Inflows into systematic investment plans (SIPs), where investors put money in mutual funds periodically, are on a decline because of poor returns and distributors' lack of interest in serving small investors.
According to executives at various distribution houses, net SIP additions have come down to 50,000 accounts per month from a high of 250,000 in 2007 and 2008. Also, lapsed SIPs are not being renewed. There is no official data on SIP account details.
"SIPs had slowed down, but we have seen the momentum come back in the last two months," said Sundeep Sikka, chief executive, Reliance Mutual Fund.
Bajaj Capital Chief Executive Anil Chopra said the main reason for SIPs not finding favour with distributors was that they were not finding it profitable to serve smaller customers. "The economics does not seem to be working out. If you look at the numbers, SIPs have actually died down. For most advisors on the offline platform, serving a small ticket size like Rs 2,000 or 3,000 per month does not cover even petrol expenses. So, it becomes unviable."
LOST BATTLE
For the period between Feb 1, 2009 to Feb 1, 2010
Fund Annualised
SIP return Annualised
non-SIP return
DSP Balckrock Opportunities 53.89 79.33
HDFC Top 200 80.55 97.95
Birla Sunlife Top 100 50.86 82.01
IDFC Premier equity 85.65 108.08
Principal Large Cap 59.03 75.62
UTI Opportunities 50.04 79.92
All the figures in % Source: Valueresearch Online
According to rough estimates, there were close to 4.2 million SIPs running at the peak of the bull run, which has come down to 2.5-3 million. SIPs took a big hit in 2009 when adverse market conditions played havoc with retail investors' portfolios. A lot of investors cancelled their SIPs after failing to meet their commitments. Several distributors also blame the new commission regime for the fall.
According to Maju Nair, head of distribution at Sharekhan, banks and independent financial advisers (IFAs), which were major contributors to SIPs, had been badly hit by the new commission regime. "IFAs have gone out of business and are looking at other revenue streams by selling insurance products. Bank are also not pushing for SIPs in a major way as they are getting only 50-80 basis points."
"The cost of providing the service has become more than the money they will make. So, everybody across the distribution spectrum is looking for a substantial size," said Nair.
The worst affected, according to experts, is the micro SIP segment, with distributors finding it difficult to serve investors with ticket sizes as low as Rs 50 and Rs 100. Distributors said this had turned out be a loss-making proposition for most fund houses.
However, Sikka of Reliance Mutual Fund said, "Investor confidence seems to be returning and we are getting fresh inflows. Advisors will have to look at the life-time value of a customer and not just short-term interests. The micro SIP is more of an entry-level strategy where we are trying to bring retail investors at the smallest level into the fold."
Reliance mutual fund has a micro SIP, Reliance Common Man SIP, in which one can invest a minimum of Rs 100 per month. Similarly, SBI has Chhota SIP and UTI has IIMPS (Invest India Micro Pension Services).
Wednesday, February 10, 2010
Saturday, September 12, 2009
Lessons from the world financial crisis
The collapse of Lehman triggered the world financial crisis this time last year. Stock markets crashed; credit was frozen and banks were scurrying for cash; crude oil prices dipped and gold prices shot up; investment shrank.
Finally, the financial crisis translated into recession with severe loss of employment and income. With the inter-linking of economies no country escaped these drastic consequences.
India was hit badly but avoided recession. Nevertheless growth dropped and is yet to recover. FIIs repatriated more than $13 billion and deepened the fall in stock prices.
Sensex plunged 62 per cent, much more than Dow Jones. The RBI had to draw down reserves. The rupee fell 20 per cent, industrial production declined and exports slumped.
Indian banks, except probably two, did not have exposure to sub-prime debt since they did not have much international business. Besides, the regulations of RBI did not permit excessive debt:equity ratio. Hence Indian banks were largely unaffected.
The international crisis prompted the Indian Government to act. That was more to avert recession than to back up the financial system.
Stimulus packages were introduced mainly aimed at increasing demand by reducing excise duties and increasing investment in infrastructure. The RBI did pump in liquidity with cuts in CRR, SLR, and the repo and reverse repo rates. Recovery has started but progress is slow.
There are lessons to learn from the crisis and new initiative to be taken.
First, with large infusion of cash by Federal Reserve, it is likely that the dollar will weaken in future against other currencies. RBI has a large part of its foreign exchange reserves in dollars and should therefore change the composition of reserves in favour of the euro and gold.
Second, although most banks are owned by Government, they should be financially sound on their own. Therefore the capital base of banks has to be sound and conform to the new Basel standards. Banks should be modernized and to attain economic size through mergers.
Third, financial supervision has to be strong. That also requires that there should be coordination among the concerned agencies like the RBI, fiscal authorities, Sebi, etc.
Fourth, regulation should go hand in hand with innovation of financial instruments. The financial crisis was to a large extent spurred by financial instruments like Collateralized debt obligations (CDO).
Fifth, RBI should keep constant watch on liquidity requirements. The financial system in the U.S. would have collapsed but for the timely release of cash by Federal Reserve. The measures taken by RBI were a little too late.
Sixth, Government should curb fiscal deficit to ease pressure on the market and continue to take steps to open up the economy, whether in respect of trade, convertibility of the rupee, external commercial borrowing and foreign investment, since the benefits would be much more than the safety of a closed system.
It appears that the worst is now over and the salvage operations are complete. It is time to reform the system to enable it function smoothly and efficiently under good supervision.
(You can e-mail Dinker H. Pai Panandiker at: dpanandiker@gmail.com)
Finally, the financial crisis translated into recession with severe loss of employment and income. With the inter-linking of economies no country escaped these drastic consequences.
India was hit badly but avoided recession. Nevertheless growth dropped and is yet to recover. FIIs repatriated more than $13 billion and deepened the fall in stock prices.
Sensex plunged 62 per cent, much more than Dow Jones. The RBI had to draw down reserves. The rupee fell 20 per cent, industrial production declined and exports slumped.
Indian banks, except probably two, did not have exposure to sub-prime debt since they did not have much international business. Besides, the regulations of RBI did not permit excessive debt:equity ratio. Hence Indian banks were largely unaffected.
The international crisis prompted the Indian Government to act. That was more to avert recession than to back up the financial system.
Stimulus packages were introduced mainly aimed at increasing demand by reducing excise duties and increasing investment in infrastructure. The RBI did pump in liquidity with cuts in CRR, SLR, and the repo and reverse repo rates. Recovery has started but progress is slow.
There are lessons to learn from the crisis and new initiative to be taken.
First, with large infusion of cash by Federal Reserve, it is likely that the dollar will weaken in future against other currencies. RBI has a large part of its foreign exchange reserves in dollars and should therefore change the composition of reserves in favour of the euro and gold.
Second, although most banks are owned by Government, they should be financially sound on their own. Therefore the capital base of banks has to be sound and conform to the new Basel standards. Banks should be modernized and to attain economic size through mergers.
Third, financial supervision has to be strong. That also requires that there should be coordination among the concerned agencies like the RBI, fiscal authorities, Sebi, etc.
Fourth, regulation should go hand in hand with innovation of financial instruments. The financial crisis was to a large extent spurred by financial instruments like Collateralized debt obligations (CDO).
Fifth, RBI should keep constant watch on liquidity requirements. The financial system in the U.S. would have collapsed but for the timely release of cash by Federal Reserve. The measures taken by RBI were a little too late.
Sixth, Government should curb fiscal deficit to ease pressure on the market and continue to take steps to open up the economy, whether in respect of trade, convertibility of the rupee, external commercial borrowing and foreign investment, since the benefits would be much more than the safety of a closed system.
It appears that the worst is now over and the salvage operations are complete. It is time to reform the system to enable it function smoothly and efficiently under good supervision.
(You can e-mail Dinker H. Pai Panandiker at: dpanandiker@gmail.com)
Wednesday, September 2, 2009
MFs: Tackling a missing intermediary
There are several issues that are faced by investors when they are dealing with their mutual fund investments.
One of these relate to a disruption in the mode of receipt of services related to the investment. This happens when there is no existing distributor available to serve the investor. This is an important matter that has become a reality for several people and hence will need a clear strategy from the investor regarding the manner in which this will be tackled.
Developing situation
There are times when the investor is put in a strange situation. In most cases, investors use the help of distributors or other advisors for making their mutual fund investments.
The total assets of mutual funds at the end of July 2009 stood at nearly Rs 6.90 lakh crore and a very miniscule percentage of this involves direct investment by the investor. The process involved various types of services in the process of making the investment.
In several cases, there is a situation where the distributor no longer wants to serve the client or there might be a situation where the distributor even exits the business. In the last six months, there has been a sharp fall in the interest of investors.
During the period April - July 2009 for which figures are available the number of new schemes varied in the range of 4-6 a month impacting a major source of income for intermediaries. In such a situation, the investor finds that when it comes to solving some question, they have to look at some different option.
The easiest way is to look for another distributor and advisor and shift to this route, but now with additional payment required on the part of investors for using their services, there is an increasing bent towards going it alone. This can result in a sticky situation where the investor realises that there needs to be some steps for the purpose of ensuring that there is no disruption in the service that they receive.
Contact possible
In case of any situation, the investor has to understand that the mutual fund is the entity with which the entire investment is based. This remains the base entity with which all the details about the investment is available and hence the investor can ensure that they get any required information from the mutual fund itself.
This is the best source for ensuring that there is clarity about the entire situation and this will also provide options for ensuring the smooth continuation of activities. The data required for this purpose is the Folio Number that is present on all mutual fund statements. All the necessary details are available with the mutual fund, which can be retrieved.
There is the entire list of mutual funds that are available with the market regulator SEBI (Securities and Exchange Board of India) and the fund association AMFI (Association of Mutual Funds in India). There are around 35 mutual funds in operation at the end of July in the country.
Code
There is now no entry load that is present for making an investment into a mutual fund. This means that there is no expense that the investor has to worry about now as compared to the situation earlier when only direct investments did not have any entry load.
If the investor is careful and they take a look at the details on the mutual fund statement that they get then they will be able to see that there is a space where the code for the distributor is mentioned.
This means that the commission for the investment goes to that particular entity and they are the ones who will be servicing the investor. When it comes to the issue of ensuring that there is a direct investment that is made, then the investor would have to ensure that the space for the code is blank or that it is mentioned direct.
This will also ensure that there is no trail commission that is going to any entity, especially if the investor is direct. If the investor wants to check directly with the fund then various funds allow transaction through their own website and this includes funds like HDFC MF, Franklin Templeton MF, ICICI Pru MF among others.
Checking
There are two angles to the entire investment that they have. One of them relates to the investment that has already been made and hence this will have a separate situation because this is complete, but the requirement here deals with proper monitoring.
On the other hand, there is also the case of new investment and if this is done using a distributor then the investor will have to pay fees that are decided between the two parties. In case of a small distributor, this can be negotiated, so you might end up paying something like Rs 500 for a Rs 50,000 investment.
On the other hand, big players leave little room for bargain and the amount here is fixed like Rs 30 per transaction for systematic investment and so on. This is the reason why they need to be clear about the manner in which they are investing so the choices can be selected.
There can also be a direct interface that is set up between the mutual fund and the investor. This can be done through interacting through some center of the fund or through the transfer agent. Most major cities have these offices.
Another way in which the same situation can be set up is through the route of using the internet for the interactions. In this situation, the investor makes further investments as well as redemption and other changes through their login on the internet and hence there is some clarity available for them about the exact status of their investment.
Using either or all of these will help the investor meet their requirements.
One of these relate to a disruption in the mode of receipt of services related to the investment. This happens when there is no existing distributor available to serve the investor. This is an important matter that has become a reality for several people and hence will need a clear strategy from the investor regarding the manner in which this will be tackled.
Developing situation
There are times when the investor is put in a strange situation. In most cases, investors use the help of distributors or other advisors for making their mutual fund investments.
The total assets of mutual funds at the end of July 2009 stood at nearly Rs 6.90 lakh crore and a very miniscule percentage of this involves direct investment by the investor. The process involved various types of services in the process of making the investment.
In several cases, there is a situation where the distributor no longer wants to serve the client or there might be a situation where the distributor even exits the business. In the last six months, there has been a sharp fall in the interest of investors.
During the period April - July 2009 for which figures are available the number of new schemes varied in the range of 4-6 a month impacting a major source of income for intermediaries. In such a situation, the investor finds that when it comes to solving some question, they have to look at some different option.
The easiest way is to look for another distributor and advisor and shift to this route, but now with additional payment required on the part of investors for using their services, there is an increasing bent towards going it alone. This can result in a sticky situation where the investor realises that there needs to be some steps for the purpose of ensuring that there is no disruption in the service that they receive.
Contact possible
In case of any situation, the investor has to understand that the mutual fund is the entity with which the entire investment is based. This remains the base entity with which all the details about the investment is available and hence the investor can ensure that they get any required information from the mutual fund itself.
This is the best source for ensuring that there is clarity about the entire situation and this will also provide options for ensuring the smooth continuation of activities. The data required for this purpose is the Folio Number that is present on all mutual fund statements. All the necessary details are available with the mutual fund, which can be retrieved.
There is the entire list of mutual funds that are available with the market regulator SEBI (Securities and Exchange Board of India) and the fund association AMFI (Association of Mutual Funds in India). There are around 35 mutual funds in operation at the end of July in the country.
Code
There is now no entry load that is present for making an investment into a mutual fund. This means that there is no expense that the investor has to worry about now as compared to the situation earlier when only direct investments did not have any entry load.
If the investor is careful and they take a look at the details on the mutual fund statement that they get then they will be able to see that there is a space where the code for the distributor is mentioned.
This means that the commission for the investment goes to that particular entity and they are the ones who will be servicing the investor. When it comes to the issue of ensuring that there is a direct investment that is made, then the investor would have to ensure that the space for the code is blank or that it is mentioned direct.
This will also ensure that there is no trail commission that is going to any entity, especially if the investor is direct. If the investor wants to check directly with the fund then various funds allow transaction through their own website and this includes funds like HDFC MF, Franklin Templeton MF, ICICI Pru MF among others.
Checking
There are two angles to the entire investment that they have. One of them relates to the investment that has already been made and hence this will have a separate situation because this is complete, but the requirement here deals with proper monitoring.
On the other hand, there is also the case of new investment and if this is done using a distributor then the investor will have to pay fees that are decided between the two parties. In case of a small distributor, this can be negotiated, so you might end up paying something like Rs 500 for a Rs 50,000 investment.
On the other hand, big players leave little room for bargain and the amount here is fixed like Rs 30 per transaction for systematic investment and so on. This is the reason why they need to be clear about the manner in which they are investing so the choices can be selected.
There can also be a direct interface that is set up between the mutual fund and the investor. This can be done through interacting through some center of the fund or through the transfer agent. Most major cities have these offices.
Another way in which the same situation can be set up is through the route of using the internet for the interactions. In this situation, the investor makes further investments as well as redemption and other changes through their login on the internet and hence there is some clarity available for them about the exact status of their investment.
Using either or all of these will help the investor meet their requirements.
Monday, August 24, 2009
SEBI NORMS - Indian mutual fund industry to revisit business model
The Rs7.2 trillion Indian mutual fund industry is revisiting its business model to be in sync with the new norms put in place by the capital market regulator, the Securities and Exchange Board of India, or Sebi.
India has 36 asset management companies (AMCs) and at least some of them are planning to start their own distribution business instead of selling funds through third-party distributors. Among other things, they plan to cut distributors' commission by 25-30 basis points (bps) and shift their focus from frequent churning of funds to managing money for the longer term.
One basis point is one-hundredth of a percentage point.
Sebi banned fund houses from charging investors an upfront fee of up to 2.25%, known as entry load, from 1 August.
That encouraged fund houses to fine-tune the exit load, or the penalty they charge investors on premature redemptions, from six months to three years. In other words, fund houses have forced the investor to lock in their investment for three years if they do not want to pay the exit load.
The exit load is currently capped at 1% of investment.
However, only retail investors are subjected to this and fund houses do not charge the exit load on any investment of Rs5 crore and above.
The plan was to use the exit load to take care of the commission paid to the distributors. The fund houses also announced a new incentive structure for distributors ranging between 0.5% and 1.25%.
JM financial Asset Management Pvt. Ltd is offering 1.25%, UTI Asset Management Ltd 1% and HDFC Asset Management Ltd 70 bps, one of the lowest in the industry.
However, this move has not gone down well with the market regulator. It has directed fund houses to bring parity in the exit load for all class of investors, irrespective of the amount of investment.
It also said fund houses should follow a uniform exit load structure for all plans within a scheme. Normally each mutual fund scheme has different plans catering to different classes of investors.
Finally, on Tuesday, Sebi asked the fund houses to limit the lock-in period to one year.
The three-year lock-in, planned by AMCs, would have covered a major portion of equity fund investments in the industry.
According to the industry lobby Association of Mutual Funds in India (Amfi), 57.23% of all the equity investments as of 31 March were less than two years old. The rest of the corpus was more than two years old, but Amfi does not specify the maturity profile.
According to Rajesh Krishnamoorthy, managing director of iFast Financial India Pvt. Ltd, a transaction intermediary, "a minuscule portion of assets would be more than three years old".
This means that had the lock-in period been kept at three years, almost the entire assets under management would have been subjected to the exit penalty. Only 20.33% of the equity assets managed by the industry were less than one-year-old on 31 March.
A majority of the sales in mutual funds come from thirdparty distributors. Some fund houses say the dependence on third-party distributors may decline gradually following the regulatory changes.
"The brokerage structure has to come down to adopt the new changes. The impact of the recent changes on distributors' commission could be 25-30 basis points across the industry," said Suresh Soni, chief investment officer at Deutsche Asset Management (India) Pvt. Ltd.
Waqar Naqvi, CEO, Taurus Asset Management Co. Ltd, said "Incentives for distributors will have to come down.
Each AMC will take a call based on its subscription-redemption ratio. It varies between 35% and 50%. This means roughly between 35% and 50% of the subscriptions into mutual funds get redeemed within the first one year." Subscription-redemption ratio is the proportion of investors withdrawing their investments. If the ratio is high, funds will pay a lower upfront commission.
Loyalty bonus Some fund houses say while reducing the incentives for distributors, a separate loyaltybased bonus programme could be started by the AMCs in order to encourage the distributors.
"The entire business model needs to be reworked to encourage the distributors, as their commissions are reduced by 25-30 bps. We may have to start loyalty-based bonus programmes for the distributors to encourage them to continue with fund distribution business and add more long-term investors to our customer base," said the chief marketing officer at an AMC, controlled by a large bank, who didn't want to be named.
As a part of the loyalty programme, a distributor will be paid a fixed commission every year as long as the investor stays invested in a scheme.
This could happen as early as next month.
"One way out could be (to) progressively increase the trail commission earned by the distributors--the longer the investor remains the higher trail the agent gets," said an executive whose fund house is currently offering a new fund.
The trail commission is paid to agents by fund houses at the end of the year based on the assets they helped bring in.
For instance, if the first year trail is 50 bps, it could be raised to 60 bps in the second year and 75 bps in the third.
"Although we cannot comment on specific changes that will be made in distributors' commission, we believe that even if margins fall, the volume is poised to increase as mutual fund loads have been relaxed for investors. We believe that margins will be compensated by volumes," said Sundeep Sikka, CEO, Reliance Capital Asset Management Ltd, which manages at least Rs1.08 trillion in assets.
"The trail commission is essential if the distributors need to be encouraged to sell. But if there is no penalty on exit, it makes more sense for the distributor to encourage the investor to sell the units and enter a new scheme," said Sanjay Sinha, CEO, DBS Chola Asset Management Ltd.
Others agree. "If something becomes cheaper the demand goes up," Soni of Deutsche Asset Management said. According to him, fund houses will revise their business model and work more on volumes rather than on margins.
"Some fund houses may shift their focus from thirdparty distribution channel and start their own distribution services and strengthen their physical and Internet banking channels," he added.
As of June, there were 91,671 agent distributors registered with Amfi. Most banks and 20-25 large national and regional distributors also sell MFs.
India has 36 asset management companies (AMCs) and at least some of them are planning to start their own distribution business instead of selling funds through third-party distributors. Among other things, they plan to cut distributors' commission by 25-30 basis points (bps) and shift their focus from frequent churning of funds to managing money for the longer term.
One basis point is one-hundredth of a percentage point.
Sebi banned fund houses from charging investors an upfront fee of up to 2.25%, known as entry load, from 1 August.
That encouraged fund houses to fine-tune the exit load, or the penalty they charge investors on premature redemptions, from six months to three years. In other words, fund houses have forced the investor to lock in their investment for three years if they do not want to pay the exit load.
The exit load is currently capped at 1% of investment.
However, only retail investors are subjected to this and fund houses do not charge the exit load on any investment of Rs5 crore and above.
The plan was to use the exit load to take care of the commission paid to the distributors. The fund houses also announced a new incentive structure for distributors ranging between 0.5% and 1.25%.
JM financial Asset Management Pvt. Ltd is offering 1.25%, UTI Asset Management Ltd 1% and HDFC Asset Management Ltd 70 bps, one of the lowest in the industry.
However, this move has not gone down well with the market regulator. It has directed fund houses to bring parity in the exit load for all class of investors, irrespective of the amount of investment.
It also said fund houses should follow a uniform exit load structure for all plans within a scheme. Normally each mutual fund scheme has different plans catering to different classes of investors.
Finally, on Tuesday, Sebi asked the fund houses to limit the lock-in period to one year.
The three-year lock-in, planned by AMCs, would have covered a major portion of equity fund investments in the industry.
According to the industry lobby Association of Mutual Funds in India (Amfi), 57.23% of all the equity investments as of 31 March were less than two years old. The rest of the corpus was more than two years old, but Amfi does not specify the maturity profile.
According to Rajesh Krishnamoorthy, managing director of iFast Financial India Pvt. Ltd, a transaction intermediary, "a minuscule portion of assets would be more than three years old".
This means that had the lock-in period been kept at three years, almost the entire assets under management would have been subjected to the exit penalty. Only 20.33% of the equity assets managed by the industry were less than one-year-old on 31 March.
A majority of the sales in mutual funds come from thirdparty distributors. Some fund houses say the dependence on third-party distributors may decline gradually following the regulatory changes.
"The brokerage structure has to come down to adopt the new changes. The impact of the recent changes on distributors' commission could be 25-30 basis points across the industry," said Suresh Soni, chief investment officer at Deutsche Asset Management (India) Pvt. Ltd.
Waqar Naqvi, CEO, Taurus Asset Management Co. Ltd, said "Incentives for distributors will have to come down.
Each AMC will take a call based on its subscription-redemption ratio. It varies between 35% and 50%. This means roughly between 35% and 50% of the subscriptions into mutual funds get redeemed within the first one year." Subscription-redemption ratio is the proportion of investors withdrawing their investments. If the ratio is high, funds will pay a lower upfront commission.
Loyalty bonus Some fund houses say while reducing the incentives for distributors, a separate loyaltybased bonus programme could be started by the AMCs in order to encourage the distributors.
"The entire business model needs to be reworked to encourage the distributors, as their commissions are reduced by 25-30 bps. We may have to start loyalty-based bonus programmes for the distributors to encourage them to continue with fund distribution business and add more long-term investors to our customer base," said the chief marketing officer at an AMC, controlled by a large bank, who didn't want to be named.
As a part of the loyalty programme, a distributor will be paid a fixed commission every year as long as the investor stays invested in a scheme.
This could happen as early as next month.
"One way out could be (to) progressively increase the trail commission earned by the distributors--the longer the investor remains the higher trail the agent gets," said an executive whose fund house is currently offering a new fund.
The trail commission is paid to agents by fund houses at the end of the year based on the assets they helped bring in.
For instance, if the first year trail is 50 bps, it could be raised to 60 bps in the second year and 75 bps in the third.
"Although we cannot comment on specific changes that will be made in distributors' commission, we believe that even if margins fall, the volume is poised to increase as mutual fund loads have been relaxed for investors. We believe that margins will be compensated by volumes," said Sundeep Sikka, CEO, Reliance Capital Asset Management Ltd, which manages at least Rs1.08 trillion in assets.
"The trail commission is essential if the distributors need to be encouraged to sell. But if there is no penalty on exit, it makes more sense for the distributor to encourage the investor to sell the units and enter a new scheme," said Sanjay Sinha, CEO, DBS Chola Asset Management Ltd.
Others agree. "If something becomes cheaper the demand goes up," Soni of Deutsche Asset Management said. According to him, fund houses will revise their business model and work more on volumes rather than on margins.
"Some fund houses may shift their focus from thirdparty distribution channel and start their own distribution services and strengthen their physical and Internet banking channels," he added.
As of June, there were 91,671 agent distributors registered with Amfi. Most banks and 20-25 large national and regional distributors also sell MFs.
Saturday, August 22, 2009
Asset allocation for disciplined investing
There are no short cuts to investing and more often than not investors burn their fingers in trying to time the market. My advice therefore to all investors with long-term investment goals is to follow disciplined investing with a risk reward balance. It definitely pays.
We all know of the proverb "Don't put all your eggs in one basket", similarly investors should diversify investments across asset classes, markets, managers, tenor, etc. to achieve desired returns with lower risk at the portfolio level.
Diversification involves dividing an investment portfolio among different asset categories, such as equities, fixed income and alternate investments. The process of determining which mix of assets to hold in a portfolio varies from investor to investor and also on the investment objectives.
If the portfolio has the right allocation, it will be well on its way to deliver the investment goals (with an acceptable amount of risk factored in).
Therefore, before making any investments, investors should define an investment philosophy and assess their investment objective, risk profile and suitability.
Your investment objectives need to be set, based on factors such as personal wealth level, age, family circumstances, investment/financial goals, need for regular income streams, understanding of asset classes and risk reward payoffs, conventional versus alternate assets such as art, commodities, real estate.
Some other factors include loss bearing ability, past investment experience time horizon of the investment, liquidity needs, proportion of liquid net worth in a high risk/locked-in product, tax status, inflation and market outlook.
The asset allocation that works best for an investor will depend largely on the time horizon and his/her ability to tolerate risk. Investors should pay attention to structural considerations such as financial planning, trusts, insurance and annuities, and tax and liability management.
Once an investor has decided on the investment objective and risk profile, asset allocation would include all or most of the following considerations/steps:
• Document all the assumptions made
• Calculate rates of return, standard deviation and correlation between different asset classes
• Check for consistency of returns across economic cycles & time periods
• Select the asset mix that would optimize the risk reward payoff – minimum risk for the desired return
• Agree on the benchmarks to be used for comparing performance results and degree of tracking vs. benchmarks
• Decide if the investments are to be made on a staggered manner (in 3 to 4 installments), recommended in volatile markets
• Implement the desired asset allocation through best in class products based on net of tax expected returns
• Evaluate portfolio hedging options and cost
• Active versus Passive management
• Periodic review and rebalancing
Asset allocation has evolved over time. In its initial stages of evolution, this was a simple philosophy of spreading eggs across baskets to spread losses. It then moved to a more complicated mathematical model where the amount of allocation to be made to each asset class was made based on the risk-return framework and correlation between asset classes.
In its more modern form, asset allocation is a more forward looking exercise which lays significant importance to qualitative overlay. This qualitative overlay is derived from experts and it makes asset allocation a more relevant exercise in today’s time, than a traditional quant-based asset allocation.
This overlay can be in terms of analysis of geo-political events, macro economic indictors, market sentiment, or any other factor that cannot be captured by standard risk metrics such as standard deviation of an asset class.
With this evolution in the area of asset allocation, comes into play the role of Tactical Asset Allocation. Tactical Asset Allocation, to some, is essentially about market timing. To my mind, however, it is not market timing but is a dynamic strategy that actively adjusts a portfolio’s asset allocation by taking an informed call on the portfolio in reaction to or in anticipation of the certain trends.
While the importance of long term investments and therefore strategic asset allocation cannot be undermined, in today’s markets, tactical asset allocation, if followed with rigor can certainly deliver alpha (incremental returns) to an investor’s portfolio.
Once invested, one should periodically review and rebalance investments if required. Investors should have pre-defined Profit & Loss booking levels based on their profiles. These levels should be periodically reviewed and reset based on market outlook.
Investors should also maintain certain liquidity in the portfolio to take advantage of sudden opportunities. In addition, investors could consider maintaining separate trading and investment portfolios with different investment objectives.
With increasing globalization, complexity, volatility and lack of time and/or expertise, smart investors always engage professional investment advisors to manage their portfolios. Good Investment Advisors have developed the skill, insight, perspective, and common sense needed to recognize when assets and/or markets may be entering cyclical and secular turning point.
Finally the most crucial factor of disciplined investing - never get emotionally attached to your investments. There is no harm in booking profits and staying liquid. Markets will always give opportunities to make returns from investments in the future.
David M. Darst, Chief Investment Strategist at Morgan Stanley Smith Barney says, "Rather than attempting to time the market in a limited number of asset classes, asset allocation seeks, through diversification, to provide higher returns with lower risk over a sufficiently long time frame and to appropriately compensate the investor for bearing non-diversifiable volatility."
We all know of the proverb "Don't put all your eggs in one basket", similarly investors should diversify investments across asset classes, markets, managers, tenor, etc. to achieve desired returns with lower risk at the portfolio level.
Diversification involves dividing an investment portfolio among different asset categories, such as equities, fixed income and alternate investments. The process of determining which mix of assets to hold in a portfolio varies from investor to investor and also on the investment objectives.
If the portfolio has the right allocation, it will be well on its way to deliver the investment goals (with an acceptable amount of risk factored in).
Therefore, before making any investments, investors should define an investment philosophy and assess their investment objective, risk profile and suitability.
Your investment objectives need to be set, based on factors such as personal wealth level, age, family circumstances, investment/financial goals, need for regular income streams, understanding of asset classes and risk reward payoffs, conventional versus alternate assets such as art, commodities, real estate.
Some other factors include loss bearing ability, past investment experience time horizon of the investment, liquidity needs, proportion of liquid net worth in a high risk/locked-in product, tax status, inflation and market outlook.
The asset allocation that works best for an investor will depend largely on the time horizon and his/her ability to tolerate risk. Investors should pay attention to structural considerations such as financial planning, trusts, insurance and annuities, and tax and liability management.
Once an investor has decided on the investment objective and risk profile, asset allocation would include all or most of the following considerations/steps:
• Document all the assumptions made
• Calculate rates of return, standard deviation and correlation between different asset classes
• Check for consistency of returns across economic cycles & time periods
• Select the asset mix that would optimize the risk reward payoff – minimum risk for the desired return
• Agree on the benchmarks to be used for comparing performance results and degree of tracking vs. benchmarks
• Decide if the investments are to be made on a staggered manner (in 3 to 4 installments), recommended in volatile markets
• Implement the desired asset allocation through best in class products based on net of tax expected returns
• Evaluate portfolio hedging options and cost
• Active versus Passive management
• Periodic review and rebalancing
Asset allocation has evolved over time. In its initial stages of evolution, this was a simple philosophy of spreading eggs across baskets to spread losses. It then moved to a more complicated mathematical model where the amount of allocation to be made to each asset class was made based on the risk-return framework and correlation between asset classes.
In its more modern form, asset allocation is a more forward looking exercise which lays significant importance to qualitative overlay. This qualitative overlay is derived from experts and it makes asset allocation a more relevant exercise in today’s time, than a traditional quant-based asset allocation.
This overlay can be in terms of analysis of geo-political events, macro economic indictors, market sentiment, or any other factor that cannot be captured by standard risk metrics such as standard deviation of an asset class.
With this evolution in the area of asset allocation, comes into play the role of Tactical Asset Allocation. Tactical Asset Allocation, to some, is essentially about market timing. To my mind, however, it is not market timing but is a dynamic strategy that actively adjusts a portfolio’s asset allocation by taking an informed call on the portfolio in reaction to or in anticipation of the certain trends.
While the importance of long term investments and therefore strategic asset allocation cannot be undermined, in today’s markets, tactical asset allocation, if followed with rigor can certainly deliver alpha (incremental returns) to an investor’s portfolio.
Once invested, one should periodically review and rebalance investments if required. Investors should have pre-defined Profit & Loss booking levels based on their profiles. These levels should be periodically reviewed and reset based on market outlook.
Investors should also maintain certain liquidity in the portfolio to take advantage of sudden opportunities. In addition, investors could consider maintaining separate trading and investment portfolios with different investment objectives.
With increasing globalization, complexity, volatility and lack of time and/or expertise, smart investors always engage professional investment advisors to manage their portfolios. Good Investment Advisors have developed the skill, insight, perspective, and common sense needed to recognize when assets and/or markets may be entering cyclical and secular turning point.
Finally the most crucial factor of disciplined investing - never get emotionally attached to your investments. There is no harm in booking profits and staying liquid. Markets will always give opportunities to make returns from investments in the future.
David M. Darst, Chief Investment Strategist at Morgan Stanley Smith Barney says, "Rather than attempting to time the market in a limited number of asset classes, asset allocation seeks, through diversification, to provide higher returns with lower risk over a sufficiently long time frame and to appropriately compensate the investor for bearing non-diversifiable volatility."
NRI Keen To Invest In Indian MF
Many non-resident Indians are keen to keep their Indian ties intact and invest in various avenues like mutual funds (MFs), fixed deposits, real estate and so on.One Of Well Known Financial advisories says, "Most of these people look to return to India finally. That is one of the reasons why they are keen to invest here."
Apart of emotional reasons, it also makes sense as the economy of India is growing at better rate than other countries in the current situation. A wealth manager with a bank says, "The chances of getting double digit returns abroad are limited. In India, you can always hope to get 8-10 percent returns. For example, Indian stock market has given even 100 percent returns till a few years ago, something one can never dream of in a developed country."
However, financial advisors caution NRIs that they have to be careful while listing the details at the time of investment. They should clearly mention their status, complete with relevant documents and details. Advisor offers an example of investing in MFs, "They should clearly mention in the application form that they are NRIs. They should also provide their overseas address. In case of fixed deposits, they should know the difference between various deposits like NRE account and NRO account. This is crucial because you can repatriate the income under NRO, while you can't do the same in NRE account."
The issue of relevant papers and documents is something that creeps up regularly in conversations with financial experts. They all insist that having relevant documents is a key factor. "Some investments may require the investor's status card abroad. If they are going for insurance cover, the company may ask for details like work permit in some cases. It can vary from company to company," says Financial Planner
Apart of emotional reasons, it also makes sense as the economy of India is growing at better rate than other countries in the current situation. A wealth manager with a bank says, "The chances of getting double digit returns abroad are limited. In India, you can always hope to get 8-10 percent returns. For example, Indian stock market has given even 100 percent returns till a few years ago, something one can never dream of in a developed country."
However, financial advisors caution NRIs that they have to be careful while listing the details at the time of investment. They should clearly mention their status, complete with relevant documents and details. Advisor offers an example of investing in MFs, "They should clearly mention in the application form that they are NRIs. They should also provide their overseas address. In case of fixed deposits, they should know the difference between various deposits like NRE account and NRO account. This is crucial because you can repatriate the income under NRO, while you can't do the same in NRE account."
The issue of relevant papers and documents is something that creeps up regularly in conversations with financial experts. They all insist that having relevant documents is a key factor. "Some investments may require the investor's status card abroad. If they are going for insurance cover, the company may ask for details like work permit in some cases. It can vary from company to company," says Financial Planner
ICICI Bank to come out with IPO in 4 units, insurance stake sale possible
Keen to revive its plans to unlock values in its four units, in line with the revival in the stock markets, ICICI Bank Ltd Friday said it could make initial public offerings in four subsidiaries or sell stake in its insurance ventures, as soon as the government raises sectoral foreign direct investment (FDI) limit.
The bank would take a call on the subject once the laws are amended to hike foreign direct investment in insurance sector to 49% from 26%, ICICI Bank chief executive and managing director Chanda Kochhar told reporters.
Earlier, in 2007, the bank was contemplating to list its three units—ICICI Securities, ICICI Prudential Life Insurance and ICICI Lombard General Insurance.
The bank had also announced its intention to transfer its entire holdings in ICICI Prudential Life Insurance, ICICI Lombard General Insurance Co, Prudential ICICI Asset Management Co and Prudential ICICI Trust to ICICI Holdings. At that moment, Reserve Bank of India had said it preferred to avoid an intermediate holding company structure, under which a bank is owned by a holding company that conducts non-banking businesses, because it would raise problems with regulation.
While pointing out that ICICI Bank's share price had increased three times in the last six months to about Rs750 per share, Kochar clarified that the listing of its unit would help in creating values for the stake holders. At this price, ICICI's market capitalisation is about Rs800 billion compared to market leader SBI's about Rs1.2 trillion.
"Still we are way off from the peak of over Rs1,450," she rued but said that she would strive to do everything to add value in the group for the shareholders.
"In all these four units, ICICI Prudential Life Ltd, ICICI Lombard Ltd, ICICI Securities Ltd and ICICI Home Finance Ltd possibility exists, but nothing that we have finalised currently. Hence, nothing you would see immediately," she said, when asked about the time frame she envisaged in terms of monetising investment in these entities.
She, however, was non-committal on any preferential treatment for its existing shareholders in the IPOs, saying they would anyway share the value unlocked from this exercise.
"As far as subsidiaries are concerned, over a period, we (will) clearly monetise some investment made in our subsidiaries. This means we would either do IPO or watch what happens on the insurance side that is clearance of government's norms to raise FDI cap for selling stake in the venture," Kochhar said.
A bill to increase FDI cap to 49% from 26 is awaiting the nod from the parliament. Currently, ICICI Bank holds 74% stake in both life and non-life venture insurance companies.
"In terms of IPO, we should wait for how the FDI cap issue turns out and then decide what percentage foreign partners will hold and so on. We will take a decision after that," she elaborated, but made it clear that time and market was not opportune for IPO in the life or general insurance ventures.
Pointing out that there was no need to take a decision on IPO in a hurry, she said the bank had enough capital and also the requirement of investible funds in these subsidiaries was very small this year.
"As I said we have enough capital to fund our growth but to fund growth of subsidiaries as well. And I think in the current market, it's not the best value and the right optimum value that they are going to get. I would rather wait for the market to reach a position where we get most optimum value and then look at," she added. – Yogesh Sapkale
source:-ww.suchetadalal.com
The bank would take a call on the subject once the laws are amended to hike foreign direct investment in insurance sector to 49% from 26%, ICICI Bank chief executive and managing director Chanda Kochhar told reporters.
Earlier, in 2007, the bank was contemplating to list its three units—ICICI Securities, ICICI Prudential Life Insurance and ICICI Lombard General Insurance.
The bank had also announced its intention to transfer its entire holdings in ICICI Prudential Life Insurance, ICICI Lombard General Insurance Co, Prudential ICICI Asset Management Co and Prudential ICICI Trust to ICICI Holdings. At that moment, Reserve Bank of India had said it preferred to avoid an intermediate holding company structure, under which a bank is owned by a holding company that conducts non-banking businesses, because it would raise problems with regulation.
While pointing out that ICICI Bank's share price had increased three times in the last six months to about Rs750 per share, Kochar clarified that the listing of its unit would help in creating values for the stake holders. At this price, ICICI's market capitalisation is about Rs800 billion compared to market leader SBI's about Rs1.2 trillion.
"Still we are way off from the peak of over Rs1,450," she rued but said that she would strive to do everything to add value in the group for the shareholders.
"In all these four units, ICICI Prudential Life Ltd, ICICI Lombard Ltd, ICICI Securities Ltd and ICICI Home Finance Ltd possibility exists, but nothing that we have finalised currently. Hence, nothing you would see immediately," she said, when asked about the time frame she envisaged in terms of monetising investment in these entities.
She, however, was non-committal on any preferential treatment for its existing shareholders in the IPOs, saying they would anyway share the value unlocked from this exercise.
"As far as subsidiaries are concerned, over a period, we (will) clearly monetise some investment made in our subsidiaries. This means we would either do IPO or watch what happens on the insurance side that is clearance of government's norms to raise FDI cap for selling stake in the venture," Kochhar said.
A bill to increase FDI cap to 49% from 26 is awaiting the nod from the parliament. Currently, ICICI Bank holds 74% stake in both life and non-life venture insurance companies.
"In terms of IPO, we should wait for how the FDI cap issue turns out and then decide what percentage foreign partners will hold and so on. We will take a decision after that," she elaborated, but made it clear that time and market was not opportune for IPO in the life or general insurance ventures.
Pointing out that there was no need to take a decision on IPO in a hurry, she said the bank had enough capital and also the requirement of investible funds in these subsidiaries was very small this year.
"As I said we have enough capital to fund our growth but to fund growth of subsidiaries as well. And I think in the current market, it's not the best value and the right optimum value that they are going to get. I would rather wait for the market to reach a position where we get most optimum value and then look at," she added. – Yogesh Sapkale
source:-ww.suchetadalal.com
Reliance, HDFC MFs top Crisil ranking
Crisil's composite performance rankings (Crisl-CPR) saw Reliance Mutual Fund emerging as the most successful fund house for the first quarter, with their funds getting the maximum number of ranks (ten) in the top category of CPR 1.
HDFC Mutual Fund and ICICI (ICICIBANK.NS : 745.4 +25.85) Prudential Mutual Fund came up next with six CPR 1 ranks each, closely followed by Birla Sun Life Mutual Fund, DSP BlackRock Mutual Fund and UTI Mutual Fund with five CPR 1 ranks each.
For the quarter, Reliance MF showed a sharp improvement compared to the previous quarter ended March 2009, where the fund house received only four CPR 1 ranks.
According to Krishnan Sitaraman, director, Crisil FundServices, "Reliance Mutual Fund's strong performance was driven by its superior performance on risk adjusted returns as well as on portfolio related parameters in the equity, liquid and ultra short term debt categories."
For ICICI Prudential Mutual Fund, ICICI Prudential Income Plan and ICICI Prudential Short Term Plan came out strong on risk adjusted returns while ICICI Prudential Flexible Income Plan Premium performed well on portfolio based parameters like liquidity and company concentration.
For HDFC Mutual Fund, its HDFC Top 200 Fund came on top based on risk adjusted returns, while the HDFC Cash Management Fund Savings Plan revealed consistent CPR performance and returns. HDFC Cash Management Fund Treasury Advantage Plan was another CPR 1 ranker which did well on risk based parameters like volatility, company concentration and asset size
HDFC Mutual Fund and ICICI (ICICIBANK.NS : 745.4 +25.85) Prudential Mutual Fund came up next with six CPR 1 ranks each, closely followed by Birla Sun Life Mutual Fund, DSP BlackRock Mutual Fund and UTI Mutual Fund with five CPR 1 ranks each.
For the quarter, Reliance MF showed a sharp improvement compared to the previous quarter ended March 2009, where the fund house received only four CPR 1 ranks.
According to Krishnan Sitaraman, director, Crisil FundServices, "Reliance Mutual Fund's strong performance was driven by its superior performance on risk adjusted returns as well as on portfolio related parameters in the equity, liquid and ultra short term debt categories."
For ICICI Prudential Mutual Fund, ICICI Prudential Income Plan and ICICI Prudential Short Term Plan came out strong on risk adjusted returns while ICICI Prudential Flexible Income Plan Premium performed well on portfolio based parameters like liquidity and company concentration.
For HDFC Mutual Fund, its HDFC Top 200 Fund came on top based on risk adjusted returns, while the HDFC Cash Management Fund Savings Plan revealed consistent CPR performance and returns. HDFC Cash Management Fund Treasury Advantage Plan was another CPR 1 ranker which did well on risk based parameters like volatility, company concentration and asset size
Tuesday, August 18, 2009
Draft tax code – how does it affect you?
Last Week, The Finance Minister announced the draft tax code. In his budget announcement on July 6 he had promised to follow up with the draft code. Well its here, and some of the changes, as you might have already seen in the press, are the most substantial that have been suggested in over a generation. So how do these affect you?
Well, the simple answer is that right now these changes don’t affect you. Why?
First of all, this is a draft code and contains proposals. Different interested parties have been invited to give their views, comments and feedback on the draft. You can too offer your feedback.
Secondly, if at all these proposals do pass muster, they will need to be drafted into a Parliamentary bill likely by end 2009 and be taken through legislative procedure. That itself could take time, and the Minister has suggested a start date of 2011 for when the code might actually be enforced, if it is a law by then.
So at the earliest, the impact of this tax code is likely two years away. So what should you be doing right now?
For starters just wait and watch. If you have strong views on some of the radical changes proposed, you should give your feedback here
Talk to your HR and payroll department to understand the impact of some of the proposed changes regarding how perquisites and benefits will be taxed. Ask them to explain to you how your take home pay might change and what they can do to mitigate the impact of any higher tax burden on you.
Sources:-www.reuters.in
Well, the simple answer is that right now these changes don’t affect you. Why?
First of all, this is a draft code and contains proposals. Different interested parties have been invited to give their views, comments and feedback on the draft. You can too offer your feedback.
Secondly, if at all these proposals do pass muster, they will need to be drafted into a Parliamentary bill likely by end 2009 and be taken through legislative procedure. That itself could take time, and the Minister has suggested a start date of 2011 for when the code might actually be enforced, if it is a law by then.
So at the earliest, the impact of this tax code is likely two years away. So what should you be doing right now?
For starters just wait and watch. If you have strong views on some of the radical changes proposed, you should give your feedback here
Talk to your HR and payroll department to understand the impact of some of the proposed changes regarding how perquisites and benefits will be taxed. Ask them to explain to you how your take home pay might change and what they can do to mitigate the impact of any higher tax burden on you.
Sources:-www.reuters.in
Monday, August 17, 2009
L&T Finance NCD Issue open on August 18
NCD issue opens on L&T Finance open on August 18.
L&T Finance Ltd., promoted by engineering and construction giant Larsen & Toubro Ltd. and L&T Capital Holdings Ltd., will open on August 18, its first-ever public offer of 50,00,000 Secured Redeemable Non-Convertible Debentures (NCDs) of Rs.1,000 each. The NCD issue aggregates to Rs5bn, with an option to retain over-subscription up to Rs5bn for issuance of additional NCDs, aggregating up to a total of Rs10bn. The NCD issue with various investment options and yield on Redemption of up to 10.5% (per annum) opens on August 18, and closes on September 4.
TheNCDs offered through the prospectus are proposed to be listed on National Stock Exchange of India (NSE). The face value of Rs1,000 per NCD and tradable lot size of 1 NCD is expected to enhance liquidity and trading in the secondary market.
The NCDs have been rated ‘CARE AA+’ by CARE and ‘LAA+’ by ICRA. Instruments with a rating of ‘CARE AA+’ by CARE are considered to offer high safety for timely servicing of debt obligations. Such instruments carry very low credit risk. The rating of ‘LAA+’ by ICRA indicates high-credit-quality and the rated instrument carries low credit risk.
There are four investment options:
Option 1 (Quarterly interest payment): The face value is Rs. 1,000 and the minimum application is Rs. 10,000 (Retail) and Rs. 1,01,000 (NIIs and QIBs) and in multiples of Rs. 1,000 therein. The redemption date or maturity period is 60 months. from the deemed date of allotment. The coupon rate is 9.51% p.a. and the annualized yield is 9.85%. The interest payment is quarterly and the face value plus any interest that may have accrued is payable on redemption.
Option 1I (Semi-annual interest payment): The face value is Rs. 1,000 and the minimum application is Rs. 10,000 (Retail) and Rs. 1,01,000 (NIIs and QIBs) and in multiples of Rs. 1,000 therein. The redemption date or maturity period is 60 months from the deemed date of allotment. The coupon rate is 9.62% p.a. and the annualized yield is 9.85%. The interest payment is semi-annual and the face value plus any interest that may have accrued is payable on redemption.
Option I1I (Cumulative interest payment): The face value is Rs. 1,000 and the minimum application is Rs. 10,000 (Retail) and Rs. 1,01,000 (NIIs and QIBs) and in multiples of Rs. 1,000 therein. The redemption date or maturity period is 88 months from the deemed date of allotment. The coupon rate is 9.95% compounded annually and the annualized yield is 9.95%. The interest payment is cumulative and Rs. 2,005 per NCD is payable on redemption.
Option IV (Semi-annual interest payment): The face value is Rs. 1,000 and the minimum application is Rs. 10,000 (Retail) and Rs. 1,01,000 (NIIs and QIBs) and in multiples of Rs. 1,000 therein. The redemption date or maturity period is 120 months from the deemed date of allotment. The coupon rate is 10.24% p.a. and the annualized yield is 10.50%. The interest payment is semi-annual and the face value plus any interest that may have accrued is payable on redemption.
Senior citizens, who are 65 or more years of age at any time during the financial year (FY) 2009-10, enjoy the special privilege to submit a self declaration in the prescribed Form 15H for non-deduction of tax at source in accordance with the provisions of section 197A (1C) of the I.T. Act even if the aggregate income credited or paid or likely to be credited or paid does not exceed the maximum amount not chargeable to tax; i.e., Rs. 225,000 for FY 2008-09 (proposed Rs. 240,000 from FY 2009-10).
L&T Finance was promoted by L&T and L&T Capital Holdings. The company was incorporated on November 22, 1994, as a public limited company under the Companies Act, 1956, to provide a range of financial services. L&T Finance began by financing the small and medium enterprises and later synergized with the opportunities provided by L&T ecosystem consisting of its subsidiaries and associates along with its large network of dealers, vendors, suppliers, clients, etc.
L&T Finance has now evolved into a multi-product asset backed finance company with a diversified corporate and retail portfolio. As on March 31, 2009, the company had an asset base of Rs521,864 lakhs. It has consistently made profits with its revenues for the year ending March 31, 2009, standing at Rs83,028 lakhs.
The funds raised through this issue will be used by the company for its various financing activities including lending and investments and for its business operations, including capital expenditure and working capital requirements.
L&T Finance Ltd., promoted by engineering and construction giant Larsen & Toubro Ltd. and L&T Capital Holdings Ltd., will open on August 18, its first-ever public offer of 50,00,000 Secured Redeemable Non-Convertible Debentures (NCDs) of Rs.1,000 each. The NCD issue aggregates to Rs5bn, with an option to retain over-subscription up to Rs5bn for issuance of additional NCDs, aggregating up to a total of Rs10bn. The NCD issue with various investment options and yield on Redemption of up to 10.5% (per annum) opens on August 18, and closes on September 4.
TheNCDs offered through the prospectus are proposed to be listed on National Stock Exchange of India (NSE). The face value of Rs1,000 per NCD and tradable lot size of 1 NCD is expected to enhance liquidity and trading in the secondary market.
The NCDs have been rated ‘CARE AA+’ by CARE and ‘LAA+’ by ICRA. Instruments with a rating of ‘CARE AA+’ by CARE are considered to offer high safety for timely servicing of debt obligations. Such instruments carry very low credit risk. The rating of ‘LAA+’ by ICRA indicates high-credit-quality and the rated instrument carries low credit risk.
There are four investment options:
Option 1 (Quarterly interest payment): The face value is Rs. 1,000 and the minimum application is Rs. 10,000 (Retail) and Rs. 1,01,000 (NIIs and QIBs) and in multiples of Rs. 1,000 therein. The redemption date or maturity period is 60 months. from the deemed date of allotment. The coupon rate is 9.51% p.a. and the annualized yield is 9.85%. The interest payment is quarterly and the face value plus any interest that may have accrued is payable on redemption.
Option 1I (Semi-annual interest payment): The face value is Rs. 1,000 and the minimum application is Rs. 10,000 (Retail) and Rs. 1,01,000 (NIIs and QIBs) and in multiples of Rs. 1,000 therein. The redemption date or maturity period is 60 months from the deemed date of allotment. The coupon rate is 9.62% p.a. and the annualized yield is 9.85%. The interest payment is semi-annual and the face value plus any interest that may have accrued is payable on redemption.
Option I1I (Cumulative interest payment): The face value is Rs. 1,000 and the minimum application is Rs. 10,000 (Retail) and Rs. 1,01,000 (NIIs and QIBs) and in multiples of Rs. 1,000 therein. The redemption date or maturity period is 88 months from the deemed date of allotment. The coupon rate is 9.95% compounded annually and the annualized yield is 9.95%. The interest payment is cumulative and Rs. 2,005 per NCD is payable on redemption.
Option IV (Semi-annual interest payment): The face value is Rs. 1,000 and the minimum application is Rs. 10,000 (Retail) and Rs. 1,01,000 (NIIs and QIBs) and in multiples of Rs. 1,000 therein. The redemption date or maturity period is 120 months from the deemed date of allotment. The coupon rate is 10.24% p.a. and the annualized yield is 10.50%. The interest payment is semi-annual and the face value plus any interest that may have accrued is payable on redemption.
Senior citizens, who are 65 or more years of age at any time during the financial year (FY) 2009-10, enjoy the special privilege to submit a self declaration in the prescribed Form 15H for non-deduction of tax at source in accordance with the provisions of section 197A (1C) of the I.T. Act even if the aggregate income credited or paid or likely to be credited or paid does not exceed the maximum amount not chargeable to tax; i.e., Rs. 225,000 for FY 2008-09 (proposed Rs. 240,000 from FY 2009-10).
L&T Finance was promoted by L&T and L&T Capital Holdings. The company was incorporated on November 22, 1994, as a public limited company under the Companies Act, 1956, to provide a range of financial services. L&T Finance began by financing the small and medium enterprises and later synergized with the opportunities provided by L&T ecosystem consisting of its subsidiaries and associates along with its large network of dealers, vendors, suppliers, clients, etc.
L&T Finance has now evolved into a multi-product asset backed finance company with a diversified corporate and retail portfolio. As on March 31, 2009, the company had an asset base of Rs521,864 lakhs. It has consistently made profits with its revenues for the year ending March 31, 2009, standing at Rs83,028 lakhs.
The funds raised through this issue will be used by the company for its various financing activities including lending and investments and for its business operations, including capital expenditure and working capital requirements.
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