Mutual Funds – Why should I opt for this?

Nowadays, Mutual Funds are one of the hottest topics among small investors. Since the last few years, the mutual fund industry is performing well and offering an average return of 20% per annum. Compared to other traditional investments, it has given a far better return…. Fixed deposits are offering a maximum return of 9.5%, Postal schemes are offering a return of merely 7 to 8%, and companies’ fixed deposit scheme too are offering returns in the same range.On one hand, we are not getting sufficient returns from our traditional investments and on the other there is apprehension about rising inflation. If you are keeping money idle, then apart from an opportunity lost there is a devaluation of your amount equivalent to the inflation rate. Currently, inflation rate is around 4.5%, thus if you are investing your money then you should keep one thing in mind that the returns from such investments should be at least equal to the inflation rate. This helps us calculate the real returns from any investment. For eg. if Fixed Deposit is giving a return of 9.5 percent then in real terms the return will be 5% i.e. 9.5% less 4.5%. Then you should also consider the taxation rates to get your effective returns.Now it is essential to find an investment, which will offer higher returns and at the same time be easy to operate and Mutual fund is one that satisfies both objectives.The main features of a mutual fund can be studied in the following way-1. Designed to suit the individual small investorsMutual funds are designed in such a way that small investors can invest their money in the scheme. The investor thus can invest in instruments, which require bigger initial outlays.2. Adjusting the period of maturityMutual funds have the capability to covert a primary security of a certain maturity in to the another security of different maturity.For example, suppose an investment has a maturity period of one year, thus it is necessary to engage your fund for at least one year. However, when you are opting for mutual funds, you need not bother about maturity terms of investments made by the mutual fund. The investor can withdraw the investment as per the terms between the mutual fund and him.3. Risk DiversificationInvestments mean managing risk rather than managing returns and one of the good ways of managing risk is diversification of one’s investments. The small investor faces a hurdle while trying to diversify his investment due to lack of funds and thus is bound to face higher amount of risk. However mutual funds can easily diversify its risk as compared to an individual investor as it has access to larger funds. Thus when a mutual fund investor is investing an amount as small as Rs 5000 then too he is reaping the benefits of diversification.4. Professional touch to your investmentOne way to enjoy sound sleep is to handover your investments into expert hands. Yet, it is not possible for small investors due to the cost associated with it. It is not feasible too, to employ a fund manager for small investment like Rs 5000.Mutual funds find possible and feasible to employ experts to control assets under management (AUM). Hence by investing in mutual funds you are hiring the services of fund managers.Thus, from the above facts it can be concluded that it is always better to opt for mutual funds to manage your risk and maximize returns.

An introduction to commodities market

Stock market achieved a highest publicity level, every single citizen of India knows something about stock market but it is not the case with Commodities market. Many of you are away from commodity market because of various myths about it.

In India currently total 24 commodity exchanges are working of which 3 are national level exchanges and remaining 21 are working on regional level.

The commodity future contracts and the exchanges organizing trading of such contracts are regularized as per The Forward Contract (Regulation) Act, 1952 and the Rules frames there under. Future Market Commission (FMC) is the agency governing the rules and regulations of commodity market.

To trust on something you should know it thoroughly and commodities market is not an exception to the rule. Hence it is very much important to know the base of it i.e. “Commodity”

“Commodity includes all kinds of goods”
Thus all that can be considered as “Goods” will be considered as “Commodity” Hence now it is essential to know what is mean by goods…

The Forward Contract (Regulation) Act, 1952 (FCRA) defines goods in following words- “Goods means every kind of movable property other than actionable claims, money and securities”

Section 2(7) of The Sale of goods Act, 1930 defines goods as-
“Goods” means every kind of movable property other than actionable claims and money; and includes stocks and shares, growing crops, grass, and things attached to or forming part of the land which are agreed to be served before sale or under the contract of sale”

Thus from the above two definitions it can be conclude that all the movable things other than money, actionable claims and securities are covered under commodity. (There is contradiction between two acts for inclusion of “security” under goods. I have excluded it from goods as FCRA is the governing act for the commodities exchange)

Now the equally important second definition is “Commodity exchange”
A commodity exchange is an association, or a company or any other body corporate organizing a future trading in commodities

The commodities as discussed above are traded in the commodities exchange in the form of future contracts and on the basis of demand and supply rates for the commodity are determined.

For each commodity three types of contracts can be entered in to on the basis of time. These are -
Near- contract for one month (Current month)
Next – contract for the month after near month (Next to current month)
Far – contract for third month

Thus at any point of time one can get exposure for maximum three months. Usually “Near” contract is the mot active contracts in terms of trades. It carries maximum risk and maximum price fluctuations.
Just like in share market, only members can deal on a commodity exchange and those who are not members can trade through members.
All features of derivative contracts (Shares) are available in the commodity future contract like mark to market, margin maintenance etc

Additionally future contracts on commodity exchange carry one special feature of delivery. If any member intends to take or give delivery of the traded commodity then he need to inform the exchange of his intention at the beginning of the tender period.

Tender period begins two weeks before the expiry of the contract. Such a delivery can be obtained from the warehouse maintained by the commodity exchange after settlement of the consideration among both the parties to the contract. After delivery purchaser becomes the owner of the goods. He may use the goods for his consumption or export or may sell in spot market or can be used for future contracts.
Thus commodity exchange provides good information to decide about which crop to grow for future as one gets sufficient time of three months for price fixation. It can be use to generate profit through hedging activity too.

Commodity – 04-March-2007

New addition in banned item list

On February 28th, 2007 Forward Market commission issued an order banning the contracts in wheat and rice future. The order is issued with immediate effect. According to the notification dealing in wheat and rice contract can be made only for squaring off the position and no further new positions can be taken.

“As per the directives of the Forward Market Commission, it is hereby informed that no new wheat and rice contracts will be launched till further notification," the National Commodity and Derivatives Exchange Limited said.

The move is taken as a measure to control the inflation. In the budget speech Mr. P Chidambaram said that a committee has been appointed to study the effect of trading in future market on the commodities and resultant effect on inflation. The Committee is expected to deliver their report by April end.

Anyway irrespective of the result of the committee at present the only sufferer is the investor as the prices of future contracts in wheat and rice are bound to come down.

Budget Highlight-

Mission for Pulses: Integrated Oilseeds, Oil palm, Pulses and Maize Development program to be expanded with sharper focus on scaling up the production of breeder, foundation and certified seeds; Government to fund the expansion of Indian Institute of Pulses Research, Kanpur, and offer other producers a capital grant or concessional financing to double production of certified seeds within a period of three years.

Plantation Sector: financial mechanisms for re-plantation and rejuvenation to be put in place for coffee, rubber, spices, cashew and coconut.

Fertiliser Subsidies: Based on study to be conducted, a pilot program to be implemented for delivering subsidy directly to farmer.

Petroleum and Natural Gas: 162 production sharing contracts awarded; investment of Rs.97,000 crore made in exploration; 23 coal bed methane blocks awarded for exploration.

Duty of Rs.300 per metric tonne to be levied on export of iron ores and concentrates and Rs.2,000 per metric tonne on export of chrome ores and concentrates.

Specific rates of duty on cigarettes to be increased by about 5%; duty (excluding cess) on biris to be raised from Rs.7 to Rs.11 per thousand for non-machine made biris and from Rs.17 to Rs.24 per thousand for machine made biris; duty on pan masala not containing tobacco to be reduced from 66% to 45%; withdrawal of exemption for pan masala containing tobacco and other tobacco products given to units in the North Eastern States

Source: www.indiabudget.nic.in

Commodity – 26, February 2007

Increase in VAT rate

Central and state governments have agreed upon increasing basic VAT rate to 6% from the existing rate of 4%. The new rate will be effective April 2009.

Commodities like branded bread, paddy, pulses, wheat, rice and edible oil will primarily face the rate increase. The tax rate on these commodities will be at 5% from April 2008 and will increase to 6% from April 2009.

The rate on tobacco will be 12.5% effective April 2007 hence tobacco consumers need to make higher provisions from this year.

Conference on Potato disease

The Ontario Potato Board and the Ontario Ministry of Agriculture, Food and Rural Affairs (OMAFRA) will host the first International Conference on potato to be held in Guelph, Canada.

The Conference will run for two days, 5th and 6th of March 2007. The main objective will be to discuss common scab a disease caused by the bacterium Streptomyces scabies. Experts around the world will come together to discuss current and potential management practices to reduce the incidence of this disease.

The conference is useful for growers, researchers and crop consultants.

Other commodities update

Flying prices of onion is expected to come down as fresh arrivals of onion are expected from Kurnool and Tandur. Low onion arrivals have caused the price to touch a high of Rs 1190 per quintal.

Irregular and insufficient rainfall has affected cardamom production drastically and consequently the production of cardamom is expected to be lower by 5-10 percent this season.

Out of total national output of 12540 tons in 2005-06, Kerala produced 9765 tons while Karnataka and Tamil Nadu produced 1,775 tons and 1,000 tons cardamom respectively.

Pepper future showed a down trend last week on reports of possible stoppage of trading in pepper futures in the commodity market.
On NCDEX the March contract fell by Rs 142 a quintal compared to its Thursday’s close and closed at Rs 12422 per quintal.

On NMCE the March contract fell by Rs 186 a quintal compared to its Thursday’s close and closed at Rs 11850 per quintal.
The total turnover on NCDEX increased by 2,544 tons to 26,550 tons, while on the NMCE it increased by 1,376 tones to 6,019 tons.

Commodity- 19-February, 2007

Wheat export banned for the whole year 2007

Government banned export of wheat for whole year 2007. The measure is taken to control prices of essential food items. Agro commodities including wheat had contributed substantially for the inflation. The inflation for the week ended on 27th January, 2007 was stood at 6.58 %.

The estimated production of wheat for the year 2007 is stood at 72.5 million tones and ban on export has been ordered to ensure that Food Corporation of India (FDI) has sufficient stock for the year 2007.

In Punjab and Hariyana, a sudden competition between FDI and large trading houses to procure wheat has converted market in to battlefield. The government has increased the support prices to Rs 750 per quintal, from Rs 650 per quintal. However from market sources it is learned that large trading companies has booked a huge amount of wheat at Rs 850 per quintal.


Other Commodities

Unfavourable weather conditions and irregular rainfall may damage potato crop substantially. The production is expected to reduce this year and resultantly potato future rose sharply on good demand from trader’s expectations of fall in production.

Both Agra and Tarkeswar varieties were closed with positive note. During the week potato gained almost Rs 93 per quintal. On Friday, 9th February potato touched a low of Rs 508 and it has seen a high of Rs 601 on Thursday, 15th February.
Potato gained almost 18 percent compared to its 15 days low however traders preferred to book profit on Thursday and hence it closed at Rs 586 per quintal.

Pepper contract for February has declined by Rs 15 and closed at Rs 12350 per quintal. All other contracts except August were declined in the range of Rs 44 to Rs 102 per quintal while August contract has been closed at Rs 13735, up by Rs 119 per quintal.

Commodity Round Up- 5-February-2007

The Commodity Market Spreads its wings

The Commodity market is becoming popular day by day. Various steps are being taken by its fans to increase its popularity. One such activity is taking place in Mumbai on 10th and 11th February 2007.

This mega event covering multiple commodities of economic significance to the country is being arranged in Mumbai, where well known industry experts will critically analyse major sectors like food grain, sugar, biofuel, fiber etc.

Another attraction of the event is the seminar on emerging global and domestic issues in production, quality, marketing, foreign trade, packaging, risk management and price outlook for various commodities.

Quality check on chillies

If we want to compete in the international market then it is essential to maintain the quality as per international standards. Realizing this fact, the Spice Board decided to set up a quality evaluation laboratory of international standards at Guntur in Andhra Pradesh.

The aim of the laboratory is to maintain the quality of chillies in the states having production of at least 60 percent of India's total production. The laboratory will be equipped with latest testing instruments and will be handled by the qualified scientists.

Agro Commodity zone

For most commodities, last week was overall a good time. Most of them on NCDEX and MCX closed in positive state.

Rape Seed/Mustard Seed production for this year is expected to be 55 lakh tonnes compared to 68.7 lakh tonnes last year. The Rapeseed/Mustard seed contract for February gained 1.09 percent and closed at Rs 404 per 20 Kg.

Wheat futures on NCDEX closed at Rs1044 per quintal after recording a gain of 1.64 percent. Guar seed futures closed at Rs 1967 after gaining 1.50 percent.

Jeera futures too maintained the rally with others and closed at Rs 9084 per quintal with a gain of 0.80 percent.

Cardamom continued its upward movement. The increased export demand and the fall in supply due to unfavourable weather conditions boosted the market rate for cardamom.
The price of cardamom rose by around Rs 35 per Kg and closed at Rs.352 per Kg.
Official sources pointed out that the weather conditions will continue to be unfavourable and this is likely to have further negative impact on the crop.

Unit Linked Insurance Plan (ULIP) – is it really a better option of investment/insurance…

Now a days one of the most hot topics is ULIP… Unit linked insurance plan. What is this plan? How does it work? Is it really beneficial??? Lets check the answers to all these and many more related questions…

Simply speaking, this plan is a combination of life insurance and the mutual fund. From the premium itself, the company deducts some portion against the insurance cost and invests the remaining portion in products like equity, debt, gilt securities etc. according to the predefined objective of the fund.

In other words, it is a money back policy, which is offered by almost all insurance companies, however the returns fully depend on the performance of the investment made by the insurance company out of the funds collected from insurers.

Generally, insurance company offers following options of investments based on the objective of risk and return.
Equity based option
Balance of equity and debt
Debt; and
Government securities

Of the above investments, the first option carries highest risk compared to the second one and second one carries higher risk compared to the third one. The risk is the least in debt investment option while the government security carries no risk they are risk free investments.

However, as we know, risk is inversely related to returns hence as risk decreases, return also decreases thus chances of highest returns are always in the equity based option and the returns decrease as you move further towards risk free investment.

The additional benefit available with the ULIP is that of tax benefit under section 80C of the Income Tax Act, 1961. The whole premium paid to the insurance company is deductible from the gross total income of the individual.

Now let us discuss few shortcomings of the above scheme -

The most important drawback is that the company charges a substantial amount against the insurance risk and hence on an average the least charges are 4% while it increases as you increase your insurance coverage. Over and above the insurance charges, the company charges the administrative cost on monthly basis, which the company adjusts against available units to the investor’s account. Thus the scheme carries the hidden cost of Administrative charges. Most of the times investor comes to know about the administrative charges only when he receives his annual unit statement.
The other important thing is lock in period i.e. once the premium paid then it gets blocked for the period of three years. The option to surrender the policy is available; however in that case, investor looses a handsome return.

The investor can avail the same benefits as that of the ULIP and can earn the higher returns on his investment.
Check out the following example for more understanding-

The individual investor aged 25 years has Rs. 1,00,000/- and he has the following two options of the investments-

Option - 1
Investment in unit linked insurance plan –
Having allocation rate of 94%
Administrative charges of 1% of the sum assured
And insurance coverage of five times of the investment amount i.e. Rs. 5,00,000/- in our case.

Option- 2
Opting for a insurance coverage without money back option; and
Investing the remaining amount in the mutual fund.

Now suppose the investment fetches the returns @ 25% p.a. in both the options.

Thus the benefits in the two options will be as follows-

Option-1

Total amount available for investment = 1,00,000*94% = Rs.94000/-
Investment of the above money @ 25%
Thus returns = 94000*25% Rs. 23500/-
Add- Tax benefit @ 30% on 1,00,000 Rs. 30000/-
Less- Administrative charges@1% of 5,00,000 Rs. 5000/-

Net returns in the hands of the investor Rs. 48500/-


Option- 2

Premium chargeable for the insurance coverage of 5,00,000 = Rs. 1500/-
Net amount available for investment = Rs. 1,00,000- 1500 = Rs. 98500/-
Which is to be invested in Equity Linked Savings Scheme (ELSS)
with entry load @ 2.25%.

Net benefit will be –
Return from investment@ 25% = (98500-2.25%)*25% = Rs. 24010/-
Tax benefit u/s 80c on (98500+1500) @ 30% = Rs. 30000/-
Total return = Rs.54010/-

Net additional benefit over the option-1 = Rs.5510/-

Thus from the example it is clear that the second option is more beneficial that the option one.

While framing the example following assumptions are made-
It is considered that the investor falls under 30% tax bracket.
Education Cess ignored.

Any Comments or suggestions on above are welcome at sagarmadurwar@gmail.com