Friday, July 6, 2007

Reliance Mutual Fund presents Fixed Maturity Plans.

Hello friends,
I got a post from Reliance MF some days ago which had my account statements of Reliance MF I hold and also mentioning about their new plan called "Fixed Maturity Plan" (FMP). As you all know that Fixed Deposits are one of the safest way of investment. But its drawback is that the rate of return is very very low. Most FD's offer only up to 8.25%, for about 1-3 years of lock-in period. Also the returns are taxable ( 33.99% ) depending on the level of your income. Another safe investment is PPF (Public Provident Fund). But PPF has lock-in period of 15 years ( Note:you can withdraw part of your contribution only after completion of 6 years) - so its just toooooo long. ( I personally treat PPF not for our generation - but for next generation.) Also there is another option of RBI Savings Bond, but there NRI's cannot invest and premature encashment is not allowed. Reliance wants to provide a blend in this type of reliable investment adding flavours of attractive returns, choice of Maturity periods, and tax efficient returns. They have come up with FMP.

FMP offers various maturity period options - monthly / quarterly / half yearly / yearly and more than one year. You can invest depending upon your requirement of cash flows on maturity. FMP offer minimal risk as compared to normal open-ended debt funds. These open-ended debt funds are associated with 3 kinds of risks : interest rate, credit and liquidity risk. Last but not the least feature of FMP is that it provides tax-benefit. For FD's tax rate is 33.99%, but for FMP's its 22.66% and also indexation benefits are available. If we assume 10% rate of interest/year and compare FD and FMP then calculations tell that assuming 5% indexation rate, and considering tax deductions, we actually get 6.61% for FD and 9.86% for FMP. More information can be found on

I personally think its a good choice of investment rather than normal FD's of nationalised banks. Only one concern is that, even FMP have very very low risk, they still are venerable to market ups and downs and FMP don't offer guaranteed returns, but it is likely to yield better than FD's. You can also get benefit of double-indexation, where you can get indexation benefit of 2nd year by remaining invested just for some time more than 1 year. So you get benefit if total 2 years, instead of 1 year. Your comments are awaited.

Monday, July 2, 2007

Chips Down for IT

Between February 19 and April 2, the BSE IT index lost 16 per cent! And most equity oriented mutual fund investors were hit by this, with some fund managers maintaining as much as 42 per cent of their fund's assets in this sector. In fact the average exposure of the equity diversified fund category to the technology sector was much as 16.20 per cent! (as of February 28).
But what has caused this sudden blip? Ever since the rupee started appreciating, the BSE IT index started slipping and by May 30, the index had lost as much as 10 per cent (between January 2 and May 30). And when the chips went down, mutual funds were not far behind in offloading their stake in the sector, with 148 equity diversified funds collectively offloading close to Rs 930 crore from the sector. And they did just as well for this move, for while the BSE IT index was in a bear grip, most equity diversified mutual funds were hitting their 52-week highs by June 1, 2007. Domestic mutual funds have surely learnt from their mistakes of 2001.The fear of the rupee appreciation becomes alarming because the Indian technology sector is mostly export led. When the rupee starts appreciating against the dollar, all Indian exports become less competitive in the global market. Earnings then take a hit. While most technology companies have various rupee hedging mechanisms in place, such a drastic appreciation of the currency in a short span of time has taken everyone by surprise. Take for instance the fact that by April 13 this year; Infosys Technologies had put its rupee outlook for the financial year 2008 at Rs 43.10 against a dollar and by April 25 the rupee stood at 40.97 to a dollar.So what is the take away from these developments? Should we start redeeming our funds that are heavy on the tech sector? Well, it is still premature to take such a drastic step. The fact remains that as on June 21 the one-year average return of technology specific equity funds is still unbeatable at 63.83 per cent. With the economy growing impressively, an appreciation or strengthening of the rupee is inevitable. This is bound to hit the earnings of the technology sector and those of other export oriented sectors. So one can expect a rationalisation of earnings from this sector and there is no need to panic yet. Nevertheless, it makes better sense to keep your portfolio balanced across sectors. Overdependence on any sector be it technology or infrastructure will always be a risky proposition. So if you are invested heavily in a technology-specific mutual fund, you could look at reducing your stake here. If you are invested in an equity diversified fund, let your fund manager take the call on re-jigging the portfolio.