Category: Investments

How To Review Your ULIP Investments Before Surrendering

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

Do you belong to a group of those people who bought a life insurance policy a few years back expecting it to deliver good returns and are regretting your decision since then cursing the sales executive who sold you a useless policy as the returns have not met your expectations?

If yes, then I’m sure you must have thought of doing something with your policy – either surrendering it or stop paying further premiums for it or consulting a financial advisor to discuss other alternatives before taking a final decision. Whatever you have done since then, I hope this article will help you in making further progress in the right direction.

First of all, there might be different reasons for different investors to explore the option of discontinuing their life insurance policies. Some of them are:

1. Unsatisfactory performance of the current life policy, as it was initially sold to you by a sales executive/relationship manager showing a very rosy picture or you bought it with a very little understanding

2. Not making financial sense to you anymore, as you have become more financially literate now and with better understanding of the markets and the products you have a view that ULIPs are not for you

3. ULIPs are too complicated for you to continue, as you don’t understand the various kind of charges involved in it, where your money is getting invested and other things involved in ULIPs

4. Availability of better investment options like mutual funds, gold or real estate and you have a shorter term horizon to invest

Options available to you

  • Surrender the policy and withdraw the whole of the Surrender Value or Fund Value
  • Stop paying further premiums, withdraw majority of the invested amount, keep the policy running and enjoy the life cover. This option is available only with old ULIPs.
  • Get the policy fully paid-up (in case of traditional policies)
  • Do a self-assessment (be your financial advisor for your investment)
  • Keep paying the premiums as you are convinced ULIPs outperform Mutual Funds in the longer run.

Before we move any further, we first need to understand the various charges attracted by these ULIPs. You can check these charges applicable to your ULIP in the “Sales Benefit Illustration” or the product brochures. A sales benefit illustration illustrates various charges, year by year, for the term of the plan so that you know where your money is exactly going, how much money is deducted as charges and what is finally getting invested. Here is the link to check a sample of a sales benefit illustration:

1. Premium Allocation Charges – These charges account for the initial expenses incurred by the company in issuing the policy e.g. cost of underwriting, medical tests and expenses related to distributor/agent fees. These are deducted upfront from the premium either annually, half-yearly, quarterly or monthly depending on the frequency of the premiums.

2. Mortality Charges – These charges refer to that part of the premium which goes towards the death benefit and are recovered by cancellation of units on a monthly basis.

3. Policy Administration Charges – As the name suggests, these are administrative charges and are recovered by cancellation of units on a monthly basis.

4. Fund Management Charges – These are the charges incurred to manage the investment portion of your premium and vary from fund to fund depending on the percentage of equity component in the fund.

5. Surrender Charges: These charges are deducted for premature surrender/termination of a policy and are capped at 15% from September 1, 2010.

Surrender Value: It is the sum of money an insurance company will pay to the policyholder in the event he/she voluntarily terminates or surrenders the policy before its maturity or the insured event occurring. In other words, it is the amount payable to the policyholder should he/she decide to discontinue the policy and encash it. This cash value is the savings component of most permanent life insurance policies, particularly whole life insurance policies. This is also known as ‘cash value’ and ‘policyholder’s equity’. The life cover provided by a life insurance policy ends with its surrender as it effects a termination of the contract between the insured and the insurer. Surrender Value = Fund Value – Surrender Charges

Fund Value: The value of the investment portion of your life insurance policy is known as Fund Value. Till the time surrender charges are applicable in ULIPs, surrender value is calculated by deducting the surrender charges from the fund value. Fund Value is paid in full once the surrender charges cease to exist, usually 5 years in new ULIPs. Fund Value = Total no. of units under the policy * NAV of the fund chosen

Let us also take a look at the rules that have been there before and after an important date in the history of ULIPs.

Rules governing ULIPs bought before Sept 1, 2010

Lock-in period of 3 years: Policies taken before September 1, 2010 used to have a lock-in period of 3 years only, after which you were allowed to surrender your policy and take away the fund value after getting the surrender charges deducted.

Surrender Charges: Surrender Charges used to continue after the lock-in period of 3 years. In some policies, these charges continue even after 5 years.

Minimum Premiums Payable: Three

Cover Continuance: This feature was available in older ULIPs wherein you were allowed to continue with the policy even after paying premiums only for the first three years. Your money remains invested in your choice of fund option and the mortality charges will be deducted to maintain the life cover. This was due to mis-selling by intermediaries. Life cover continues even after you surrender the policy or stop paying policy premiums.

Charges: Charges are relatively higher.

Rules governing ULIPs launched on or after Sept 1, 2010

Lock-in period of 5 years: The so-called New Ulips, which have been launched on or after September 1, 2010, carry a lock-in period of 5 years i.e. you’ll get the fund value only after 5 years if you’ve paid the premiums for all the 5 years. If you surrender the policy without paying even 5 premiums, then also you’ll get the surrender value only after 5 years but in that case your money will earn only 4% p.a. interest.

Surrender Charges: Surrender Charges cannot be levied after the lock-in period of 5 years if the policy term is 10 years or less and after 6 years if the policy term is more than 10 years. If you surrender after paying only the first premium, the maximum surrender charges as per IRDA can be Rs. 3000 (for premiums up to Rs. 25000) or Rs. 6000 (premium above Rs. 25000).

Minimum Premiums Payable: Five

Cover Continuance: The new ULIPs don’t offer this feature. If you stop paying premiums after the lock-in period, the policy will be discontinued and the value will be returned to you. Life cover ceases once you surrender the policy or stop paying policy premiums. It was one of the best features with the older ULIPs but I fail to understand why it has been removed from the new ULIPs altogether. The agents used it extensively to mis-sell ULIPs by telling their clients that they just need to pay only three premiums and after that they can either withdraw the investment or the life cover will continue even they don’t pay further premiums.

Charges: Charges are relatively lower

What to look for before surrendering your policy – step by step process:

  • Check whether the policy is bought before or after September 1, 2010
  • Check the various charges deducted till date: “Premium Allocation Charges”, “Mortality Charges”, “Policy Administration Charges”, “Fund Management Charges” etc.
  • Check the Surrender Value or Fund Value by making a call to the customer care centre or online logging into your account
  • Check the various charges to be deducted in the forthcoming years and do a self-assessment to decide whether the charges are justifiable for you to continue with the policy
  • Do a background check of the fund manager before you continue with your existing ULIP – who the fund manager is and what is his/her qualification? How long has he/she been in the fund management business and how has been his/her performance history?
  • Compare the performance of the fund vis-a-vis some of the good performing diversified mutual fund schemes over a period of one year, three years, five years and since inception. ULIP returns should be easily available on the company’s website. If the fund is underperforming consistently, you should seriously consider discontinuing the policy.
  • Compare the mortality charges of your ULIP with a good term plan with the same Sum Assured. Newer ULIPs usually carry high mortality charges as they don’t come under the cost caps, which gives insurance companies an opportunity to have a high margin on the mortality cost. It is most likely that the term plan would be offering a cheaper option to cover your life. If that is the case, then I think you should get your ULIP discontinued by encashing the fund value.
  • Take the help of a financial planner in case you are not able to understand the charges or the performance of the funds before taking final decision.

Reasons why you should not surrender your ULIP:

Most of the older ULIPs either carry very high costs in the initial years or have steep surrender charges or both. It is only in the later years that charges become somewhat reasonable and more money gets invested. So it would be a bad idea to surrender ULIPs with high costs in the initial years and a penalty for discontinuance.

There are a few old ULIPs, in which the policies carry surrender charges almost till the end of the policy term. You need to check your policy, the surrender charges involved in it and then decide whether it is worth surrendering or keep the policy till its maturity.

If you have taken one of the old ULIPs, then your life will remain covered even without paying further premiums with the “Cover Continuance” feature. In that case, if the mortality charges of future years are reasonable, then you may stick to your policy and hope the fund is managed in an efficient and professional manner.

As I mentioned earlier, you should not surrender ULIPs if you are convinced ULIPs outperform Mutual Funds in the longer run.

Reasons why you should surrender your ULIP:

There is lack of transparency in almost all sections of their workflow.

Fund managers of almost all ULIPs have failed to deliver and there is no certainty whether they will be able to deliver in the future years also.

Premium Allocation Charges will remain quite high in future years also which eat up a significant portion of your principal investment.

Term plans are the best insurance plans to get your life insured.

It is better to invest in investment avenues like mutual funds, Gold ETFs, PPF etc. or to pay-off any of your loans which carry a higher rate of interest than your ULIPs will deliver.

Documents you need to submit for policy surrender:

  • Policy surrender form – it should be easily available on the company’s website
  • Policy bond
  • A self-attested copy of your ID proof
  • Any cancelled cheque or bank attested bank statement or bank attested passbook copy for fund transfer

I have a personal view that one should never mix his/her investments with insurance. But, if somebody has already done that then the best option is to try not to surrender the policy in a real hurry, keep it alive as long as possible, study all the features and charges of your policy thoroughly and reap the maximum benefits out of it. It is generally advisable that you should wait for a longer period before surrendering your policy, as this will ensure the higher initial charges are spread out. But, if after doing the extensive research, you have decided to surrender the policy, then you should visit the nearest branch office of the company to surrender your policy along with the above mentioned documents.

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Religare Finvest NCD Issue Details

Religare Finvest which is a fully owned subsidiary of Religare is also coming out with a NCD issue shortly, and this is about the same time when they issued NCDs last year.

I’m going to talk about some key points that people looking to invest in NCDs are looking for and then move on to some general aspects.

Issue Open and Close Date: The NCD open date is on September 14 2012 and the close date is on September 27 2012.

Issue Available to NRIs: NRIs can invest in these NCDs on a non – repatriable basis.

Minimum Investment Amount and Listing: There will be 5 series and the minimum for applying in any series is Rs. 10,000. There will be 4 categories of investors and like the other issues, retail investors will get a slightly higher rate than others. Here are the 4 categories of investors:

  • Institutional
  • Non Institutional
  • Non Reserved Individual Investors: Individual investors who invest more than Rs. 5 lakhs.
  • Reserved Individual Investors: Individual investors who invest less than Rs. 5 lakhs.

Here is a chart that shows the terms and conditions of the 5 series.

 

Religare Finvest 2012 NCD Issue
Religare Finvest 2012 NCD Issue

 

Interest Payment and Record Date: Interest will be paid on 1st April every year wherever applicable, and the record date is going to be 10 days prior to the interest payment date.

Secured or Unsecured: This is a secured issue; this doesn’t however mean that your money is guaranteed by anyone and if you’re unsure of what this means then please leave a comment.

Credit Rating: The issue has been rated “CARE AA-” by CARE and “ICRA AA-” by ICRA. Both of these are good ratings.

Other Things to Consider

These yields are certainly better than the Shriram City Union NCD that came out before this one, and at over 12% for all maturities I think this is pretty decent. Whether you should invest or not of course depends on where else have you invested and if this issue fits in with your other goals or not.

One thing I have always said in the past and want to repeat here is that it is not possible for most retail investors or even auditors to sniff out trouble in a company till it’s very late, and in absence of that, the best bet is to spread your money around and be safe in case something goes wrong.

This post is from the Suggest a Topic page.

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Shriram City Union Finance NCD Issue

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

Shriram City Union Finance Limited (SCUF), a part of the Shriram group of companies and the sister concern of Shriram Transport Finance will be launching the public issue of its secured non-convertible debentures (NCDs) of Rs. 500 crore including a green shoe-option of Rs. 250 crore from September 12, 2012.

The company plans to use the proceeds from the issue to finance its business operations, repay the existing loans, for lending and investment purposes and other business operations including capital expenditure and working capital requirements. The issue closes on September 26, 2012.

About Shriram City Union Finance

SCUF, incorporated in 1986, is registered with the Reserve Bank of India as a deposit-taking non-banking finance company (NBFC) with its presence in gold loans, small business finance loans, auto loans, two-wheeler loans, personal loans and consumer durable loans. The promoter group companies hold 54.95% stake in the company at present. The company has a network of 927 branches as on June 30, 2012, out of which 654 branches are located in the southern states and 85 branches are located in Maharashtra.

Financials of the company

During the year ended March 31, 2012, SCUF reported total income of Rs. 2,056 crore as against Rs. 1,323 crore during the year ended March 31, 2011, an increase of approximately 56%, mainly on account of 68% growth in the assets under management (AUM) of the company at Rs. 13,431 crore in FY12 vs. Rs. 7,998 crore in FY11.

The company reported an increase of 66% in its operating costs to Rs. 425 crore in FY12 as compared to Rs. 256 crore in FY11 while there was a jump of 42.32% in company’s profit after taxes (PAT) which stood at Rs. 343 crore in FY12 as compared to Rs. 241 crore in FY11. It reported a marginal decline in its net interest margin (NIM) from 8.21% in FY11 to 7.53% in FY12. In the first quarter of FY13, the company earned PAT of Rs. 103 crore on total income of Rs. 674 crore.

Asset quality of the company has been improving consistently over the last 2 years despite a healthy jump in its AUM. Gross NPAs and Net NPAs of the company stood at 1.55% and 0.38% respectively as on March 31, 2012 as against 1.86% and 0.43% respectively as on March 31, 2011 and 2.27% and 0.71% respectively as on March 31, 2010. This consistent decline in the NPA figures is actually quite remarkable in the current business environment and looking into the kind of customer profile the company has.

Gold loans and small business finance loans constituted 64.84% of the AUM in FY12. This figure suggest that the company is primarily focusing on these two segments to grow its business. Its portfolio is geographically concentrated as just three states, Andhra Pradesh, Tamil Nadu and Karnataka, accounted for around 89% of its portfolio as on March 31, 2012.

Features of the Issue

The company is offering an annual coupon rate of 10.60% for a period of 36 months and 10.75% for a period of 60 months to all the categories of investors except the “Resident Individual Investors” i.e. for the retail investors investing up to Rs. 5 lakhs in a single name. Like it was done in the Shriram Transport Finance NCD issue in July, the company has decided to offer an additional incentive of 0.90% per annum for 36 months and 1% per annum for 60 months to the Resident Individual Investors.

40% of the issue is reserved for the Reserved Individual Category i.e. for the individual investors investing up to Rs. 5 lakhs and another 40% of the issue is reserved for the Non-Reserved Individual Category i.e. for the individual investors investing above Rs. 5 lakhs. 10% of the issue is reserved for the institutional investors and the remaining 10% is for the non-institutional investors. NRIs and foreign nationals among others are not eligible to invest in this issue also. The allotment will be made on a “first-come-first-served” basis.

The NCDs have been rated ‘CRISIL AA-/Stable’ by CRISIL and ‘CARE AA’ by CARE indicating high degree of safety regarding timely servicing of financial obligations and very low credit risk. The bonds will offer reasonable liquidity to the investors as they are going to list on both the stock exchanges – NSE and BSE.

Unlike Shriram Transport Finance and IIFFL NCD issues, investors will not have the option to apply these bonds in physical form i.e. it is mandatory for all the applicants to apply for these NCDs only in the dematerialised form.

The investors will have the option to get the interest either paid annually or at the end of the tenure along with the principal. Under the cumulative interest option, retail investors will get Rs. 1,743.30 after 5 years and Rs. 1,386.20 after 3 years for every Rs. 1,000 invested. For all other investors, these amounts stand at Rs. 1,666.65 and Rs. 1,352.90 respectively.

Series I I II II III III IV IV
Investor Category Individuals Non-Individuals Individuals Non-Individuals Individuals Non-Individuals Individuals Non-Individuals
Face Value Rs. 1000 Rs. 1000 Rs. 1000 Rs. 1000 Rs. 1000 Rs. 1000 Rs. 1000 Rs. 1000
Coupon 11.50% 10.60% 11.75% 10.75% N.A. N.A. N.A. N.A.
Redemption Amount Rs. 1000 Rs. 1000 Rs. 1000 Rs. 1000 1386.20 1352.90 1743.30 1666.65
Maturity Period 36 Months 36 Months 60 Months 60 Months 36 Months 36 Months 60 Months 60 Months

As is the case with all of the listed NCDs, the interest earned will be taxable but the company will not deduct any tax at source (or TDS). The issue keeps a minimum investment requirement of Rs. 10,000 (or 10 bonds of face value Rs. 1,000) which is somewhat higher than the minimum investment requirement of Rs. 5,000 in case of IIFFL.

Performance of the bonds issued last year

NCDs issued last year by SCUF offering 12.10% coupon and 60 months to maturity are currently yielding 12.06% with the last closing price quoting at Rs. 1,043.45. NCDs offering 11.85% coupon with 36 months to maturity are currently yielding 12.78% with the last closing price at Rs. 1030. The 60 months option was subscribed by maximum number of people last year and it is also the most traded option among all the options offered. So, going by these yields, 11.75% and 11.50% should not ideally attract too many retail individual investors. At least I would not be jumping on to it for my investments.

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India Infoline Finance Limited NCD Review

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

India Infoline Finance Limited (formerly known as India Infoline Investment Services Ltd.) will be launching its second issue of non-convertible debentures (NCDs) from September 5, 2012. To keep things absolutely clear right from the beginning, I’ll use IIFFL as the short name for this company as I want to distinguish this company from its well known listed parent company, India Infoline Limited (IIFL), and advise the readers not to confuse this issue as the issue launched by the parent company IIFL.

About India Infoline Finance Limited

India Infoline Finance Limited is a credit and finance arm of the IIFL group and provides loans against property, housing loans, gold loans, loans against securities/margin financing and medical equipment financing to the corporates, high networth individuals (HNIs) and retail clients. One of its subsidiaries, India Infoline Distribution Company Limited, is also engaged in the business of distribution of financial products like mutual funds, insurance products, company fixed deposits, NCDs, National Pension System (NPS), IPOs etc.

The company was originally incorporated on July 7, 2004 as a private limited company which leaves this company with a very short operating history and unproven business track record.

Financials of the company

During the year ended March 31, 2012, the loan book of the company stood at Rs. 6,746 crore as against Rs. 3,288 crore, an increase of approximately 105%. This jump has been achieved mainly on account of mortgage loans and gold loans which constitute approximately 45% and 41% of the total loan book respectively. The mortgage loan book is contributed by loan against property (LAP) at 89% and home loans at 11%. These figures suggest that the company is primarily focusing on gold loans as the new business segment and LAP in the housing loan segment.

IIFFL reported revenues of Rs. 953 crore in FY12 as against Rs. 520 crore in FY11, a jump of almost 83%. It also reported 76% increase in its net interest income (NII) to Rs. 412 crore in FY12 from Rs. 234 crore in FY11 mainly on account of a 105% increase in its lending book. Gross NPAs and Net NPAs of the company stood at 0.61% and 0.44% respectively as on March 31, 2012 as against 0.37% and 0.30% respectively as on March 31, 2011.

The company has made a significant branch expansion in the gold loan business last year which resulted in 79% increase in its operating costs to Rs. 297 crore in FY12 as compared to Rs. 166 crore in FY11. This resulted in a very tepid improvement of 14% in company’s net profit after taxes (PAT) which stood at Rs. 105 crore in FY12 as compared to Rs. 92 crore in FY11.

Here is the link to check the latest audited financial results of the company ending March 31, 2012.

About the NCD Issue

The size of this NCD issue is Rs. 500 crore including a green-shoe option of Rs. 250 crore. The company plans to use the proceeds for various financing activities including lending and investments, to repay existing loans, for capital expenditures and other working capital requirements.

The bonds offer a coupon rate of 12.75% per annum in three different options – payable monthly, payable annually and cumulative annually payable on maturity. Unlike Shriram Transport Finance NCD, this issue will not offer any additional incentive to the retail investors and the same rate of interest will be offered to all the categories of investors. This uniform rate of interest should make it attractive for the Category I – institutional investors and Category II – non-institutional investors. Under the cumulative interest option, the investors will get Rs. 2054.50 at the time of maturity. The maturity period in all the three options will remain 72 months only.

Option I II III
Rate of Interest 12.75% 12.75% 12.75%
Interest Payment Monthly Annual Cumulative
Effective Yield 13.52% 12.75% 12.75%
Tenure 72M 72M 72M
Redemption Amount Rs. 1000 Rs. 1000 Rs. 2054.50

The interest earned will be taxable as per the tax slab of the investor but the company will not deduct any TDS on it as is the case with all of the listed NCDs taken in a demat form. The company has decided to keep the minimum investment requirement of Rs. 5,000 (or 5 bonds of face value Rs. 1,000) which has made it easily investable from the small retail investors’ point of view.

Like most of the NCDs, these bonds are going to list on both the stock exchanges – NSE and BSE. Investors will have the option to apply these bonds in physical form also.
25% of the issue is reserved for the “Reserved Individual Portion” i.e. for the individual investors investing up to Rs. 5 lakhs and another 25% of the issue is reserved for the “Unreserved Individual Portion” i.e. for the individual investors investing above Rs. 5 lakhs. 40% of the issue is reserved for the institutional investors and the remaining 10% is for the non-institutional investors. NRIs and foreign nationals among others are not eligible to invest in this issue. The allotment will be made on a “first-come-first-served” basis.

IIFFL is a relatively new company with a limited operational track record. The issue has been rated ‘AA-/Stable’ by CRISIL and ‘AA- (Stable)’ by ICRA. One notable point I want to emphasise here is that unlike last year and unlike all NCD issues of the past, these NCDs qualify as “Unsecured Redeemable Subordinated Debt” in nature or in other words, in the event of default, no charge upon the assets of the company would be created in connection with these NCDs.

I’ve picked this text from the DRHP

“The NCDs will be in the nature of subordinated debt and hence the claims of the holders thereof will be subordinated to the claims of other secured and other unsecured creditors of our Company. Further, since no charge upon the assets of our Company would be created in connection with the NCDs, in the event of default in connection therewith, the holders of NCDs may not be able to recover their principal amount and/or the interest accrued therein in a timely manner, for the entire value of the NCDs held by them or at all. Accordingly, in such a case the holders of NCDs may lose all or a part of their investment therein. Further, the payment of interest and the repayment of the principal amount in connection with the NCDs would be subject to the requirements of RBI, which may also require our Company to obtain a prior approval from the RBI in certain circumstances.”

Though this feature should not make this issue an untouchable one to invest in but the investors should exercise extreme caution while investing in such issues as extreme adverse business conditions related to gold loan business or housing loan business might put IIFFL’s fortunes in trouble and it would become difficult for the investors to recover their hard earned money in the form of investment.

The issue closes on September 18, 2012.

Performance of the bonds issued last year

As I mentioned in the Shriram Transport Finance NCD post also, as many as ten such NCD issues had hit the markets last year issued by companies like Shriram Transport Finance, Shriram City Union Finance, Muthoot Finance, Manappuram Finance, Religare Finvest and India Infoline Investment Services Ltd. All the issues, except Shriram Transport Finance NCDs, listed at a discount and that too at a very deep discount of 5-8% in some cases. Many of them have still not been able to recover from those losses. They are yielding higher than 13% even now.

NCDs issued last year by IIFFL offering 11.90% coupon were secured in nature and are currently yielding 13.75% under the 60 months reserved individual option with the price quoting at Rs. 1001.10. It is the most traded option among all the options offered last year.

Next 20-30 days will witness three more such NCD issues seeking your investment offered by Shriram City Union Finance, Muthoot Finance and Religare Finvest. These companies have already filed their respective draft red herring prospectus (DRHP) with SEBI and almost all the regulatory formalities have been completed. Let us see how these NCDs perform once they get listed and if they are able to give any kind of much needed relief from the sinking stock prices or escalate our pain by listing at a discount again.

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Mutual Fund Capital Gains Statement and Consolidated Account Statement Online

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

Not many mutual fund investors know that they don’t require services of their distributors or any other agent/advisor to check the status of their investments or realised/unrealised profit/loss they have made in mutual funds. Surprisingly, even many of the distributors don’t know that it is very easy to get various kinds of consolidated mutual fund statements online and that too in a very short span of time.

Actually writing about it struck me when I was surfing Suggest a Topic here and also while I was filing I-T returns for my clients during the last fortnight of July. I used this tool for a few clients of mine while calculating their “Capital Gains” and “Exempt Income”.

Are you surprised, curious and happy at the same time that such a service exists? Just read on how to go about getting these statements in your mailbox. I’m sure you would like to use this service as soon as you finish reading this article.

All what is required to get the necessary information related to your mutual fund investment is that your email id(s) must have been registered with the mutual fund company with whom you’ve made the investment and the same email id should still be active or you can make it active if required.

Here is the process to follow on CAMS Online:

  • Visit CAMS Online website – https://www.camsonline.com/default.asp
  • Click on “Online Services for Investors”
  • Click on Check it Out! under Mailback Services
  • Here you have the option to choose the statement(s) you require for your purposes
  • For Capital Gain purposes – Click on “Consolidated Realised Gains Statement”. It is also called Investment Performance Statement. It calculates realised gains/losses on FIFO a basis and segregates them as long term and short term. The statement also contains a summary of the dividends paid out in respect of the account
  • To check your entire holdings across CAMS, Karvy and Franklin serviced mutual funds – Click on “Consolidated Account Statement – CAMS+Karvy+FTAMIL”
  • For other purposes, click on the other respective tabs available there
  • Once you select the statement you require, you need to provide your email id(s) which you or your distributor/advisor/agent must have filled when you did your investment(s). If you want to have all your investments across different email ids, you need to repeat this process
  • Select the Delivery Option – a download link or an encrypted attachment
  • Enter a password of your choice twice just to protect the statement from misuse

CAMS Online accepts only 2 such requests per day and 10 requests per month per registered email id as a precautionary measure in order to prevent spamming. This is an email-only service i.e. if your email address is not registered with the mutual fund company, then you’ll not be able to have your statement online through this process, not even with your PAN or Folio No. In that case, you’ll have to contact the mutual fund company and they’ll send it to your address registered with them or the address registered with CVL while undergoing KYC process.

Here is the process to follow on Karvy Mutual Fund Services (Karvy MFS):

  • Visit Karvy MFS website – https://www.karvymfs.com/karvy/
  • Click on “Investor Services”
  • Under Mailback Services, you have the options to check your portfolio by email id or PAN, get your Account Statement by email id or folio no. and Capital Gains Report by folio no.
  • Click on the tab as per your requirement and feed the necessary input to get your statement(s)
    • “Portfolio By Email ID” – This tool mails your latest Portfolio Valuation
    • “Portfolio By PAN” – This tool mails your latest Portfolio Valuation
    • “Account Statement By Email ID” – This tool mails your latest Account Statement
    • “Account Statement By Folio” – This tool mails your latest Account Statement
    • “Capital Gains By Folio” – This tool mails your Capital Gain Report
  • To check your entire holdings across CAMS, Karvy and Franklin serviced mutual funds – Click on “Consolidated Account Statement – CAMS+Karvy+FTAMIL” under Online Services

With Karvy, you need to have the Folio No. of your mutual fund investment to get the Capital Gain Report. If you don’t have the folio number. readily available with you, then you can first get the account statement in your mailbox and then get this report by taking folio number from the account statement.

I hope this article helped you in getting to know about the whole process of getting these statements in your mailboxes. If you have any query or feel that I’ve missed something here please leave a comment and I’ll definitely respond to it.

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Part 3: Futures and Options – How do Options work?

There are two types of Options that you can trade in – Call Options and Put Options. You buy Call Options when you think a share is going to go up in value and you buy Put options when you think a share is going to go down in value. This means that the value of your Calls go up as the stock rises, while the value of your Puts go up when your share falls.

For a retail investor, there are three common reasons for owning an Option.

Why own an Option?

1. Speculation: Options are a way to take a short term speculative position given that they can’t be held for very long.

2. Going Short: You can’t borrow and short sell shares in India, so along with selling Futures, buying a Put Option or selling a Call Option (without owning it first) is a way to go short a share or index.

3. Leverage your position: Buying a Call Option is the same as buying a share in the sense that you profit from both the trades when the share price rises then why buy a Call Option at all? Options can leverage your positions which means that you can gain or lose a lot more with the same amount of money using Options than you can by taking cash positions. This is akin to trading on the margin, and has the same effect.

Hedging is a popular reason given for owning Options but I don’t think it is all that applicable when talking about small investors, especially with a product that expires in a short time. But theoretically, hedging is also one reason to own Options.

Popular Definition and Key Terms of a Call Option

Let’s get to the popular definition of Call Options now which I will use to give an example and explain them in detail.

Call Option: A Call is a right, not an obligation to buy an underlying asset at a predetermined date at a predetermined price by paying a certain amount upfront.

Now, look at this picture below and let’s take that example to understand Call Options a little better.

Nifty Call Options
Nifty Call Options

I took this screenshot from the Options chain section of the NSE website, and this shows the Call Option details for NIFTY which expires on 25th October 2012. Every Option has an expiry date and the Option becomes worthless on that expiry date. The expiry date is the predetermined date in the definition.

This is a Call option to buy components of the Nifty, so the Nifty is the underlying asset from the definition.

The Strike Price which is the right most column in this image shows at what price you will be buying Nifty. If you look at the first row that’s a price of Rs. 3,800 and then it increases by Rs. 100 at every row, and this is the predetermined price from the earlier definition.

Now, if you look at the sixth column from the left of this picture – that’s “LTP” which stands for “Last Traded Price” and this shows you at what cost per unit the last transaction happened for this contract. A Nifty Call Option is made of 50 units, so you pay 50 times whatever is listed in the LTP column.

The Nifty closed at 5,392 this week, and let’s look at the last highlighted row in this picture which is for the strike price of 5,300 and see how that fits our definition.

This Call is a right, not an obligation to buy Nifty at a predetermined date of October 25th 2012 at a predetermined price of Rs. 5,300 by paying Rs. 232 per unit upfront.

So if you bought this contract today, you will have to pay Rs. 232 and in return you will have the right to buy a Nifty contract at Rs. 5,300 on October 25th 2012. If Nifty is at say 6,000 on that date, then your Call option will be worth a lot more than Rs. 232 because you can buy it at 5,300 and then sell it at 6,000. That’s also why in the image above you see that the price of the Options keep increasing as the Strike Price keeps going down.

If the Nifty closes below 5,300, the Option will expire worthless because why would you buy Nifty at 5,300 when you can buy it for lower in the market. The part of the definition where it says that the Option is a “right but not an obligation” comes into play here because if Nifty closes below what you paid for it then you don’t have to do anything at all as it is your right to buy, but you aren’t obligated to buy.

This means that when you buy a Call Option your loss is defined to what you paid for it. You can’t lose more than that on the transaction.

The seller of the Call however who is known as the person who writes the option doesn’t have a cap on how much he loses and can lose an unlimited amount (theoretically) in the transaction. This is because the person who writes the option has an obligation to sell you the underlying asset at the price decided in the contract.

As far as Options trading in real life is concerned you don’t actually buy and sell the underlying asset but pocket the difference between the price you paid for the Option and the price at which you sold the Option.

One last thing about this is that Call Options that are lower in value than the underlying asset or are profitable are called “In the Money” and in the image above these are highlighted in yellow. Other Options are called “Out of the Money”

Now, let’s move on to the Put option.

Popular Definition and Key Terms of a Put Option

Let’s look at how a Put option is defined now.

Put Option: A Put is a right, not an obligation to sell an underlying asset at a predetermined date at a predetermined price by paying a certain price upfront.

Now, look at this picture below and let’s take that example to understand Put Options a little better.

 

Nifty Put Options
Nifty Put Options

This screenshot is also from the Options chain section of the NSE website, and this shows the Put Option details for NIFTY which expires on 25th October 2012.

Since this is similar to Call Option but in a Put you have the right to sell instead of the right to buy, let’s look at the first highlighted row and see if we can define it the way we defined the Call Option.

This Put is a right, not an obligation to sell Nifty at a predetermined date of October 25th 2012 at a predetermined price of Rs. 5,300 by paying Rs. 81.10 per unit upfront.

So if you bought this contract today, you will have to pay Rs. 81.10 and in return you will have the right to sell a Nifty contract at Rs. 5,300 on October 25th 2012.

If Nifty is at say 4,800 on that date, then your Put option will be worth a lot more than Rs. 81.10 because you can buy it at 4,800 from the market and sell it at 5,300.

So, in the case of a Put option, you benefit from the contract when the price of the underlying goes down because you have the right to sell it at a much higher price.

Like Calls, you benefit from Puts by pocketing the difference between the price you paid and the price the Put is currently trading at – you don’t have to actually own the underlying asset and then sell it to profit.

And like Calls, Puts also limit your maximum loss to what you paid when you bought the contract. You can’t lose more money than that and this makes it a good way to go bearish on something because the other alternative is by selling a Futures contract and you can stand to lose a lot of money very quickly there if the market turns against you.

Conclusion

Options are a fascinating subject and I’ve spent many hours researching and looking at different Options strategies and trades because of this. For someone who is coming across them for the first time, they can seem a bit intimidating but once you get the hang of it they are fairly easy to understand and build positions with.

If you have any questions about this post, or any other observations, please leave a comment and I’ll answer them.

Edit: Lot size corrected. 

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Best Company Fixed Deposits – Returns-Wise & Safety-Wise – Be Wise

This post is written by Shiv Kukreja, who is a Certified Financial Planner and runs a financial planning firm, Ojas Capital in Delhi/NCR. He can be reached at [email protected]

Continuous volatility in the stock markets coupled with bad macro-economic data, high inflation numbers and unclear government policies have forced many investors to shift their investments from equity to fixed income instruments like tax-free bonds, non-convertible debentures (NCDs), bank fixed deposits and company fixed deposits. Whereas bank fixed deposits barely manage to beat inflation, some investors always remain on the lookout for higher returns from company fixed deposits.
A few days ago, one of the readers, Vimal Raj, put up a query regarding fixed deposit offering from Hawkins. Here is the quote Vimal Raj left under Suggest a Topic:

“In today’s ET, I read that Hawkins is open for Fixed deposit. Is it worth to invest in? And why they are offering fixed deposit rather than bonds?”

Here is my effort to make the readers know some of the details about company fixed deposits and what you should be looking for before making an investment.

Not all companies can accept public deposits. Government companies, manufacturing companies, housing finance companies (HFCs), financial institutions and non-banking financial companies (NBFCs) registered under the Companies Act 1956, have been authorized to offer fixed deposits. Whereas bank fixed deposits are covered by a guarantee from the Deposit Insurance and Credit Guarantee Corporation of India, which assures repayment of Rs. 1 lakh in case of any default by a bank, but there is no such guarantee for company deposits.

However, if any company including an NBFC or HFC defaults in repayment of deposit, the investor can approach Company Law Board (CLB) or consumer forum or file a civil suit in a court of law to recover the deposits.

Who regulates company fixed deposits?

Category Regulator Website
Government Companies MCA www.mca.gov.in
Manufacturing Companies MCA www.mca.gov.in
NBFCs RBI www.rbi.org.in
Housing Finance Companies NHB www.nhb.org.in
Financial Institutions MoF www.finmin.nic.in
http://www.watchoutinvestors.com/http://www.iepf.gov.in/

Factors that investors should be looking for before investing in company fixed deposits:

Credit Rating: It goes without saying that safety of the principal amount is the most important factor that any investor would consider before seeking a higher return. It will take you 10 years to recover your principal amount if you risk your investment with a company likely to default but offering 12.5% return vis-a-vis a financially sound company offering 10% return.

Reserve Bank of India (RBI) and National Housing Bank (NHB) have made it mandatory for NBFCs and HFCs such as HDFC, Shriram Transport Finance etc. to have at least ‘A’ rating to be eligible to accept public deposits. Whereas HDFC deposits have been rated ‘FAAA’ by CRISIL and ‘MAAA’ by ICRA, ICRA has granted a rating of ‘MAA’ to Canfin Homes for securing these deposits. As per CRISIL, ‘AAA’ rating implies that the company has the highest credit quality and the lowest credit risk. All the companies which get their fixed deposits rated by the rating agencies are required to clearly display the given rating on their application forms.

Credit risk is the biggest risk for fixed deposit investors. Investors should not get too greedy for high interest rates while looking to invest in fixed income instruments rather they should focus on 4 C’s of credit analysis – capacity, collateral, covenants and character of the issuer.

Capacity is the ability of a borrower to repay its obligations. Investors should primarily focus on the financial condition and past track record of the company before committing their hard earned money into these deposits.

Collateral represents assets that the company pledges as an alternate repayment source against the deposits. I have no idea which companies in India offer collateral while accepting public deposits for the safety of investors’ money. If any reader has an idea about any such company then please let me know.

Covenants are the terms and conditions of the lending agreements. Covenants are essentially restrictions on the company to ensure its financial position remains under check and help minimise the risk to the depositors.

Character refers to the credit history of the borrower. It is very important to check how efficient the management of the company is and how prompt the company is towards the payment of periodic interest, maturity proceeds and issuing investment certificates. You must ask your financial advisor or the servicing agent all these things before deciding the company to invest. My personal experience with HDFC was quite satisfactory whereas it was not very good with Jaiprakash Associates and Unitech.

Financials: Securing a rating is not mandatory for non-finance companies. So, in their case, the investors need to check their balance sheets, profit & loss accounts and cash-flow statements in order to understand how the company would generate the money to make the interest payments and principal repayments.

Rate of Return: Presently, the maximum rate of interest any company can offer is 12.5%. Observing the returns these companies are offering at present suggests that in most of the cases the safer the deposits are, the lower the returns will be but it is not always the case. It is natural to consider the term deposits offered by the government organizations to be the safest, probably that is why their returns are also lower. The investors need to make a balance between the risks and the returns.

Here is a list of the major company fixed deposits that are open to investors right now.

Companies Ratings 12M 24M 36M 60M Senior Citizens
Government Organisations
EXIM Bank CRISIL FAAA/ ICRA MAAA 9.25% 9.25% 9.25% 9% +0.50%
HUDCO FITCH TAA+/CARE AA+ 9.40% 9.40% 9.40% 9% +0.25%
Kerala Transport Development Finance Kerala Govt Undertaking 10.25% 10.25% 10.25% 10% +0.25%
SIDBI CARE AAA 9.25% 9.10% 9.10% 9.10% +0.50%
Housing Finance Companies (HFCs)
NHB CRISIL FAAA/ FITCH TAAA 9.50% 9.50% 9.25% 9.25% +0.60%
Canfin Homes Ltd. ICRA MAA 9.75% 9.75% 9.50% 8.50% +0.50%
DHFL CARE  AA+/ BWR FAAA 11% 10.50% 10.50% 10.50% +0.50%
HDFC CRISIL FAAA/ ICRA MAAA 9.25% 9.40% 9.50% 9.25% +0.25%
PNB Housing Finance CRISIL FAA+ 9.50% 9.50% 9.75% 9.75% +0.50%
LIC Housing Finance CRISIL FAAA 9% 9.25% 9.50% 9.50% +0.25%
Gruh Finance CRISIL FAA+/ ICRA MAA+ 9.25% 9.75% 9.50% 9.50% +0.25%
Sundaram BNPP Home Finance ICRA MAA+ 9.25% 9.50% 9.50% 9.50% +0.50%
Non-Banking Financial Institutions (NBFCs)
Sundaram Finance ICRA MAAA 9.75% 9.50% 9.50% N.A. +0.50%
Mahindra Finance Samruddhi CRISIL FAAA 9.25% 10% 10.25% 9.75% +0.25%
Shriram Transport Unnati CRISIL FAA+/ ICRA MAA+ 9.25% 9.75% 10.75% 10.75% +0.25%
Manufacturing Companies 6M 12M 24M 36M Senior Citizens
Ansal API(www.ansalapi.com) 11.50% 12% 12.25% 12.50% N.A.
Ansal Housing(www.ansals.com) 10% 11% 11% 11.50% N.A
Apollo Hospitals(www.apollohospitals.com) N.A. 9% 9.25% 9.50% N.A.
Bombay Dyeing(www.bombaydyeing.com) N.A. N.A. N.A. 10.50% +0.50%
CEAT Ltd.(www.ceat.in) N.A. 9.50% 10% 10.50% +0.25%
Elder Pharma(www.elderindia.com) N.A. 10% 11% 12% +0.50%
Force Motors(www.forcemotors.com) N.A. 9% 10% 11% N.A.
Gati Ltd.(www.gati.com) N.A. 10% 10.50% 11% +0.25%
Ind-Swift Labs(www.indswiftlabs.com) N.A. 11% 11.50% 12% +0.50%
Jaiprakash Associates(www.jalindia.com) 11.50% 11.75% 12.25% 12.50% N.A.
Jaypee Infratech(www.jaypeeinfratech.com) 11.50% 11.75% 12.25% 12.50% N.A.
J K Tyre & Industries(www.jktyre.com) N.A. 9% 9.25% 9.50% +0.50%
Unitech  11.50% 11.50% 12% 12.50% N.A.
Valecha Engineering(www.valechaeng.com) N.A. 10% 10.50% 11% +0.50%
* Special Tenure FD Rates – HUDCO – 8.50% (84M), DHFL – 10.75% (400 Days), HDFC – 9.75% (15M & 33M), PNB Housing Finance – 9.50% (84M), LIC Housing Finance – 9% (18M), Gruh Finance – 9.50% (84M), Sundaram Finance – 9.75% (18M), Mahindra Finance Samruddhi – 9.75% (18M)

Liquidity: As per deposit regulations, companies in India cannot accept demand deposits. A deposit which is immediately withdrawable on the depositor’s demand is called a demand deposit. There is a lock-in period of 3 months during which the investors cannot ask for a withdrawal of their investment except in the event of the death of the depositor. If you go for a withdrawal between 3 months and 6 months of making the investment, no interest is paid. Thereafter there is a penalty of 1% if you go for a premature withdrawal.

As per the RBI and NHB regulations, minimum period of deposit cannot be shorter than 12 months and maximum period of deposit cannot be greater than 60 months in case of NBFCs and 84 months in case of HFCs. For manufacturing companies, the minimum period cannot be shorter than 6 months and the maximum period cannot be greater than 36 months.

Tax Implications: The interest income earned on a company deposit is taxable at the same tax slab as the investor is in and is added to the income under the head “Income from Other Sources”. Tax will be deducted at source @ 10.30% whenever the interest income exceeds Rs. 5000 in a financial year, in accordance with section 194 A of the Income Tax Act, 1961.

Floating Rate Option: Suppose you take a floating rate home loan at 10.25% and after 6 months, the housing finance company announces an increase in its lending rate by 0.75%, the applicable rate on your home loan automatically becomes 11%. Have you ever heard of any bank or a company offering a similar benefit on your fixed deposit? I did not till the time I visited the website of EXIM Bank of India. This is a unique feature of the term deposit scheme offered by this bank. Suppose you do a fixed deposit of 36 months with the EXIM Bank at 9.25% and after 12 months the bank decides to increase the rate to 10% for the same maturity, the applicable rate on your deposit will automatically become 10% for the residual period of investment.

Moreover, if the existing rate on a deposit, say 9.25% (contracted based on original maturity at the time of placing deposit), is higher than the revised rate applicable for the residual tenor, say 8.50%, then the original higher rate of 9.25% would continue to apply.

Coming back to Vimal Raj’s query, I could not find any details of the fixed deposit scheme offered by Hawkins Cookers Ltd. anywhere, not even on the company’s website and annual report. So, I’ll not be able to comment on that.

RBI may not be in a mood to cut the interest rates and concede against the spiraling inflation, but if we observe the recent actions taken by some of the big banks including SBI etc., returns on some of the fixed income instruments should soon begin their journey downwards. So, if you find these rates attractive enough to park your money from risk-return perspective then you should lock into these deposits soon before they start falling.

To be posted soon: “Company Fixed Deposits – Should You Invest?”

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How to calculate Yield to Maturity of a Bond or NCD

This post is written by Shiv Kukreja

A few days back TCB, one of the regular visitors on OneMint, asked me about the process to calculate YTM of a bond. I wanted to tell him the whole process while replying but that would have been too much for the comments section and therefore I decided to write a post on it.

What is Yield to Maturity and how to calculate it?

Yield to Maturity (or YTM) is the annualised rate of return that an investor earns on a fixed income instrument such as bond or debenture, if the investor purchases the bond today and holds it until maturity. This yield incorporates the yield earned in the form of interest payments and the present value of the principal amount (or face value) of the bond.

In other words, it is the discount rate which equates the present value of coupon payments and maturity amount equal to the market price of the bond. The Yield to Maturity is actually the Internal Rate of Return (IRR) on a bond.

Market Price of the Bond = Present Value of Coupon Payments + Present Value of Maturity Amount of the Bond

Real Example: I’ll take the real case of 9.95% SBI 15-year bonds to present the process to calculate the YTM. Consider the below mentioned data of SBI bonds for the calculation:

Face Value: Rs. 10000
Maturity Amount: Rs. 10000
Tenure: 15 Years
Allotment Date: March 16, 2011
Maturity Date: March 16, 2026
Coupon/Interest: 9.95% p.a. payable annually (Rs. 995 on the Face Value of Rs. 10000)
Interest Payment Date: April 2nd every year
Market Price: Rs. 10788.56 (July 23, 2012)
Remaining Tenure: 13 Years and 236 Days (or approx. 13.65 Years)
YTM: To Be Calculated

YTM is the discount rate in percentage which is going to make the present value of Rs. 995 payable every year on April 2nd and the present value of Rs. 10000 payable on March 16, 2026 equal to the market price of Rs. 10788.56.

In equation terms:

Rs. 10788.56 = Rs. 995/(1+YTM)^0.65 + Rs. 995/(1+YTM)^1.65 + Rs. 995/(1+YTM)^2.65 + Rs. 995/(1+YTM)^3.65 + Rs. 995/(1+YTM)^4.65 + Rs. 995/(1+YTM)^5.65 + Rs. 995/(1+YTM)^6.65 + Rs. 995/(1+YTM)^7.65 + Rs. 995/(1+YTM)^8.65 + Rs. 995/(1+YTM)^9.65 + Rs. 995/(1+YTM)^10.65 + Rs. 995/(1+YTM)^11.65 + Rs. 995/(1+YTM)^12.65 + Rs. 10995/(1+YTM)^13.65.

The discount rate which makes LHS = RHS is the YTM of the bond. Now, we will have to use the “Trial and Error” method to determine this YTM.

There is an approximation formula to calculate YTM very close to the correct YTM:

Approximate YTM = [(Coupon Payment + ((Face Value – Price)/Years to Maturity)] / (Face Value + Price)/2

How to calculate YTM using a financial calculator?

We can also use a financial calculator or an excel sheet to calculate YTMs. Here is the link to one of the financial calculators:

http://vindeep.com/Corporate/BondYTMCalculator.aspx

You just need to feed your data in the boxes provided on the left hand side of this calculator and it will calculate YTM for you after just couple of clicks. You can observe here that you cannot make changes in the boxes on the right hand side and these boxes calculate the required figures on their own.

Maturity Date: 16/03/2026
Coupon: 9.95%
Coupon Payment Frequency: Annual
Maturity Value of bond: 100
Interest Accrual Start Date: 16/03/2012
Clean Price: 104.3656
Settlement Date: 23/07/2012
Ex-Dividend: No
Day Count Basis: Actual/Actual

“Settlement Date” is the date on which you are calculating the YTM. In our case, it is July 23, 2012 or July 25, 2012 (a couple of working days after today’s date) and click on “Calculate Bond Yield (YTM)” after filling the first five boxes of the financial calculator. “Dirty Price” should be equal to the “Market Price” of the bond but we cannot change it on our own. So, in order to change it, we need to change the “Clean Price”.

To calculate the correct clean price, we need to deduct the “Accrued Interest” of Rs. 3.52 from the market price Rs. 107.89. The resultant figure is Rs. 104.37 and when we put it in the sixth box and again click Calculate Bond Yield, we get the correct dirty price of Rs. 107.89. ‘Ex-Dividend’ box should remain ‘No’ and “Day Count Basis” should be “Actual/Actual”. Now we get the correct YTM as 9.3509%.

How to calculate YTM using excel?

We can calculate the required YTM using the ‘Yield’ function in an excel sheet also. As we did it using financial calculator, we just need to feed the data here in a similar way. Start by typing “=Yield” (without the quotes) and then enter the following parameters:

Settlement: “23/07/2012” (must be in quotes) [Note: This assumes that your Excel is setup to take date format in DD/MM/YYYY, if it doesn’t work, try MM/DD/YYYY)]
Maturity: “16/03/2026” (must be in quotes)
Rate: 9.95% (or 0.0995)
Pr: 104.3656 (Clean Price)
Redemption: 100 (Maturity Amount)
Frequency: 1 (Interest Payable Annually)
Basis: 1 (Actual Days since Last Interest Payment/Actual Days in a Year)

You can check that the data we have entered here is quite similar to the data we entered using financial calculator. Actually the financial calculator uses excel itself in the background to calculate YTM. Here we get the YTM as 9.3571%, a bit different than we calculated above. That is probably due to the rounding-off differences of “Accrued Interest” while working on the financial calculator.

You can similarly calculate “Yield to Call” and “Yield to Put” also, which are regular features of corporate bonds issued in the developed markets. But, here in India, call/put options are not used extensively so I’ll try to write a post on them whenever the need arises. If I missed something here or there is something which is incorrect or require explanation, please leave a comment.

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Dematerialization Process – Special Situations

This post is written by Shiv Kukreja

“Converting my physical share certificates and mutual fund investments into a dematerialised form has been a huge pain”. This is the experience which many of my clients have shared with me. The reasons are many – lack of knowledge with the clients about how, where and whom to approach, complicated procedures to do it, very little knowledge with the people who work for broking companies or DPs and most importantly very little interest shown by the sales-driven broking industry. We are giving it a shot to simplify the process a bit for you.

How to dematerialise your physical asset holdings

Dematerialisation is the process by which physical certificates of one’s financial investments like shares or mutual funds can be converted into an electronic form. An investor, who wants to get the securities dematerialised, needs to have a demat account with any of the depository participant (DP) like HDFC Securities, ICICI Securities, India Infoline etc.

The investor needs to surrender the certificate(s) to the DP along with the duly filled Dematerialisation Request Form (DRF), who then sends the securities to the concerned Registrar & Transfer (R&T) agent. To avoid any misuse of the share certificates, the investor must ensure that they are defaced by marking “Surrendered for Dematerialisation” on the face of the certificates. After receiving the certificates, R&T agent registers either NSDL or CDSL as the holder and the  client as the beneficial owner of these securities, if the certificates are found to be in order.

On receiving intimation from the R&T agent, NSDL or CDSL credit the securities in the depository account of the client with the DP and inform the client accordingly. It should not take more than 30 days from the date of submission of a demat request to get the holdings dematerialised.

Dematerialisation request is subject to a DP scrutiny and can be rejected in case:

* A single DRF is used to dematerialise securities of more than one company.
* A single DRF is used to dematerialise securities having different ISINs of the same company.
* If the material information on the security certificates is not readable.
* Part of the certificates pertaining to a DRF are either “locked-in” or “partly paid-up”.

Here are some of the common situations I’ve seen over the years.

Transfer cum Demat Form – Transfer of physical securities certificate from one name to another requires the investor to forward the certificate along with the duly stamped and executed “Transfer Deed” and “Transfer cum Dematerialisation” form. While sending the certificates for transfer, the investor must ensure that the transfer duty has been paid, the stamps are cancelled and the transfer deed is complete in all respects like the transferor’s signature, broker’s stamp, SEBI registration/code no., full address of the transferee, everything is there.

Death of a joint holder – Transmission cum Demat Form – In the event of death of a joint holder(s), the other joint holder(s) can get the name of the deceased joint holder(s) deleted from the physical certificate and simultaneously get the securities dematerialised by using the “Transmission cum Demat” form.

Death of a single holder/investor – Transmission in case of nomination – In the event of death of a single beneficial owner (or investor/client), the nominee(s) can get the securities dematerialised by using the “Transmission cum Demat” form along with a notarised copy of the death certificate. These securities will then automatically be transferred in the name(s) of the nominee(s).

Death of a single holder/investor – Transmission in case there is no nomination – In the event of death of a single beneficial owner without a nomination, the legal heir(s) or legal representative(s) can get the securities dematerialised by using the “Transmission cum Demat” form, a notarised copy of the death certificate and any of the following notarised documents – succession certificate or copy of probated will or letter of administration.

Difference in the sequence of holding – Transposition cum Demat Form – The names of the holders on a certificate should exactly match with the names in the demat account and in the same sequence. If the sequence of names on a certificate is different than the sequence in the demat account, then the securities can be dematerialised by using “Transposition cum Dematerialisation” form. e.g., If A and B have a joint demat account in the same sequence and some share certificates are held in the sequence of B and A, then the shares can be dematerialised in the same demat account using the “Transposition cum Demat” form.

Theft/Loss of a certificate – A complaint needs to be lodged with the local police station and a copy of the FIR should be obtained and the event should immediately be reported to the R&T agent along with the certificate no./folio no./distinctive nos. to “Stop Transfer” of such certificate(s). The client should then request for a fresh issue of duplicate certificate by sending both these documents physically to the R&T agent.

Change in the name consequent upon marriage/divorce – The securities certificate along with a copy of marriage certificate/decree of divorce and fresh specimen signature, duly attested by the competent authorities should be forwarded to the R&T agent. The client is also required to open a new demat account with the changed name and then send the new certificate for dematerialisation.

These are some of the most common situations that the clients face. If you’ve any personal special situation/experience regarding dematerialisation of your physical holdings, then please do share with us.

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What does negative bond yield mean?

In India, we have very high rates of interest and while we are quite familiar with negative real rate of interest, we don’t often come across negative bond yields.

Negative real rate of interest is when your nominal interest doesn’t cover inflation, but a negative bond yield means that the returns you get from the bond are negative even in nominal terms.

This recently happened for a brief while with some German bonds, and Dhruv posted the following comment in the Suggest a Topic section.

Dhruv July 7, 2012 at 5:04 pm

Recently I read a news about German 2 year note yields fell to record lows of minus 0.01 percent , what does this actually mean(the minus sign on bond yields)?

This situation with the negative yields gives a good opportunity to not only look at negative bond yields but briefly touch upon Zero Coupon Bonds as well.

Zero Coupon Bonds are bonds that don’t have an interest rate, and don’t make any periodic payments at all. Investors buy these bonds because they are sold at a discount and redeemed at face value, and that’s how investors make their money. So, a bond of face value Rs. 100 may be auctioned at Rs. 95 and then when it is redeemed at Rs. 100, the investor makes the 5 rupee difference. This is a good link that explains the Zero Coupon Bonds in brief and also has a calculator to calculate yield on such bonds.

Germany issued such bonds with a two year maturity last month called Schatz, and they were sold at 99.87 Euros for a 100 Euro Face Value bond. So that’s just a very small yield of 0.07% to begin with.

Then about a week after the issue when the bond began trading in the market, the yield turned negative, which means that the bond traded for more than 100 Euros for a short while. This happened again last week when the yield on the Schatz turned negative due to Euro area concerns.

This example is for zero coupon bonds, but the yield can turn negative even for interest bearing bonds if they trade in the market and if their price is greater than the face value plus the interest payments that are remaining on the bonds.

Low or negative yields indicate that investors are seeking a very high degree of safety for their money, and for this reason this kind of thing is only seen in the bonds of developed countries, and that too occasionally. It is highly unlikely that we will ever witness this situation in India.

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