January 2013 – Page 3

SBI RGESS Fund Review

The RGESS (Rajiv Gandhi Equity Savings Scheme) was announced last year, and I had a post on it in October which explained what it was.

To qualify for this scheme you should be a first time equity investor with less than Rs. 1o lakh income, and you should invest in certain specified stocks which include companies in the CNX 100.

Now, the CNX 100 is made up of stocks of the Nifty and the Junior Nifty and that means you can invest in index funds that track either the Nifty or the Junior Nifty, and you will be eligible for the tax benefit under RGESS. You can of course invest directly in one of those stocks, and that makes you eligible as well.

What I didn’t know is that there are no active mutual funds that limit their investing universe by the CNX 100. This is the difference between SBI’s RGESS funds and other active funds that exist today.

SBI RGESS will only invest in the stocks of the CNX 100, and will be an actively managed fund. Since this mutual fund is specifically targeted at RGESS, there can be no doubt that you will qualify for the RGESS tax deduction by investing in this fund and this is an important point in my mind.

That’s because no other index fund or mutual fund has so far advertised that they are also eligible under RGESS, and even in the case of SBI – they have the SBI Magnum Index FundÂ which is a Nifty index fund, and therefore should be eligible for RGESS, so then why is SBI coming up with a new product but not advertising the existing one for RGESS as well? It makes me wonder if there is a condition that makes it mandatory that only schemes launched specifically for RGESS will be eligible? I haven’t come across any such condition, but if you know of any then please leave a comment.

Moving on to the features of SBI RGESS Fund, here are some key things to keep in mind.

SBI RGESS Fund is an actively managed fund

Active funds are those where the fund manager has the discretion to pick and choose stocks and try to beat the index and give returns over and above their underlying index. SBI RGESS Fund is such a fund, and the fund manager will try to beat the index but will be restricted to the stocks in the CNX 100.

Such funds are typically characterized by relatively high costs, and that’s true for SBI RGESS fund also.

Expenses of SBI RGESS Fund

Mutual funds incur expenses which they then charge back to their investors, and in this is expressed as a percentage, the lower the percentage the better it is.

The expenses in the case of SBI RGESS Fund are as follows:

On the first Rs.100 crores of the daily average net assets 2.70%
On the next Rs.300 crores of the daily average net assets 2.45%
On the next Rs.300 crores of the daily average net assets 2.20%
On the balance of the assets 1.95%

As you can see these expenses are higher than index funds, and that’s a negative for a fund that is meant for new investors. In fact I would consider this is as a fairly big negative and wonder why someone shouldn’t invest in a low cost index fund instead of this fund?

Available for existing investors also

Although the fund is targeted for first time investors there is nothing that prevents other investors from investing in this mutual fund if they so desire. There is no lock in period which is interesting because according to the RGESS scheme there should be a blanket one year lock in of the stock or mutual fund you buy to be eligible but that is not enforced at the fund level.

The offer document has just been filed with SEBI and no dates have been declared but when they do I will update the post.

LIC’s New Jeevan Nidhi Plan Review

LIC has launched two products in the new year, and in this post I’m going to review one of them, which is the New Jeevan Nidhi Plan.

This is an insurance product that gives you life cover and at maturity, you are then compulsorily required to either buy an annuity product from LIC or buy another single premium deferred pension product from LIC.

This is a key thing to remember – you are bound to invest the maturity proceeds in another LIC pension product, and to that extent I wonder if you wanted to do that, why not buy that product right now itself?

As far as I can see – LIC has two types of annuity products – immediate annuity and deferred annuity.

LIC Jeevan AkshayÂ is an immediate annuity product, which means you pay, and start getting the annuity immediately, you can’t build your funds over a number of years, and then get pension. So this won’t be suitable for anyone who doesn’t need pension right now.

LIC New Jeevan Suraksha however is what’s called a Deferred Annuity Product, and that means you pay premiums over a number of years, and then get a pension after the maturity of the product.

The key difference however is that New Jeevan Nidhi gives you a life cover as well, which is not given in New Jeevan Suraksha. It is important to emphasize here that the life cover you get from this product will at best beef up your existing life insurance, and on its own is not going to amount to much if you do indeed meet your maker.

So, based on this, I think someone who is looking for the following things should investigate this product further:

Your retirement is still a number of years away
You want to buy a pension product from LIC when you retire.
You have life cover right now which you want to beef up with some other insurance products.

Please leave a comment if you can think of any other reasons, or if you feel there is any error in my reasoning.

New Jeevan Nidhi Plan Features

Life Cover

This product gives you life cover and in addition to the sum assured there is a Rs. 50 per 1,000 Guaranteed Addition for each completed year in the first five years, so if you die within the first five years then you will get the sum assured plus the guaranteed additions accrued to you.

After the first five years, the plan starts to participate in the profits of LIC, which is called the Reversionary Bonus, and you will get the basic sum assured plus guaranteed addition plus the reversionary bonus plus any other final bonus declared.

This money can be paid out in lumpsum or also in form of an annuity.

Vesting Benefit

Vesting is when the term of the policy is complete and you’re ready to get the benefits from the policy. Â The New Jeevan Nidhi page on the benefits show that if they made a profit of 8% per year during the term of the policy for a 35 year old who took a policy for Rs. 1 lakh for 25 years, the total premiums paid will Rs. 1,03,025 and the total benefits will be Rs. 2,33,500. The annual premium comes out to Rs. 4,121.

Now the important thing to remember is that this is just an example, and your returns could be lower than this if LIC makes less money or higher than this if LIC makes more than this, but it’s best to be conservative at the time of investing and think that you are not likely to get higher than this amount. (Anyone reading the stories of LIC bailing out PSU IPOs could tell you that)

In fact in their illustration if they make a profit of 4%, there is no bonus at all, and you get just Rs. 1,25,000 in that case which shows you how much the returns can vary, and no one can really look that far out in the future and say what will happen during that time.

Eligibility Criteria and Other Features of New Jeevan Nidhi

You have to be at least 20 years old and no more than 60 years of age to take this policy. You need to at least get a minimum basic sum assured of Rs. 1 lakh, and the policy term can be from 5 to 35 years.

The premium can be paid monthly, quarterly, half yearly, yearly or you can even buy a single premium policy. There are rebates in the sum assured if your premium is over a certain amount and that also depends on your premium payment term.

Â Conclusion

The current high interest rate environment gives you a lot of options (Read: 10 Safe Investments in India) where you can invest your money for long durations of time and get sure returns, and I tend to favor those instead of buying this with all the uncertainty over returns, and then the condition to invest only in a LIC annuity product after vesting.

Of Resolutions, ULIPs, IPOs and Stopwatches.

Let’s start this year with a thought on resolutions, good post on HBR titled Dream Instead of Making ResolutionsÂ which talks about an interesting idea of looking beyond your resolutions and into your inner dreams to look at what you should change in your life this new year.

The new year also started with LIC launching two new products – LIC Flex Plus ULIPÂ which as Manikaran tells us may not be all that flexible after all, and LIC Jeevan Nidhi that Ranjan takes a look at.

On the similar topic, Srikanth Meenakshi who is the founder of Funds India writes about why ULIPs are a bad choice against mutual funds.

I’m not sure how serious they are about this, and I can’t see how they can implement it but ET reports that SEBI is thinking about an idea where promoters will have to repay investors if IPOs go down below a certain price within a few months of their listing. Â Â

Chirag writes about the top 10 performing IPOs of 2012.

Finally, do humans have a stopwatch built inside their head?

Enjoy your weekend!

Best 80C Tax Saving Fixed Deposits for 2012 – 13

Since interest rates are fairly high these days, the 5 year tax saving fixed deposit is also a good option for people who want to save using the 80C section. (Read: Section 80C Tax Saving Infographic)

This has a lock in period of 5 years right now, and there are several banks that give you more than 9% on your deposits, and an additional 0.50% for senior citizens in most cases.

The highest rate I could find was City Union Bank which has revised their rates just two days ago, and offer 9.50% on tax saver fixed deposits.

Here is a list of the top tax saver fixed deposits that I could find. If you know of a bank that offers more than these then please leave a comment and I’ll update the table.

Bank	Interest Rate
City Union Bank	9.50%
Deutsche Bank	9.50%
TamilNad Mercantile Bank	9.25%
State Bank of Travancore	9.00%
IDBI Bank	9.00%
Indian Overseas Bank	9.00%
Vijaya Bank	9.00%
Bank of Baroda	9.00%
State Bank of Hyderabad	9.00%
South Indian Bank	8.75%
SBI	8.75%
Karur Vysya Bank	8.75%
Bank of Maharashtra	8.75%
J&K Bank	8.50%
Central Bank of India	8.50%
Kotak Bank	8.50%
Canara Bank	8.50%
Punjab National Bank	8.50%
ICICI Bank	8.50%
Allahabad Bank	8.50%
Axis Bank	8.25%

Updates:

Added Deutsche Bank per Vimal’s comment.
Added TamilNad Mercantile Bank per Vijay’s comment and corrected rate for SBH per Mohan AV’s email.Â

Comparison of all Tax Free Bond Issues in 2012 – 13

There have been four tax free bond issues so far in this financial year, and in this post I’m going to compare the main features of the bonds so we can take a look at how different they have been from each other in terms of tenor and rate of interest offered or the credit rating of these bonds.

This post will also serve as a calendar like the one we had last year so there is only place where you can see a quick list of all the tax free bonds, and can click through to the individual reviews.

I have taken the credit rating of CARE only because as far as I remember they have been rating all issues since last year, and there has been no variance between the credit raters themselves, so just looking at one that has rated all bonds does provide sufficient credit rating information in my opinion.

Issuers	Open and Close Date	CARE Credit Rating	10 years Retail	15 years Retail	20 years Retail	Interest Payment Date
HUDCO Tranche 2	Feb 18 2013 – Mar 15 2013	AA+	7.53%	7.69%	NA	Â
PFCÂ Tranche 2	Feb 25 2013 – Mar 15 2013	AAA	7.38%	7.54%	NA	Â
RECÂ Tranche 2	Feb 25 2013 – Mar 15 2013	AAA	7.38%	7.54%	NA	Â
IRFC Tranche 2	Feb 25 2013 – Mar 15 2013	AAA	7.38%	7.54%	NA	Â
HUDCOClick here to read review	Jan 9 2013 – Jan 22 2013	AA+	7.84%	8.01%	NA
IIFCLClick here to read review	Dec 26th 2012 – January 11th 2013	AAA	7.69%	7.86%	7.90%
PFCClick here to read review	Dec 14th 2012 –	AAA	7.69%	7.86%	NA
RECClick here to read review	Dec 3rd 2012 – Dec 10th 2012	AAA	7.72%	7.88%	NA

As more issues get declared, I will update this list and include other issuers. Please leave a comment if you want to see any other information about them, or if you see any errors.

HUDCO Tax Free Bonds Features

HUDCO is the latest company to announce its tax free bonds issue, and there will be two series – one with a tenor of 10 years, and another one with the tenor of 15 years.

HUDCO Tax Free Bonds Open and Close Date

The issue is going to open on the January 9 2013, and will close on January 22nd 2013, and you can apply for these bonds in the Demat or the physical format.

The bonds will list on the NSE so if you wanted to trade them then you need to have them in the Dematerialized format.

Terms of the HUDCO Tax Free Bond Issue

These bonds have similar terms to the ones issued earlier by IIFCL, PFC and REC and the table below lists down some of the main ones.

HUDCO Tax FREE Bonds Options	Series 1	Series 2
Tenor	10 years	15 years
Interest Rate – Retail Investors	7.84%	8.01%
Interest Rate – Other Investors	7.34%	7.51%
Face Value	Rs. 1,000	Rs. 1,000
Minimum Investment	Rs. 5,000	Rs. 5,000

Can NRIs invest in these bonds?

Like the IIFCL issue, NRIs can invest as retail investors or in the other category for the HUDCO tax free bonds.

Credit Rating of the Issue

This issue has got a slightly lower rating than the other tax free bonds as CARE has rated this issue AA+ whereas it had rated the other three issuers as CARE AAA.

How much of a difference does this make? I honestly can’t give this much importance. As I’ve said several times earlier, the best way to diversify risk from your investments is to spread them across different instruments and it is very hard for even experts and auditors to predict trouble, let alone individual investors.

HUDCO is giving a slightly higher rate than other issuers for the same bonds, and there is not much more you can expect from these bonds where the interest rate is capped as it is.

Do these bonds have a step down feature?

Step down feature is where the interest rate on the bonds bought by retail investors come down to the other categories if they are bought from the stock market. All bonds that have been issued this year have the step down feature including this one.

Who is a retail investor?

Resident individuals, NRIs and HUFs who invest less than Rs. 10 lakhs in this issue will come under Category IV – Retail Investors, and will get an additional rate of interest of 0.50%.

Conclusion

As I’ve said earlier, these tax free bonds are a good option for someone in the 20% or 30% tax bracket and they are quite close in their terms of issue, so it doesn’t really matter which one you choose from. Ideally you should select two or three different ones so if something does go wrong with a particular company, you don’t have all your money invested in it.

It is likely that the interest rates are going to come down in the next month or so and if you wanted to invest in these bonds then you should look to choose one and put your money in them quickly.

Click here to download the application form

Happy new year and thoughts for 2013!

Here’s wishing all the readers a very happy and prosperous new year 2013!

Thoughts for 2013

As this year comes to an end, and the new year dawns – I thought about some of the things that helped me get through 2012 in a productive manner, and which I’d like to keep in mind for 2013 also.

I made this small graphic with 5 thoughts that I would like to keep in mind in 2013, and hope that you find them useful as well. I’ve explained them a little as well so you can see why I’m thinking of these thoughts in the new year.

Focus on money and relationships with the long term in mind

Earlier this year I met a person who gave me some advice that sounded counter to his own interests.

I asked him why he was doing it, and he said your best interest contradicts with mine in the current situation, and I have the power of influence over you right now, but I don’t want to take advantage of that and lead you to the wrong decision. I want to build a relationship with you that lasts for several years, and I want that to start off on the basis of trust.

I was really impressed by that and I think everyone should inculcate this attitude.

Nothing worthwhile will ever be easy, hard work is the foundation of every success

This is something that I just like to remind myself constantly so I can continue to put my head down and work hard, and work productively, it’s true that you need to work smart, but that’s not a substitute for hard work, you must work hard and work smart.

Continue to make small positive changes, and they will lead to greater things

I think too often we get carried away in our day to day work and ignore the small improvements we can easily make that will enrich our lives. Smaller improvements are a lot easier to think of and implement and I hope to make a lot of those in the coming year.

Only a small percentage of news is newsworthy

I believe that most news is meant for entertainment, and not education. This is specially true of investing where many times the best action to take is to take no action at all.

Change is hard, and change is necessary

We inherently resist change because it is hard and unpleasant but change is necessary if you want to move forward. So be prepared to make changes even if they seem hard because there is no progress without change.

Have a happy and prosperous new year!