S&P BSE Sensex*	Re/US $	Gold Rs/10g	Crude ($/barrel)	FD Rates (1-Yr)
34,153.85 |97.02 0.28%	63.36 |0.70 1.09%	29,340.00 | 95.00 0.32%	68.00 |1.81 2.73%	5.00% - 6.75%

Social media can be devious sometimes — unintentionally though.

In the absence of adequate information, knowledge “forwards” are circulated at thumb-blazing speed. These days, social media platforms have been buzzing with fear-mongering posts about the Financial Resolution and Deposit Insurance Bill (FRDI), 2017.

This is causing anxiety among gullible readers regarding the ‘bail-in’ clause in the Bill. It’s widely believed that many banks might face insolvency due to the on-going problem of Non-Performing Assets (NPAs). It’s also considered that the ‘bail-in clause’ may enable such banks to seize unsecured deposits, i.e. those above the threshold limit of Rs 1 lakh; in the event of the shortfall of risk-capital.

Essentially it meant that depositors might lose unsecured deposits and would have to forgo a part of the deposit or settle for equity in the same bank. Isn’t this frightening — especially considering the awful state of state-owned banks?

Let’s understand in detail what the ‘bail-in’ actually entails...

It’s precisely the opposite of ‘bail-out’— the method of using taxpayers’ money (or other external resources) to shore up the capital base of a troubled bank. The bail-in offers a troubled financial institution a chance to negotiate with its creditors (depositors in the case of banks) to restructure loans and agree to forgo a part of claims or at least roll them over for a period of time.  This method became popular only in the aftermath of the global financial crisis. Due to the sheer size of failures, ‘bail-outs’ can be costly, unviable, or politically difficult to reach in some cases.

That’s why a ‘bail-in’ appears to be a suitable option in these cases.

In the Indian context, the inadequacy of the government’s resources to recapitalise troubled state-owned banks legitimises the fear of depositors losing money. Nonetheless, the Government has issued clarifications from time to time saying, concerns about the implications of the ‘bail-in’ clause are entirely unfounded.

The Government has clarified that unsecured creditors, i.e. depositors with deposits over Rs 1 lakh, would enjoy a preference over other creditors including the Government itself. Further, state-owned banks won’t exercise the bail-in clause. The Resolution Corporation (RC) will have the authority to determine the insured amount to the limit it deems appropriate. Nonetheless, the Government will scrutinise the functioning of the RC. Additionaly, the Parliament will also monitor its activities.

A Finance Ministry statement tried to bring down the curtains on many controversies with these statements. "As per the provisions of the FRDI Bill, the claims of uninsured depositors in the case of liquidation of a bank will be higher than those of the unsecured creditors and government dues". 

How should you interpret these developments?

First and foremost, you must understand the ‘bail-in’ is absolutely the last resort. Given the massive political costs associated with banks exercising ‘bail-in options’, no Central Government and RBI would easily let banks exercise their discretion. Therefore, the worries of depositors losing money are over-emphasised and misplaced.

In case you aren’t aware, the existing limit of Rs 1 lakh for deposit insurance scheme was set about 25 years’ ago. At the time of taking this decision, approximately 90% bank deposits were worth Rs 1 lakh or below then. Today, the equivalent threshold would have been Rs 15 lakh or thereabouts, if the Government was to raise the limit of deposit insurance to cover bank deposits of the same proportion.

At present, the banks pay the premium to avail the deposit insurance scheme which is approximately 0.01%. However, with the upward reshuffling of the limit to, say, 12 to 15 lakhs, there would be a proportionate rise in the premium.

Under such a scenario the banks would be hesitant to pay the premium from their own pockets fearing the loss of profit and may try to recover the cost of insurance from the depositors. Since charging depositors separately would convey a negative message, the banks may prefer to lower the interest rates concurrently.

What should you know about the topic?

The Government will continue to provide its implied guarantee to the depositors’ money in the public sector banks. In other words, depositors banking with state-owned banks won’t have to worry about the deposits which are not covered by the insurance scheme. But the banks may offer lower interest rates to ascertain the safety of your hard-earned money.

The bottom line…

Your deposits with public sector banks will be as safe as they are, but now there will be a cost associated with providing you with a higher insurance cover. For now, the cooperative banks have been left out from the purview of FRDI Bill 2017.

However, if they are silently included at a future date, the story of cooperative banks with political links will continue to misuse the provisions of the insurance scheme and may exploit any potential rise in the threshold limit of insurance to the fullest.

In the past, there have been instances wherein the cooperative banks had shoddily approved loans to politically-motivated debtors that turned defaulters after some point, resulting in the loss of depositors’ money. The insurance claims paid out thereon only worked to the benefit “shameless defaulters” who never returned money to cooperative banks.

Therefore, it’s become imperative to keep cooperative banks out of the purview of FRDI to avoid this “cooperative loot”. Besides, cooperative banks, any other bank has hardly made any insurance claim ever. This means, if cooperative banks are kept out or given a separate scheme, the insurance premiums may not substantially go up for other banks. This is the only way to have a win-win situation — where depositors get a higher protection to their deposits and banks don’t shell out much on the insurance premium.

At present, the Bill has been under the examination of the Joint Parliamentary Committee. It remains to be seen how the Government handles this issue once the joint committee presents its report.
 

Come February Equity Mutual Funds Will Revise Their Benchmark: SEBI

At present, most mutual fund houses in India depict their performance against Price Return Index (PRI) — which captures the price movement of index constituents. But as you would know, total returns on your investments also include dividends/interests, besides capital gains.

So far, the dividend and the interest income on the index constituents aren’t getting captured in the benchmarking of performance. To correct this practice, the SEBI has urged all mutual fund houses to benchmark their performance against Total Return Index (TRI) from February 01, 2018.

The SEBI circular noted that the "TRI is more appropriate as a benchmark to compare the performance of mutual fund schemes." 

What would change once the new benchmark is adopted?

• It will increase the transparency in the operation of mutual funds.
   
• The practice of comparing the scheme’s performance against TRI will reflect a more realistic picture, thereby making it easy for the investors to choose the right scheme.
   
• Showing the performance of a scheme against the TRI would always keep fund managers on their toes, especially, for schemes that outperform price performance indices only marginally.

Over last one year, Nifty has generated 27.0% returns, but Nifty-TRI has generated 28.6% returns.

Therefore, it would be prudent to say a scheme has outperformed only if it has generated returns more than 28.6%. In the case of large-cap oriented funds, TRI will play a more crucial role since outperformance is tough to come by, given the difficulty in identifying the mispriced bluechip companies.

What does it mean for investors?

This is a positive move and it will make the process of selecting schemes easier for the investors. Nonetheless, you should compare all schemes beating the TRI to identify the potential winners. For this purpose, you should use various quantitative and qualitative parameters.

PersonalFN follows a stringent scoring model, which ensures that a scheme is tested on various quantitative as well as qualitative parameters, and then accordingly compared and scored vis-à-vis other schemes. Only the schemes that pass through PersonalFN’s rigorous assessment and achieve the maximum composite score on all parameters (based on pre-specified weightages), make it to the recommendation list.

If you need research-backed recommendations to select the best equity and debt mutual fund schemes for your portfolio, opt in for PersonalFN’s model mutual fund portfolio service ‘FundSelect Plus’, which has completed a decade. What’s more is, we are offering subscriptions at a massive 75% discount!  

Get access to 7 high-performing, time-tested readymade portfolios with a decade-long market-beating track record.  PersonalFN’s track record speaks for itself, as all three portfolios have comfortably achieved higher than their respective benchmarks. Subscribe now!

Don’t Expect Unbiased Advice From A Mutual Fund House. Here’s Why…

Mis-selling is common  in the mutual fund industry.

Haven’t you seen mutual fund distributors—acting as your advisers—mis-selling you mutual fund schemes that weren’t suitable for your financial health or didn’t need? Haven’t they made you churn you portfolio unnecessarily just to earn more commission?

Promoting schemes yielding higher commission without paying any heed to risks associated with it is another form of mis-selling.

This happens because mutual fund distributors act in dual capacity—they represent mutual fund houses while pretending to keep the best interest of investors. But this masquerade drops when investors realize they are losing their hard earned money.

Of course, this isn’t a new phenomenon. In fact the capital market regulator—Securities and Exchange Board of India (SEBI) has been trying to curb such malpractices. Recently, SEBI reiterated its stance on keeping mutual fund distribution and the advisory functions at arm’s distance.

As per the revised consultation paper issued on Amendments/Clarifications to the SEBI (Investment Advisers) Regulations, 2013, June 2017, there should be a clear demarcation in the advisory and distribution of mutual funds.

The highlights include, the consultation paper recommends that the investment advisers shall always act in the interest of investors and shouldn’t have any ‘reward’ arrangement with the mutual fund houses. Further, advisers must consider ‘product suitability’ as the most important factor when advising their clients on mutual fund investments. They are required to take into account the client’s needs and exercise due diligence. They are expected to demonstrate professional skills and financial-advisory acumen .

SEBI is resolute on pushing for norms in this regard, which may be effective from April 01, 2019.

Although SEBI has proposed to disallow mutual fund distributors from offering investment advice; they can explain the product features to potential investors. Moreover, mutual fund distributors can’t offer any advice on financial planning. That being said, suitability of the product to the investors is their primary focus. 

To read more about this story and Personal FN’s views, please click here.

Is Your Mutual Fund Skewed To Finance Stocks?

Are you planning to invest in a diversified equity mutual fund?

Well, the mutual fund you pick may not meet the definition of diversification.

An equity diversified fund is expected to be diversified across stocks and sectors. If the portfolio is skewed to the top holdings or even to a few sectors, it may not exactly be diversified.

In certain cases, according to the fund’s investment objective, it may take concentrated bets. However, when a majority of funds skew their portfolio to a specific sector, it is a cause for concern.

Consider this, on analysing the November 2017 portfolio of the 180 diversified equity funds, we find that as many as 61 schemes had an allocation of over 30% each to financial stocks. About 64 equity schemes had an allocation between 20%-30% to financial stocks. This means that nearly 70% of the equity schemes maintain an exposure of over one-fifth to financial stocks.

To read more about this story and Personal FN’s views, please click here.

Get Richer In 2018. Start Financial Planning Today!

Have you noticed how frequently we make a mockery of our own New-Year resolutions. Even after trying hard to be serious about it initially?

Typically, it happens when we have promised ourselves to do something that doesn’t excite us much. But, something that is annoying now, might lead to serious implications in the future. If you often feel tired and complain about paining knees, perhaps you are overweight.

For you, a regular exercise isn’t optional, but an absolute necessity. How many times do you hit the snooze on your alarm in the morning? It is as common as salt to do that when you are supposed to get out of bed and take that brisk walk.

Momentary gratification at the cost of long-term loss never made a man healthy, wealthy, or wise! 

Similarly, ignoring personal finances because you are not mature enough to take them seriously is nothing but postponing an important exercise to avoid temporary pain.

Avoiding pain? Of course, it’s human tendency.

Financial planning can be a painful activity for many of us because it makes us follow the rules. It imposes do’s and don’ts — don’t we abhor having conditions imposed?

We don’t need any advice on spending money, do we? But when it comes to creating, growing, sustaining wealth, even the smartest investor and wealthiest person requires an adviser. Unless you have wealth in abundance, so much that there wouldn’t be any deterioration in your financial position even if you burned millions of rupees every year, you need to create a personalised financial plan.

To read why you need finacial planning, click here.
 

If you file your Income-Tax Returns (ITRs) online and often face technical difficulties, you need not worry anymore. The Income-Tax (I-T) Department has established a new help-desk for your assistance. You can call their toll-free number 1800 1030 025 or the direct number +91 8046 122 000.

This helpdesk can assist you to do various activities such as tracking the status of various applications and initiating grievances for redressal.

8 New Year Resolutions To Keep You Financially Fit in 2018

Your Financial To-Do list in 2018

Has Your PAN Been Blocked? Check PAN Card Status In 3 Simple Steps
 

 

Haircut: A haircut is the difference between prices at which a market maker can buy and sell a security. The term comes from the fact that market makers can trade at such a thin spread. The term may also refer to the percentage by which an asset's market value is reduced for the purpose of calculating capital requirement, margin and collateral levels.

Quote: "The secret to investing is to figure out the value of something – and then pay a lot less."‒ Joel Greenblatt