - P/E
2. Earnings per share - EPS
3. Operating Margin
4. Market Capitalization

If you compare the new issue with that of an existing stock, the numbers must be comparable and the difference must be in favor of the new issue and not the already listed stock.

How to arrive at the final decision?

Take out a notepad and a calculator. Create a table like below:

FactorScoreWeightageWeighted Score
Lead Manager Credibility10
Promoter Holding10
Plans for Investment20
Company Sector10
Profit Making History25

After you gather information about each of the 6 factors above, assign a rating score of 1 to 10 with 1 being lowest and 10 being highest. Let us say, based on what you learnt about the company promoters history of profit making and operation, you feel they have a great chance of making profits in future as well you may assign them a 8 out of 10. If you feel they have a good chance but aren’t sure if their chances are great, you can assign them a 6 out of 10. If you are totally unsure of their future profit prospects, you can give them a 2 or 3 out of 10.

This way, assign a score for each of the factors. Let us say I am analyzing the IPO of Kekhran Mekhran and Company that is due to open in January 2013. So, I am assigning the following values:

FactorScoreWeightageWeighted Score
Lead Manager Credibility910
Promoter Holding610
Plans for Investment620
Company Sector710
Profit Making History525

After you enter your score from 1 to 10 for the 6 factors, multiply the score with the Weightage and calculate the Weighted Score. Once we do that, the table will look as below:

FactorScoreWeightageWeighted Score
Lead Manager Credibility91090
Promoter Holding61060
Plans for Investment620120
Company Sector71070
Profit Making History525125

Sum up the Weighted scores in the last column. In this case my total comes to 565 out of 1000.

How to Understand the Weighted Score:

Below is how you must understand your weighted score. Though the investment decision is entirely yours, I have mentioned an upper limit to the amount of money you should invest for each category because it is always a good idea to limit our exposure to IPO issues. No matter how high or low the weighted score is, we never know how the stock will perform once it gets listed. So, we must be careful. Here, the term "Portfolio Net Worth" means the total value of your Investment Portfolio. Remember what an Investment Portfolio is? If not, Click Here to find out.

So, if my total Portfolio is worth 5 lakhs, I will not invest more than 50,000 rupees in an issue where my weighted score works out to more than 800 or I will not invest more than 40,000 rupees in an issue where the score is between 700 to 800 and so on...

Weighted ScoreInvestment ChoiceWhat to Do
800 or AboveAn Excellent InvestmentYou can consider investing in the IPO with prospects of great returns in the future. Remember to limit the exposure to less than 10% of your total portfolio Net Worth
700 to 800A Good InvestmentThe IPO has a good chance of being a profitable investment. So, if you decide to invest in this issue, limit the exposure to 6-8% of your total portfolio Net Worth
600 to 700A Decent InvestmentThe IPO has a decent chance of being a profitable investment. So, if you decide to invest in this issue, limit the exposure to 5% of your total portfolio Net Worth
500 to 600A Medium Risk InvestmentThe IPO has a 50-50 chance of profit/loss. So, if you decide to invest in this issue, limit your exposure to less than 5% of your total portfolio Net Worth
400 to 500A High Risk InvestmentThe IPO is a high risk proposition. There is a more than 50% chance that your investment will end up in losses. So, if you decide to invest in the issue, limit your exposure to less than 3% of your total portfolio Net Worth
Less than 400don’t even think about itThe IPO is an extremely high risk proposition. If you invest in this issue, only God can Save you…

Some Last Words:

As with any stock market investment, the chances of Losses are very real. As this is the first time the stock of this company is going to get listed, the chances of losses are even higher. More importantly, NO technique of Stock Analysis is fool proof. This is just layman’s way of analyzing an Issue. A lot more analysis is done by Brokerage Houses and Investment Advisors before advising their clients as to whether they must invest in or avoid the IPO. As I always say, believing blindly in advisors recommendation is a bad idea. So, if you read a report suggesting you either invest or avoid an issue, you can spend some time, do the calculations yourselves and corroborate the decision...

At the end of the day, the decision as to whether to invest in the issue or avoid it is entirely yours. So, take a wise decision!!!

Happy Investing!!!

Wednesday, December 26, 2012

Every Question you will ever have about PPF - Public Provident Fund - Answered

Public Provident Fund or PPF is one of the most preferred means of Investment as well as Tax Saving in India. As we are entering into the New Year, people will be wondering where to invest their hard earned money to reduce their tax liabilities. As PPF is one of the excellent choices, we have already covered it in detail in some of the earlier articles in our blog. The purpose of this article is to try to answer all possible questions that may arise in your mind about PPF. If you can’t find an answer to any query you may have about PPF, please feel free to leave a comment and I will be more than happy to clarify it :-)

Before we Begin: Old articles in our blog that cover PPF

1. Public Provident Fund (PPF) De-Mystified
2. Best Tax Saving Options Available for Investment
3. Saving Income Tax through Investments
4. Life Stage based Tax Saving Portfolio

The Questions and their Answers!!!

Q1. Who can open a Public Provident Fund PPF account?

Any Indian who earns an Income in India can open a PPF account, either on his/her own behalf or on behalf of a minor. Even NRI's who wish to avail tax rebate on their income in India are also eligible to open a PPF account. Payments, however, will have to be made from their NRO account on a non-repatriable basis.

Q2. Can an NRI who does not earn an Income in India Open a new PPF Account?

No. They cannot. However, if the NRI had opened a PPF Account before he/she left the country, they can keep the account open and even make contributions towards it.

Q3. Can a Hindu Undivided Family (HUF) open a PPF account?

No. HUFs are no longer allowed to open any PPF account.

Q4. How many PPF Accounts can one Individual have?

Only One.

You can have only one PPF account in your name. If, at any point, it is detected that you have two accounts, the second account you have opened will be closed, and you will be refunded only the principal amount, not the interest. Plus, don’t forget the penalties and fines for having kept two accounts.

Q5. Can I open a PPF Account for a minor?

Yes, but there are a few limitations.

* The person opening the account must be the legal guardian for the Minor
* Either the father or the mother can open a PPF account on behalf of their minor child, but both cannot open an account for the same child

Q6. Where can you open an Public Provident Fund - PPF account?

You can open a PPF Account at any of the following:

a. Any branch of State Bank of India
b. Any branch of SBI's associated banks like State Bank of Mysore, Hyderabad etc.
c. Your nearest Post Office

These days, some more Nationalized and even Private Banks have started offering PPF Accounts to their customers. Remember, banks don’t get any money or fees to handle these PPF accounts and more importantly the money has to be credited to RBI the very same day. So, they may be slow or reluctant to help you with the PPF account. So, some people feel that the Post Office is much more accessible in terms of PPF Account opening as well as for subsequent transactions.

Note: No matter where you open an account, you will be given a passbook in which all subscriptions, interest accrued, withdrawals, loans and so on, are recorded. Remember to collect it and keep it safely.

Q7. How long can/must you keep the Public Provident Fund account active?

The normal term of a PPF account is 15 years. However, the effective period works out to 16 years because you are allowed to make your last contribution in the 16th financial year. Even if you make a contribution on the last day, you still get the tax rebate, although you won’t earn any interest on the amount.

Q8. Can I continue the PPF account after the 15 year lock-in period?

The PPF account is valid for 15 years. The entire balance can be withdrawn on maturity, that is, after 15 years from the close of the financial year in which you opened the account. So, if you opened an account now in FY 2012-13, your PPF matures on April 1, 2028. (15 years from March 31st 2013 which is the last day of the current financial year 2012-13)

You have an option of extending your accounts after the 15 year tenure with or without further subscription, for any period in a block of 5 years. The balance in the account will continue to earn interest at the prevailing rates till the account is closed. In case the account is extended without contribution, any amount can be withdrawn without restrictions. However, only one withdrawal is allowed per year. If you continue the account after 15 years, with continued deposit, withdrawal up to 60 per cent of the balance at the beginning of each extended period (block of five years) is permitted.

Q9. What are the Minimum and Maximum deposit limits?

A Minimum deposit of Rs. 500 must be made during every financial year. The Maximum amount you can deposit every year as of now is Rs.1,50,000/-  (It was 70,000 till 2011, was increased to 1 lakh and later revised to 1.5 lakhs)

Q10. How many deposits can I make in one year?

Deposits could be in either one lump sum, or in regular installments. You could vary the amount and the number of installments, as per your convenience, but you cannot exceed 12 installments in one financial year.

Note: The amount that is being deposited should be in multiples of Rs. 10/- You cannot deposit Rs. 501/-

Q11. What happens if I fail to make the Rs. 500 minimum payment?

If you Fail to deposit the minimum amount (Rs. 500/-) your account would be discontinued.

Q12. When my PPF Account is discontinued, will it continue to accrue Interest?

Yes, the amount in your account will continue to earn/accrue interest.

Q13. Can I revive my discontinued PPF Account?

Yes, you can revive your PPF account by paying a fee of Rs. 50/- for each year that you defaulted, along with subscription arrears of Rs. 500/- for each such year.

Q14. Can I open a new PPF account after my old account got discontinued?

No. You cannot. You will not be debarred from opening a new one if your old account got discontinued.

Q15. Can I make withdrawals from my PPF account?

It depends on the number of years the PPF Account has been active.

* The entire credit balance in your PPF account is yours to withdraw when it matures at the end of the 15 year period.
* The first withdrawal can be made from the Seventh year
* You can make only one withdrawal ever year
* You can withdraw up to 50 per cent of the balance at the end of the fourth year or the year immediately preceding the withdrawal (whichever is lower)

Q16. If I open a PPF account for my Minor son and deposit 1.5 lakh in it for this year and then deposit 1.5 lakh in my PPF account, can I get 3 lakhs tax benefits under Sec 80C?

No. The upper limit under Section 80C of the Indian Tax Laws is 1.5 lakh and it includes contributions made towards all saving instruments that fall under this category against both your as well as your dependents names. The upper limit is on a per individual basis and not on a per account basis which means if I have a PPF Acc and have one on my Sons name, A combined of 1.5 lakh only can be deposited both accounts put together.

Q17. Can you get loans form your PPF account?

Yes. You can get loans from your PPF Account. But, there are a few restrictions:

* There can only be one loan at any point in time.
* The existing loan has to be repaid in full before you can apply for a new loan
* Loans can be taken after completing 3 full years of keeping the PPF account active
* Loan amount is limited to 25% of the corpus that was present in the PPF Account at the end of two years preceding to the current date (when the Loan is being applied).
* Interest is charged at the rate of 1% if prepaid within 36 months and at 6% on the outstanding loan after 36 months.
* The repayment may be made either in lump-sum or in Installments.

Q18. Is the amount that I receive at maturity taxable?

No. The amount you receive at the end of the 15 year period is fully Tax Free. Even the Interest you earned in your PPF Account is not taxable.

Q19. Who decides the Rate of Interest earned in the PPF Account?

The Government of India decides the Rate of Interest.

Q20. How is the Interest calculated on my PPF account balance?

The Interest is calculated on a monthly basis based on the lowest balance in an account between the close of the 5th day and the end of the month. So, if you had Rs. 10,000/- on the 4th of the month and deposited another 10,000/- on the 6th, for Interest calculation purposes, only Rs. 10,000/- will be considered for the current month. Only the next month will earn an interest on Rs. 20,000/-

Q21. When will the Interest get credited into my PPF Account?

The Interest will get credited at the end of each financial year.

Q22. From which account can an NRI invest into his/her PPF account?

An NRI can use funds in the NRE account or the NRO account to make investments in the PPF account.

Q23. Does the minimum investment of Rs. 500/- every year apply to NRIS's?

Yes, it applies to all individuals who have opened a PPF account irrespective of their residential status.

Q24. What happens on maturity of PPF Account of NRI?

If you are an NRI at the time the deposit matures, you would need to withdraw the balance.

Q25. Can an Individual who is an NRI at the time of maturity apply for extension for another 5 years?

No. An NRI is not eligible for extension on the PPF account.

Q26. What happens if an NRI leaves the account unattended past the maturity date?

Though this is not a recommended option, in such cases the account will be considered "extended without contribution" and can be closed by the NRI at any point he/she visits the country.

Q27. Do I have to pay Wealth Tax on the maturity proceeds of my PPF account?

No. The PPF Maturity proceeds as well as the amount accumulated in your PPF account are fully exempt from Wealth Tax irrespective of how much money you have in your PPF Account.

Q28. If I am involved in any legal dispute, can any court attach my PPF account to settle the same?

No. The balance in a PPF account cannot be attached under an order or decree of a court. This means that, if you're involved in a legal dispute, a court cannot attach or question the money in your PPF account like it can with your other personal property.

Q29. What was the best Interest rate ever offered by PPF?

During the initial days when the government was trying to motivate people to open PPF accounts they offered 12% interest per year.

Q30. Do you have historical PPF rate information?

Yes, I do. They are as follows:

From 01.04.1986 To 14.01.2000 - 12%
From 15.01.2000 To 28.02.2001 - 11%
From 01.03.2001 To 28.02.2002 - 9.5%
From 01.03.2002 To 28.03.2003 - 9%
From 01.03.2003 onwards - 8%

Q31. Can I open a PPF Account as a joint holder with my Spouse or anyone else?

No. A PPF account can be opened under only one name.

Q32. Can I nominate my spouse or anyone else to receive the PPF account proceeds?

Yes, you can. You can nominate as many people as you want. You need to register their name and bank account details while nominating them for your account.

Q33. Can the Nominee(s) continue to keep the PPF account open after the death of the account holder?

Yes, they can keep it open, but they cannot make any further contributions. The amount in the PPF account will continue to earn Interest until it is closed.

Q34. Will the PPF account proceeds be paid out even before 15 years in case of the death of the account holder?

Yes, it will be paid out even before completion of the mandatory 15 years’ time period in case of the death of the account holder

Q35. If the PPF account holder does not nominate anyone, who gets the money?

The Legal Heir of the PPF Account holder will get the money. Usually the Spouse or Kids of the account holder will be considered Legal Heirs in the absence of a legal Will document. There was an article a few months back about the importance of a legal will. Click Here to read it

Q36. How will the payment be made to the nominees after the death of the account holder?

A single cheque is issued in favor of all the nominees. So, it would be a good idea for the nominees to open a joint bank account. However, it would also be a good idea to keep the number of nominees to one or two and not too many.

Q37. I recently moved from one city to another. Can I get my PPF Account transferred to the new city?

Yes, you can. Locate a post office or a bank branch that services PPF accounts and submit a written request to get the account transferred along with details of your existing account that was opened in your old city.

Q38. Can I make withdrawals or apply for loans without the PPF Passbook? I know my PPF account number.

No. Without the PPF Passbook you cannot apply for partial withdrawals or apply for a loan.

Q39. What can I do if my passbook is lost or damaged?

If Lost - Visit the branch where you opened your PPF account with identity proof and submit a request for a replacement passbook. They will ask you for proof that you held a PPF Account, so, take some old statement or at least your PPF Account number before going.

If the book is damaged, you can take it to the branch where you opened and request a replacement book.

Q40. If my PPF Account is currently discontinued due to non-payment of the minimum amount and I opened a new PPF Account, can I close the old one and get the money?

No. The old account that was discontinued cannot be closed until it completes the 15 years lock-in period. I would rather reactivate my old account by paying the meager sum of Rs. 50/- rather than open a new account and have the hassle of maintaining two PPF accounts.

Q41. Can I Deposit more than 1.5 lakh in my PPF Account?
No you cannot. The upper limit is 1.5 lakh only. Even if you have multiple accounts (one in your name and one in your childs name) the 1 lakh limit includes both these accounts

Q42. I have been depositing more than 1.5 lakh each year. Is that a problem?

From what experts highlight, any transaction that is above the limit (in one shot or the last deposit which makes the total deposit exceed the limit) gets rejected. Even if somehow you manage to deposit more than the limit, the interest that you can earn on a yearly basis is capped at the upper limit which is 1.5 lakh now. The excess amount does not earn an interest plus it cannot be withdrawn as well.

Q43: I have a HUF PPF Account which is maturing soon. Can I renew it for another 5 year period?

No. The policies governing HUF PPF Accounts were amended in 2011 whereby such accounts will automatically mature at the end of 15 years and Cannot be Renewed.

Q44. When a normal PPF Account is allowed renewal, why is the HUF PPF Account prohibited from doing the same?

As with anything in our country, people have misused this PPF facility. The same person opens an individual PPF account to earn a 8% tax free interest at one post office/bank and then opens another as part of a HUF to enjoy double benefits. As the government doesnt want to restrict all HUF's in one shot, they have restricted the renewal so that people dont continue to misuse the facility.

Q45. I have a HUF along with my wife and daughters. What happens when my daughters get married?

When your daughter gets married, they are no longer part of your HUF. So, they are not part of the PPF Account as well.

Hopefully this answered all your PPF related questions. If it did, don’t forget to share it with your friends to that they too may take advantage of this wonderful tax saving investment option. If you have any more questions, feel free to leave a comment and I will answer them...

Happy Investing!!!

Tuesday, December 25, 2012

Your Bank Could Be Cheating You

Yes, you read the title correct. Your bank could be cheating you. The purpose of this article is to cover the blatant misselling of ULIP products as well as other services that banks are indulging in these days to cheat customers… To summarize the problem in one line, you visit the bank to get X service and they say you will get X only if you take Y as well, like a bundled package. This is wrong and so as customers we need to stand up to the bank and protect our rights...

Note: There are some bank officers who actually expect a bribe in exchange for granting the loan to customers who are either less creditworthy or do not have sufficient income. Though this whole concept of bribery and corruption is illegal, it is not part of this article. I am just covering the topic of banks selling more than one product to a customer who came in looking for just one.

What Triggered his Article?

A friend of mine (who works with me here in Singapore) went on a vacation a couple of weeks back. His wife was employed in Vellore (A district in the state of TamilNadu, India) and his sons were in school as well. So, he thought of buying his first home in Vellore. He was lucky enough to identify a good apartment at a reasonable price which his family liked. As any person would, he arranged for some initial payment and then visited one of the leading government banks for a home loan for approx. 30 lakhs. He spoke to the Manager of the branch and told him that he was on a 2 week vacation to India and hence would like to finish all formalities before he left back to Singapore. The manager was more than happy to oblige as it was an NRI customer. But, there was big catch here which my friend did not know or expect!!!

The manager started the formalities and convinced my friend that for his salary it would be a piece of cake to get the loan and promised them the loan within 7 days. A couple of days later he received a call which shocked my friend. He told my friend that, the loan is almost approved but it would only be sanctioned if he opted to purchase a ULIP policy paying at least Rs. 50,000/- every year. My friend’s wife had already decided on the decorations to the house esp. the Kitchen and so my friend did not want to disappoint here. So, he did some math and thought that Rs. 50,000/- works out to a little over Rs. 4000 per month which wasn’t a big deal and he unwillingly agreed.

He came back to work last week and told me this whole story over our usual coffee break. So, I thought I should write something about such misselling…

What Misselling happened here?

My friend went to get a home loan but instead he was sold a ULIP scheme also as a bundle offer. In this case, the amount involved is only Rs. 4000/- per month but, the point here is not about the money involved. Instead it is about what is right and what isn’t…

Are banks allowed to sell such bundled products to Customers?

No. The Reserve Bank as well as IRDA (Insurance Regulator in India) are very clear about this. A customer must not be forced to buy something that he isn’t interested in buying in the first place. In such cases, the customer has the right to refuse all the products that are being sold to him as a “Bundle”…

I am not talking about the regular pure-life-insurance policies that are sold along with Home Loans. In one of my earlier articles on buying a home, I had specifically suggested that we purchase a pure term Life Insurance policy that equals to the amount of loan that we are taking. This is done to safeguard our property in case of any accident. These pure term policies are extremely cheap and cost around 15000 rupees per year for coverage of around 50 lakhs. The ULIPs that are being sold these days to home loan customers charge you a ton of money and provide insurance coverage that usually doesn’t even work out to 10 or 15% of the loan amount we are borrowing.

So, if your bank asks you to purchase a pure term policy equaling the amount of loan you are asking for, that is a very good idea and you should take it. However, if they are asking you to invest in some XYZ ULIP and pay 50,000 or 1 lakh every year in order to get the loan, you must refuse or follow any of the strategies below…

To read more about the article on buying a home click here

Do banks sell ULIPs only to Home Loan Customers?

Actually, NO. ULIPS and Home Loans was just one example. Below is one more – from my own life…

Last year when I went to India, I had visited one of the major private banks in India to check out the availability of a Safety Deposit Locker to store my valuables. My mom was worried that since I work abroad and my brother too was planning a trip abroad, the valuables back home wouldn’t be so safe. So, I thought getting a safety deposit locker would be a good idea. When I visited the branch, the branch manager was very clear. She was willing to give me a locker if I purchased a ULIP product by investing at least 2 lakhs every year. I was shocked but at the same time did not want to give-in to their bullying and told them to keep their lockers to themselves.

Irritated by the response from the private bank, I visited one of the major public sector banks in India for the same thing. Guess what the manager there wanted me to do???

He wanted me to place 2 lakhs in a Fixed Deposit for 1 year and suggested that the FD had to be active for as long as I wanted to retain the locker. The moment I liquidate my deposit, I would have to surrender the locker.

The problem here is – There are no set rules or guidelines that actually give banks the right to force customers to buy/avail some product in order to get the main product/service they came for. But still, due to lack of proper enforcement, banks continue to blatantly missell stuff that customers don’t need.

So, how should we handle this situation?

So, let us assume that we are in a situation where a bank is trying to sell us something that we actually did not ask for in the first place. How should we handle it?

We have multiple options… Read on to find out more…

Remember – Safety Deposit Lockers are in great demand. So, these strategies will most likely not work in any bank irrespective of whether it is private or government owned. Home loans on the other hand are a totally different story. Customers who can take home loans are in great demand irrespective of the bank you choose. So, if Bank A wont give you, Bank B will be more than happy to give you a loan. So, don’t get bogged down by unreasonable demands from Banks. Always consult more than one bank and choose the best deal. At the end of the day, you are the customer and they are serving you by giving the loan and not vice versa.

Step 1: Ask them to give it in writing

No bank can actually give you a written statement that suggests that you purchase product X in order to get product Y. In this case, there is no way the bank would’ve given me a letter that said that they would grant me the locker if I deposited 2 lakhs as FD or invested 2 lakhs in some ULIP. Nor will they give the letter to my friend stating that his home loan will be sanctioned only if he purchased a ULIP worth Rs. 50,000/- each year.

Best Case Scenario – The bank staff will sell you the product X that you went looking for – Home Loan in my friends case or Safety Deposit Locker in my case

Worst Case Scenario – The bank staff will refuse to entertain your request and refuse to sell you the item

Most Likely Scenario – The bank staff will try to deviate from the topic and pressurize you to purchase product Y in order to get product X and will not give you anything in writing

Step 2: Tell them you know the banking rules

Tell them that you know the banking rules and regulations in India and hence they cannot sell you such items as bundled packages.

Best Case Scenario – The bank staff will sell you the product X that you went looking for

Worst Case Scenario – The bank staff will refuse to entertain your request and refuse to sell you the item

Most Likely Scenario – The bank staff will try to deviate from the topic and pressurize you to purchase product Y in order to get product X

Step 3: Reject the Offer and walk away

Tell them that you are not interested in product Y. Tell them that you are interested only in Product X and will check out with some other bank if they cant sell just X. convey this message politely and walk away. In all probabilities the bank will contact you in the next few days to sell you just the product X that you asked for…

Remember, if you are earning a good salary and have no history of defaults against loan payments, then you will definitely be able to get a loan with some other bank. The only problem here would be the additional few days of delay. Either you will need a few days to get the loan from some other bank or in the next few days the original bank will contact you. Eitherways you will not be giving in to the unreasonable demands of the bank.

Best Case Scenario – The bank staff will sell you the product X that you went looking for immediately

Worst Case Scenario – Nobody from the bank contacts you and you don’t get the product you were looking for

Most Likely Scenario – The bank staff will contact you after a few days and agree to sell you the product X that you went looking for.

In most cases, step 3 yields better results than steps 1 and 2. But, that does not mean that you go to step 3 right away. Step 3 is the knockout punch. You don’t go for the knockout right away. You warm up the opponent for the right moment and then go for the knockout. In this case, warm up the bank with the first 2 steps and show them that you are not a pushover and will only buy what you want. When they are rattled by your defense, go for the knockout and get what you want…

Lastly, remember that you are the customer and you have the right to choose the product or service you want to buy. Just because I want a home loan that does not mean that the Bank Manager can ask me to buy a ULIP.

Hope you found this article useful…

Happy Banking Folks!!!

Saturday, December 15, 2012

Salaried Employees - Get Ready for a Reduction in your Take Home Salary

Are you a Salaried employee of an Organization? Does your employer offer Provident Fund benefits? If so, the following article has both Good and Bad news for you.

Before we Begin: Employee Provident Fund or PF in short is a retirement benefit that is provided to all individuals who work as salaried employees of organizations across india. A % of their basic salary is usually deducted as provident fund and remitted against their PF Accounts. An equivalent contribution is done by the employer as well. This money earns an interest and is given to the employee at the time of retirement as a bulk settlement.

The Employees Provident Fund Organization (EPFO) has come up with a new ruling that could potentially spell “BAD” news for almost everyone who would read it. I personally would consider that a blessing in disguise but the fact of the matter is, in the immediate future, it would definitely be considered as Bad News.

So, what is this news?

The EPFO has decided that:

The PF contribution of an employee will now be deducted not just on his/her basic salary but on their gross income.

Is this BAD News?

In the Immediate Future - Of course, YES. I will explain the Good News part shortly. For now, lets find out how this is bad news.

Let us say your monthly salary is split up as follows:

Basic Salary: Rs. 25,000/- p.m
Other Allowances: Rs. 10,000/- p.m

Net Monthly Salary: Rs. 35,000/-

Current PF Amount (Contribution by both Employee + Employer): Rs. 6,000/- (3,000 + 3,000)

Proposed PF Amount: Rs. 8,400/- (4,200 + 4,200)

Difference: Rs. 2,400/- per month additional contribution to the Employee Provident Fund Account.

What Exactly is the Bad News here?

Most Organizations in india currently offer salary on a CTC (Cost To Company) basis wherein they fix a total salary per year that is inclusive of all components like Basic Salary, House Rent Allowance, PF, Gratuity etc. So, this additional PF contribution will obviously get deducted from your monthly salary.

If the above calculation was for someone on CTC it would mean:

Salary: Rs. 35,000/- p.m

Old Take Home Salary: Rs. 29,000/- p.m (After deducting old PF amount of Rs. 6,000/-)

New Take Home Salary: Rs. 26,600/- p.m (After deducting new PF amount of Rs. 8,400/-)

Effectively your Take Home Salary has come down by Rs. 2,400/- and this is Bad News Right???

Is there any Good News here?

Actually YES. I am pretty sure most of you who are on CTC type salaries will disagree but the fact is, there is a significant good news.

Good News No. 1:

If you are not on CTC and the employer side PF and other Retirement Benefits are over & above your salary (like Government Employees) then your total Gross Salary is effectively being hiked. Look at the non CTC calculation for the same individual below:

Salary: Rs. 35,000/- p.m

Old Net Salary: Rs. 38,000/- (Including Employer PF contribution = Rs. 3000/-)

Old Take Home: Rs. 32,000/- p.m (After deducting Employee PF Contribution)

New Net Salary: Rs. 39,200/- (Including Employer PF Contribution = Rs. 4,200/-)

New Take Home Salary: Rs. 30,800/ p.m (After deducting Employee PF Contribution)

As you can see, though your take home salary has come down by Rs. 1,200/- your total salary has gone up by the same amount because your employer too is being forced to shell out his part of the contribution and hence your net effective salary is UP.

Good News No. 2:

As the PF is going to be calculated on your total gross salary, your PF contribution every month is going to be significantly higher than what it was earlier. Though you will feel a small pinch in monthly cash flow due to the lower take home salary, you will definitely retire rich.


Let us take the same example where Rs. 6,000/- was contributed as PF every month. So, in one year you will accumulate Rs. 72,000/- per year in your PF Corpus as per the old calculation. However, as per the new calculation you will be accumulating Rs. 1,00,800/- which is a significant increase. If you consider the fact that, this will continue for the next 20 or 30 years that you work, your retirement corpus will be a whole lot bigger when you retire.

So, in the long run, this is definitely GOOD NEWS.

Some Last Words:

As of now, there is not much clarity on what all components of a persons CTC Salary would be considered for this PF Calculation. There is also speculation that there is an upper limit of Rs. 6,500/- per month as the amount considered as Salary for calculation of PF for both employer and employee contribution. However, here again there is not much clarity on this as to whether this limit will be enforced.

Anyways, in the next few weeks/months we should get that information as well. The moment the info is released to the public, you can expect the same to be covered here – like always!!!

Thursday, December 13, 2012

Read this before you buy one more Endowment or Money-Back Insurance Policy

The new year is just around the corner and the investment or should I say “Buy Insurance as an Investment” season is about to begin. Insurance salesmen will be selling Traditional Insurance policies like Endowment or Money-Back policies like hotcakes to people. I am not going to blame any of the insurance salesmen because they are just doing their job which is to sell insurance policies. The only thing we can do as smart investors is to be careful and buy only what we want.

Before we begin – Endowment and money-back policies are extremely safe and can provide guaranteed returns to people along with providing Insurance coverage. The purpose of this article is not to prevent you from buying these policies at all. If you read this article fully, you will be able to understand what I am trying to say…

What are Traditional Insurance Policies?

These are the most sold insurance policies in India. They collect premiums from people and give them decent Insurance coverage with guaranteed returns on maturity making them pretty attractive.

The most common type of Traditional Insurance policies are Endowment and Money-Back policies. If you go and talk to someone in their 50's or 60's (Someone who is of the age of our Father) about investments, the first investment they will suggest is an Endowment Policy by LIC. That is how popular these ultra-low risk investments are. However, the returns they offer are low too.

What Makes them Attractive?

The following are some of the key selling points for such insurance policies:
a. They provide a decent Insurance coverage
b. They can guarantee Capital Preservation
c. They provide guaranteed returns at maturity
d. They provide decent commissions to the salesmen to the agents who sells them

What Points do they fail to tell us?

The following are some key points that salesmen fail to tell us while selling these policies:
a. They have pretty low potential for returns
b. The premiums are invested only in debt instruments
c. The returns range only around 6%
d. If we consider Inflation, the net returns may come down from 6% as well

A Sample Calculation:

Let us say I purchase a policy where I pay a premium of Rs. 25,000/- every year now with a policy term of 20 years, below would be the calculation:

Premium paid in 20 years: Rs. 5 Lakhs
Guaranteed Sum Assured at Maturity: 5 lakhs
Insurance Coverage: 5 Lakhs
Expected Bonus: 4 Lakhs (Approx)
Net Amount at Maturity (If we manage to outlive the policy): 9 Lakhs

Net Rate of Returns: 5.5%

This above calculation does not hold good if the individual who took the policy meets with an untimely demise. His family is going to get the Guaranteed Sum Assured + Bonus irrespective of how many premiums the policy holder took. So, as insurance products they are ok but as investments they are not that attractive

If the debt market in India is extremely good over the next 20 years, the amount I get in the year 2032 may be around 9.5 or even 10 lakhs which may take the rate of returns to around 6 or 6.5% but it isn’t going to cross that.

Are you going to ask me why?

The reasons are:
a. A portion of your premium is paid to the salesmen as commission. So, not all your money is invested in debt products
b. The Insurance company takes all its operating profits & fees from the money you pay them
c. The average returns debt instruments can give is around 8-9% only
So, if we factor in the fees, profits, commission etc the net returns we may earn out of these policies will be only 5.5 to 6%

Some words before we wrap up:

As Insurance products Endowment or Moneyback policies are decent but they are currently sold as Investment products. An Investment is one that can give us returns that are at least as good as a bank fixed deposit but in this case it is at least 2% less than that. That is why I consider them as bad Investment ideas.

However, if you are someone who wants guaranteed returns even if it is low along with decent insurance coverage, these are very good products.

Disclaimer: The above article is purely the authors personal opinion. It is not personalized investment or insurance advise. I am pretty sure that Insurance agents will tend to disagree with my opinion above. If you feel any points mentioned above are incorrect, leave your comments below and we can have a useful discussion/

Wednesday, December 12, 2012

Are Indians Too Greedy - The StockGuru India Scam?

Yes, you read the title right. The title may offend a few or should I say most of the people who read this article but if you read the rest of the article fully, I am pretty sure you will understand what I am trying to say. India is no stranger to scams. Harshad Mehta, Telgi, 2G, Coal-Gate, Cow-Fodder etc etc... You name something that can be sold in India, we can practically find a scam surrounding it. But, the intent of this article is not to analyze all those thousands of scams. We are going to talk about the recent StockGuru Scam which ripped off close to 1000 Crores from more than 2 lakh investors across India.

Schemes which promise exceptionally high returns lure investors almost every other day. If one scam pops up from Chennai this month, one more from Hyderabad will come up next month and one more from a different city the next...
The purpose of this article is to analyze how the so called "Smart" and "Risk Averse" Investor population of India got duped to the tune of 1000 crores. The Irony is, this isnt the first Investment Scam in India and am pretty sure this wont be the last. Every year one or more such Ponzi schemes get highlighted and Investors lose their hard earned money. We will cover the "Why" part shortly!!!

The StockGuru India Scam:

Stockguru India, was a company that claimed to be India's premier financial consultancy firm. It offered investors investment advisory services, portfolio management services, trading solutions in equity and derivatives, insurance, mutual funds and IPO. Technically - A full spectrum financial services firm. But, the crazy fact which none of the 2 lakh investors failed to check is that:

"This firm was not registered with the SEBI (Securities and Exchange Board of India, the stock market regulator) or RBI (Reserve Bank of India, the banking regulator)"

Can a company providing financial services in this country run without registering itself with either of these 2 regulators?

The Result: More than 2 lakh investors have lost close to 1000 crores of their Hard Earned Money. This works out to an average of Rs. 50,000/- per individual who invested in this scheme. Unless money is growing in my backyard, I will investigate and analyze the company thoroughly before investing that kind of money in any scheme.

How did they Cheat these investors?

The idea was simple - They floated an investment scheme which promised unbelievable returns in an unbelievably short time span.

You invest Rs. 11,000/- today (Rs. 10,000 Investment + Rs. 1,000 Registration fee). The guys at StockGuru will give you 6 postdated cheques for Rs. 2000/- each which can be encashed every month for the next 6 months totaling up to Rs. 12,000/- plus they give you a promissory note stating that your original investment of Rs. 10,000/- will be refunded to you at the end of 6 months.

How would they manage to pay us all this money? - By investing the money in the stock market and making profits.

So, if you invest Rs. 10,000/- today, you will get a total of Rs. 22,000/- at the end of 6 months. A little over "Double" your investment in 6 months. There was no upper limit on the amount one can invest. If I Invest 10,000/- I get 22,000/- and if I invest 1 lakh I will get 2.2 lakhs.

On top of this - Investors who recommended this scheme to their friends would earn a 3% referral bonus on the amount invested by their friends.

Why were they (Guys from StockGuru) doing all this? - For the Rs. 1,000/- fee you paid them. Plus they were Good Samaritans who wanted to make India a Wealth Nation. Isnt it?

Did People get paid?

The answer is - YES and NO.

The Initial bunch of lucky guys got a few of their cheques cashed which gave them confidence in the scheme and they ended up recommending this scheme to everyone they knew. So, in about 6 months when StockGuru promoters collected a huge amount of money (can I say 1000 crores as huge???) cheques stopped getting honored and then eventually the result was:

"StockGuru India's Promoter Mr. Lokeshwar Dev Jain went absconding along with his wife and all the money they collected through this scheme"

What is the Current Status?

Lokeshwar Dev Jain was recently arrested along with his wife who was a co-conspirator in this scam. Police Investigation leads us to believe that, this wasnt even their original name and they had accounts with multiple banks with multiple names and they emptied them all before skipping town. Now, this case will run for years and nobody will get a penny. Plus, this guy will serve a few years jail sentence and come out to splurge himself with this 1000 crores of money which he has cleverly hidden somewhere.

Why do people fall into such traps?

To put the answer bluntly - GREED!!!

The fact of the matter here is, we all work very hard and when there is an opportunity to earn quick money, not many of us want to pass up on the opportunity. So, without checking the background of the company or the credibility or should I say feasibility of such staggering return schemes, Investors blindly invest in them and ending up losing money.

Can we Spot such Fakes?

Of Course YES. It is extremely Easy. Just remember the following tips:

1. If something feels like "Too Good To Be True" It probably isnt.
2. Dont buy investment products in a haste
3. Every Stock Market related instrument carries a RISK - A Risk of Loss. If some stock market related instrument promises you guaranteed returns with no chances of losses - It is practically not possible.
4. Any Scheme that asks you to refer more people and promises a share of their profit is most probably a fake. It is a scheme that says "I got fooled, it would be a good idea if you get fooled too". I have seen too many good friendships get spoilt because of such I refer you kind of schemes.

As yourself this simple question - Can someone really give us this kind of returns? If so, why arent they actually doubling/tripling their own money instead of asking us to invest our money?

Think of it this way, If I knew the next breakthrough stock that is going to double in One months time, will I go around asking people to give me money so that I can share the profit with them? I will probably pool up my money and invest in it. Plus, I might give this recommendation to my close friends and family so that they too can profit from it. Definitely I wont be sharing it with the general public. Isn’t it?

A Real Life Story:

When I was working in TATA Consultancy Services in 2007 (A time before I actually started blogging) a good friend of mine (lets call him X) in TCS came to me with an Investment proposition which was as follows:

* I Invest Rs. 50,000/- in a "Gold - Pyramid" Scheme and in return they will give me 12 grams of antique gold coin
* For every person I recommend to join this scheme I get Rs. 5,000/-
* For every person that 1st level connection recommends I will get Rs. 2,000/-

It was clear that this was an "Amway" like Multi-Level-Marketing scheme. The first thing I asked the guy who was selling me this fantastic multi-level-marketing product was - All this is fine. But, if I give you 50,000 rupees, shouldnt you be giving me something that is worth that much regardless of whether I can make 10 others join this scheme? Common sense – wasn’t it?

At that time gold was around 2000 rupees per gram and so, the 12 grams worth of gold wasnt worth even 50% of what I was being asked to pay-up which made me extra cautious.

Do you know what that guys response was?

Why do you care? All you have to do is, get 10 guys to join the scheme and you get your money back, plus - you get to keep an antique piece of gold.

I told him that, just because I am getting my money-back doesnt mean I will sell crap to my friends and left the place. X actually introduced a few more of my colleagues to this seller guy and a couple of them (lets call them Y and Z) even ended up buying this so-called "Antique" gold coin. Do you want to guess what happened?

X and Y were unable to secure 10 people under them and ended up with a gold coin that was not "Antique" in the first place and not worth even 50% of what they paid for. They both stopped talking to X who introduced them to the Multi-Level-Marketing seller. X ended up earning Rs. 10,000/- at the expense of his two friends but lost something much more valuable than money.

Do you want to end up like X and lose your friends and family to earn a commission?

Has SEBI Done anything?

Yes. The SEBI Act 1992 has mandated the following guidelines:

No stock-broker, sub-broker, share transfer agent, banker to an issue, trustee of trust deed, registrar to an issue, merchant banker, underwriter, portfolio manager, investment adviser and such other intermediary who may be associated with securities market shall buy, sell or deal in securities except under, and in accordance with, the conditions of a certificate of registration obtained from the Board in accordance with the regulations made under this Act.

In spite of this, unregistered and illegal trading companies still manage to thrive and lure gullible investors on a regular basis.

The SEBI website now has a list of entities registered with it. Investors are thus advised to take due diligence and pause to check if the company is registered with SEBI on the site On top of this, based on customer complaints, they catch and penalize such criminals who cheat investors. Unfortunately the problem here is - Unless the Investors are careful and cautious while investing their money, a market regulator cannot guarantee that such scams and ponzi schemes wont happen.

Some Precautions You can Take

The following are a few precautions investors MUST and I mean MUST take to avoid falling into such bogus schemes and frauds:

1. Dont fall for schemes that promise unusually high returns esp. if they are guaranteed and risk free. Any Investment that promises exceptionally high returns must be investigated thoroughly. Remember - Higher the returns, the higher the risk will be. No low risk instrument can offer staggering returns.

2. All legal or valid investments will have proper documentation. The scheme must have a registered prospectus, and should be able to furnish clear details about its investment strategy without being vague or ambiguous.

3. Check the SEBI and RBI Website and see if the company is registered with them. Also check the company's credibility. Use Google and search for the company. Chances are that, if people have grievances about the company, they would’ve voiced it in public forums and websites on the internet.

4. Check if the investment instrument has a credit agency rating. If it doesn’t, then be doubly cautious before buying the product.

5. Dont let personal preference cloud your judgment. Just because a close friend or a relative has invested in some scheme, it does not mean that you need to do as well. If someone is trying to sell you something, no matter who is selling it, take a pause, think through and then invest your money.

6. Dont fall for the "Once in a life time opportunity" or "Never before, never again - only for 3 days" kind of advertisements. If someone can offer such a huge discount for 3 days, they can probably do it always.

The Last thing in this list would be:

Expect Realistic Returns. The Indian Stock Market or any other country's stock market has the potential to provide returns of around 25 or even 30% in a single year but it does not always do that. The Stock Market comes with a Risk of loss and there is a good chance that the money you invest may end up being halved or even go to zero. So, Any instrument that can give you returns of around 10-12% with a decent amount of Risk would be a good option. Dont go in search of "Double your money in 6 months or 1 year" kind of schemes. There is a 99.9999999999999999999999% probability that it is a fake scheme.

Some Reasonable or should I say Realistic Rate of Returns and the Risk Level for the various Investment Products currently in India could be:

InstrumentAverage Returns Risk
Savings Account4%Very Low Risk
Fixed Deposits8 to 9%Very Low Risk
Corporate Bonds8 to 12%Low to Medium Risk
Government Bonds8 to 10%Low Risk
Equity Mutual Funds15% or MoreHigh to Very High Risk
Balanced Mutual Funds 12 to 15%Medium to High Risk
Debt Mutual Funds 10 to 12%Low to Medium Risk
Direct Equities30% or moreVery High Risk
Gold12 to 15%Medium to High Risk

Note: All numbers above are indicative and average only. The actual returns may depend based on the type of Instrument being bought and the returns offered by the actual instrument.

Direct Equity purchase is the riskiest of them all. The higher the risk you take, the better the reward you will reap out of the investment.

Stay Safe - Happy Investing!!!

Saturday, December 8, 2012

Top ELSS Mutual Funds in India – December 2012

The year 2012 is almost over and the tax fever is going to pick up as soon as the year 2013 starts. All the salaried individuals in india will be scrambling to save their taxes and just like every year we will have a few articles in our blog about Tax Savings and Investments. There are more than 50 Equity Linked Saving Schemes (ELSS) in India that are available for Investors to invest in. Some are performing really well and some are not performing well. So, as investors we need to be smart and invest only in those top performing funds. The purpose of this article is to analyse the performance of the Mutual Funds in the ELSS category and pick out the top performing funds from different categories.

Before we begin: all the Statistics, returns % etc are as of Quarter Ending September 2012.

Top Performing Funds – Based on 6 Month Returns %

Fund NameAssets Under Management (In Crores)3 month Returns6 month Returns 1 year Returns2 year Returns3 year Returns
SBI Tax Advantage Sr 225.8517.8%31.2%N/AN/AN/A
Principal Tax Savings215.5215.9%24.8%34.7%2%5.6%
JM Tax Gain Fund36.8715.4%23.3%23.2%-2.1%9%
IDFC Tax Advantage144.2812.1%23.2%26.9%4.2%9.7%
HSBC Tax Saver Equity Fund200.8813.6%23%30.5%3.3%7.6%

Top Performing Funds – Based on 1 year Returns %

Fund NameAssets Under Management (In Crores)3 month Returns6 month Returns 1 year Returns2 year Returns3 year Returns
Reliance ELSF Series 1135.588.3%18.1%38.1%5.2%10,6%
Reliance Tax Saver1993.7713.5%18.7%35.2%5.7%11.6%
Principal Tax Savings215.5215.9%24.8%34.7%2%5.6%
DSP BR Tax Saver Fund728.8513.5%22%30.7%2%8%
HSBC Tax Saver Equity Fund200.8813.6%23%30.5%3.3%7.6%

Top Performing Funds – Based on 2 year returns %

Fund NameAssets Under Management (In Crores)3 month Returns6 month Returns 1 year Returns2 year Returns3 year Returns
ICICI Prudential RIGHT Fund110.6212.6%19.6%28.8%11.2%13.8%
Axis Long Term Equity Fund263.8712.2%21.9%25.1%8.4%N/A
BNP Paribas Tax Advantage Plan82.0310.8%18%25.2%7.1%9.3%
Reliance Tax Saver1993.7713.5%18.7%35.2%5.7%11.6%
Can Rebeco Equity Tax Saver456.1211.1%17.5%245.3%11.1%

Top Performing Funds – Based on 3 year returns %

Fund NameAssets Under Management (In Crores)3 month Returns6 month Returns 1 year Returns2 year Returns3 year Returns
ICICI Prudential RIGHT Fund110.6212.6%19.6%28.8%11.2%13.8%
Reliance Tax Saver1993.7713.5%18.7%35.2%5.7%11.6%
Can Rebeco Equity Tax Saver456.1211.1%17.5%24%5.3%11.1%
Reliance ELSF Series 1135.588.3%18.1%38.1%5.2%10.6%
Franklin India Tax Shield853.2610%16.9%21.3%5%10.6%

Best Performing Large Funds – Based on Assets Under Management

Fund NameAssets Under Management (In Crores)3 month Returns6 month Returns 1 year Returns2 year Returns3 year Returns
SBI Magnum Tax Gain4648.2810.2%18.%26.2%2.3%5.5%
HDFC Tax Saver3223.6710.9%14.9%17.5%-0.8%7.4%
Reliance Tax Saver1993.7713.5%18.7%35.2%5.7%11.6%
Sundaram Tax Saver1377.5111%19.6%24.2%0.9%4.2%
ICICI Pru Tax Plan1362.8511.3%19.2%25.9%3.4%9.8%

As you can see a number of new funds have come on top in the 6 month or 1 year category but that could just be a coincidence because the indian markets have performed exceptionally well over the past 1 year. The real performance of a fund can only be gauged by looking at the 2 or 3 year returns. The Indian markets have been very volatile over the past 3 years and the consistent performers are those that were able to keep their Assets Under Management intact (or even increase them) as well as provide double digit rate of returns in the 2 to 3 year timeframe.

SBI Magnum Tax Gain and HDFC Tax Saver have been in the top 5 ELSS Mutual Funds in India for close to a decade now. My first ever mutual fund investments to save tax in the year 2005 were in these 2 funds only and their performance since then too has been nothing short of amazing. The other 3 funds in the top 5 funds in terms of Assets Under Management too have been performing very well over the past 5+ years.

These large funds are those that have the confidence of investors across india and even today hundreds of thousands of ELSS investors choose these funds and their assets under management are consistently rising.

You may be wondering why I consider their performance amazing when other smaller funds have given better returns than them in short-term. Can you or me even imagine managing assets worth 3000 or 4000 crores and provide consistent returns to all investors? Managing a 100 crore asset worth fund is much easier than managing a fund that has 4000 crores worth of assets. See the difference?

Happy Tax Saving and Happy Investing!!!

Disclaimer: The above was just an analysis of the different ELSS funds in India and does not constitute Investment Advice. Equity Investments come with an inherent risk that could result in loss of capital as well. Past performance may or may not be sustained in future. So, Investors are requested to do their own research/analysis as well as consider their risk appetite before they actually purchase any funds.

Friday, December 7, 2012

Rajiv Gandhi Equity Savings Scheme – RGESS

The Indian Stock Markets have been a preferred investment option for the smart or should I say the Risk Taking Investor not only in India but across the globe. But even today a majority of the common-man investor population prefer Bank Fixed Deposits or Gold or Real Estate for investment. In order to motivate such investors to start investing in the Indian Stock Markets, the Indian Government and Income Tax Department have come up with a revolutionary scheme called the “Rajiv Gandhi Equity Savings Scheme – RGESS”.

In March 2012, in an article titled Budget 2012 - Income Tax Slabs Revised in India I had mentioned this term “Rajiv Gandhi Equity Savings Scheme” as a proposed scheme to provide additional tax benefits to investors. However, there wasn’t much clarity surrounding this scheme back then. Now more details have emerged and it looks like this could be a great investment option for the indian investor who is looking for tax benefits as well. The purpose of this article is to go over this scheme and give you the key points that could be beneficial to us.

What is this Rajiv Gandhi Equity Savings Scheme?

The Rajiv Gandhi Equity Savings Scheme or RGESS is a new scheme that was proposed in this years budget by the Finance Minister. The purpose of this scheme is to encourage individual participation in the Indian stock markets. Retail Investors (You and Me) who invest in stocks and equities based mutual funds have been offered tax benefits under this Rajiv Gandhi Equity Savings Scheme or RGESS.

On the 21st of September 2012, the indian finance ministry approved this scheme under which, beginners investing upto Rs. 50,000 in approved stocks and mutual funds can claim 50% of the amount as tax deduction. However, an important point to note here is that this benefit is available only to those with an annual income of up to 10 lakhs only.

What Stocks and Mutual Funds are eligible for purchase under this Scheme?

The following stocks and mutual funds are eligible for purchase under this Rajiv Gandhi Equity Savings Scheme:
1. The top 100 stocks listed on the BSE 100 of the Bombay Stock Exchange
2. The top 100 stocks listed on the CNX 100 of the National Stock Exchange
3. Shares of Government owned – Navratna, Maharatna and Miniratna companies
4. Investments in follow-on public offers (FPOs) of these government owned entities with an annual turnover of Rs. 4000 crores or more in the three years preceeding the issue would also be eligible
5. ETF’s and Mutual Funds that invest in approved securities are also eligible for this scheme

Under What Section can we claim this Tax Deduction?

Investors can claim deduction under the Section 80CCG of the Indian Income Tax Act, 1961. An important point to note is that investments need not be made in one shot. Investments can be made in parts during the financial year for which the deduction is being claimed – just like any other investment under the Section 80C.

Are there any Terms & Conditions?

Of course, YES.

Let me explain the rationale behind the “Why” part of these preconditions before we actually look at them.

Reason 1: To encourage retail participation – According to researchers worldwide the average retail participation in the stock markets is one of the least in the world in India. Less than 10% of the average indian population is invested in Stocks.

Reason 2: To bring in more stability to the Indices – The Stock Indices Sensex and Nifty Indices. The Indian Market Indices are a reflection of the economic scenario in the country. So, the more people stay invested, the more stable the indices would be. If people are only trading – just buying/selling without a long-term investment strategy, the indices will continue to be choppy like they are now. So, the government has given this tax benefit which could motivate guys to buy the top stocks that can directly affect the index movement plus they add a lock-in period so that only investors can use this tax benefit.

Reason 3: One of the main reasons why the common-man investor stays away from the stock market is the RISK Involved. By restricting the investments to only large cap stocks which are much less volatile when compared to the mid or small cap stocks, the government has essentially reduced the overall risk an investor is taking.

So, what are these Terms & Conditions?

The following are the terms & conditions:

The first and most important condition is that this scheme is available only for investors whose annual income is less than 10 lakhs per year.

Investments under this scheme will have a lock-in period of 3 years. For one year from the date of purchase of the Equities/MF’s under the scheme, the investor cannot sell them at all. From the second year onwards, the investor can sell the securities provided the overall portfolio held by the investor does not fall below the amount for which tax deduction was claimed for.

For ex: Let us say I buy shares of State Bank of India worth Rs. 50,000/- today and claim tax benefits for this financial year (2011-12) I cannot sell them during the first year. Next year, let us say I buy shares of some other government organization say Indian Oil Corp for 50,000/- I can sell the shares of State Bank of India because my current portfolio is worth Rs. 50,000.

Some points to note about this scenario are:
a. You cannot claim tax deduction again this year because your net investment is only Rs. 50,000/- for which you have already claimed deduction last year.
b. You cannot sell the shares of Indian Oil for another 1 year

My Take on Rajiv Gandhi Equity Savings Scheme

This is a fantastic initiative from the Indian Government. This will encourage retail participation and bring in a bit more stability to the Indian Markets. Experts predict that this will encourage approximately 8000 to 10000 crores worth of investment from Retain Investors into the select blue-chip stocks each year. Usually blue-chip stocks give us an average of around 10-15% every year. If we club the tax benefits ranging from 10% to 30% the net returns could workout to be even more than the regular returns blue-chip stocks would give us.

By restricting the amount one can invest (to claim to benefits) to Rs. 50,000/- the risk an investor is taking is only minimal. By also putting an upper limit on the income to 10 lakhs, the government is trying to provide this benefit only to the middle income group indian which is a welcome move.

All in all, it is an excellent option which everyone must utilize…

Happy Investing & Tax Saving!!!

End Note: Up until this year we only had ELSS mutual funds and ULIPs which provided us tax benefits under section 80C. Along with section 80C where we can invest 1 lakh every year and claim tax deduction. Now, if we club up this 50,000/- the total works out to Rs. 1.5 lakhs. If an individual religiously invests this 1.5 lakhs every year and builds his/her corpus in a steady basis, they will be left with a sizeable corpus and maybe even retire as a crorepati…

Tuesday, December 4, 2012

Cheque Truncation System – CTS 2010

Using a Cheque is something we do all the time. Right from paying bills to transferring money between friends/family happens via cheques. It has become such a widely used tool that unscrupulous elements have started misusing them. To avoid misuse of cheque instruments, the Reserve Bank of India cut the validity of cheques from 6 months to 3 months at the beginning of 2012. This ruling became effective 1st April 2012 and there was even an article titled “Cheques Validity Cut Short” in our blog. But now, the RBI has come up with yet another ruling that is bound to make processing of cheques much easier for banks as well as making them safer for all the customers who use it. As part of this ruling all old cheque books & leaflets will be invalid starting 1st January 2013. The purpose of this article is to elaborate on what this ruling is, why it came up and what we must do in these last 4 weeks of December to be prepared to face the upcoming rule changes starting 2013.

Why Would my Cheque become Invalid?

The RBI has come up with a new standard for using cheques called “Cheque Truncation System” or “CTS 2010” which all banks have to follow. As per RBI, only those cheques that are CTS compliant can be used as legal monetary instruments beginning 2013.

What is this Cheque Truncation System or CTS 2010?

Cheque Truncation System or CTS 2010 is just another fancy name for the new and improved way of processing cheques by banks in India.

How is it different from the existing standard?

Currently, all cheques are sent directly (In physical mode) to the other bank for clearance. This means that, if you have an ICICI Account and I give you a cheque from HDFC Bank, ICICI Bank will send the cheque you deposited to HDFC Bank to confirm that the cheque is valid and then receive the payment on your behalf and credit it into your account. This is the reason why other bank cheques take at least 2-3 days to get credited into your bank account.

Starting 2013, banks will just send a digital (scanned) version of the cheque to the other bank and technically the clearance can happen very fast (even on the same day).

This essentially means three very important benefits:

1. Easier Processing for both banks
2. No physical transfer of cheques – so lesser delays
3. Quicker receipt of funds – For Customers
From the customer’s point of view, I don’t care what the bank does to get my funds. All I care about is how fast will I get my money and this CTS 2010 standard can help banks clear funds within the same or at max the next day instead of the 2 to 3 days timeframe that prevail currently.

What are the Features of CTS Compliant Cheques?

The following are some features of cheques that will be CTS compliant:

• They will have the wordings “Please sign above this line” at the bottom right hand side corner
• They will have a watermark with words “CTS INDIA” which can be seen against a light
• An invisible bank logo will be placed with an Ultra Violet Ink which can be seen only under UV Scanners
• It will not allow any changes/alterations to the cheque. If there is any mistake or correction, the cheque will become invalid
• “Payable at par at all branches of XXXX Bank in India” text will be printed at the bottom of the cheque
• The Bank’s IFSC and MICR Code will be present in the cheque
• Signatures will have to be made using a dark ink so that your signatures can be scanned properly

Up until now, if you make a mistake, you can just correct it and counter-sign near the correction/alteration and the cheque will be deemed valid. Starting 2013, these cheques will be considered invalid. If there is any mistake in the cheque, you got no other choice but to cancel/destroy it and write a new one…

All these features would ensure uniformity across cheques issued by various banks as well as help banks scrutinize cheques properly, which in turn is expected to act as a deterrent against cheque frauds. Below is a Sample of how these new CTS 2010 cheques must look like as per the RBI:

To make things easier, below is how a new cheque will look from Kotak Mahindra Bank – Image courtesy – Internet.

What should you do?

There are many things that you may have to do as a customer.
“Contact your bank and request a new cheque book that is CTS 2010 compliant” because all your existing cheque books will be invalid/unusable starting 2013.

Do you have a few queries about this whole CTS 2010 standard? If so, read on. I have tried to answer a few of the basic queries that you may have.

1. What should I do with post-dated cheques that I have already given to other people/institutions/banks?

All post-dated non-CTS cheques will be useless/worthless starting 1st January 2013. So, if possible we must collect those signed (non-CTS) cheques from whoever we gave them to and destroy them. This is to ensure that non-CTS cheques will not be presented in the clearing system. This kind of scenario typically would arise if you have taken a loan where the lending bank/institution asks you to submit a few post-dated cheques. Contact the bank that has actually given the loan and ask them to return the old cheques and give them newer CTS 2010 compliant cheques.

2. What should I do if I don’t remember who I gave a few of the non-CTS cheques to?

Technically speaking, this is a scenario which we must strive to avoid. Whenever you issue a cheque make sure you note down the person you give it to, in the front page of the booklet. That is the whole point of having the first page that has those blank spaces to record your cheque usage so that you can refer to it in future.

Ok, coming back to the question, don’t worry. if you don’t remember who/where you have given the cheque to, go back to the front page of your cheque book and note down all the cheque numbers. Call up your bank customer care and tell them that you don’t remember whom you have given it to. They will block those cheques. An important point to remember is, all non-CTS cheques will automatically get cancelled from the system starting 1st January 2013. So, you need not worry too much about non-CTS cheques.

3. What should I do with my unused cheques?

Technically speaking, Nothing. Just tear them up into small pieces and dispose them. Some banks like ICICI and SBI have asked customers to return their old/unused cheques at their respective branches so that they can dispose them safely.

4. What should I do with cheques that are post-dated and given to me by others?

Ask the person who gave you those non-CTS cheques to read the answer to question no.1 in this article. If the person who gave you the non-CTS cheque doesn’t approach you for the replacement, you can contact them and ask them to reissue a new cheque as the one you currently hold will not be valid after 31st December 2012.


If any cheque that you have given to a financial institution like for a home loan or credit card bounces, you have to incur cheque bounce charges plus the negative effect it could have on your credit report. So, make sure you replace all your old non-CTS compliant cheques with the new and more secure cheques.

Happy Banking!!!

Tuesday, November 27, 2012

List of 87 Companies that have Vanished after raising funds through IPO in India

This is probably one of the hottest topics in the Indian Stock Market today. Every year hundreds of companies submit applications with SEBI (Securities & Exchanges Board of India) and a % of those companies manage to raise funds through Initial Public Offerings or IPO's. Indians are a notoriously smart bunch of guys who try to find out new and ingeneous ways of cheating others. Though the stock market regulator (SEBI) has strict norms and filtration criteria before they actually allow some company to issue an IPO, some crooks manage to find a way to go around the checks. They eventually offer IPO's and once investors buy their shares they just disappear. Recently the Ministor of Corporate Affairs Mr. Sachin Pilot, in a written reply to the Rajya Sabha has said that a total of 238 firms have been featured in the "List of Vanishing Companies" at the end of the financial year 2011-2012. The purpose of this article is to understand what is meant by vanishing. None of the news articles in the Internet actually listed down those 87 companies that cheated Indian Investors of their hard earned money. I did some digging and was finally able to find that information in the Ministry of Corporate Affairs website hidden away in some corner. So, for the benefit of all the Indian Investors who follow my blog - here is the list...

Before We Begin:

The following are some old articles in our blog that covered the topic of Initial Public Offering. You can revisit them to brush up your memory if you arent too sure about the IPO Process.

1. IPO Process Explained
2. Intermediaries involved in an IPO Process
3. IPO - Different Types of Issues

When is a company considered "Vanishing"?

A Company is considered "Vanishing" if it fails to file their financial statements, their operational details etc with SEBI on a quarterly basis. If a company fails to file its statements, SEBI tries to contact them at their registered office and if that too fails, SEBI tries to reach the directors of the company directly. If all of the 3 steps fail, a company is considered "Vanishing" which means SEBI does not know where the company is or what it is doing with the money that investors put into it during the IPO Process.

Did SEBI Miss all 238 Companies as mentioned in the first paragraph?

Actually, NO.

Of the 238, 151 companies have been traced. Of the 151, 31 are currently under liquidation. Which leaves us with "87" that still remain untraced.

What are the Government and Market Regulators Doing about this?

Mr. Pilot has said that government has been taking action against companies and their directors which disappear after raising money from public. He said that a central coordination and monitoring committee, co-chaired by ministry of corporate affairs chairman and market regulator SEBI monitors efforts to identify "vanishing companies" and take stock of action against them. The minister said that government is seeking assistance of police authorities and filing FIRs. He also said that, based on feedback from all stakeholders, procedural adjustments will be made in the IPO Process to minimize such situations in future.

Do we have a list of those 87 Companies that have Vanished this year?

The list contains the Name of the Company and the amount of money (In Rs. Crores) they raised via their IPO.

Name of the CompanyIssue Size in Crores (Rs.)
Aditya Alkaloids Ltd3.55
Aashi Industries Ltd. (Formerly Known as Aashi Pharmachem Limited5.52
Ambuja Zinc Ltd.2.14
Amigo Exports Ltd3.3
Asian Vegpro Industries Ltd7.09
AVR Securities Limited2.47
Bhavna Steel Cast Limited2.1
Bodh Gaya Ceramics Ltd0.49
Caldyn Aircon Ltd.4.45
Canara Credit Ltd2.49
Carewell Hygiene Products Ltd.2.49
Chhakri Tyres & Tubes Ltd Or Rhino Tyres Ltd) (Presently Known as Raam Tyres Ltd9.59
Cilson Organics Ltd.8
Citizen Yarns Limited2.2
Crestworld Marines Ltd4.38
Cromakem Limited3
Daisy Systems Limited1.31
Deccan Petroleum Ltd4.57
Flora Wall Coverings Ltd5.82
Frontline Financial Services Ltd.4.43
Genuine Commodities Development Co. Ltd2.68
Girish Hotels Resorts and Health Farms Ltd.2.59
Global Blooms India Ltd2.1
Global Exhibitions Limited. (Formerly Known as Global Network Limited )4.45
Growth Agro Industries Ltd.5.4
Hallmark Drugs & Chemicals Ltd. (Formerly Known as Lifeline Drugs Limited)7
Hi-Tech Drugs Ltd3.23
Hitesh Textile Mills Ltd.7.48
Hoffland Investments Limited (Formerly known as Vadra Investments Limited)2.9
Ichakalanji Soya Ltd2
Imap Technologies Limited1.8
Kamakshi Housing Finance Ltd (Presently Known as Kisha Impex Ltd5.71
Kedia Infotech Ltd (Formerly known as Grives Hotels Ltd.)4.98
Kesar Greenfield International Limited5.69
Kiev Finance Ltd12
Lyons Industrial Estate Enterprises Ltd. (Formerly Known as Lyons Range Finance Ltd.]6.37
Ma Capital Market Services Ltd1.44
Madhyavart Exxoil Limited2.3
Manav Pharma Ltd5.3
Marine Cargo Company Limited3.41
Nagarjuna Jiyo Industries Ltd2.73
Naisargik Agritech ( India) Ltd4.66
Naturo Pest Ltd4.84
Nishu Fincap Ltd (Formerly Known as Medha Finance and Securities Ltd)4.25
Ocean Knits Ltd2.61
Oriental Remedies and Herbals Limited1.88
Orpine Systems Limited2.71
P K Vaduvammal Finance & Investments Ltd (Presently Known as Novel Finance (I) Ltd)1.5
Panggo Exports Ltd2.47
Pashupati Cables Limited11.95
Protech Circuit Breakers Ltd2
Protech Switchgears Limited2
Pur Opale Creations Ltd (Formerly Known as Nuline Glassware ( India) Limited6.78
Rajadhiraj Industries Ltd2.5
Realtime Finlease Ltd3.75
Rizvi Exports Ltd.3.65
Rusoday & Company Limited0.94
Sai Graha Finance & Engineering Ltd4.05
Saket Extrusions Ltd2.13
Sequel Soft India Limited
Shefali Papers Ltd.2.57
Shree Vaishnavi Printing & Dyeing Limited3.24
Shree Yaax Pharma & Cosmetics Ltd6.06
Shreeji Dyechem Ltd1.94
Shri Mahalaxmi Agricultural Developments Co. Ltd5.09
Shyam Printers & Publishers Ltd2.25
Sibar Media & Entertainment Limited3.5
Sibar Software Services ( India) Limited3.5
Siddhartha Pharmachem Ltd.12
Simplex Holdings Ltd.2.27
South Asian Mushrooms Ltd6.1
Sparkle Foods Ltd5
Spil Finance Limited5.7
SSK Fiscal Services Ltd.2
Star Electronics Ltd.2.47
Sterling Kalk Sand Bricks Ltd.4.44
Sukhchain Cements Ltd. ( Formerly Known As Ganapati Cements Private Limited)3.65
Super Domestic Machines Ltd5.55
Sushil Packagings ( India) Ltd4.52
Swal Computers Limited2.6
Tirth Plastics Ltd5.03
Topline Shoes Limited7.8
Universal Vita Alimentare Ltd.1.8
Vidiani Agrotech Industries Ltd.2.80
Vipul Securites Ltd3
Visie Cyber Tech Limited1.4
Zed Investments Ltd.2.8


As you can see, all of these are ultra small sized IPO's where the largest IPO was only 12 crores and the smallest was 49 lakhs. Market Guru's always warn investors to stay away from Penny Stocks. They have the potential to give you triple or even four digit profit % returns but at the same time, your entire investment can go down the drain. The latter is what has happened to the investors who bought shares of these 87 cos.

Happy Investing & Stay away from Penny Stocks!!!
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