Thursday, January 31, 2013

Conversations with Relationship Manager

Today I got call from my Citi Bank relationship manager and the conversation went like this.

RM: Sir, we had fixed a meeting with you but could not meet. Can we reschedule the appointment.
Me: Actually I talked to your representative on phone and we decided that you don't have anything to offer me so there is no point in meeting.
RM: Sir, I have a few plans to discuss..
Me: I have adequate term insurance. I am not interested in any plan that has insurance component.
RM: May be some mutual funds
Me: I invest directly with AMCs and with the introduction of direct plans I can't even think about a distributor
RM: May be a children plan
Me: I dont want any insurance
RM: But a children plan is more than that. It creates a corpus for your kid's education and ..
Me: But mutual funds I am investing also create a corpus right
RM: Then I can create a core portfolio for you without insurance component
Me: Does than mean only mutual funds?
RM: Yes
Me: I told you I invest in the direct route
RM: Ok sir, I will get back to you when I have some thing interesting for you. Thank you for your time
Me: Thank you and bye

I am sure he will not get back to me. But I feel for him. the moment some body asks for non-insurance plans, they have nothing to offer. But may be people like me are very few and even I took one endowment policy and an ULIP in the begining of my career. I am lucky in a way. Some people realize after a dozen insurance policies and some people happily take as many policies as possible and till the end of their lives think they did very well in terms of decision making. So may be there is nothing to feel sad for the relationship manager.

Sunday, January 27, 2013

daily dividend reinvestment vs monthly dividend reinvestment

In my post http://kaipathoughts.blogspot.com/2013/01/creating-systematic-transfer-plan.html I was thinking about implementing STP using monthly dividend plan vs daily dividend plan. Dividend plan was needed to save on taxes as the dividend distribution tax is less than Short Term Capital Gain tax for tax payers of higher slabs. Dividend reinvestment plan is preferred to make sure that dividend is participating in a higher yield instrument than in a savings bank.
Advantage of monthly dividend plans are less paper work due to fewer reinvestments and slightly higer yield as tax is paid at the end of month rather than daily.
But on closer inspection daily dividend plans have lesser paper work. this is due to the way the dividends are declared. Most of the plans are maintaining constant NAV by declaring daily gains as dividend. So after entire units are redeemed at the end of the STP, there will be no gains or no losses. So no capital gains or losses to worry about or doing complex calculations for dividend stripping. As for as the yield loss due to early payment of tax is concerned my calculation show the difference to be less than 0.02% which is not really much unless the amount involved is crores (10s of millions) of rupees.
So Daily Dividend Reinvestment plans for STP is the final decision

Saturday, January 26, 2013

Creating Systematic Transfer Plan

I have few FMPs maturing over next few months. After the introduction of direct plans I am also redeeming my funds as and when they turn long term investments to invest in corresponding direct plans. I have few debt funds which I want to invest in equity plans as part of portfolio balancing. Due to this, I am going to have steady flow of big amounts which needs to be put in a STP plan with a duration of 12 months. So I was making a plan, and here is the process I followed.

Choosing transferer scheme
There are 3 options. 
Using FDs. The amount can be invested in any FD scheme. They are very tax-inefficient and the process can become cumbersome to implement.
Leaving in the savings account. The interest rate is very low compared to all the options. They are also not tax efficient. Even though there is a deduction of Rs.10000 for savings bank interest, the money I keep in banks for liquidity purposes (3,4 months of salary) already earn that much interest.
This leaves the only option of debt mutual funds.
The following decisions need to be taken for choosing the funds.
  • Dividend schemes or Growth schemes:
Growth schemes attract capital gains tax and as we are implementing an STP, almost all of those gains will be short term capital gains. So the gains will be added to the income and and taxed as such. So for any body who will fall in 20% and 30% slabs, taking the gains as dividend makes sense as some schemes offer 13.52% as . For others, the growth options will make more sense.
  • Liquid funds or Ultra short term funds or other funds       
Liquid funds are the least risky of the mutual funds. They are introduced for parking the money that needs to be deployed in the near future. Only disadvantage is they are tax inefficient. the Dividend Distribution Tax  is 27.04% almost same as the normal tax I pay and for anybody in the lower slabs, they actually will be paying more tax. For other debt funds, the DDT is 13.52% and this is the least the tax law allows as of now. But for many funds, there will be exit loads and are slightly riskier (even though rate cuts are expected in the near future). Only the Ultra Short term funds come with zero exit loads (some not all) and almost the same risk profile as liquid funds. So my decision is to invest in UST debt funds.                                                                                         
  • Dividend frequency 
Here the options are daily dividend and monthly dividend. Other option to consider is dividend reinvestment or taking the dividend. Dividend reinvestment on a daily dividend scheme will make your investments very complicated. You will have almost 250+ entries for an year of investment and to compute gains and losses on that will be very complicated. On the top of that if there are losses, you need to compute how much of the loss comes under dividend stripping. Monthly dividend option is simple but depending on the dates of dividend deposit and the STP dates, you may have some gains and losses. fortunately the daily dividend schemes keep the NAV constant. They announce the dividend such that every days gains exactly take care of dividend and dividend distribution tax. So intuitively I thought a daily dividend scheme with dividend reinvestment is the easiest option to manage account for tax purposes as well as maximum benefit of growth ( the reinvestment makes sure that the gains are always participating in the scheme for gains.
    Now the question is how less dividend reinvestment on daily basis earn compared to monthly dividend reinvestment as in the later case the tax is paid only after one month. That is another post showing the calculations but it is suffice to say that not much will be lost.

    Now choosing the actual funds. I invest in ICICI discovery, HDFC prudence and equity and Reliance regular savings fund - balanced option. So I need to choose three funds from these fund houses. They need to be ultra short term funds and need to have daily dividend option and no exit loads. After going through value research online these are funds I chose.
    1. ICICI prudential flexible Income
    2. hdfc cash management fund treasury advantage plan
    3. Reliance Money Manager

    Friday, January 25, 2013

    Why am I blogging. again

    I was always fascinated by numbers. So anything about numbers I read. Most of the times I read about numbers, I realise that I already did this some time back but did not document. And after some time if I want to look for it again, as I am very poor with book marking, it is very difficult to get the information again. This blog is going to be a place where I keep all my number simulations, some information I would require later like tax rules, and fund experiments as well as any of the other readings on web that I want to bookmark.

    Thursday, January 24, 2013

    Formulae for emi calculation, RD yield, investment yield with initial start

    RD yield:
    If an amount A is contributed for N months at the start of each month with an annual interest rate of R %, after N months the balance will be
    A*(1+(R/1200)) *((1+(R/1200))^N-1)/((1+(R/1200))-1) (Assuming compounding after every month)
    If compounding happens after every few months, the formula becomes complicated as details like starting month, compounding month needs to be known.

    EMI:
    For a loan amount of L at an anuual interest of R% for a duration of N months
    L*(R/1200)*(1+R/1200)^N / ((1+R/1200)^N-1)