Tuesday, December 24, 2013

Morgan Stanley Mutual Fund exits India!

Morgan Stanley Asset Management Company joined the list of foreign asset managers who have left India.  Last year Fidelity sold its India business to L&T Mutual Fund and few weeks back Daiwa MF sold its business to SBI MF.  So, with the exit of Morgan Stanley mutual fund, the number of fund houses in India stands at 40.

Morgan Stanley Mutual Fund had assets of Rs3300 crores.  Morgan Stanley was the first foreign Mutual Fund to launch operations in India in 1993.  Though they had the first mover advantage, the business never picked up in the last 20 years for them.  You can understand the size difference where HDFC MF manages assets of Rs1.03 lakh crores and Morgan Stanley managed Rs3300 crores.  It is less than 3% of HDFC or Reliance MF size after 20 years of operations.

Morgan Stanley had 8 schemes in its portfolio, which I think very low for a fund house with 20 years of operations.  It goes to show the lack of focus in the fund management business.  But the top 3 funds of Short Term Bond, Liquid and Growth funds have more than 2200 crores of assets.  The rest of the funds have only Rs1100 crores of assets.  Morgan Stanley ST Bond Fund and Morgan Stanley Growth Fund used to be in the top quartile with regard to fund performance.  As the schemes are taken over by HDFC, the investors need not panic.  HDFC would run it as a separate fund for some time before they go ahead and merge these 8 funds with their existing funds.  The transfer of folios from Morgan Stanley to HDFC would happen over a period of time and the investors need not worry about the tax benefits on their investments because of this transfer.

I understand that the Morgan Stanley has sold the business for Rs170 crores to HDFC MF, which translates in to 5.16% of the assets.  I guess this is a decent price with regard to the size of the assets they have transferred.

Having worked in Morgan Stanley for couple of years, I feel sad that they are closing one of their businesses in India.  Most of us feel that India has a great potential and players with staying power would reap the benefits in the long run doesn't seem to cut ice with these foreign players or do they have a better idea of what would happen to this country than us?  That is the key question which remains to be answered.  

Wednesday, October 30, 2013

ICICI Prudential Life Insurance uses Service calls to churn ULIPs/ULPPs - Beware

I have been recently receiving “service”calls from ICICI Prudential Life Insurance Company informing me that their Relationship Manager wants to meet me to discuss about my existing policies with them.  After couple of calls, I yielded to their request to meet the Relationship Manager with the condition that it shouldn’t be a sales call.  They agreed and their Relationship Manager met me yesterday morning.

A short introduction about my investment in ICICI Prudential Life Insurance.  I hold ICICI Prudential Lifetime Pension plan with an annual subscription of Rs10,000 for the last 9 years. 

The first question he asked on seeing me was if I am software professional.  I said no. I don’t know if they are soft targets.  

The meeting, a service call, started with the mention by the RM that I should stop paying the premiums on my existing policy and should invest in a new policy.  The beautiful reason given by the RM was that they have launched a new equity fund where the NAV would be only Rs10 per unit compared to my scheme where the NAV would be Rs78 per unit.  I couldn’t believe what he was saying the first time because this lower NAV is one of the oldest tricks in the market place and I didn’t think ICICI Prudential would do this after so many years.  But he further emphasized that I will get more units by taking a new plan.  This is an outrageous suggestion because if the equity markets perform well, the NAVs would move irrespective of the current value. 

Then RM told me that the new “Maximiser” fund option would have portfolio changes every 15 days compared to portfolio changes in my old “Maximiser” fund, which has 30 days.  This is again totally wrong information.  Here, what he is talking about his portfolio disclosure and portfolio changes.  The poor guy doesn’t understand this difference and tries hard to sell this as a unique feature of the scheme.

I told him politely that I am not keen on that idea and happy continuing with my existing policy.  He tried hard to sell me this idea of lower NAV and frequent portfolio changes but after sometime I had to cut him short.   When you stop premiums on the old policy and take up a new policy, then you end up paying lot more charges.  ULIP/ULPPs being front loaded products would be able to produce returns only when you stick on to them for longer tenures.

What really annoyed me is that ICICI Prudential Life uses a service calls as an alibi to meet their old clients and encourage them to churn products.  This is nothing new in Insurance industry but this happening in an era where mis-selling of financial products by financial product distributors are being looked upon very seriously by the regulators. 

Secondly, the level of understanding the Relationship Manager has with regard to his own company’s products are poor.  He could never understand how the equity market and returns function. 
I am not sure how many thousands of gullible investors have fallen prey to this gimmick of lower NAV and therefore higher units and switched to newer plans.  This is an outright fraud.  I know about ICICI Prudential Life because I own a policy with them but there may be many other people like this in the market.

This brings me to an important point of the need for understanding financial markets and how your investments work.  You need to spend time and energy to understand them or you should consult a reliable Financial Planner/Advisor before buying these kinds of products.  

PS:  All through the discussion I didn't disclose my profession and what I do for living, which is Financial Planning and Advisory services.  But finally I told him about me and he was quite taken aback.  Literally ran short of words.  Not wanting to embarrass him any further, I let him go.  

Monday, October 14, 2013

Power Finance Corporation - Tax Free Bonds - October 2013

Power Finance Corporation (PFC), a PSU Navaratna company has come out with a tax free NCD Issue for Rs 750 crores in October 13 (with a green shoe option up to Rs 3876 crores). The PFC Issue has attractive yields over tenures of 10 years, 15 years and 20 years and is very relevant for those in the 20% and 30% tax brackets.  NRIs can also apply for these bonds on a repatriation as well as non-repatriation basis.

Credit Rating:

These bonds have been rated “AAA” by all the three credit rating agencies which is the highest rating.  The total loan assets of PFC were Rs 160,000 crores with a Gross NPA of 0.71% and a comfortable capital adequacy ratio of 17.98% as of 31st March 2013.

Issue Opening Date
14th Oct 2013
Issue closes on
11th Nov 2013
Credit Rating
Face Value
Rs 1000
Minimum Application
Rs 5000 (minimum of 5 bonds)
Coupon - Category IV (Retail – Up to Rs 10 lakhs)
10 year - 8.43%
15 year - 8.79%
20 year - 8.92%

Advantages of this Tax free bond Issue

  • The post tax return of 8.79% (15 year duration) and 8.92% (20 year duration) is much higher than normal bank fixed deposits (between 6 to 7% at current FD deposits for those in the 30% tax bracket)
  • There are no upper limits (unlike PPF accounts where there is a limit of Rs 1 lakh investment per year) on the total investments.
  • It is ideal for investors looking to lock in returns for a large amount of money over the long term
  • No wealth tax will be levied on the investments in these bonds
  • The  bonds will be listed and traded on the BSE (but the liquidity of these bonds remains to be seen)
  • High degree of safety (AAA rating) for the bond which is also secured by a charge on the book debts of the company

   Investment Recommendation:

We recommend investing in this tax free bonds from PFC and you may either choose the 15 year or 20 year option depending on your time horizon.  It is an excellent product to add to your debt portfolio towards long term goals like retirement planning or children education.   

The important point to be noted here is that the annual interest payouts should be deployed in other avenues to grow the corpus rather than leaving the money to be spent for living expenses. It is better to move the yearly interest to PPF or debt mutual funds or equity mutual funds as per the investor’s risk appetite.

Thursday, September 12, 2013

Chennai real estate prices show a correction in Residex scores

Real Estate prices across Chennai market has seen a correction across the board according to the Residex scores released recently.  This is mirroring the trend across India.  The prices which has fallen the steepest in Chennai are Myalapore and Velachery.  

With the recent RBI action of stopping the 80:20 schemes, the builders would be under higher stress for funding.   They have been valiantly holding on to the price levels but something to give. In the earlier instances, the buyers had given in but this time my hunch is that the sellers would give it in.  They would no longer be able to borrow to support the prices artificially. If few desperate sellers start the distress sale, all others would fall in line.  

As far the real estate prices are concerned, I believe that further price drops are possible in the suburban areas.  Already the builders are open for negotiations on price and instead of being selective; they would announce price cuts across the board.  The number of unsold flats in the suburbs is a good indication of the impending possible price correction.  

The spate of new launches has gone down and the classifieds section in newspapers has more advertisements for sale.  I recently read that during the 90’s real estate meltdown, the prices corrected by more than 40% over the period of 1996 to 2000 in Mumbai. Is it fair to expect the same amount of correction across the board? May be, not.   The price correction would be location specific.  

I think it is becoming buyers market after a long time. 

Monday, September 2, 2013

REC Tax Free Bonds - Sept 2013 - Invest

One of the PSU Navaratna companies, REC has come out with a tax free bond issue for collecting funds of Rs3500 crores (including the green shoe option).  This is the first issue out of the 12 odd issues expected from various PSUs over the next 6 months or so.  The tax free bonds are available in tenures of 10 years, 15 years and 20 years.  NRIs can also apply for these bonds with repatriation and non-repatriation benefits.

Credit Rating:
These bonds have been rated “AAA” by all the credit rating agencies meaning that the principal and interest would be serviced on time by the borrower.  This is the highest of the credit ratings available for any bond issue. 

Interest Rates:

Coupon - Category IV (Retail)
10 year - 8.26%
15 year - 8.71%
20 year - 8.62%

The above rates are for retail investors who subscribe less than Rs10 lakhs.  For all other category of investors, it is 25 basis points less than the retail interest rates.  Considering the recent spike in Government Bond yields, the investors are lucky to get higher tax free interest rates.  

Interest would be paid out on 01 Dec every year during the tenure of the bond.

The rates on tax free bonds from PSUs are determined by the Finance Ministry based on the G-Sec yields prevailing two weeks before the issue date.  The Finance Ministry has allowed the PSUs to offer yields up to 55 bps less than the prevailing G-Sec rates to ensure that these issues don't fail as few of the previous tax free bond issues last year and early this year.  

As these are tax free bonds, there is no tax payable by any investor.  These tax free bonds are also a very useful tool to transfer wealth to spouse or others without attracting the clubbing provisions under Income Tax act.  As the income from REC Tax free bonds are exempt from tax, there is no clubbing provision applicable for investors.  

Investment Recommendation:
We recommend investing in this tax free bonds from REC and you may either choose the 10 year or 15 year option depending on your time horizon.  It is an excellent product to add to your debt portfolio towards long term goals like retirement planning or children education.   

Investors across all tax slabs can invest, though investors in the lower tax may be better off investing in Bank FDs at current rates.  

This is suitable for all types of investors as there is no volatility in returns compared to debt mutual funds.  

The issue closes on 23rd September.  If you are planning to invest, it is better to do it earlier as the retail portion has been already seen subscriptions of above 50% in 2 days. 

What are the points you have to note before investing in this bond? 

Not a cumulative product:  The important point to be noted here is that these bonds have annual interest pay-outs.  That is, REC would pay annual interest and you have to find ways and means to deploy the interest to further grow it.  If you don't have PPF account, it would be a good option to open a PPF account and move the annual interest directly to the PPF account.  

For somebody who is willing to take some risk, they can invest the annual interest in good quality debt or equity mutual funds.  

As there is a flood of Tax free bonds which are expected over the next 6 months, the investors may get more options to invest in tax free bonds.  It is also possible, that the newer issues from other PSUs may have higher interest rates.  But it is very difficult to predict how the interest rates would move for the forthcoming tax free bonds in 2013.