Suggested weekend readings (May 14, 2011): Sundaram Equity Plus NFO, Speak Asia, and ULIPs

Sundaram Equity Plus NFO is closing on 16^th May 2011.  OneMint has a good review of the same.

Multi-level Marketing (MLM as it is famously known) seems to be back again in the form of Speak Asia.  Is it a scam?  Learn more about it through Deepak Shenoy’s post at Captial Mind, Hemant Beniwal’s post at The Financial Literates and articles (Link1 & Link2) at MoneyLife.

And contrary view on ULIPs – when it can be good.  25 minutes video chat with Manish Jain.  Posted by Deepak Shenoy at Marketvision.

Have a happy weekend!!

Latest Interest Rates on Fixed Deposits

Besides helping individuals to manage money efficiently, one of the objectives of Bachhat is to provide individual investors with ready reference guide for various financial products.  As a first step in that direction, from today onwards Bachhat will provide fixed deposits rates of various banks for all tenure.  The link to the page titled 'Interest Rates on Fixed Deposits' shall be at the top section of the home page

Key highlights:

1.  The list provides best interest rates for all tenure available.

2.  For each tenure, the list will highlight the top 5 banks offering best interest rates.

3.  The list will be updated every fortnight.

4.  The list is downloadable and can be shared with others.

Click here to view the list of interest rates on fixed deposits of various banks.

We have made best efforts to ensure that all banks (other than co-operative banks) are covered.  In case you find any bank missing, please alert us.  We shall include it in the next update.

In case you have any suggestions, to make the list more informative, feel free to share with us in the comments section below or email us at bachhatonline@gmail.com.

Has retail investor started considering equity mutual fund investments as long term?

For a retail investor, one of the best ways to have exposure to equity markets is through mutual funds.  Mutual fund industry has seen plethora of regulatory changes in last two years and it has impacted the flows of funds to the industry, more so from retail investors.

As per AMFI’s website, the retail investors’ exposure to equity oriented mutual funds as of March 2009 was Rs. 71,012 crores which increased to Rs. 1,26,813 crores in September 2009, in line with increase in overall equity market.  After that the assets under management (AUM) for equity oriented mutual funds have not changed to a large extent.  As of March 2011, retail investors’ exposure to equity oriented mutual fund is Rs. 1,32,319 crores, hardly a 5% increase in 18 months.

 

It can also be seen that the equity AUM has moved in tandem with the Sensex which reflects there has not been major growth in equity mutual funds in last two years.  However, if one digs deeper in to the data available, one can notice an interesting trend.

Also read - Guide to Mutual Fund Investment

How retail investor views investments in equity mutual funds?

Ageing of equity AUM helps us to understand since how long an investor has invested in the fund.  Longer the tenure, the better for the mutual fund industry reflecting stability and also good for the investor, since equity can be volatile in short term and should be viewed as long term investments.  AMFI website has data on ageing of AUM since March 2009.  Bachhat tried to analyse the pattern of retail investment in equity mutual fund.

As can be distinctly seen, there has been a major growth in age bracket for ‘more than 24 months’(red line).  In March 2009, around 46% of the total funds in equity AUM were invested since more than 2 years.   This has substantially increased to 62% as of March 2011.  Thus the proportion of long term retail investments in equity mutual funds has increased.  One can also notice that it has increased more rapidly after August 2009, when the entry load was abolished and has stabilised in last one year.

Also read - Investing through SIP in Mutual Fund (Part 1) & (Part 2)

Is retail investor thinking long term while investing in equity mutual fund?

Initial analysis corroborate to it however, one needs to wait for couple of years to ascertain the permanent shift in pattern of investment.

On the other hand, this shift in pattern can also be due to any of the following reasons:

1. Post abolition of entry loads and changes in commission structure, fewer new schemes have been launched and the distributors are also not incentivises to chase customers.  Hence the churning has reduced leading to longer investment tenure.
2. Many of the investors in ‘more than 24 months’ bracket may have invested during the highs of 2008-2009 and are yet to break even or make decent profit on investments.  Hence they are still holding on the investment instead of booking loss / minor profit.

Whatever may be the reason, it has lead to increase in holding period of equity investments for retail investors which is a good sign.  If this trend is maintain, it will also be a big positive for the mutual fund industry in attracting stable long term retail investments.

Since how long are you invested in equity mutual funds?  Do you view equity mutual fund investments as long term?  Do share your views and comments on this article below.  Thanks.

Increase interest on savings accounts to 4% and its expected de-regulation: Will it reduce your loyalty with banks?

Reserve Bank of India (RBI), as a first step to deregulate saving deposit rates, increased the interest rate to be paid on saving deposit from 3.5% to 4.0% today.  Last month, RBI released its discussion paper on deregulation of interest rate on saving deposits and sought feedback from the public.

Deposits in saving account constitute a huge 13% of the overall savings in financial assets for individuals.  Further it also constitutes 22% of the total deposits of scheduled commercial banks.  Thus any change in interest rate on saving deposits has a major impact both on the bank as well as on the depositor.

What will deregulation of interest rate mean to you?

Post deregulation, the banks will be free to fix the interest rates on saving deposits.  It will be decided by the market interest rates which in turn will be decided by the overall liquidity situation in the market and that of the bank.

Though the market interest rates have fluctuated over a period of time, interest rates on saving bank deposits have remained unchanged at 3.5 % p.a. since March 1, 2003. 

Source: RBI Discussion Paper on Savings Rate

The above chart taken from the RBI discussion paper clearly depicts that, except for a brief period in 2005 and in 2009-10, over last 6 years, the interest rate on saving bank deposits was less as compared to interest rates on term deposits of 1 month & above.  Considering that 22% of the bank funds come from these deposits, banks benefitted by this low interest rate.

Amount lying in savings account can be bifurcated in to (a) amount kept for transaction purpose and (b) saving component.  90% of the amount in savings deposit is held for saving purposes.  Even though the tenure of such savings is not easily determinable, it can be safely assumed that it can be more than 1 – 1 ½ months on an average and warrants more interest rate.

Thus once the deregulation takes place, one can expect overall increase in saving deposit rate.   However, there might be period during which overall liquidity situation is in surplus and banks are able to procure cheaper funds.  During such periods, saving deposit rate may get reduced and can even be lower than 4% p.a.  The probability of occurrence of such instances will be rare and for short period of time frame.

Things you should be alert of post deregulation

Once deregulation is in effect, banks will need to compete and scramble for saving deposits.  In such competitive landscape, banks will introduce customized and complex products to attract customers.  It can be a combination of savings and current account, or combination of savings and fixed deposits.  It may offer layered interest rates where interest rate depends on the quantum of funds lying in savings account, with higher the amount, higher the rate.  One needs to see the suitability of such products before opting for any of them.  One thing for sure is that the ‘boring’ saving account will become more ‘exotic’ in terms of offerings and complexity.  Be prepare for deluge of saving account products.

Further, since higher rate will impact the profitability of banks, you need to be ready to pay for services you avail from your bank.  Thus bank may start charging you, in case not already charging, or increase the charge for withdrawals in excess of maximum permitted within a specified period.  They may charge you to issue cheque books, charge you in case you visit their branches or charge you for making a phone call and speaking with their customer care representatives!!  All this will lead to increase in bank charges.  Thus you need to consider the increased rate benefit and corresponding increase in charges before opting for a particular bank.

Will it reduce your loyalty to a particular bank?

Saving deposit accounts are not easily ‘transferable’ i.e. in case you are not happy with a particular bank due to its low interest rate offering, you cannot transfer your account to another bank immediately.  Though technically one can freely and easily open and close a savings account, however, in real life, it is difficult to do so, since the savings account is linked with other financial products.  You give your savings account number to your employer for direct credit of salary, your savings account is linked with your mutual fund investments and demat account, your home loan and car loan EMI is debited to the savings account, you have given your savings account number to income tax department for refund and the list goes on.

Thus savings bank account is closely linked with one’s financial products and change in savings bank account will not be an easy decision.  Thus before you leap for a bank who gives you a carrot of high interest rates on your savings account, do check for the sustainability of higher interest rates (it can be a short term marketing gimmick to attract customers) and also check for the charges bank will be levying.

What are your views on deregulation of interest rate on saving deposits?  Once deregulated,  whether difference in savings rate compel you to change your bank?  Do share your views and comments on this article below.