Use mutual funds to address financial needs

Most financial experts will tell you that it is important to plan your investments according to your financial goals and personal needs. These vary from one individual to the other, with some looking to build a nest egg for their retirement, and others wanting to fund the down payment of their dream house. Funding children'seducation and marriage are also prominent goals for most people. One can plan for these goals with the help of different mutual funds which are suited to various requirements. The choice of mutual funds depends on the time horizon as defined by the proximity of goals and one's tolerance towards risk. Here's how one can plan for specific goals in life by using mutual funds.

Retirement

Creating a sizeable corpus for one's twilight years is a key financial goal. Ideally, one should begin saving for it as soon as one begins earning. A systematic investment plan ( SIP) in mutual funds is the best route to help you achieve this goal. If you are in your 20s or 30s, start investing aggressively in diversified equity funds, which carry the potential to create long-term wealth. A mix of large-cap and mid-cap oriented funds with healthy track records should be a part of your portfolio. Remember, however, that you will need to gradually shift your money to safer debt funds as you get closer to retirement.

Children's education or marriage

Providing for these goals requires careful planning. Since you cannot compromise on your child's future, your investment should not be subjected to high risk, but should still leave scope for good returns. Balanced funds, which invest in a mix of debt and equity, are the ideal choice for these. Index funds can also be used in a smaller proportion. For your daughter's marriage, the need for gold jewellery can be met by buying gold ETFs at regular intervals. Since you cannot predict the price of gold at a given time, the least you can do is keep pace by accumulating gold ETF units.

Down payment for house / car

If you are saving to buy a car or make the down payment for a house a year or two down the line, steer clear of equity investments. Such short-term goals can be met through debt funds, which invest purely in fixed income instruments. Income funds or short-term bond funds should be used to ensure that your money grows at a steady pace. These work best when interest rates are heading southwards.

Meeting recurring expenses

If you want to earn a regular income to meet certain recurring expenses, monthly income plans could be the right option. These are suitable for investors who don't want to take too much risk as these invest up to 20% inequities and the rest in debt instruments. These are fairly stable and can provide a steady stream of income by way of regular dividends.

Tax planning

If you want to reduce your taxable income and also build long-term wealth, you can invest in equity-linked saving schemes or ELSS funds. This investment is eligible for tax deduction, with the income from dividends and capital gains being tax-free even though these plans come with a lock-in period of three years. These can be used to supplement other equity fund investments meant for your retirement goal.

Economic Times

Check your cheque status, only those in new format will be honoured from January 1

Add one more item — get a new cheque book — to your list of 'things to do' before the New Year. You may not be able to use your old cheques from next year with the implementation of the new Cheque Truncation System (CTS-2010), which will eliminate physical movement of cheques for clearing. Instead, only their electronic images, along with key information, will be captured and transmitted. It will make the clearing process more efficient, secure and quicker; but for that, you must switch to new cheques with prescribed standard features before December 31.

"Customers need not worry about the impending CTS implementation. I am sure they will not be inconvenienced due to the migration process. Some transitory period, from January 1 to March 31, could be given during which both types of cheques will be accepted. Banks are sending messages to customers now so that they comprehend the urgency and act upon it," says AC Mahajan, chairman, Banking Codes and Standards Board of India (BCSBI).
CHECK YOUR CHEQUE'S STATUS

If you have ordered your cheque books recently, say, a month ago, you may already have the new cheque leaves with you. Since most banks have already migrated to the new system, chances are that your bank would have sent you CTS-compliant cheque leaves.

However, if you have received the cheque book more than two or three months ago, you need to run a status check. For instance, the compliant ones will have the new rupee symbol (.`) inscribed near the numerical 'amount' field.

"Visibly, there will only be the following difference: "Please sign above" is mentioned on the cheque leaf on right had side bottom; and, void pantograph (wavelike design) is embossed on left hand side of the CTS cheque leaf," explains Anindya Mitra, senior vice-president, retail liabilities group, HDFC BankBSE -0.17 %.


GET YOUR OLD CHEQUE BOOKS REPLACED

If you haven't received the new form of cheque books already, speak to your bank as early as you can. "Banks could adopt two methods to replace the old cheques. One is to send new cheque books by registered post and ask users to cancel the old ones. Customers may be asked to show proof of the same to the bank. They may also ask customers to surrender the older ones. Or, the customers can visit the bank branch themselves to surrender the old cheques and receive the CTS-compliant ones," says Mahajan. Banks will not charge any fee for replacing the old cheque leaves.

ISSUE NEW POST-DATED CHEQUES FOR EMIS

If you have issued post-dated cheques (PDCs) for your home or auto loan EMIs, you will have to issue fresh cheques. "RBI's guidelines to NBFCs state that if they have accepted post-dated cheques from their customers for future EMI payments, they should get them replaced with CTS-2010 standard compliant cheques before December 31, 2012. This will be applicable to banks as well," explains VN Kulkarni, chief credit counsellor with the Bank of Indiabacked Abhay Credit Counselling Centre.

"Most of our customers have opted for the ECS (electronic clearing system) mode for their EMI payments. So, the new sys-tem will not impact them. Only a small percentage of borrowers pay their EMIs through post-dated cheques. We are asking them to give us new cheques and accept their older cheques back," says Abhijeet Bose, head, retail assets and strategic alliances, Development Credit BankBSE 0.52 %.

Not all banks will return your older cheques, though. You needn't be concerned about it as these cheques will be non-compliant with CTS standards and hence not be valid.

To avoid these hassles, you can simply switch to the ECS mode, where the EMI amount is debited from your account every month. It will also save you the trouble of altering the amount on PDCs in case of any change in EMIs.


Economic Times

MANAGEMENT LESSON

-       Once upon a time, a very strong woodcutter asked for a job with a timber merchant, and he got it.
-       The pay was really good and so were the work conditions.
-       For that reason, the woodcutter was determined to do his best.
-       His boss gave him an axe and showed him the area where he was supposed to work.
-       The first day, the woodcutter brought 21 trees.

-       “Congratulations,” the boss said. “Go on that way!”
-       Very motivated by the boss’ words, the woodcutter tried harder the next day but he only could bring 17 trees.
-       The third day he tried even harder, but he only could bring 10 trees.
-       Day after day he was bringing less and less trees.

-       “I must be losing my strength”, the woodcutter thought.
-       He went to the boss and apologized, saying that he could not understand what was going on.
-       “When was the last time you sharpened your axe?” the boss asked.
-       The woodcutter replied : “Sharpen? I had no time to sharpen my axe.
-       I have been very busy trying to cut trees.

"JUST HARD WORK IS NOT ENOUGH TO ACHIEVE SUCCESS,

WORK SMART AND WITH THE RIGHT ATTITUDE TO ACHIEVE SUCCESS IN LIFE".

L&T Mutual Fund to now manage Rs. 12,800 crore for 9.5 lakh investors.

L & T Mutual Fund’s AUM jumps from Rs 3,842 crore in September 2012 to Rs12,800 crore. The AMC will be catering to around 9.5 lakh investors from 200 cities and towns.

“The decision to acquire Fidelity’s mutual fund business in India was made with an aim to become the best value provider of investment solutions across asset classes. With this acquisition, our fund suite spans the whole range of investment opportunities – equity, fixed income, hybrid, domestic and international funds – and moves us closer to becoming one of the country’s leading and admired asset management companies.We now have a high quality business that combines best-in-class practices, a strong domestic brand, market knowledge and a proven performance track record,” said Y.M.Deosthalee, Chairman & Managing Director, L&T Finance Holdings.

The fund house will now be offering 25 funds, amongst which few popular funds are L&T Tax Advantage Fund, L&T Equity Fund, L&T India Large Cap Fund, L&T Triple Ace Bond Fund, L&T India Special Situations Fund and the L&T Global Real Assets Fund, which feeds into Fidelity’s Luxembourg-based SICAV – Fidelity Funds Global Real Asset Securities Fund.  

“The comprehensive fund range, proven track record, geographical reach, our commitment to distributor training and investor education, and the support of our investors provides an opportunity to take the All New L&T Mutual Fund to the next level. We have significantly enhanced our capabilities in all areas including equity and debt fund management, operations and customer service,” said Ashu Suyash, CEO, L&T Mutual Fund.

What is CRR, SLR, Repo Rate and Reverse Repo Rate?

Reserve Bank of India plays an important role in controlling the interest rates in the banking system, by adjusting the liquidity in the system.

How RBI control the interest rates in India? If you want to understand the above, we should understand certain commonly used terms by RBI.

These are CRR, SLR, Repo Rate and Reverse Repo Rate.

What is Cash Reserve Ratio (CRR)

Each bank has to keep a certain percentage of its total deposits with RBI as cash reserves. It is called Cash Reserve Ratio (CRR). On 30^th October.2012, RBI reduced the CRR by 25 basis points to 4.25%. If the bank is having a deposit of 100/-, it has to keep Rs.4.25 as cash reserve with RBI and it can use only the balance 95.75 for lending or investments.

What is the role of CRR in the banking system

RBI uses CRR as a means to control the money supply in the system. When the money supply is on the higher side, RBI will increase the CRR to reduce the supply and vice versa.

What is Statutory Liquidity Ratio (SLR)

Every bank has to maintain at the close of every day a certain percentage of its total liabilities (Deposits) in cash, gold or government approved securities. This is called SLR. At present, the SLR is 23%.

What is the role of SLR in the banking system

Its role is more or less similar to CRR and controls the money circulation the banking system. If RBI wants to suck, excess liquidity from the system, it will increase the SLR. Banks will be forced to keep the higher percentage as liquid assets and its power to lend will come down.

What is Repo Rate

When banks require short term money, RBI will lend member banks against securities held by them. RBI will charge interest on these loans and this rate of interest is called Repo Rate. At present, Repo Rate is 8%.

What is the importance of Repo Rate in the economy

When RBI wants to decrease the lending activities in the country, it will increase the Repo Rate. Once the Repo Rate is increased, the cost of funds to banks from RBI will increase and it will in turn increase the lending rates to customers. This will reduce the lending transactions. But if the RBI feels the need of more lending activities, it will decrease the Repo Rate and reduce the cost of funding. This will translate into lower rates on loans and lending will pick up.

What is Reverse Repo Rate

If banks have excess amount with them, they can park the surplus money with RBI and earn interest on this. The interest on such amount is called Reverse Repo Rate. At present the Reverse Repo Rate is 7%.

RBI will increase the reverse Repo rate, if it wants to reduce liquidity in the system. Banks will be tempted to park money with RBI rather than lending, if this rate is high. At present Reverse Repo Rate is kept 100 basis points below Repo Rate.

By adjusting CRR, SLR, Repo Rate and Reverse Repo Rate, RBI will ensure that the banking system is working fine.  It will adjust these factors to promote an orderly growth of the economy by controlling interest rates and liquidity in the system.

Top 20 banking terms you should know

1. National Electronic Funds Transfer (NEFT)

Transfer of funds initiated by electronic means such as an electronic terminal, telephone, computer, or ATM. The NEFT facilitates the process of fund transfer within the same bank or inter-bank transfers. The minimum amount that can be transferred is as low as Rs 100.

2. Linked Account

Any account linked to another account in the same bank where funds can be transferred electronically between accounts and carry out other specified services as well.

3. Travellers' Cheque

Cheques issued by a bank and function as cash but are protected against loss or theft when travelling.

4. Base Rate

It is the minimum rate a bank charges its most credit worthy customer. The bank cannot lend below this rate (with an exception to banks employees, loans to bank's depositors against their own deposits, albeit with the subvention of the central bank).

For a retail customer, the Base Rate will cover all loans from auto, personal to home loans effective from July 1, 2010.

5. Balance Transfer

Balance transfer is an option included under credit card payments and is useful for persons holding more than one card. On availing this facility, the cardholder can transfer the balance amount outstanding on card one to card two and vice versa, if he/she is not able to make full payment that is due on a particular card.

In any case, the payment due date is only delayed but the payment has to be made at the scheduled time as stated in card two. Balance transfer facility is useful in reducing the interest outgo (on card one) and extending the payment due date on the original card.

6. Banking Ombudsman

Banking Ombudsman is an unbiased forum formed to resolve complaints registered by bank customers with respect to the services provided by banks. The RBI introduced this scheme under Section 35A of Banking Regulation Act, 1949. In case one has not been satisfactorily serviced by their bank, they should first register a complaint with the bank customer service department.

If they are not happy with the bank's response, then they can approach the banking ombudsman for an unbiased resolution.

7. Cashback

The term 'cashback' is used with reference to credit cards. Cashback means giving back some portion of money (spent by the cardholder through the credit card) to the cardholder himself. The cashback is made in terms of points earned; for example, the bank may say one point will be earned for every Rs 100 spent by the cardholder and at the end of the year, the money worth of the points earned (say Rs 1 for 1 point) will be credited back into the cardholder's account.

8. Credit History

Credit history is an account of an individual's past borrowings by way of loans, credit cards and all other debt that needs to be repaid/has been repaid. Credit history in India is currently being provided by CIBIL (Credit Information Bureau of India Limited) and contains records of an individual's open and past accounts of loans and credit cards.

Through the CIBIL report, the bank (lender) can know if the individual (borrower) had made any late payments or defaults. You can get your own credit history report from CIBIL for a nominal fee.

9. Collateral

A borrower needs to provide some kind of security to the bank in case of high ticket loans (except home loans where the property is the security). Such security is called 'collateral'.

In case the borrower fails to repay the loan, the bank has the authority to attach the collateral to the loan and claim its dues.

10. Documentation/Processing Fee

Bank requires certain documents from the borrower to look into his creditworthiness and charges a fee for the same. These charges are known as documentation charges.

Processing Fee is charged by the bank upon sanctioning of loan to the borrower.

11. Dormant/Inactive Account

If an individual has not made any transactions in his/her account (except for interest payments credited by the bank) for more than two years, the savings/current account is declared as dormant/inactive.

12. Fixed Rate

Fixed rate is the interest rate that remains constant for the full term of the loan.

13. Floating Rate

An interest rate that is referenced to a market rate and is revised as per the change in the interest rates in the economy. When interest rates in the economy rise, floating rates rise and vice versa.

14. MICR Code

MICR stands for Magnetic Ink Character Recognition. MICR Code comprises 9 digits given at the bottom (right side) of the cheque number. It is a unique code and varies between each bank branch.

MICR Code is required for cheque clearance. MICR Code is different from the IFSC code, which is also mentioned on a cheque.

15. No-frills Account

This account is a basic savings account provided by banks to make banking simpler and more accessible for all customers. In a no-frills account, you do not have to maintain minimum balance and enjoy basic banking facilities such as electronic funds transfer (EFT), netbanking, free cheque book issuance.

16. Electronic Clearing Service (ECS)

It is a service provided by the banks to facilitate direct debit from your bank account towards an investment account (such as a mutual fund SIP) and/or paying regular loan EMIs.

One can give a standing instruction (SI) to the bank to transfer the specified amount every month for a specified period. Alternatively, you can direct a one-time transfer of funds through NEFT/RTGS (explained next).

17. Processing Fee

Bank levies processing fee in order to process the loan application of the borrower. This fee is a small percentage (example: 2.5 per cent) of the loan amount sanctioned and is usually waived off during festival time to attract more borrowers.

18. RTGS

The RTGS or Real Time Gross Settlement System facilitates fund transfer within same bank or inter-bank transfers, but unlike NEFT, RTGS ensures the fund transfer fast and smooth in 'real-time' for a nominal fee.

The minimum transfer amount is higher than NEFT (usually Rs 2 lakh and above).

19. IFSC

IFSC code is useful in bank fund transfers and cheque clearance. It is an 11 character code assigned by RBI to identify every bank branch uniquely. The first part is the first 4 alphabet characters representing the bank. Next character is 0 (zero) and is reserved for future use. The last 6 characters is the branch code.

20. KYC

KYC or Know Your Customer norms are imposed by RBI on banks and other financial institutions to ensure that the correct identity of the banks' customers is established and to ensure that banks deal only in legitimate banking operations and not in money laundering or frauds.

Rule of 72

31st October is celebrated as World Savings Day but what a coincidence Halloween is also celebrated on the same day. (tragedy is we know about Halloween but….) Let’s learn some basic rules that you can practically apply in your day-to-day life.

The ‘Rule of 72′ is a simple way to determine how long an investment will take to double, given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors can get a rough estimate of how many years it will take for the initial investment to double itself.

For example, the rule of 72 states that Rs 1 invested at 10% would take 7.2 years (72/10 = 7.2) to turn into Rs 2. In reality, a 10% investment will take 7.3 years to double (1.10^7.3 = 2). When dealing with low rates of return, the Rule of 72 is fairly accurate. Albert Einstein said compounding is eighth wonder of this world & “rule of 72″ eight wonder. Below chart compares the number of years it takes an investment to double at certain rate.

Every Penny Counts

Let’s try to practically apply this rule. Let’s assume that as today is World Savings Day – you added Rs 1000 to your retirement kitty. (assuming you are 29)

WOW! So if someone save Rs 1000 today for his retirement – it will become Rs 32000 in 30 years or Rs 64000 in 36 years.(@ 12%) Just imagine if this amount is Rs 10000 this month (if you don’t splurge in the festive season) or Rs 1 Lakh this year (bought a small car or vacation or may be combination of many small things).

There is also a reverse usage of rule of 72 – where you divide 72 by number of years & you will get the rate at which money will double in this period. Similarly there are 114 (triple) or 144 (quadruple).

Hemant Beniwal