March 2012 – Page 3

Motilal Oswal MOSt Shares Gold ETF Review

Motilal Oswal has come up with an interesting product in the crowded space of gold ETFs with its MOSt Gold shares ETF. The new fund offer for this opened on March 02 2012 and will close on the March 16 2012.

This is a gold ETF which means that the fund will buy physical gold as its underlying and trade on the stock market. It will trade on both the NSE and the BSE. In this respect, it is similar to every other gold ETF that exists in the market right now; what makes it different from all the other funds is that in this ETF you can actually redeem your units and get delivery of physical gold.

I’ve seen numerous comments from people who have said that they want to be able to redeem their gold ETFs with physical gold and Motilal Oswal has sensed this opportunity and brought out this unique product to cater to it.

If you remember the post about the difference between mutual funds and ETFs – I used this diagram there to show the process of creation and redemption of ETF units.

The same thing is applicable here as well, and the only difference is that they have made the redemption units really small by allowing investors to redeem just 10 grams of gold whereas for other ETFs this is a much larger number like a kilogram.

So, if you have 10 units which are equivalent to 10 grams of MOSt Goldshares you can ask Motilal to redeem your units for physical gold.

You don’t get exactly the price of 10 grams for 10 units because they will deduct transaction charges at the rate of Rs. 750 per 10 grams and Rs. 250 per 100 grams if you want to get physical gold (no charges for a kilo) and secondly the expenses of the scheme will be deducted from the NAV and as time progresses each unit will represent less than a gram.

MOSt Goldshares will charge 1.3% expense ratio which means that they will use up to 1.3% of the total assets under management to cover for their expenses. This money is reduced from the NAV so although one unit of gold ETF is supposed to represent one gram of gold – in reality it is always less than that. This is true for all gold ETFs, and in fact every other type of ETF also and that’s the reason you should always look for funds with the lowest expense ratios.

In this regard, there are a lot of funds with much lower expense ratios than MOSt gold ETF and these Motilal Goldshares fare worse than them as far as charging expenses to investors are concerned.

However, based on what people have reported here I think you will still get gold coins cheaper from them than you get them from banks – a good way to find out if that is true is to compare the NAV after this ETF lists to the daily prices of gold coins sold by banks and post offices and see how much of a difference is there.

To conclude, I think for someone who is looking to invest in gold electronically, a gold ETF with lower expense and higher liquidity is much better than this fund, but I know from comments here that there is a segment of people who are only interested in buying a gold ETF if it promises to redeem that unit into physical gold and I believe this is a good option for them. The one thing you will have to figure out is after you redeem this for gold units where will you sell them for cash because if you have to take those gold bars or coins to a jeweler and he charges you a deduction again (which they normally do) then you are stuck with yet another expense and it lowers your returns.

A few thoughts on LIC Jeevan Vriddhi Plan

LIC has come up with a new single premium insurance plan that’s called the Jeevan Vriddhi plan and it’s pretty similar to the plan I reviewed last October called the LIC Bima Bachat Plan.

Essentially, you need to pay a single premium that gives you a coverage which is equal to 5 times the premium and then at the end of 10 years which is the maturity period of the plan you get some returns which are broken down between guaranteed and fixed returns.

The benefit illustration page shows that for a 30 year old you can expect returns of a little under 7% which is a fairly decent return for something that’s covered under Section 80C and it is certainly better than the 5% odd that the LIC Bima Bachat plan’s benefits were showing up to be.

Bear in mind though that there are several tax saver fixed deposits that offer upwards of 9% interest guaranteed and these have a shorter lock in period of 5 years as well.

If you aren’t interested in tax savings or have exhausted the 80C limits then the tax free bonds that are out these days like the REC tax free bond give close to 8% and that’s better than this too.

There are two things I’m not considering here, the first thing is that LIC does provide an insurance cover which the others don’t and I’m not giving that much weight because you really should have a term plan that takes care of your insurance needs and buying these type of products to take care of insurance needs is not a good strategy as it leads to getting into products with sub optimal returns and then you aren’t getting a lot by way of insurance coverage either.

The second thing I’m ignoring is the variable returns, and the reason for that is the way LIC is investing in disinvestment programs and incurring losses on those investments – it doesn’t inspire much confidence that they will be able to give you much by way of anything over the guaranteed returns. In fact, Business Standard has got a great article today on how LIC has incurred massive losses on the disinvestment stocks it has bought since 2009 and how it has missed out on all IPOs that have turned profitable since that time.

In going through this product I think this is not as bad as some of the other insurance cum investment products that you come across but at the same time I don’t see any compelling reason to invest in this. Philosophically, I have a mindset of not mixing insurance and investment and my default case is to stay away from such products and there should be something really sweet on offer to change my default case.

Finally, Ranjan and Hemant have done good reviews with calculations on their blogs and those are good reads for anyone considering investing in this product too.

LIC Jeevan Vriddhi Plan Review at TFL Guide

LIC Jeevan Vriddhi Plan Review at Personal Finance 201

Muthoot Finance NCD Issue: March 2 2012 – March 17 2012

Muthoot Finance, which is the largest gold loan financing company in India, and has come up with two debt issues this fiscal has come up with another NCD issue which opened on March 02 2012 and will close on March 17th 2012.

In their last NCD issue, Muthoot offered an interest rate of upwards of 13% and created a lot of excitement in the market, and the terms of this issue are exactly the same as the terms of the last issue.

This issue is for a total size of Rs. 500 crores and the bonds will be issued in dematerialized form only. The issue has been rated ICRA AA-/Stable by ICRA and CRISIL AA-/Stable by CRISIL.

Here are the other details of this issue.

Muthoot Finance NCD March 2 2012 to March 17 2012

Muthoot has been classified as a systematically important NBFC by RBI, is a huge company with gold loans under management worth Rs. 207 billion and has a capital adequacy ratio of 18%. The promoters hold a little more than 80% of its shares and all these are positive factors that go in favor of the company.

In my post about the last Muthoot NCD issue I had written that that you shouldn’t have a lot of your portfolio exposed to either this issue or any other like this. The company is doing well currently but that doesn’t mean it will always do well and you don’t want to end up in a situation where you find that you lost a lot of money for a few extra percentage points in a debt issue.

I would say the same thing here, and if anything, I’ve become more wary of investing money here because of the frequency and timing of the issue. When everyone expects interest rates to come down in a few months, why not wait to come out with a debt issue then?

Gold prices have also ended their one way march up and haven’t moved anywhere in the past 6 months and that doesn’t bode too well for a gold loan company either.

If you want to benefit from the high interest rates currently prevailing then you could take a small exposure in this issue but if you already own these bonds then it’s best to avoid them and look at other things that offer more safety albeit at a lower rate.

REC Tax Free Bonds Review

This post is the old post that talks about the REC 2011-12 issue, please read about the current REC tax free bonds 2012-13 issue here.Â

REC (Rural Electrification Corporation) is going to issue tax free bonds and the issue will open on March 6 2012 and will close on the 12th of March 2012. They had issued infrastructure bonds earlier, and these tax free bonds should not be confused with them.

When you buy 80CCF infrastructure bonds, the amount you invest in those bonds get reduced from your taxable income but in these bonds that’s not going to be the case. The interest on these bonds will be tax free and they are similar to the other tax free bonds like the HUDCO, NHAI and PFC issues. For the two of you interested in knowing this – these bonds are tax free under Section 10(15)(iv)(h) of the Income Tax Act.

Now on to the issue itself and let’s start with the high credit rating that the issue has got. The REC tax free bond issue has been given the highest rating by all issuers since the government owns the majority stake (66.8%) in REC, it has been consistently profit making,Â this is a secured issue, and it has also been granted the Navratna status by the government. The issue is ratedÂ â€œCRISIL AAA/Stableâ€ by CRISIL, â€œCARE AAAâ€ by CARE, â€œFitch AAA(ind)â€ by FITCH and â€œ[ICRA]AAAâ€ by ICRA.

This is a Rs. 30 billion or Rs. 3,000 crore issue and the minimum application size is Rs. 5,000 with each bond having a face value of Rs. 1,000.

There are two series which will pay interest every year and the maturity on one series is 10 years while the other one is 15 years. The interest rate is slightly higher for retail investors and retail investors are defined as resident investors who invest less than Rs. 1 lakh in the bond issue.

Unfortunately for NRIs, they can’t invest in this bond issue – the prospectus doesn’t explain why NRIs are barred from investing in these bonds.

These bonds will list on the BSE and will only be issued in dematerialized form. Here are the details on these bonds.

Options	Bond Series 1	Bond Series 2
Tenor	10 years	15 years
Interest for Retail Investors	8.13%	8.32%
Interest for Other Investors	7.93%	8.12%
Face Value	Rs. 1,000	Rs. 1,000

If you compare this with any of the earlier issues you will see that the interest rate offered is very similar, and I think these bonds make a good investment option for the fixed income part of your portfolio especially if you are in the 30% tax bracket. Some people have lamented the fact that the interest is not reinvested automatically and you will have to find alternate means to reinvest that interest and if you need the money 10 or 15 years from now and aren’t interested in any interest income then that’s probably valid (although you should consider inflation in that case and also read my detailed post with the comparisons)but other than that I think these tax free bonds offer a good opportunity to take advantage of the high interest rate environment that prevails today. I think the slowing economy is going to force RBI to bring down rates and these type of rates aren’t going to be on offer for very long so waiting for better rates is not be very prudent at this stage.

I’m sure a lively discussion is going to take place on listing gains in the comments section, but I am neither knowledgeable enough to say how much listing gains you can expect nor am I interested in these short term gains so I’m not going to be of any use there. Anything else, leave a comment and I’ll try to answer it.