Systematic Transfer Plan

In an uncertain market, retail investors always have the confusion of not knowing when to buy especially if they are planning to invest a large sum of money. This where the SIP comes in and you can read more about SIP at

1. Systematic Investment Plan - Part I

2. Systematic Investment Plan - Part I


The SIP mode is the best route to invest with if there are regular cash flows in the future and you can match these cash flows with the intended investment into mutual funds. But if someone had a huge corpus and plans to invest in equities and at the same time then they are worried about the prevailing uncertainty in the market? Even in those circumstances, the systematic investment route remains the best vehicle to invest. The gains that one could get by investing an SIP can be enhanced by opting for a systematic transfer plan (STP) along with the SIP.

STP allows one to make periodic transfers from one mutual fund into another. In an SIP, an investor typically parks the money in a bank savings account and a certain amount is transferred at a regular interval from the savings account to the fund house for buying into a specified equity fund. In the case of an STP, the lumpsum is invested in a liquid or a floating short-term plan and is transferred at regular interval to a specified equity fund. For example, one has Rs 1,20,000 to invest in equities, he can put the entire amount in a liquid plan and go for a monthly SIP (assuming that period of investment is 1 year) of Rs 10,000 in an equity plan through a systematic transfer. However, the primary limitation of this investment process is its inability to invest in different mutual fund houses. So, if you have an equity fund to invest through the SIP mode, you would have to necessarily choose the liquid fund of the same fund house. But with little difference in returns among different liquid funds and its almost risk-free status, STP is still a better bet than parking that lump sum in a bank deposit.

While an investor earns only around 3.5% pa interest on the amount parked in the savings account, a liquid fund gives a higher return of 6-8% pa on the corpus with the same level of liquidity. As these funds invest in safe and liquid debt instruments, the level of risk remains very low and also these liquid funds typically do not have any entry or exit load if one remains invested for a week.

So, maximize your returns by having a combination of STP and SIP.

FMP update

Given that the CRR has increased in the credit policy yesterday and an unlikely scenario where the bank would increase the interest rates for the borrowers, the banks are likely to decrease the rates for the deposits and hence this could be an opportune to lock up some money in FMPs.

Here are some more launches of FMP that are available in the market at this point of time

Please read the following blogs to get details about what an FMP is and its advantages

1. Why invest in Fixed maturity plans ?

2. Fixed Maturity Plan - FAQ

ICICI Prudential Fixed Maturity Plan Series 38 - 1 Year Plan C
Tenure: 370 Days
Offer open: October 10, 2007
Offer closes: November 15, 2007
Plans: Retail and Institutional
Schemes: Growth and Dividend Payout
Minimum investment: Rs 5000 (for the retail plan) and Rs 2 crores (for the institutional plan)
Cost per unit: Rs 10

ICICI Prudential Fixed Maturity Plan Series 38 - 1 Year Plan D
Tenure: 370 Days
Offer open: October 12, 2007
Offer closes: November 21, 2007
Plans: Retail and Institutional
Schemes: Growth and Dividend Payout
Minimum investment: Rs 5000 (for the retail plan) and Rs 2 crores (for the institutional plan)
Cost per unit: Rs 10

ICICI Prudential Fixed Maturity Plan Series 39 - Eighteen Months Plan B
Tenure: 550 Days
Offer open: October 26, 2007
Offer closes: November 6, 2007
Plans: Retail and Institutional
Schemes: Growth and Dividend Payout
Minimum investment: Rs 5000 (for the retail plan) and Rs 1 crores (for the institutional plan)
Cost per unit: Rs 10

Systematic Investment Plan - Part II

In part 1 of this series Systematic Investment Plan - Part I, you must have seen the benefits of Systematic investment plan (SIP). SIP is very helpful in a volatile market. Since you invest a fixed amount, you buy more of the security when its prices fall and less when it is more expensive.

In this post, I will explain the formalities to be completed on the ground to establish an SIP for a mutual fund.

All mutual funds define the dates on which you can make the regular investments (typically 1st/7th/15th/21st of every month). If you are a salaried employee, you will realize that you have surplus monthly savings and hence this can become a preferred option for you. Let us say that you receive your salary on the 1st of the month and hence you can make the investment every 1st of the month.
Along with the other details that are required to open the mutual fund, one has to fill the SIP application form and inform the mutual fund that you want to invest on specific date of every month. If that date happens to be a holiday, typically it gets executed on the next business working day.

Almost all mutual funds provide a direct debit facility in the form an Electronic Clearing Scheme (ECS) with the major banks: this means that one can sign an order giving details of the MICR code, bank name etc to be executed by one’s bank that one is giving an authority for the mutual fund company to take a specified sum of money from their bank account on specified dates for a specified period (Typically the period of time is anywhere between 12-18 months and one has to ensure that the SIP continues even after this period by getting in touch with the mutual fund company to keep the SIP alive). In most cases the cheque from where one makes the initial payment is good enough for the details that one needs to provide for the SIP. This saves one the hassle of signing post dated cheques or sending cheques on a periodic basis to the mutual fund.

In case of redemption of the units of the fund, the same account from which the debit is made will be credited reducing the hassle of getting a cheque and then depositing a cheque.

Systematic Investment Plan - Part 1

Over the past couple of months, equity investors in India have seen their fortune swing back and forth. Concerns over sub-prime lending in the US and its spill over in India, yen-carry trade and the possibility of a US slowdown and the recent PN issue in India not only cause wild swings in the domestic and global equity markets, but also raised doubts among several retail investors on the course of the markets in the short- to- medium-term and over the long term.

A retail investor like in most times is always confused as to whether it is the right time to enter the markets or should one expect some more corrections? Unfortunately, no one can predict the course of the market. For a retail investor, timing the entry or exit is a difficult act to follow. The best way to survive a volatile market is to keep investing in equities and stay put with a long-term horizon. This is where Systematic investment plan or SIP comes into the picture.

SIP (Systematic Investment Plan)

For the retail investors, the systematic investment plans (SIPs) is the best method to stay invested without bothering too much about the market ups and downs. Ideally one should be looking at an SIP in mutual funds (better than direct investment as one does not the fundamentals of the stock, industry etc) and also should ensure that the frequency of the SIP is not monthly but atleast 2-4 times a month. Through regular investing, one gets to invest in the highs as well as the lows. This helps in averaging out the market volatility especially if there is too much volatility within the month. The investor keeps investing a certain amount (even as small as Rs 50 in case of some mutual finds) at regular intervals. As the market soars, even the value of the investment scales new highs. And when the market tanks, the value of the mutual fund units — the net asset value (NAV) — too comes down. This means more units are bought for the same SIP amount.

SIP has the following advantages

1. It inculcates the discipline to invest regularly
2. Generally provides good returns over longer periods of time
3. The long term nature of the investment provides for capital gains tax on te returns made.
4. When the markets are up, it buys lesser number of units and when the markets are down, it provides for the purchase of a larger number of units thus providing a mechanism to constantly accumulate the units.
5. SIP avoids the risk of locking in to one single valuation and facilitates one to get an 'average' of the valuations on the various dates that one invests.

In the next part of this series, I will explain the procedures that one needs to adopt to participate in a SIP, what kinds of mutual fund schemes exist etc

Lotus India AGILE fund

Lotus India Asset Management Company has announced an open-ended equity scheme called Lotus India AGILE fund, a quant-based mutual fund scheme.

The fund, which is priced at Rs 10 per unit will open for subscription from October 25 and close on November 23. The fund will re-open for ongoing purchases/redemptions no later than December 20. The fund will invest in 90-100 per cent in equity and equity-related instruments and 0-10 per cent in debt and money market instruments.

The fund aims to generate capital appreciation by investing in a passive portfolio of stocks selected from industry leaders on the basis of a mathematical model and offers growth, dividend payout and dividend reinvestment options.

The fund will invest in 11 stocks determined by a mathematical model and the portfolio will be reviewed and reset every month. Out of the total corpus, 9 per cent will be invested in each of the 11 stocks and one per cent will be kept in money market instruments.

The benchmark index for the fund is the S&P CNX Nifty.

The minimum application amount is Rs 5,000 and in multiples of Rs 1 thereafter, and in case of additional purchase the application amount is Rs 1,000 and in multiples of Rs 1 thereafter, and the minimum redemption fee is Rs 1,000 or 100 units.

The entry load is 2.25 per cent where the purchase amount is less than Rs 5 crore, whereas the exit load in case of redemption on or before expiry of six months from the date of allotment is one per cent and if redeemed after six months and on or before the expiry of one year from the date of allotment it is 0.60 per cent.

Source : Business Line news paper

Sahara R.E.A.L Fund

Sahara Mutual Fund has launched a close-ended equity fund. Named as Sahara R.E.A.L Fund, it will have a maturity period of 36 months, after which it will be converted into an open-ended fund. The new fund offer will be open between October 5, 2007 and November 2, 2007.

The fund seeks to provide long term capital gain by investing predominantly in equity and equity related of companies in the retailing, entertainment & media, auto and ancillaries and logistic sector. A ceiling of 50% of the total investible corpus would be imposed per sector in order to avoid concentration of investment.

Around 65-100 per cent of investments would be allocated to equity and equity-related instruments. Debt and money market component in the portfolio would be upto 20 per cent.

Snapshot
Face value: Rs 10
Type: Close-end, Equity Fund
Options: Growth and Dividend Reinvestment
Minimum application amount: Rs 5000
Entry load: Nil
Exit load: An exit load of 4% would be charged if the investment is redeemed within 12 months from the date of allotment.3% would be charged if the redemption is made after 12 but within 24 months and 2% would be charged if the investment is redeemed after 24 but within 36 months.
Benchmark index: CNX Nifty

Reliance Gold Exchange Traded Fund

Reliance Mutual Fund has launched a Gold Exchange Traded Fund - Reliance Gold Exchange Traded Fund. This open-ended fund will track domestic prices of gold through investments in physical gold. The fund will be initially available for subscription from October 15, 2007 to November 1, 2007.

The fund aims to provide returns that closely correspond to the return provided by the price of gold through investment in physical gold. The performance of the scheme may differ from that of domestic price of gold due to expense and other related factors.

An investor can buy/sell units of RGETF on a continuous basis on the National Stock Exchange and/or other recognised stock exchanges where units are listed and traded like any other publicly traded securities at market prices which may be close to the actual NAV of the scheme.

Around 90-100 per cent of investments would be allocated to physical gold and gold related instruments. Debt and money market component in the portfolio would be upto 10 per cent.

Snapshot
Face value: Rs 100
Type: Open-end, Gold ETF
Options: Dividend
Minimum application amount: Rs. 5000
Entry load: The fund would charge an entry load of 1.50% for investment less than Rs. 1 lakh, 0.75% for investment equal to or greater than Rs.1 lakh but less than Rs. 25 lakhs, 0.50% for investment equal to or greater than Rs.25 lakhs but less than Rs. 50 lakhs and 0.25% for investment equal to or greater than Rs.50 lakh but less than Rs. 1 crore.

Exit Load: Nil
This load is applicable during the NFO period but on the continuous basis the fund would not charge any entry or exit load.

HDFC Arbitrage Fund

HDFC Mutual has come out with its new offering called HDFC Arbitrage Fund. It is an open end equity fund whose objective is to generate income by investing predominantly in arbitrage opportunities between cash and derivative market and arbitrage opportunities within the derivative segment and by deployment of surplus cash in debt securities and money market instruments.

These arbitrage funds typically tend to give returns that are similar to liquid mutual funds but there is no gaurantee of the same. They are just trying to make money by arbitraging between derivatives and the cash market in case of any knee jerk fluctuaitons or market imbalances that happens many times or technical issues causing these imbalances.

Asset allocation under normal circumstances:
Equity and equity related instruments: 65-90 per cent
Derivatives: 65-90 per cent
Debt securities and money market instruments: 10-35 per cent

Asset allocation under defensive circumstances (When adequate arbitrage opportunities are not available in the derivative and equity markets)
Equity and equity-related instruments: upto 65 per cent
Derivatives: upto 65 per cent
Debt securities and money market instruments: 35-100 per cent

Snapshot
Face value: Rs 10
Offer opens: September 28, 2007
Offer closes: October 15, 2007
Type: Open-ended equity
Plans: Retail and Wholesale
Options: Growth, Dividend Monthly and Dividend Quarterly

Minimum application amount:
Retail Plan
Growth and Quarterly Dividend Option : Rs 5,000
Quarterly Dividend Plan : Rs. 25000

Wholesale Plan
All the options: : Rs 1 crore

Entry load: Nil
Exit load: The fund would charge an exit load of 0.50% if the units are redeemed or switched out within 3 months from the date of allotment.

Benchmark index: Crisil Liquid Fund Index

The performance delivered by funds in similar peer group rage between 8% and 9% p.a. based on their past performances:

Other funds in this caregory are Benchmark Derivative, ICICI Pru Equity & Der. Income Opt (Inst & Retail), ICICI Pru Monthly Interval Plan I, ICICI Prudential Blended, JM Arbitrage Advantage, JM Equity & Derivative, Kotak Equity Arbitrage, Lotus India Arbitrage, SBI Arbitrage Opportunities, Standard Chartered Arbitrage and UTI Spread

Banks cut home loan interest rates and Term deposits

THE country’s largest and second largest lenders — State Bank of India and ICICI Bank — have brought down interest rates on various loans including new housing loans. SBI has also lowered interest rates on some term deposits. The move comes a few days after the finance minister asked banks to bring down interest rates.

The proposed rates are under a festival offer applicable for all new loans sanctioned on or after Monday and are valid up to end-December for SBI.

As part of the festival offer, SBI has reduced interest rates on all new home loans, car loans, twowheeler loans and personal loans. Home loans are now cheaper by 0.50% to 1% depending on loan maturities and amount of loan. SBI also gives discount if the salary account is with the bank and further discount if a higher margin is available. For home loans up to Rs 20 lakh with a tenor of up to five years, SBI has cut rates from 10.75% to 10%, for loans with tenor between five and 15 years rates are cut from 11.25% to 10.25%. For tenors from 15 to 20 years the rate is reduced from 11.25% to 10.5%. For loans over Rs 20 lakh, rate cuts are 25 basis points lesser on comparable tenors.

ICICI cuts floating home loan rates

ICICI Bank has also cut interest rates marginally by 25-50 basis points on home, car and personal loans. This is a part of the festive offer by the bank. On the home loan front, the rate cut is only for floating loans. The bank has, however, not bought down its interest rates for deposits.

Rates of SBI’s new car and two-wheeler loans have been reduced by 1% depending on the amount and maturity of the loan. New car loans are now available at 11% to 12%.

Similarly, personal loans are now cheaper by 0.50% to 1%. In addition to the above, the bank is offering 50% concession in processing charges on all the personal segment loans.

Source : Economic Times of India

Will Home Loan rates come down ?

With the inflation coming down and the US fed reserve cutting the rates effectively for the banks in the US, there is a growing feeling that the RBI will also reduce the CRR or reduce the benchmark rates thereby paving the way for the bank to reduce the rates for the customers across various assets especially the home segment.

Some banks like HDFC, Canara bank have already cutting the borrowing rates by about 0.5 % pa. for the new loans and have mentined that they will decide about the existing customers after the credit policy.

However, the situation in India is slightly different now. Even though the inflation is low, there is a serious infusion of Foreign money into the Indian stock markets with frsh money pouring in every day. This has caused a huge demand for the Rupee and the ruppee is appreciating and has breached the Rs 40 mark to the US dollar. The RBI and the government have also said that the pace of appreciation is too fast for comfort and they know that exporters will get hit if the Ruppee continues to appreciate.

Thus while on one hand, we have a stable inflation and reducton in interest rates across the world led by the recent cut in the US, we have an appreciating Ruppee and a huge liquidity position with us. With a huge amount of liquidity in the markets, there seems to be a possibility of a CRR hike. This means that the home loan rates might actually increase or remain stable as a result of this. The cost of funds for the banks will go up, if there is a CRR hike.

Assuming a 50 bps CRR hike, the net outgo of banks, which they would have lent out, at around Rs 13,889 crore, would be now kept with the RBI.