My article last week in the DNA Money (Ref: Get your gold over time via a SIP dated 7^th April, 2010) evoked keen response amidst readers who wanted to know the process of investing in SIP of gold ETF.

Not only this, many readers also wanted to know from where and how they can go about doing it. Indeed it speaks volumes about the love for gold we Indians have!

If you are one of those, I hope this piece of information will be of great help.

So for the beginners, it is a step-by-step process.

First and foremost you will need to open a Demat account with a depository participant before opening an account with a broker as brokers normally insist on opening a demat account before you can open a trading account with them. (In case you already have these then you can start right away after reading the article).

A Demat account is like a saving account of securities where you can electronically deposit or withdraw your shares like your money in savings account. When you buy any share, these are credited in your Demat account by your broker. There are broking Companies which provide Demat services also, therefore you can open the share trading account with one such brokerage houses. You can have more than one Demat account as well as share trading account.

For opening a Demat account, a valid PAN number and an Operative bank account is mandatory besides documents for your address proof like ration card, driving license, voter Id card, rent/purchase agreement in respect of the property or latest insurance policy status for a live insurance policy are required. You can also provide documents like electricity bill, bank statement, telephone bill or bank for the purpose.

In case your broker also offers Demat services known as Depositories Services, then both your Demat and share account are opened simultaneously.

However in case you have opened your demat account with depository like Stock Holding Corporation  Limited,  you need to open an account with a share broker, which is popularly known as trading account, for the purpose of buying the Gold ETF. The documents required for the purpose of opening the share trading account are almost the same as required for opening a Demat account.

Let me tell you that for buying or selling the Gold ETF units you do not have to open a new Demat or share trading account.

For purchasing and selling of Gold ETF you may call up your broker and place the order. Some brokers allow you to trade Online also.

The scrip name with underlying gold quantity and exchange code of major schemes of Gold ETF on Bombay Stock Exchange are given below as a ready reference for the people who buy stocks On line and for others to convey to their brokers what they want to buy specifically:

Except for the ETF of Quantum Mutual Fund which has a quantity of half gram against each unit all others have one gram of gold underlying each unit of Gold ETF.

These units are traded on stock exchanges and cannot be purchased from Mutual Funds. Here you cannot set up a SIP (Systematic Investment Plan) in its traditional way. But you can set the target of quantity of gold to be bought in a year and accordingly decide to buy the quantity spread over the year evenly. This will help you in absorbing the volatility in the price of gold.

Suppose you want to accumulate 10 gram of gold every month, you can plan to buy Gold ETF on alternate day of one unit or alternatively one unit of quantum for each day when the stock exchange is open as the market is on average open for 20 days in a month and if you buy 1 unit of quantum Gold Fund ETF on every day or 1unit of any other Gold ETF on every alternate day. Based on your target quantity of gold required in future, you can set the quantity and frequency of units to be purchased.

To give effect to the above plan, you can instruct your broker to buy the Gold ETF on the days fixed in advance. It will help if you set up your personal reminder for purchase of Gold ETF on fixed days. Some of the Online trading sites allow you to set up for auto purchase of shares. This arrangement will bring in financial discipline in those of who are careless about their money as they have to honor the cheques for payment of Gold ETF regularly and religiously.

As you are planning to purchase the Gold ETF on regular basis and the payment of money has to be made within three days normally, making of payment involves some logistics difficulty in arranging for payment frequently. In such cases where the payment of the purchase amount is automatically debited in the bank, like Online broking companies affiliated or floated by bank does not pose major logistics problem.

However in cases where the bank account and broking account is not linked, you can solve this difficulty by handing over a few cheques periodically. Do not forget to make the cheques for  not above a particular amount, which you think can be maximum  payable  in respect of purchase of Gold ETF during the relevant period. However please ensure that you maintain adequate balance in your bank account during currency of the self devised gold ETF.

So if you follow the SIP way, you can be a proud owner of gold over a period of time.

Assuming this decision is implemented (it is yet to be officially intimated to the mutual fund industry although the press release is dated June 18, 2009) I think it needs to be welcomed with a muted cheer. The reaons for a rather muted cheer are many.

The Mutual fund industry will now not be able to give any upfront commission (at least officially) to the mutual fund agents. The agents are expected to ask the investor to pay separately for the services rendered. Off course they will still be entitled to the commission that most mutual funds pay when the investor continues to keep his money in the scheme (called trail commission ).  This has already caused a lot of discomfort to the mutual fund distributors and they are reportedly organising a dharna at the SEBI offices in Mumbai even as i write this blog.

So then is this a good thing for the individual investor? In my opinion this is a mixed blessing for the investor. First assuming this applies to NFOs as well (not very clear to me right now) the rush of new NFOs that will die down and we will see the consolidation of various schemes.  The biggest advanatge off course is that the investors will now be able to negotiate the amount of fees that they wish to pay to their agent and pay him directly at the time of purchase.

Having said that follows some of the disadvanatges of this step if implemented :

The charge structure for the mutual fund industry is expected to change significantly and we are likely to see singinificant increases in trail commissions. This charge  is debited to the scheme account and reduces the NAV. In fact a high trail commission which is payable on the portfolio value (inlcuding the gains that the portfolio has made) and not just on the amount contributed by the consumer will ,for an investment held over 8-10 years, result in a lower investment value for the consumer.  We have done a very interesting excel calculation. We took the example of a systematic Investment plan for Rs. 10,000 per month for a period of 15 years. If you took the average annual returns at 12% p.a. and the entry load at 2.25% the cumulative value of the investment before considering any trail commission is around Rs.48,83,000. If we remove the entry load of 2.25% and substitute it for a trail commission of 0.40% p.a. the investor will accumlate only around Rs. 48,10,000 at the end of 15 years i.e. he would have been better off with the entry load of 2.25% rather than an increase in trail commission by 0.40%. The reason for these startling numbers is not difficult to find - whereas the entry load is charged only on the incremental amount invested the trail commission is charged on  the entire cumulative investment amount including the returns that the investors are entitled to.

If we extend the same example but take only a period of 10 years then the investor would be more or less the same in both the alternatives. If we take an even smaller period of 5 years the investor would be better off paying an extra  trail commission of 0.40% rather than an entry load of 2.25%. Thus clearly an extra trail commission in lieu of an entry load discriminates against a long term regular investor.

The other big issue is that with the entry level commissions reducing so significantly the distributors may shift to promoting only ULIP products which may not be suitable for all consumers.

However it is reported that AMFI has made a representation to SEBI to defer the implementation of this  desicion. Meanwhile IRDA is also reportedly planning to issue guidelines for streamlining all charges in a ULIP plan and is even reportedly considering a  maximum limit for such charges.

All in all this is one domain where we are likely to see lots of changes in the next few months. The manner in which financial products are distributed in India is going to completely change. Keep watching this space…….

Dear Sir/Madam,

Can you kindly advise me how to and where to register my complaint for the following?

My stock broking agent has sold out my MF holdings HSBC dynamic growth on 3/6/9 without my consent.I asked for the compensation but they declined.

How can I proceed?

If the NAV is down from the selling NAV then is there any point pursuing this matter?

kindly advise

Subhasis

SEBI has given the green signal to mutual fund agents for charging “negotiable fee” to their prospective investors. By abolishing the entry load for mutual fund schemes, SEBI has induced a sense of professionalism and ethical practice in planning our finances.

Here raises the big question - Are AMFI certified agents trained for professionalism and ethical practice in planning our finances.? A two hour examination gives them license to direct us on our finances? This examination is mandatory for selling mutual fund and not for “Professional Advice”. Since technically we will not be paying an entry load for the mutual fund units we invest in, we will be induced to pay an amount to the sales agents for their “recommendations” which would now be termed as “advice”

Thus we can infer that we investors will be paying a fee to someone who only is trained for being a salesman (not advisor) of mutual fund units.

So is it justifiable to consider an agent as a professional financial advisor? So what is actual role of a financial advisor? A financial planner follows a process. Initially would segregate needs and expenses and then accordingly suggests whats are the steps to be taken.

Lastly would suggests the various arenas of investments. Also, this is a continuous process. Since our needs change with the continuous changing scenario, it becomes important to accordingly adjust our investment structures. This has led to opening arenas, respecting and using expertise of Certified Financial Planners.

Since now the ball is in our court, we have to select our investments based on performance. We wont be forced to buy investment schemes to fulfill somebody else’s sales targets!

The entry load on Mutual Funds, generally 2.25% of the total investment sum, has been officially abolished by SEBI (Securities and Exchange Board of India) in June 2009. This charge was one of the major sources of revenue for mutual fund agents.

Hence, there is very less chance why an agent should sincerely advice a prospective investor on the various mutual funds schemes available and which one to opt. The only reason for this is that there is no consistent incentive for the agent to do the same. They now don’t have any stable source of income. However we cannot completely ignore the fact that distributors can charge a negotiable fee which for the “advice” they give you on choosing a suitable scheme.

Does this mean that now agents may focus toward selling other financial products like ULIP plans which give them better commissions? More often than not, agents do end up pitching for products which are more rewarding to them. Hence there is a very high probability that they don’t suggest you to invest in mutual funds at all.

On the 19th of June 2009, one of the leading newspaper reported that India will become a trillion-dollar wealth management market by 2012. The wealth management market in India will have a target size of 42 million households by 2012, as against just about 13 million in 2007. But can this be possible with such an unstable business model? Will this result in loss of jobs? These questions now remain unanswered and only time will explain what happens next!

The S.E.B.I (Securities and Exchange board of India) has launched a reform, which is going to change the whole mutual fund market. Yes it’s true! The entry load on Mutual fund schemes, new or old, has been officially abolished. Normally mutual funds used to invest 97.75% of the principal amount paid by the investor, the rest 2.25% was paid by the fund house to the distributor.

The new reform will dramatically change the whole scenario of the fee amount charged by the mutual fund. The law complies the investors to directly pay the distributors a fraction of the 2.25%. The distributor will charge the fee for his advisory role in recommending the investor where to invest. The distributor has much more role to play in the current scenario, since the distributor will have to spell out to investors the commission received from the various fund house. This single rule itself is the biggest impetus to bring the transparency and the professionalism in the distribution of the mutual fund.

The new wave of fee based professionalism in the Mutual fund market.

In any market if the opportunity to earn money is much more, when a certain person offers his expertise. Since the entry load has been abolished, the distributor has to offer his expertise in the areas of the asset allocations and the portfolio management to the investor to maximize his profit and bring another stream of revenue. The distributor can only charge the fee on his advisory services, which can be 1% of the portfolio or any fee amount depending on the negotiation between investor and distributor.

To survive in this cut throat financial market and with the waiver of entry load the distributor has to raise to the top most level of professionalism, give right kind of financial plan or advice and customize the plan according to the investors’ preferences. It’s the only way he can survive in the market and grow substantially.

In the present market only CFPs (Certified Financial Planner) are allowed to make financial plans for the investors. The CFPs have a major role to play in the future of our financial market.

The S.E.B.I has put more powers in the hands of the investor and made the job of the distributor of the mutual fund more difficult, the distributor can only survive in this market if they bring a different level of professionalism and transparency to the system.

The distributor will have to change the whole perception of a normal agents or mutual fund marketers. After this reform the world view on distributor of the mutual fund is that of a wounded horse right now, but this an opportunity for the distributor to mature as a professional and bring expertise in their field and they have to take this challenge head-on.

Mutual funds constitute a unique investment gateway where you can invest a small sum and reap the benefits of a well-diversified portfolio selected by professionals, who are not only accountable to their seniors at the mutual fund but also responsible to you as the investor. The mutual fund as a concept is not new, the foundation of the modern mutual fund laid with the establishment of Massachusetts Investors Trust (now MFS Investment Management) in 1924. In India, the mutual fund story started in 1964 with establishing the Unit Trust of India (UTI) by an Act of Parliament. Subsequently, in the years 1987-1993, public sector funds entered in the fray. In 1993, the first mutual fund regulations came into existence, under which all mutual funds, except UTI were to be registered and governed. This paved the way to private sector funds and international players. The 1993 SEBI (Mutual Fund) Regulations were substituted by a more comprehensive and revised set of regulations in 1996. The industry is now governed by the SEBI (Mutual Fund) Regulations 1996.

The composition of mutual fund consists of three entities - sponsors, trustees, and Asset Management Company (AMC).  The sponsors initiate the idea to set-up a mutual fund and arrange/organize capital. Trustees secure the necessary approvals from SEBI to float the schemes. The trustees enter into a management agreement with the AMC to manage the money collected through various schemes. The AMC takes investment decisions, maintains proper accounting and information, calculates the NAV, and provides all relevant information.

Mutual funds offer many types of schemes with the objective of offering many options to the investors to match their investment objectives. These schemes can be broadly divided into following generic categories:

• By structure, such as open-ended/interval/close-ended schemes
• By investment objective, such as growth, income, balanced and money market schemes.
• Other schemes, such as tax-saving schemes, index schemes, and sector-specific schemes

Mutual funds offer many unparalleled advantages in investing, such as professional management, portfolio diversification, low costs, liquidity, transparency, and flexibility.

Criteria of mutual fund selection

There is nothing that can completely ensure that the investor will earn maximum returns but the following fund parameters will help to reduce risk and enhance returns:

• Size of Asset Under Management (AUM): A large-sized AUM not only helps to reduce cost but also puts the fund in a position to absorb risk and liquidity crises in a better way.
• Past Performance: Past performance of a mutual fund does not guarantee anything for the future but it definitely indicates the ability of its fund managers.
• Lower Investment Management Expenses: It is generally favorable for the investor to choose schemes with lower Investment management expenses.
• Low Portfolio Turnover: High portfolio turnover unnecessarily increases transaction cost, hence look for funds with low portfolio turnover to take the cost advantage.
• Evaluation of Indicative Portfolio: An investor should properly evaluate a fund’s indicative portfolio and try to avoid schemes with exposure in underperforming sectors.

Matching Investment Objective with Schemes

Every investor has one goal - to maximize returns subject to his/her risk appetite. Mutual funds give a lot of options to enable one reach or get close to one’s desired goal.

• Corporates/individuals can put idle money in liquid funds rather than savings accounts and earn much better returns. Money can be withdrawn from liquid mutual funds by giving just one day’s notice.
• If an investor plans to earn reasonable returns for a period in the range of three months to more than a year, fixed maturity plans (FMP) are a good option. In case of FMPs of more than one year’s tenure, an investor can also take the advantage of long term capital gains.
• If an investor wants to invest on a recurring basis, a systematic investment plan (SIP) is a good option. Its long duration helps to reduce the impact of bull and bear phases.
• Investors with very high risk appetites and good understanding of the market can always look for equity or equity-oriented mutual funds. If the investor feels that a particular sector will do well, he/she can choose sector-specific schemes. Mutual funds also have the expertise to hedge investments to ensure lesser downside risk.
• If the investor wants to enjoy fixed income with a mix of equity returns, he/she can go for balanced/debt-oriented/equity-oriented mutual fund schemes.
• An investor can choose the dividend/growth option as per his/her requirement of funds. Dividend is tax-free income for the investor.

Final Thoughts

But the bigger fact remains that it is your money, you should not rely on anybody with closed eyes. In the worst scenario, even considerably safe investments like FMPs can give negative returns. You should always be in touch with the market or at least watch the Sensex on a regular basis. An informed investor can always use the option of switching from one particular scheme to a liquid fund and vice versa at appropriate times. However, by investing through mutual funds you can take advantage of expert selection of securities, daily monitoring, risk reduction, lower cost etc. and improve your returns.

Prabhat Varma works as General Manager (Finance), Sahara India Financial Corporation, Mumbai.

Here’s what mutual funds (MFs) are, and how they work.

Let’s say you and I had some money, about 1 lakh rupees each. And we have 8 other friends with the same idea. We all decide that we need to invest this in stocks, but we don’t have the time or energy to do research, tracking, buying selling etc. So we hire a manage who has the right experience and tell him - “Look, you can take up to 2.5% of the total value every year as your fees, but you buy shares that will grow over time, and sell when the time is ripe, etc.”

Ten of us have now put in a lakh each and the total corpus is Rs. 10 lakh. We decide that we will issue ‘units‘ to denote our interest in the fund, so we issue 1 lakh units at Rs. 10 each. (It’s like chips at a casino). So each person gets 10,000 units, corresponding to an investment of Rs. 1 lakh.

The manager, who is quite experienced and informed, makes stock-buying decisions based on what we, the investors, decided up front - i.e. only large cap stocks, or only technology stocks, at least 90% invested (only 10% cash) etc.

As the stock values grow, so does the total corpus value. Let us say the value has gone up to Rs. 15.6 lakh in two years. Now we have to pay the fund manager 2.5% every year, which works out to Rs. 60,000 for two years. That leaves Rs. 15 lakh. So the value of the 1 lakh ‘units’ is now Rs. 15 lakh, meaning each unit is now worth Rs. 15. This is called the ‘Net Asset Value‘ or the NAV. Since each of us has 10,000 units, our individual value is Rs. 1.5 lakh.

Now I decide to take a trip to Singapore and spend Rs. 75,000. So I sell half my units at the current NAV, meaning I sell 5000 units at Rs. 15. To give me money, the fund manager sells some stocks, and now the total corpus is down to Rs. 14.25 Lakhs. But that will again grow with time, but I will see lesser growth than anyone else in the fund because I have only 5000 units and while the others have 10,000.

One day, when the NAV is Rs. 15 per unit, the fund manager decides the market is going to fall. So he sells half the holdings. Now there is half the money in stocks and half the money in the bank. So the manager gives us the money in the bank as a ‘dividend.’ Let’s say he decides to give Rs. 5 per unit as a dividend, for 1 lakh units (ignore my selling bit for a moment here). The dividend would then be 50% (since the initial value of the unit was Rs. 10; your initial value stays the same even after the dividend)
So, each one of us get Rs. 50,000 as dividend. But now, the total corpus has fallen by Rs. 5 lakhs! The NAV (total corpus divided by no. of units) is going to fall by Rs. 5 per unit. So a dividend for this “mutual” fund is the same as no dividend - you get money, but your fund value goes down.

This is how mutual funds work.

Now funds can be misused (manager can run away etc.). Hence, the government has regulations for organised mutual funds. They must have a sponsor (usually a bank), a set of trustees (some independent), and an asset management company (AMC), which appoints a fund manager. Promotion of the fund is done through agents who are recognized by the Association of Mutual Funds in India (AMFI). These people get commissions to sell the mutual funds, and therefore mutual funds carry an ‘entry load’, which is usually between 2 to 2.5%. (This is apart from the AMC/Fund manager fee)

How to invest?
Go to your bank, or go to mutual fund sites online. They will give you forms to fill and you can write a cheque to the fund. The fund will then give you a “holding statement” with a folio number.

Selling (Redemption of units)
You can use your folio number to sell any of your units. Funds release their NAV regularly, sometimes daily. When you sell, it will be at a certain day’s NAV (usually the day you sell or the next working). And usually, you get the money in two-three days.
Some places allow you to invest online - Reliance Mutual Fund does that. HDFC bank’s Netbanking and ICICI Direct too give this facility.

Types of Funds
Mutual funds can invest in anything - not just stocks. There are those that invest in government bonds, fixed income securities, real estate, indexes, part debt-part equity, etc. Read the offer document of a mutual fund carefully before you invest, see what the fund will invest in, and how much.
There are open-ended and closed-ended funds. If you can buy anytime and sell anytime, the fund is open-ended. Closed-ended funds can only be sold at or after a certain date.

No doubt that investing in equity seems to be very attractive option for investment. Why it so? We hear many stories, some true, some fictitious, of people who have become millionaire overnight. But the fact is, earning money is not at all easy on the stock market. Let’s accept this simple fact that it is not everybody’s cup of tea. So, we have to be very objective about it.

It is well understood universally that a diversified portfolio is less risky and much safe than a concentrated portfolio.

In India, small-time investors usually have a very limited capital for investment. Therefore, it follows that it is a lot more difficult for this investor with limited capital to have a diversified portfolio. In other words it is not possible for small-time investors to invest directly in the market and to make their portfolio diverse.

So, how can small investors get the opportunity to make their portfolio diverse? The only option left is investing in mutual fund. Mutual funds offer a well-diversified portfolio even with just Rs 100.

A concentrated portfolio, also, could deliver high or low returns. This means that, again, it is against the small investors’ investment appetite normally. It would suit only selected expert investors with high net-worth.

One more thing to notice is that with limited capital it is difficult for small investors to buy shares with high prices like ICICI Bank, Infosys, Reliance, L&T, and other blue chip shares.
Again mutual funds seem to be the better route.
Let’s now discuss equity and mutual funds from a different perspective keeping in mind the common man’s objective.

Let us be honest as far as possible. Ask yourself the following Yes/No questions:

• Reading balance sheet of the company as a fund manager might do
• Identifying up-coming sectors
• Knowledge about companies, market, economics, and politics as a well-experienced professional fund manager might have
• Identifying the risk elements in an investment
• Predicting the future of the market as per any given scenario

If you have all of the above capabilities, go on and make wealth! In most cases, however, the answers would be “No.” Most of us do not have time to learn all these aspects of investment. Even if we do, we may not be able to do it regularly. Mutual funds are well-equipped with fund managers to do all the above activities.
Let us just concentrate on our jobs and leave our wealth management to the pros.

The full story is at:
http://economictimes.indiatimes.com/Personal_Finance/Mutual_Funds/Trail_fees_by_any_other_name_pinches_as_much/rssarticleshow/3299673.cms

The story is about MF houses charging illegal fees to their investors.
“In a bid to boost their profitability, several MF houses are now charging trail fees (even for direct investors) under the other expenses head, disguising it with names like miscellaneous marketing expenses or other operating charges,” says a financial planner, who is empanelled with several fund houses.
Why are the fund houses fooling the investor? This shows clearly that the MF houses are only looking at their own benefits. Why is the regulator silent on all these wicked strategies of mutual fund houses? Why is no action being taken? Why is SEBI not taking this seriously?
There will be people who might think that this is a small issue; but my dear friends, this is a very serious issue as the MF houses are eating up investors’ money. They are committing fraud as no one is stopping them. Not even the regulator! I would request all the people who read this to complain to SEBI about it.