Yes Bank was the first one to raise the interest rates on savings account with all balances to 6%, and this was followed by Indus Ind and Kotak bank announcing interest rates hikes on their savings accounts too.
I think other banks are going to follow suit soon, and I’m going to maintain a list of the best savings bank account interest rates on this page which will be updated periodically.
To start with, these are the three banks that have announced a hike in their interest rates.
**Karnataka Bank offers 5% for deposits over two lakhs.
Thanks to Hari for leaving comments and informing me about this.
Bemoneyaware caught the fact that the original RBI notification was being interpreted in at least two different ways – one was that all banks will have to pay the same interest rate on deposits of less than Rs. 1 lakh, and the other was that banks were free to decide the interest rates on deposits of less than a lakh as long as they don’t create slabs under that amount.
The fact that these banks have set up different rates for deposits of less than Rs. 1 lakh helps clarify that and show that there will be differential rates even for savings bank balances of less than a lakh. This is good because a large number of people will fall under this category.
Once again – thanks to Hari and Bemoneyaware for their timely and keen inputs.
Update: Thanks to Vivek for pointing out that Karnataka Bank has also raised their interest rates.Â
Algorithmic trading or algo trading is the use of computer programs and software to execute trades based on pre – defined criteria and without any human intervention. High Frequency Trading (HFT) is a subset of algorithmic trading, and this type of trading involves buying and selling thousands of shares in fractions of seconds.
HFT came into spotlight about two years ago when Goldman Sachs sued one of their former employees for stealing code that was used in one of their programs used to execute this type of trade.
For a while, newspapers were all over this story, but with time the attention faded. This event helped bring to light something that most regular investors didn’t know about – that large institutional investors have been allowed to place their servers in the same building as the stock exchanges, and they are able to gleam at transactions a few milliseconds before the other market players do.
The NYT later did a full story on HFT and while the actual way HFT works remains a bit of a mystery, it did help clarify that these big players get trade information milliseconds before other players, and as a result they can trade on this information and trade on the spreads that exist at that point in time. That article had an example of how this affects share prices and they used a $1.4 million order on which they said the slow moving investors had to pay $7,800 extra because of high frequency traders which is about half a percent more on the trade than they would have otherwise had to. An ET article that appeared recently quoted NSE’s Chief Technology Officer stating that the impact cost of high frequency trading on the NSE is 0.07% – 0.08%.
Since these operations are rather opaque, and these are just two numbers I think it’s not reasonable to compare them, but in terms of the impact that they currently have on prices, I think a long term investor is not impacted a whole lot by the small price changes either in India or in the US.
However, in May 2010 – a flash crash took place in the Dow in which several companies and blue chips lost a lot of their value in a matter of minutes, and the NYT reported that shares of big companies like P&G and Accenture saw ridiculous prices like a penny or a $100,000. The prices were later restored to more usual levels.
The SEC investigated this, and said that while the starting point of the flash crash was a mutual fund legitimately hedging its position by selling mini S&P Futures – a confluence of factors, primary among which was HFTs getting in on the trades, and then suddenly stopping altogether caused this market distortion.
Although, there weren’t any reports of regular investors losing money because of these events, it does show that these computer trading programs pose risk, and can cause damage because of the way they are structured. Even in India – BSE canceled all the futures traded on muhurath trading this year, and at least an initial report blamed an algo trader from Delhi for causing havoc because of their trades.
Since no one wants to talk about actual volumes that can be attributed to algorithmic trading – it’s hard to say how big it is in either India or in the US, but I think the fact that no one wants to disclose it shows that it must be reasonably large.
These were the similarities between the US and India, but there is a difference too. It appears that while it’s only a question of how profitable these operations are in the US and whether the profits of firms that engage in this runs in billions or tens of billions; in India – the profitability is itself questionable.
I don’t know how far this is true, and I’m certainly skeptical about it – but maybe they don’t have enough volumes or enough of an edge to be as profitable as they are in the US.
To summarize what we know:
Algo and HFT exists in good volume in India, and while the difference it makes on an individual trade is very low, it is capable of causing wildly large market movements. So far, we have not seen any real damage because of these swings, and exchanges seem to have things under control.
Now, as far as a small investor is concerned, unfortunately even if you don’t agree with the argument that HFT provide liquidity to the market, and are an essential part of the market there is not much you can do about it and you need to really focus on stuff that you do have control over.
What you can do is always place limit orders, and not sell in this kind of panic – that’s all which is in your control, and rather than fretting over half a percent I think small investors are better served focusing on things that are in their control.
Personally, I don’t see any utility in HFT and find it unfair that someone should get information before others, if only for a few milliseconds, and don’t buy the argument that they really do contribute to liquidity. The markets were working quite fine without them for decades, and that someone by virtue of their size gets an edge on other market participants seems unfair to me.
Let’s start this week’s links with Felix Salmon’s post about an unusual thing (at least to me) that happened this week – a Twitter fight – between a fund manager and a CNBC host.
Here is an excerpt from Salmon’s post:
As a general rule, it’s not a good idea to take investment advice from people who appear on CNBC a lot. CNBC Is a marketing platform: fund managers love being on there because it increases their visibility and the chances that people will want to invest with them. Think of it as a dumbed-down, glossy version of Seeking Alpha. But do you really need to be invested with the kind of people who are trolling for customers by appearing on CNBC? I don’t think so.
I quite agree with this because what makes good TV or sells a lot newspapers, magazines, or page-views is often at odds with sound advice that is usually boring and dull.
To add to that, I haven’t come across anyone so far who can predict the market with any reasonable accuracy which most of these pundits try to do. Things like Twitter and blogs make it quite easy to do a fact check on what these pundits said a few months ago and how the market behaved, but even then not many people bother to do that.
Predictions by most people is just an extension of the current situation – when gold was rising, and stocks were falling – they said that it will continue to behave that way in the future also. Now, when stocks have started to rise – the same people are talking about buying into stocks and getting “cautiously optimistic”.
It’s your money and it’s up to you to do the fact checking and figure out who to listen to and who to ignore.
Moving on, the Psy Fi blog has a huge list of behavioral biases and it wasn’t really hard for me to think of one example of each of them that I have experienced myself while reading the post.
Section 80U tax deductions are over and above other deductions and are meant for people who suffer from disabilities.
This section can only be utilized if you suffer from the disability yourself and is not applicable for parents, spouse or any other dependents.
They have two classes of disabilities – one where the person suffers from a disability and the other where a person suffers from severe disability.
You need proof from a medical practitioner to decide what kind of disability you suffer from, and a person from disability will get a deduction of up to Rs. 50,000 from his taxable income while a person who suffers from severe disability can get a deduction of Rs. 1,00,000.
You will also find the forms that need to be downloaded on that link.
I can’t quite remember if they propose to have this deduction or any other form of it post the Direct Tax Code, so I’ll update that aspect once I know more about it.
This is fairly simple thing so I’ll stop here, and thank you Furqan for bringing this to my attention!
One of the more popular options covered under Section 80C is the tax saver fixed deposits.
These have a term of at least five years, and given the high interest rate environment we’re currently in – you can find a lot of banks that offer more than 9% on these tax saving fixed deposits.
Here is a list of some of the higher paying ones that I found, and you can see that there are quite a few options that offer over 9.25% if you are a senior citizen.
Even otherwise, there should be a bank near you somewhere that offers 9%, and that’s pretty good as well.
Most banks specify the rate of interest on tax saver fixed deposits on their websites, and then some others say that the rate of interest of the tax saver FDs are the same as other fixed deposits with a 5 year maturity.
Then there are some banks that don’t have anything about tax saver FDs on their website. In the above list those are indicated by an asterisk. For these banks I have included their 5 year interest rate as the rate of interest for the FDs. I’ve assumed that these banks do offer tax saver FDs, and haven’t updated their website, so if you know otherwise then please let me know and I’ll update this list.
Also, a slightly dated ET article mentioned some other points about tax saving FDs – chief among them, that they don’t offer overdraft, sweep in facility, and bank loans that might be of interest as well.
I’m delighted to be able to wish you all a very happy Diwali for the third time through OneMint! This is a great time for me to thank you for reading, and contributing to OneMint by sharing your suggestions, suggesting topics, helping out other readers by answering questions, and being kind when I make mistakes.
Thank you very much!
I hope you’re spending some quality time with your families and that the new year brings you lot of wealth, wisdom and prosperity.
Every year I used to get a pretty picture from Flickr and share it with you for this post, but since I started doing puzzles, I thought I’d use that to create something special for Diwali.
The main condition that RBI has put forth is that interest rates for all account holders with less than Rs. 1 lakh will remain uniform.
I understand this to mean that the bank will have to pay me the same rate of interest regardless of whether my account has Rs. 10,000 or Rs. 1,00,000 but that interest rate can differ from one bank to the other.
So, Lakshmi Vilas Bank can decide to give its savings account holders 5% while ICICI may decide to give its account holders 4%.
Secondly, banks can create a tier structure for interest rates on balances of over Rs. 1 lakh, so they could offer 5% for balances between Rs. 1 lakh – 5 lakh, and 6% for balances over Rs. 6 lakhs and so on.
The way the interest is calculated should remain the same – that is the daily balance method that’s currently followed and banks shouldn’t get back to their gimmicky ways of taking the minimum balance in a month etc.
While this is great news, and in general I think market players should have more freedom in what they do – this also gives people an excellent way to behave penny wise and pound foolish.
You have to be cautious that you don’t spend too much time chasing an extra percent on a few thousand rupees. After all, 1% of Rs. 1 lakh is a thousand bucks and if that’s all you get extra by switching bank accounts, it will not be worth the effort at all.
If you have a lot in savings account then instead of switching – the question should be why not create a fixed deposit out of it.
Now, this is meant more as a thing to keep in mind rather than to say you should shun a higher saving rate and stick to whatever bank you have.
Most people have a salary account from their employer, and it is probably very easy to set up a second account and then do online transfers to benefit from the extra percent or two, but if that becomes too much of your focus then you will end up playing the wrong game.
I say that based on the experience of how so many people wait till the very last minute to buy the tax saving infrastructure bond knowing fully well that a new issue will earn them just half a percent or so extra and if you’re investing all of Rs. 20,000 in these bonds then that’s peanuts.
I will create a list of savings bank interest rates here when banks change their interest rates, and if you have anything else to add to this please leave a comment.
LIC Bima Bachat is a single premium money back policy which gives you insurance cover as well as some returns on your money.
Now, don’t fool yourself and buy LIC Bima Bachat if you want it for the insurance. A 30 year old will have to pay Rs. 67,058 to get a cover of Rs. 1 lakh and that’s actually one of the better scenarios.
So, if you’re buying it – you’re buying it for the returns and the 80C exemptions that it gets you so let’s look at those factors.
LIC Bima Bachat Covered Under 80C
The premium paid under LIC Bima Bachat policy is covered under Section 80C and what that means is the premium you pay will reduce your taxable salary by that much, and that will then reduce your tax liability.
Since you pay the premium only once – the uncertainty caused by the Direct Tax Code implementation doesn’t affect this.
LIC Bima Bachat Premium and Benefits
The policy can be for 9, 12 or 15 years, and the way it is structured is that you pay the premium, and then they will return you 15% of the sum assured every third year, and then the initial premium at redemption.
So, for a 9 year term policy:
3rd year – 15%
6th year – 15%
9th year -Â Premium
A 12 year policy:
3rd year – 15%
6th year – 15%
9th year – 15%
12th year -Â Premium
A 15 year old policy
3rd year – 15%
6th year – 15%
9th year – 15%
12th year – 15%
15th year -Â Premium
They pay you some loyalty additions at the maturity as well, but there isn’t any documentation on what this addition could be. Based on what some agents have said – the loyalty addition could be around Rs. 35 per 1,000 premium paid, but there’s really no guarantee on what they might be.
The premium itself depends on the age and the term of the policy, and they give you certain rebates in the premium as well.
This table lists down the rebate.
Less than Rs. 50,000
NIL
Rs. 50,000 and Less than Rs.1 lakh
5%
Rs. 1 lakh and Less than Rs.2 lakh
7%
Rs. 2 lakh and above
8%
Now, let’s look at the returns you can expect from this policy.
I created a simple spreadsheet to calculate the IRR of the three illustrations given in LIC’s website, and you can find that Google Spreadsheet here. You can edit this document as well so please be careful of what changes you make as it will affect everyone.
Now, let’s look at the details of the 3 maturities with the same kind of age and sum assured.
Policy Term
9 year
12 year
15 year
Premium
67058
72145
75195
Age
35 years
35 years
35 years
Sum Assured
100000
100000
100000
As you see the premium goes higher as you increase the maturity period, and the returns from all three of these policies are around the 5% mark if you don’t consider the loyalty additions.
Even if you do consider the loyalty additions of Rs. 30 or 35 per Rs. 1,000 premium paid – it’s not likely to make much difference in the returns.
As a point of reference there are quite a few tax saving fixed deposits that fetch you over 9% right now.
I’m not sure if the 15% they pay or the final payment is taxed – so that’s one thing I still need to find out.
I see that they also offer you a loan at a rate of interest of 9%, so maybe that’s something that might be of interest as well.
This is all I wanted to cover in the LIC Bima Bachat policy review, and you can use the spreadsheet to calculate returns based on your age and premium.
DSP Blackrock has launched a new fund of fund called DSP Blackrock World Agriculture fund, and it has just closed the NFO period on the 14th October 2011.
DSP Blackrock has a few other unique fund of funds, and this adds to that basket by introducing a fund that invests in global agriculture businesses.
Since this is a fund of funds – all of its investments will be made in the units of BGF World Agriculture Fund. The BGF World Agriculture Fund was launched in Feb 2010, and had assets under management of $475 million on September 2011, so it’s much smaller than the other similar funds they have like the World Gold Fund, World Mining Fund, New Energy Fund, and World Energy fund which have assets in excess of a billion dollars.
The big idea behind this fund is that the companies that are engaged in agriculture related businesses will benefit as the world population grows and more and more countries industrialize improving the standard of living of their people and making them demand more food.
Indians can probably easily relate to this theme because of the high inflation experienced over the past couple of years, and the RBI repeatedly saying that a big part of that has been the shift to protein rich foods, and increased demand for those pushing up prices.
The BlackRock Agriculture Fund builds on this theme by investing in global companies involved in agriculture related companies all over the world.
In fact, the fund invests in so many countries that it will have exposure to assets in more than 7 currencies, and a breakup of those is shown below.
As is evident, the USD is the biggie with Singapore Dollar coming in second, and then you have exposure in currencies of other industrialized countries.
BGF Agriculture Fund Currency Composition
The DSP Blackrock Agriculture Fund will of course add one more currency to the equation because that will trade in India, and buy units in the US based mutual fund, and therefore the USD INR exchange rate will also affect the returns of this fund.
Here is a look at the fund’s top ten holdings which show that a lot of the companies they are invested in are primarily US companies. In fact, the top 10 has only three companies outside of the US.
Company
% of Assets
Country
Monsanto
9.10%
USA
Potash Corp
8.20%
USA
Deere
7.20%
USA
Syngenta
6.70%
Switzerland
Wilmar International Ltd.
6.00%
Singapore
Archer-Daniels-Midland
5.00%
USA
Brazil Foods
4.30%
Brazil
Mosaic
3.90%
USA
Agrium
3.80%
USA
Bunge Ltd
3.40%
USA
Total
57.60%
The good thing about this is that the fund is heavily invested in large companies with 62.5% of its assets in companies that have a market capitalization of more than $10 billion, and 32.6% of its assets in companies with market cap of more than $1 billion. Only 4.9% of its assets are in companies smaller than a billion dollars.
The scheme information document shows recurring expenses of 2.50%, and the expenses as on August 31 2011 were 2.10% which are fairly high. You lose about 10% of your money if you just held the fund for 5 years, and that’s not a good thing.
While this fund gives people who are so inclined an opportunity to invest in global agriculture stocks or primarily American agriculture related stocks – I don’t really see anyone set up a SIP in this fund, and my guess is that most people who do buy the fund will only buy it as a means to diversify and hold an asset that they couldn’t own prior to this launch.
The thing to keep in mind in that case is the current Rupee Dollar Exchange rate, and recognize that a depreciated Rupee isn’t good for foreign investments (the USDINR rate breached 50 last Friday). That’s simply because you will get lesser units for the same amount of money now than if the exchange rate were 40 Rupees to a Dollar.
On October 21st, the NAV of the Blackrock World Agriculture Fund was $10.77 and at the current exchange rate of Rs. 50, you could only buy $200 if you had Rs. 10,000 and about 18.57 units of the fund. But, if the exchange rate were to move to Rs. 40 to a Dollar – the same Rs. 10,000 could buy you $250, and about 23.2 units of the fund if the fund itself didn’t move at all.
So, if you were interested in the fund, it might still make sense to wait a bit and let the current uncertainty recede which should help the Rupee get back to stronger footing.
I don’t think people should have a lot of such expensive, and fairly complicated investments in their portfolio – if you own a little for diversification then that’s fine, but if your portfolio has many of these fund of funds then fees are gnawing into your returns, and in many cases you are even uncertain on what needs to go well for these funds to perform well because they are spread out in so many countries with exposure to multiple exchange rates, and can get fairly complicated to get a grasp of.
That was all that I wanted to cover about this fund – what do you make of it and do you have many such other fund of funds in your portfolio?
Scott Adams writes that you are what you learn, and regardless of whether you agree with the idea philosophically, it’s a good principle to live by. Be on the lookout to learn new things, and combined with a good work ethic – you’re sure to be rewarded.
