Not all eggs in One Basket!!

Whether you are working or retired, your portfolio can maximum have 4 asset types – Equity, Bonds &  Savings instruments which give interest on them, Real Estate assets that you can own and Commodities. The need to have several asset classes is predicated on the simple principle of diversification. Let us look at these in detail…

Assuming you plan to accumulate a corpus of Rs. 3 Crores over a period of time. The first thing that you have to decide is the amount to be saved for every month and then the compounded annual return that investment has to earn. e.g if you just decide that the return on investment for one full year is to be in the region of just 5%, even RD in a bank would suffice.

But if you want a higher rate of return, then investing in Equity is the only viable option. Of course, there are risks associated with it, but in life, you need to take risks to achieve your ambitions and goals. The need for equity is the same whether you are a working individual or a retiree. If you are a working individual, you need higher return to save less and spend more. As a retiree, the higher return will help you meet your ever increasing cost of living haunted by the spectrum of inflation. We would recommend an investment into Equity through structured savings in SIPs of such Equity oriented Mutual Funds.

On the other hand investment in real estate is met with many imponderables. The problem of associating your investment in real estate is being purely speculation driven, lumpy and illiquid. Moreover, real estate market crashes are also an important factor to contend with especially considering the fluid global economic scenario. It will also be hard to ensure that your property is well maintained if you move to another City or Country.

Your portfolio of investment should be based on the employment portability. If you are vulnerable to transfers frequently, then it will be in the fitness of things if your portfolio is in financial assets. But,the scenario changes if you are a retiree or approaching retirement.

There are several ways to earn return on your investment. You can even generate monthly income from bank deposits and life time annuities. Similarly, renting or leasing out your land and building will also yield you higher returns in the form of rent and security deposit keeping pace with inflation. Also, investment in commodities will also yield high returns. But the traditional norm and practice is to invest only in Gold and not on other commodities such as copper, zinc or crude oil.

Most of the Indians are literally obsessed with Gold and accumulate it mostly in the form of ornaments. But the point here is that these ornaments neither have a higher resale value nor do they generate income and are just kept as idle asset in your house safe lockers. Investing in financial gold (ETFs or gold funds) is also an excellent option. This too could be part of your portfolio.

But, during a financial crisis or unexpected extreme events and acts of god like situations of famine, drought, collapse of economy, any amount of our best investment plans can fail and mostly all asset classes typically crash. So, it is better for us to be aware of the need of diversification which will provide higher returns and various degrees of safely. Do not put all your eggs in one basket is what we would love to tell you…

We have a wealth of information in our CAMSONLINE portal and you could also view our enlightening videos in our FaceBook page. Cheers!!

Investing is Easier!!

Do not worry…Learning to invest is easier than you think it is… You will not be learning swimming in Cold December month..

Few suggestions that could help you to shed the fear on investing…

  1. Nothing comes before you chose where you intend to invest in. Yes, planning comes in first and you have a variety of advisors who can advise you on your financial planning. Get it straight, any travel can begin, only when the destination is finalized.
  2. While there is lot of information available in the public domain, nothing like getting sound financial advice. There are AMFI registered intermediaries who can assist you on which fund, what kind of funds will suit your risk profile. Please look up AMFI Site to locate a distributor near you. CAMS is the Registrar being vested with the responsibility of Issuing these ARN numbers to distributors.
  3. Do you know that funds insist to know you well before you commence a relationship with them? Yes, this is called Know Your Customer (KYC) process. This is a rule to comply with the Anti Money Laundering regulations by government of India. You will necessarily have to get KYC done for you before you could invest in Indian Mutual Funds. CAMS KRA is one of the SEBI regulated KYC registration agency.. Just look the website to learn more.
  4. Should you not know the specifics of the scheme that your financial advisor suggests you to invest in? Yes… Please take a look at the Scheme Information document (SID) to learn the fundamental attributes of the investments you are making. It would basically give you insights on the asset class, past performance, fees chargeable and you could verify if this will suit your investment objective or not.
  5. Well… you are almost ready now to invest.. You could go through your advisor to start investing to begin with. You have the flexibility and convenience of setting up Systematic Investment Plans (SIPs) for a monthly debit from your bank account and allow units to get accumulated in your folio.

To learn more on these important steps, watch our Investor Education Videos

How to pledge your Mutual Fund Units and borrow against them?

If you want to borrow against them, this is how you go about marking a lien

Investors can pledge their mutual fund units with banks and other financial institutions, to borrow funds.

To do so, a lien has to be marked against the units. Lien refers to the right of the financier to take and hold or sell the property of a debtor as security or payment for a debt. How to go about it?

Marking a lien

An investor can approach a financier/banker and get a loan or overdraft facility sanctioned by pledging his/her mutual fund units as security.

The investor should then send a letter to the Mutual Fund/Registrar requesting the fund to mark a lien on the units in favour of the financier.

The letter should clearly state the name of the investor, as in the mutual fund records, the folio number, scheme and the number of units for which lien is to be marked.

This should be signed by the unit holders according to the mode of holding, i.e. by all holders for joint holding and accompanied by a letter from the financier stating the above.

If the investor is a non-individual entity, board resolution/partnership deed authorising the concerned person for pledging the units should be submitted.

The lien is marked on units, hence the request to mark lien will be rejected if only an amount is mentioned in the letter.

The fund/scheme/number of units mentioned in the letter from the financier should tally with that of the investor.

The number of clear units available for marking lien (i.e. units not locked due to being tax saving schemes, etc.) should be equal to or more than the number of units pledged.

The Registrar will mark the lien and send a letter to the financier with a copy to the investor confirming the marking of a lien.

The financier can also ask for the removal of the lien and send a request letter to the fund.

This request should clearly state the name of the investor, fund, folio number, scheme and the number of units for which the lien should be removed.

A financier can request partial removal of lien too on some of the units. These units would then become ‘free’ units.

Normal, Dynamic

If the financier in his letter of request for marking a lien mentions only the number of units on which the lien is to be marked, it would be a normal lien. This would mean that any dividends reinvested or any future accrual in the scheme would be free and not under lien. However, if the request specifically states that future accruals to the existing investment, such as dividend reinvestment, are to be marked under lien, then it would be a dynamic lien.

If the borrower defaults in making payment, the financier can enforce the lien, i.e. request the mutual fund to redeem the units and they will send the proceeds/cheque to the financier.

(Contributed by CAMS Viveka, an Investor Education Initiative from CAMS. The views expressed are general practices in the mutual fund industry.)


Mutual Fund Simplified

CAMS25Many of us wonder on this – How does a mutual fund work and what is there in for me and all sorts of other questions engulf the eager investor. Here is a simpler version of it…

All the money that you invest in a Mutual Fund, provides you credit in terms of a unit issued in your name (in your folio or a relationship account).

The funds that investors like you have invested gets pooled and a qualified Investment Manager ( who knows the trick of the trade) is given the task of managing the mutual fund.

The scheme that you invest in decides on the instruments in which the fund will invest, namely, it could be an Equity, Debt, Gold Fund or could even invest in currencies if the same is declared by the fund.

All your investments keep earning returns and the profits are accumulating and reflect in the Net Asset Value (NAV) which proportionately increases.

It is very simple and easy for you to encash your investments. Yes, you approach a Registrar and Transfer Agent (RTA) like CAMS or approach the AMC branches to redeem the units.

The proceeds now-a-days are directly credited to your account, as long as you have given a valid NEFT code and the account details are correct.

Next important step (you need not be taught) Go to the ATM, swipe the card, take the money and SPEND It…..

Understanding PAN Number

Do we know and understand the PAN (Permanent Account Number) that most of us have now-a-days?

We attempt to provide some basic insights into the logic of PAN .

This is a 10 digit Alpha Numeric Number. The first 5 characters are letters and the next 4 numbers followed by last one letter. This makes it a 10 digit unique number and this can divided in five parts as explained:

The meaning of each number has been explained further.

  1. First three characters are alphabetic series running from AAA to ZZZ as issued by IT Department.
  2. Fourth character of PAN represents the status of the PAN holder.

C — Company
P — Person
H — HUF (Hindu Undivided Family)
F — Firm
A — Association of Persons (AOP)
T — Trust
B — Body of Individuals (BOI)
L — Local Authority
J — Artificial Juridical Person
G — Government

  1. Fifth character represents first character of the PAN holder’s last name/surname.
  2. Next four characters are sequential number running from 0001 to 9999.
  3. Last character in the PAN is an alphabetic check digit.

Date of Issue of PAN card is mentioned at the right side of the photo on the PAN card ( you will see it in vertical imprint).

Collated by CAMS Digital Media Team

Your Financial Security

Financial security provides every individual the impetus for better living. If you are financially secured, things are always on a smooth run in your life. Managing financial security effectively is the need of the hour and we should frame financial objectives and set life goals actively identifying and planning for them.

We belong to a generation where there is growing job insecurity, cascading inflation and lack of a comprehensive pension system.   In this scenario, financial security acquires paramount importance in the overall scheme of things and managing it well is critical for fostering family’s investments and thereby multiply income generation. There is an impending need to actively craft and plan the family’s investments in such a manner so as to be aligned to investment objectives and personal life goals.

What is the key to financial security? Is it an asset of a secured bank balance, property and credit to refer precisely? Well these things give you financial security but maintaining this security is really a big deal. This is exactly where planning for financial security or more comprehensively financial security comes into focus.

Take an example, you inherit a large property of your grandparents. And elated as if on top of the world you start using or spending from the asset in reckless terms. What will be the consequence in course of time? Things get over without giving you an opportunity to recover. On the other hand, another gentleman begins from zero and through conscious financial planning; bit by bit he builds up an asset and may be at the end of the day this turns out to be an empire. In the words of eminent Scientist Albert Einstein, the power of compounding is the eighth wonder of the World. History has many such legend examples where the individual began from nothing and ended with everything.

What do these two examples try to portray?  They actually signify the importance of financial planning and the need to set life goals. Depending on life goals, one could plan for short-term, medium term and long term investments. Benefits of linking investments with life goals via active management or planning are many and varied. Not only does it help manage our investments with a clear objective in mind, but also provides a framework to guide investment selection.

Once the tenor and timelines of goals are clear, one can choose the right mix of asset class based on risk vis a vis return. Mutual Funds offer a plethora of choices for an average investor to pick up the right asset class depending on your profile. Mutual Funds are serviced by Registrar and Transfer Agents (RTA) like CAMS for all their customer servicing needs.

Listed below are some of the choices an Investor can make depending upon his/her goal related objectives.

Nature of   Goal Tenure Preferable mode of investment Benefits
Short to medium term 1-3 years Fixed Income Ensures capital protection and checks volatility
Medium to long term 3-10 years Income fund Best returns complemented with safety with little volatility
Balanced Mutual Fund Capital appreciation with
Long term Above 10 years Equity or hybrid funds Negates volatility combined with better returns acting as a hedge against inflation.

Success in financial planning and ensuring financial security depends upon identifying our life goals, setting timelines, calculate the amount of funds required for life goal fulfillment and link investments to each individual goal. Once our vision and priorities are clear, we should embark on a monthly investment plan or design a plan with disciplined investing over the year selecting the right type of funds suiting our profile. In such a focused manner, expenditure and savings management can be conducted in an admirable manner. Financial planning is no child’s play. You need to dedicate an ample amount of time to work on it and systematically schedule things to earn maximum benefits.

So, what are you waiting for ?? Isn’t the time to enlist your life goals and actively plan for them ? Start the process sooner than later to ensure your financial security.

Do you know what is known as Expense Ratio in Mutual Funds?

Mutual Funds do have expenses to make apart from trying to earn you a good return on what you give them to manage. Do you know this?

Do you know that there are quite a lot of fees that they have to pay to distributors (who sells you the MF Units), the advertisements that you get to see in news papers, the big hoardings that you happen to see when you are traveling etc?

While Mutual Fund is a collective investment trust, the day to day expenses of managing the funds will be a necessity. This is handled by a component called Expense Ratio which is explained here in a simple way….

Like a doctor who charges you for his service, mutual funds too charge a fee for managing your money. This involves the fund management fee, agent commissions, fees payable to the Registrar and Transfer Agent (RTA) and for selling and promoting the Mutual Fund Products related expenses.

All this falls under a single basket called expense ratio. To put it in its perspective, expense ratio is the fee charged by the investment company to manage the funds of investor. For example, if you invest Rs 10,000 in a fund with an expense ratio of 1.5 per cent, then you are paying the fund Rs 150 to manage your money.

Though the expense incurred may appear to be small and insignificant, when compounded, it usually impacts the return of a scheme over a long period.

Factors influencing the expense ratio include the size of the fund sales charges, and the management style of the fund. Smaller funds are a natural disadvantage considering they have to spread their expenses over a smaller number of investors. Different Funds have different expense ratios.

Happy reading!!

%d bloggers like this: