IDFC TAX FUND - AVOID

IDFC AMC which manages assets worth Rs 8,686 crore across 78 schemes (as on 30 November) has launched IDFC Tax Advantage (ELSS) Fund an open-ended equity linked saving scheme. This fund will invest in equity and equity related instruments
The IDFC Tax Advantage (ELSS) Fund with a minimum subscription of Rs. 500, will not only help investors avail of a tax benefit, but also seek to generate long term capital growth from a diversified portfolio of predominantly equity and equity related securities. The scheme will invest in well-managed growth companies that are available at a reasonable value and offer a high return growth potential.
Mr. Naval Bir Kumar, Managing Director, IDFC Mutual Fund says “We are happy to offer The IDFC Tax Advantage (ELSS) Fund to investors who are looking for a tax break as well as an easy and affordable way to take advantage of the growth potential of equity funds.” He continues, "The scheme will invest in well managed growth companies that are available at a reasonable value and offer a high return growth potential to investors,"
Idea distiller: IDFC does not have a tax plan as yet. As the last three months of a financial year see a lot of people rushing to invest in tax-saving schemes, it is an ideal time for IDFC to push an ELSS.
MY TAKE ON IDFC TAX FUND:
IDFC's equity funds have a rather brief history. Invest in this fund only if you want to go in for a low-cost NFO rather than an existing scheme with a higher NAV.
It is better to invest in a fund that has earned enough to reach a high NAV, some of them with compelling track record and a well defined portfolio characteristics and thus ensures dividends for the period that you are locked in, and has a fund manager who has excelled in managing assets across all cycles of the market.
In a nutshell, AVOID

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TEMPLETON INDIA PENSION PLAN (TIPP)

AUM: Rs 143.2 crore

Current NAV: Rs 41.40 (Dec 10, ’08)

52-Week High NAV: Rs 55.70 (Jan 7, ’08)

52-Week Low NAV: Rs 39.40 (Nov 20, ’08)

Fund Managers: Anand Radhakrishnan, Sachin Desai, Vivek Ahuja


Following in the footsteps of UTI’s pension fund, Franklin Templeton launched its pension scheme in March 1997 and till date, is the only private sector fund house to have launched such a scheme. The fund’s investment structure is similar to that of URBP with a 60:40 investment ratio in debt and equity, respectively.

PORTFOLIO:

Investors may find it surprising to see a debt-oriented balanced fund having an investment of over 30% in equities, despite the adverse market conditions. While the fund’s equity exposure has declined from 40% to 30% in the past one year, given the market volatility in ’08, even 30% equity exposure appears to be on the higher side. However, the management has aptly justified its strategy of having an adequate equity exposure.

Since the fund is meant only for longterm investors, the management feels there is no point in changing exposures to different asset classes based on short-term market movements. At the same time, the fund has ensured adequate liquidity and relative safety for its equity exposure by incorporating large-cap stocks in a very high proportion.

The fund’s equity investment in largecaps is more than 85% at any given point of time. As far as its debt portfolio is concerned, the fund focuses on nonconvertible debentures with minimum exposure to securitised debt.

PERFORMANCE:

If one compares the performance of this fund vis-à-vis URBP, over the long term, TIPP clearly has an edge over its competitor. The fund has a history of outstanding performances, beating the category average on almost all occasions since ’03, when it returned a whopping 42.2%, vis-à-vis the category average of 27.6%. While in ’05, TIPP’s 16.5% returns did lose out to URBP’s 21.8%, it recovered in ’06 by generating almost 19% returns, even as the category average stood at 14%.

TIPP continued its feat in ’07 as well. However, in ’08 so far, its performance has lagged that of URBP. Its year-to-date trailing returns as on December 11, ’08 stand at - 24.6%, against the category average of - 10.7%. In the past six months alone, the fund has lost about 13%.

A high equity exposure may be construed as one of the reasons for this decline. But since TIPP has a very long-term investment mandate, a healthy performance in future can sideline these short-term hiccups.

INVESTORS’ DIGEST:

Considering its long-term investment mandate, TIPP has stringent exit rules, which may be stricter than those of URBP. TIPP mandates a compulsory three-year lock-in period and while one can redeem investments post the lock-in period, investors have to pay a penalty of 3% as exit load.

The maturity period for the scheme is 58 years age and the exit load is waived off only if the investment is redeemed after attaining this age.

The fund also calls for a minimum investment of Rs 10,000 during the period of investment, failing which, the exit load can be as high as 10% at the time of redemption. But this load may be waived off under spe cial circumstances like serious illness, education requirement, housing necessity, financial
hardships, loss of job, bankruptcy etc, sub ject to submission of proper documents.

TIPP has been quite regular in paying dividends to those who have opted for the dividend option. It declares dividends annually by the end of the calendar year; it has already announced a dividend of 12% for ’08. Just like any other pension fund, TIPP is also eligible for tax benefits under Section 80C of the I-T Act.

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UTI RETIREMENT BENEFIT PENSION (URBP)

UTI RETIREMENT BENEFIT PENSION (URBP)

AUM: Rs 435.3 crore

Current NAV: Rs 17.90 (Dec 10, ’08)

52-Week High NAV: Rs 22.10 (Jan 7, ’08)

52-Week Low NAV: Rs 17.20 (Oct 27, ’08)

Fund Manager: Amandeep Singh Chopra


THE oldest fund house in the country can be credited for pioneering a pension plan that goes beyond the conventional 100% debt-based investment. Launched in December 1994, this fund is one of the oldest in the category of debt-oriented balanced funds.

Notwithstanding the fact that an average Indian investor seeks safety above all other parameters when it comes to saving for retirement, URBP was launched to provide both safety and returns — through an appropriate mix of equity and debt in the portfolio. Given its equity exposure, one can argue that this fund is slightly riskier than other conventional ‘retirement’ saving products.

However, investors can take relief from the fact that over the long term, it is difficult to lose money in an equity investment. And since this fund is aimed at pensioners, only investors with a horizon of at least 10 years are advised to put money
in this fund.







PORTFOLIO:

URBP’s allocation in debt and equity cannot exceed the ratio of 60:40 respectively. While the fund has often tried to maximise its returns by utilising its equity limit to the fullest, the recent changes in the stock market have forced it to rejig its portfolio.

Its equity composition is down from over 39% in December ’07 to 20% as in November ’08. Nearly two-thirds of its equity portfolio comprises large-cap stocks. Also, the equity portfolio appears to be highly diversified and currently has about 29 scrips.

On the debt front, the fund has exposure in government securities, non-convertible debentures and securitised debt. Since the fund manager is anticipating further reduction in interest rates, the fund has refrained from taking exposure in banks’ certificate of deposits, which are of a shorter duration.

Instead, it has increased investment in securitised debt. Its exposure in these papers has increased from 10% to more than 25% in the past one year. The fund is currently strategising its portfolio in favour of long-term securities to cash in on falling interest rates.

PERFORMANCE:

Since its launch, the fund has generated about 10% CAGR returns , which makes it an average performer among debt hybrid funds. After posting a commendable performance in ’05 with annual returns of about 22%, the fund slipped in ’06, generating just 9%. The average returns of debt hybrid funds were over 13% then.

But URBP managed to improve its performance in ’07, generating an annual return of 22.7% — a tad higher than the category average of 21.2%. URBP has been able to put up a better show in ’08 vis-à-vis its competitor TIPP, but has failed to beat the category average. The fund’s trailing year-to-date returns as on December 11, ’08 stood at -17 .5%, against the category average of -10 .7%.

INVESTORS’ DIGEST:

Investors who want to invest in mutual funds only to generate quick and high returns should keep away from this fund. URBP is meant only for those seeking some income, post retirement. Since the scheme targets only long-term investors, its exit load structure is designed to deter investors from redeeming their investments earlier.

Thus, exiting from the scheme within one year of investment will call for an exit load of 5%, redemption within 1-3 years from the date of investment will attract an exit load of 3%, while redemption after three years will attract a uniform exit load of 1%. The exit load is waived only if an investor redeems the investment after maturity, i.e. after attaining 58 years of age.

While most long-term funds declare regular dividends to give periodic sums of money to their investors, URBP instead declares bonuses. This is done with an intention to save on dividend distribution tax. The fund has declared bonuses in the past at intervals of a little over a year, but is yet to declare bonus for the current financial year. Investment in this scheme is also eligible for tax deduction up to Rs 1 lakh under Section 80C of the Income Tax Act.

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Retirement Target of 25000 per month

I am 27 years old, working in a knowledge process outsourcing (KPO) unit. Currently, I am the only earning member in my family. My aim is to create a retirement corpus that will give me a monthly income of Rs 25,000. I have attached my current investment details. I have deliberately not balanced or diversified my portfolio yet. I felt the need to first get it reviewed and obtain some guidance on that front. This should help me choose my future investments properly. Please suggest me some funds that I should choose to fulfil my goals. I would also appreciate some guidance concerning my investment strategies.

Existing Portfolio
Funds

Yearly Amt (Rs)
DSPBR Top 100 Equity Reg-G 12,000
HDFC Taxsaver-G 10,000
Kotak Opportunities-G 12,000
Magnum Taxgain-G 10,000
Reliance Diversified
Power Sector Retail-G 12,000
Sundaram BNP Paribas Taxsaver-G 12,000

ULIPS/Insurance/Mediclaim

Yearly Premium(Rs)
LIC Market Plus 20,000
LIC Profit Plus(Two) 20,000
LIC Jeewan Tarang(Two) 50,000
HDFC Unit Linked Endowment Plan 20,000

Government
Instruments Maturity
Amount (Rs) Maturity
Date
PPF 50,134 8/1/2023
Kisan Vikas Patra 100,000

11/19/2015
National Saving Certificate 16,010 1/25/2013
National Saving Certificate 24,015 2/23/2012
Post Office MIS 33,000 1/29/2009
Post Office MIS 13,200 2/28/2009


REPLY :

Your approach of investing 30 per cent of your income in various short- and long-term assets and keeping 10 per cent in cash for emergencies reflects a sensible and disciplined approach towards investing.

Let's look at each of them.

DEBT
Even though you are young, it is always important to have some amount of exposure to this asset class. Your investment in debt is in Kisan Vikas Patra (KVP), National Savings Certificate (NSC), Post Office Monthly Income Scheme and Public Provident Fund (PPF). All these are very safe since they are backed by the government.

Due to their fixed return and safety, they will provide the stability to your portfolio. Also, your investments in PPF and NSC will fall under Section 80C of the Income Tax Act, enabling you to use the tax benefit. But please keep in mind the tenure of the instruments and try and ensure that you will not need this money for the entire time-frame. For example, the NSC has a lock-in period of 6 years, while it is 15 years for PPF.

UNIT-LINKED INSURANCE PLANS OR ULIPS
We are not against insurance. And since you are the only earning member in your family, it is mandatory in your case. But we do not advocate mixing insurance with investments.

Currently, you have four Ulips in your portfolio and this is eating away a lot of money in the form of expenses. We did a simple comparison between a Ulip (LIC Market Plus) and a mutual fund scheme on the basis of chargeable expenses. We allocated Rs 20,000 annually for 20 years in both the instruments.

In the case of the Ulip, the deductible charges amounted to Rs 6,356, including the premium allocation, policy administration, fund management charges, addition to fund charges and other charges.

After deducting the chargeable expenses, we found that in case of the Ulip, the investable amount stands at Rs 13,644 and in mutual funds Rs 19,600. Looking at this as the annual investment for the next 20 years, the corpus in hand will eventually stand at Rs 11.41 lakh (Ulip) and Rs 13.80 lakh (mutual fund). This difference of almost 20 per cent is directly the result of expense charges. The commission paid to agents, which goes as high as 50-70 per cent of the premium, was not taken into account.

Currently, with four Ulips and two 'with-profit whole-life' plans, you are paying a heavy premium to get insured. For instance, your annual premium for the two LIC policies is Rs 50,000. But had you opted for a basic-term policy, you would be able to obtain a huge cover at a cheap rate. And you would be in a position to invest the balance amount elsewhere.

MUTUAL FUNDS
Your current portfolio is high on quality in spite of tax-saving funds, accounting for 57 per cent of the total investment.

In your mutual fund portfolio, you have eight schemes. You can make DSPBR Top 100 Equity and Magnum Tax Gain your core holdings. Both these funds are large-cap schemes with a strong track record.

From the remaining two -- HDFC Tax Saver and Sundaram BNP Paribas Tax Saver -- you can stay invested in any one of them. But do remember to sell only after the lock-in period. HDFC Tax Saver is a mid-cap-oriented fund, while the other is a multi-cap fund.

It would be wise to stay away from theme-based funds like DSPBR World Gold Fund and Reliance Diversified Power Sector Fund. You can take a minimum exposure to Kotak Opportunities Fund. For the debt allocation, do consider a debt fund like Kotak Flexi Debt and not just fixed-return instruments.

GETTING THERE
Our entire analysis is based on your need to create a corpus that will offer you Rs 25,000 a month. Let's make a few assumptions:

* You retire at the age of 57.

* Since you are 27 years of age, that will leave you with 30 years to invest.

* You live for 43 years after you retire.

To survive on a monthly income of Rs 25,000 for 43 years, you will require a corpus of Rs 1.30 crore when you retire.

To generate Rs 25,000 a month, you need to systematically invest Rs 9,000 every month for the next 30 years. This will allow you to sit on a corpus of Rs 2 crore, if we assume a compounded annual return of 10 per cent, quite moderate if the asset in question is equity.

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http://buycall.blogspot.com/
and http://indiahotelstariff.blogspot.com/