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Some myths about investing in a Mutual Fund, including through SIP

ashish — Sun, 25 Apr 2010 10:58:26 +0000

There are many myths prevalent about investing in a Mutual Fund, especially through a SIP (Systematic Investment Plan). In this article, we will talk about some of these myths, and provide a detailed explanation of what is the actual reality.
- Let us start with the first one that talks about investing a NFO of a Mutual Fund. I have heard of a number of people who prefer to invest in a NFO since they feel that it gives them the Mutual Fund at unit price (similar to the IPO of a stock that is obtained at the original issue price). However, this is not a valid comparison. For an individual company that goes in for an IPO, the concept is that the company will improve over a period of time, and the IPO price is a good point at which to start acquiring the company. However, the NFO price of a new Mutual Fund is not the same. The NAV of a Mutual Fund at any point of time is the value of the stocks that the Mutual Fund holds at any point of time. So, whether the price of a Mutual Fund unit is Rs. 10 or Rs. 265, the price is the correct value. In fact, if you have bought a MF with a NAV of Rs. 265, that means it has a track record which can be used to determine its performance, and whether it is worth buying.
- You need not do every investment via a SIP. If you have selected some MF’s based on performance and decided to hold them for a long term (5 years+), you can invest in a lump sum rather than through a SIP.
- What happens if you miss a month’s SIP. If you miss a month’s SIP, all that it means is that there will be no investment for that month, but it does not mean that your existing SIP will be dropped, or something similar will happen
- You can do better than a SIP. It needs a pretty arrogant as well as well informed person to claim that they can do better than a SIP. Investing in a MF by themselves means that you need to decide when to invest, and go through the logistical process of actually doing the investment.
- When investing in a tax-saving fund through a SIP, can you withdraw all your money after 3 years. NO. As per income tax rules, investments in tax-saving MF’s means that you can only withdraw 3 years after the investment was made, so you can only withdraw each SIP 3 years after it was made
- You can only invest the regular SIP amount in the MF. If you have more money in a certain month, you can invest as a lump sum in the same MF as which you are investing through a SIP.

Insurance company forced to pay compensation to consumer after not replying to a Right To Information Case

ashish — Sun, 11 Apr 2010 14:40:32 +0000

The Right To Information is a way of getting information from Government agencies that are not willing to provide the information when you would normally ask for it. Under the RTI Act, Government agencies are obliged to provide the required information unless there are specific security or personal privacy or commercial secrets involved. So what happens is that people who have business with a Government agency and are not getting the information from these agencies (something that can be very common) can use the RTI Act to get the required information; and if the information is not provided, a penalty is applied on the official concerned. Consider the case of this gentleman who needed to get information regarding his insurance policy and its premium payment (link to article):

MUMBAI: The Central Information Commissioner (CIC) has asked the United India Insurance Company Ltd (UIICL) to pay a compensation of Rs 5,000 to a citizen in a Right To Information case. Moreover, the commissioner has also imposed a penalty of Rs 22,000 on an official for dereliction of duty. In his order dated March 23, information commissioner A N Tiwari ordered UIICL to pay a compensation of Rs 5,000 to A M Attar—who had filed an RTI query—for the “detriment suffered by him’’ and also slapped a fine of Rs 22,000 on a senior divisional manager in Mumbai.
After a series of hearings, the commissioner said the senior divisional manager had got an RTI query on September 16, 2007. Though he had got the requisite information from the agent concerned on September 29, 2007, the information was forwarded to CPIO, regional office on Dec 27, 2007. Thus, there was a delay of 88 days on his part, the commissioner said.

Government preparing to force builders to provide more information

ashish — Sun, 27 Sep 2009 20:09:49 +0000

Over a period of time, dealings in the property sector have been the woe of many investors. Except for the richer investors, or the very well informed buyer, other purchasers of property have always been at the receiving end of problems. Some of the problems that are typically found in property transactions are:
- The builder did not have adequate permissions to proceed, but did not state this in the offers or in the agreement, or has not yet wrapped up the civic permissions
- The builder does not clearly specify the rates for different definitions such as carpet area, super area (where you end up paying for lift areas, and other common areas), plinth area (where the area covered by the walls is included), and buyers get confused by these different definitions. I remember one case where the builder had included long corridors leading from the main corridor, and the area of these corridors was included in the super area
- There have been cases where the builder would have changed the number of apartments being constructed after selling apartments; so a person who bought an apartment at a certain floor found that in the new plan, his view would be blocked since the builder added more floors in front
- Builders, when the going is good, have asked for higher rates even when the deed is already in place. And buyers had been given the option of either paying up, or getting their sale terminated. This happened when the sales deed were typically informal arrangements between the builder and the buyer.
A lot of these problems could go away if a landmark law is passed by the Government that will reduce the ability to builders to hoodwink buyers (link to article):

The aam aadmi looking to own a piece of real estate might be able to breathe easier. The possibility of being hoodwinked by a smooth-talking builder or salesman might be reduced sharply as developers will soon be required to post project details, including civic clearances, on the website of the real estate regulator. This should also reduce the chances of honest property buyers being duped by developers hiding behind terms like “super area” and fine print about various “charges” to conceal actual floor area and the final costs.
The law to regulate real estate developers will call on builders to provide details of the number and size of plots, layout plan, carpet area and plinth area of flats, apartments or any other housing complexes. Importantly, it will prevent builders from changing the plans or inserting charges as the sale agreement will be considered binding. The proposed bill mooted by housing ministry, a draft of which has been circulated to all stakeholders, has asked promoters to submit the details of approval and sanctions from civic agencies and bank guarantee furnished.

Experience with ICICI Prudential agent

ashish — Sun, 08 Feb 2009 17:35:05 +0000

This is a post about my experience with a few of the agents of ICICI Prudential (and you should be able to extend this experience with other companies as well). This all started a few weeks back when my dad (a Government pensioner and a well-read man) got a phone call from an ICICI agent about a great pension plan with a guaranteed return. My dad has seen the past 1 year fury of the stock market bringing down the value of most companies, as well as having read enough of the over-promising by insurance Direct Sales Agents. So when anybody from a finance / insurance / investment company call, he asks them to speak to me (not that I am much better, but I am better informed about being able to get details).
So, the guy came once to meet at home, promised us a spiel about investing Rs. 30,000 every year as premium, and in December 2013, ICICI will offer us units with a NAV of Rs. 15 as part of a scheme called ICICI Life Stage Pension Plan (with investments in the Return Guaranteed Fund). Overall, it seems like a great return, and this is a pension plan. So I did some research over the next weekend when the guy was to come back again for trying to get us to sign up for this pension plan. The scheme looks good, and after all, who does not want a guaranteed rate of return for their investments, but it seemed too good to be true. And then I found a few articles that criticized the scheme for the charges that they were levying, refer this article in the Hindu.com (link):

The recently launched ICICI Prudential Return Guaranteed Fund or ‘RGF’ is a good example of how charges diminish ‘guaranteed returns’. One unit of the RGF is available for Rs. 10 NAV with a guaranteed return of Rs. 15 NAV (50 per cent) after five years. This wonderful scheme (I am kidding) can be availed if you enrol in their annual premium ULIPs: Life Stage Pension or Life Stage Gold. All right you may say! At least I am getting 50 per cent minimum guaranteed returns for my first premium. The answer is ‘no’, because only a portion of your first premium is used towards purchase of units. About 20 per cent of the premium is deducted towards premium allocation charge! That means although you expect a total return of 50 per cent (Rs. 10 NAV to Rs. 15 NAV after five years), your effective guaranteed return after charges would be much lesser — close to 20 per cent after five years. That’s a pathetic guarantee! You would earn more in a Bank FD.

This was not something that was clear in the documents that I got from the agent, but this article seemed convincing. And when I showed this review to the agent, he was speechless. He did not deny anything or try to make some more promises to me, but instead told me that I was free to make whatever decision I wanted, and then left. This overall forces me to be more careful the next time.