Khota Paisa

Why You Don’t Need A Demat Account?

Posted in General by khotapaisa on February 16, 2010

When I first started investing, I opened a demat account with my bank. I started investing online thru mutual funds. I was doing exactly what others around me were doing. But soon I was using the demat account as my current account. I would buy fund (though on ad-hoc basis) and feel good about the fact that I had saved. But I would end up redeeming units whenever I needed money. The reason for withdrawal could be anything from birthday expenses to jewellary to even plane tickets. Over a period, I realised that I was withdrawing just because it was too easy (just few clicks) for me to do so. The ease of investment prvided by online demat account also resulted in many unneccesary emotional buys as I would buy on impulse. The demat account was actually becoming an impediment to saving towards long-term goals like retirement, child education etc. I finally decided to stop using my online demat account. I moved to the good old way of investment (paper based) thru my financial advisor. This meant that for any buy or sell, I had to call the advisor. He would then come to get the signature, cheque etc and process the request. This added extra hassle & time to any transaction I did. Though I never felt the extra hassle  or time involved, it drastically reduced no. of buys & sells in my portfolio. Another added advantage was the absense of online status of investment (though recently, the advisor has started providing this service). For a lot of investors, a big reason to sell or churn the portfolio is the ups & downs the investor observes on daily basis. So the less the investor looks at the portfolio, the better for the investor.
Recently, I sold the last holding in my online demat account. I am demat-free now!

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Mutual Funds – Going The Wrong Way

Posted in General by khotapaisa on February 14, 2010

A few days back, I read a news about these new mutual fund enabled ATMs called Super ATMs. It seems that SEBI is going ahead with this concept of super atm which would allow the investor to access mutual funds at the click of a button. What surprised me was the need to commoditize MFs. Why does the investor need to be able to buy/sell fund at the click of a button? First of all mutual funds, unlike stocks, are not tradable entities. Mutual funds are not designed to be bought/sold daily. Secondly, financial products (specially investment products) are complex products. They need to be understood well before being bought/sold. This means that funds, like any investemt product, MUST NOT be bought or sold without advice or knowledge. Infact, the more easy you make it for the investor to buy/sell funds, they more likely they are to churn or tap into the portfolio. Having said that, I am not against use of technology/automation to make life easy. But the question is how easy? A more prudent step would have been to spend the money on investor education. Another significant step would be to make it mandatory for fund houses to regularly release fund paramaters like standard deviation, churn ratio, sharpe ratio etc. This would be a big step towards pushing product information towards the ingestor as against the current pull-based mechanism where the investor has to put effort to get these information. There are so many issues with the mutual fund industry and the last thing it needs is the so-called Super ATMs.

The New Pension Scheme (NPS)

Posted in Retirement Planning by khotapaisa on February 5, 2010

If you are looking for market linked pension plan, you would typically consider various ULIP based pension plan. You would then be advised to select a low cost ULIP. But before you decide, consider the New Pension Scheme (NPS) launched a few months back. I would try to sumarize the NPS in short here so that you get a fair idea whether it makes sense for you or not.

Features :

  • Equity based pension plan with minimum 6000/- pa contribution.
  • Account can be opened at various banks & other contact centers.
  • Can select your equity exposure upto a max of 50%.
  • Type I and type II account available. Type II allows you to withdraw money anytime unlike type I. But a type I account is required for a type II account.
  • Available for everyone i.e. no bank account or PAN no. required.

What’s good :

  • A simple, no-nonsense pension plan for the masses.
  • Very-very low cost.
  • High level of customization available for investor.
  • Facility fo choose, change your fund manager.
  • Can use the same account throughout India.
  • One way transfer of money from type II account to type I account allowed.
  • Most investor friendly equity-linked product in market.

What’s bad :

  • Maximum equity exposure limited to 50% thus limiting your possible gains.
  • No pre-mature partial/full withdrawal facility.
  • On maturity (when your reach 60), you can withdraw a max. of 60% of your corpus. Rest must be used to buy annuity.
  • Maturity proceed (max 60% of corpus) is taxed on withdrawal.
  • No loan facility.

Overall, it’s a revolutionary product. At first, you may find various problems but most of them are designed to make it a pure pension plan (long term). Some of the major drawbacks include the tax treatment, though it is expected that in coming times this will be rectified. With introduction of type II accounts, the problem of no-withdrawal has been solved. Some may see the limit of 60% for withdrawal as a big problem but I guess it has been kept to prevent you from misusing (using it for anything other than retirement) your retirement fund. In theory this may not look good but, in practice, it is a boon for the investor. 
So if you have opted for NPS, you have selected the most investor friendly product in the market. If you have not, just wait for some time (a year or two) till the tax issue is resolved.