I have moved to a new city; where can I get an introduction to open an account? Can I move my old account to this new place?
—SURESH K. THOMAS, EMAIL
Currently, most banks have a core banking facility in practice. In case your bank, too, has it, there is no need for you to move your bank account to a new location. Also, you can ask your bank to provide you cheques that are payable at par across its branches. In case your bank does not provide a core banking facility, then you need to open a new account in the new location. Your colleagues can act as your introducers.
What is the procedure for obtaining one’s credit report from Credit Information Bureau (India) Ltd (Cibil)?
—KARNAN SHANMUGAM, EMAIL
The facility of credit scores for individuals was recently launched by Cibil in association with TransUnion Llc. As a result, any individual who has been using any line of credit (home loan, personal loan and credit card) for a minimum of six months will have a credit score. However, this score cannot be shared with individuals at present. Once the Reserve Bank of India (RBI) comes up with guidelines in this respect, credit scores will be available to individuals.
What purposes do crossing a cheque and writing ‘A/C payee’ on it serve? In which cases is it essential?
—SUBODH KATIYAL, EMAIL
Crossing your cheque is the best way to ensure that it’s ultimately paid to the right party. The objective of crossing a cheque is to ensure that the drawee bank (that is, your bank) does not cash it, but pays it to a banker presenting it for payment (which should be the bank of the payee, the party you are paying). The benefit of this is that it enables you to trace the path of the cheque through the banking system and to identify the person who finally presented it for payment.
On the other hand, ‘A/C payee’ means that the amount mentioned in the cheque can only be credited in an account of the person/institution concerned . In such cases, the cheque cannot be encashed across the counter. Ideally, whenever you make cheque payments, you should cross the cheque and make it A/C payee. Apart from these things, you should not leave any unnecessary gaps in the cheque while writing words and figures. Don’t forget to strike out any blank spaces after you have written the name of the person to whom you are making the payment and the amount that has to be paid. Also, strike out the ‘or bearer’ option.
Which institutions offer reverse mortgage products? Is there a minimum age to qualify for the products? Can I pledge ancestral property for reverse mortgage?
Reverse mortgage made its entry into India in August 2006 when Dewan Housing Finance Corp. Ltd launched the first reverse mortgage product (Saksham). However, since then, many other institutions have moved in. Today, there are only a handful of institutions that offer reverse mortgage products. These include Bank of Baroda, Central Bank of India, Dewan Housing Finance, Punjab National Bank and State Bank of India. The minimum age to qualify for reverse mortgage product is 60. But, you cannot pledge ancestral property under reverse mortgage.
I want to invest Rs3 lakh in mutual funds. Is the systematic investment plan (SIP)/systematic transfer plan (STP) route better than investing a lump sum?
—JATIN VEDI, EMAIL
Typically, when equity markets are at a bottom or in a rising phase, it makes sense to invest a lump sum amount. It’s only when the markets turn volatile that an SIP or STP helps your cause because it buys more units when markets drop and fewer units when markets rise, thereby averaging your cost.
Although equity markets have corrected heavily recently, the global turmoil, especially in the US economy, is still far from over. There’s no telling how the volatility will pan out in the near future. It is safer to opt for SIP/STP instead of lump sum investment.
I have a systematic investment plan (SIP) of Rs5,000 in Franklin India Flexi Cap Fund that will continue for the next two years. I also have an SIP of Rs20,000 in Reliance Equity Fund. I want to start another SIP now. Which funds should I go for? Does it make sense to exit from Reliance Equity now?
—C.G. PRABHAKAR, EMAIL
Franklin India Flexi Cap Fund (FIFCF) is a diversified equity fund that invests in stocks across market capitalization. The fund has returned 28.6% and 18.3% and is not the best fund in its category. Franklin Templeton’s fund management has been subdued for the past two years, but we expect the fund house to turn around in the next two years or so. Continue your SIP with it.
Reliance Equity Fund (REF) is not your typical, go-getter diversified equity fund. Although it is an equity fund and diversified across the market, it also systematically hedges its portfolio as and when the market heats up.
The amount of its portfolio that it can hedge depends on Nifty’s price-to-earnings (PE) ratio. If Nifty’s PE ratio is up to 12, REF will hedge up to 10% of its portfolio; if Nifty’s PE ratio is between 12 and 16, it will hedge between 10% and 30% of its portfolio and so on, as indicated in its offer document. This caps the upside potential of the fund, but limits the downside should equity markets move southwards.
As equity markets rise, REF will compulsorily hedge its portfolio. If you want to purely capitalize from equity markets and want pure equity returns, avoid it. The other well-performing diversified equity funds that we can suggest are Fidelity Equity, Birla Sun Life Equity and DSP ML Opportunities Funds. Else, stay invested.
In what ways is a mutual fund investment different from purchasing shares?
—MUKESH MAHIN, EMAIL
An equity stock represents ownership of a single company and, therefore, its price depends on the expectations, reasonable or unreasonable, on the fortunes of that one company.
A mutual fund unit, on the other hand, represents the ownership of shares of a basket of companies (that is, equity), or a basket of debt, or a mix of both. These choices are made by the fund manager according to the declared objective of the fund or the plans.
Depending on the amount of risk you want to bear, you can choose the mutual fund(s) to invest in. The price of a mutual fund unit, known as its net asset value (NAV), depends on the prices of its underlying securities, equity or debt. NAVs change every day.
As there are limits on the amount a mutual fund can invest in one single company, or one single security, it would, by circumstance, have to spread its investments across securities. This diversification reduces the risk of loss. But this can also limit the possibility of gain in consonance with the reduction in risk. Since, unlike equity shares, what a mutual fund unit represents is controlled by fund managers, their ability to pick the right paper is crucial to the performance of a fund. This is in addition to the expected performance of the paper (stocks and/or bonds) owned by the mutual fund. Therefore, the NAV of a fund is also a function of the fund management skills of its manager.
What is the difference between equity, debt and balanced funds? What is the ideal ratio one should maintain to balance risk and return?
A mutual fund (MF) plan that buys equity shares of companies is an equity fund. These are risky funds because equity investments are volatile. Equity funds are meant for investors who want higher returns and at the same time can take high risk.
On the other hand, debt funds are those that invest in fixed income instruments, such as bonds, commercial papers and government securities. Compared with equity funds, debt funds are less risky and earn more conservative returns. Debt funds are meant for those investors who desire stability and regularity in their income (although MFs don’t guarantee regular income). Balanced funds invest in equity as well as debt markets; typically in the ratio of 65% upwards in equities and the rest in debt instruments.
There is no ideal ratio between equity and debt funds that an investor should maintain. This is a function of one’s own asset allocation.
My life insurance policy gives me the option of choosing between different funds. How should different investment funds be chosen?
Several factors influence the choice of a fund for investment, such as the financial goals, time frame of the investment and the risk appetite of the investor. Therefore, there is no generic solution for the choice of investment fund.
Risk appetite refers to the risk tolerance ability. If one is conservative and averse to taking risks, selection of investment funds with lower risks, such as secured funds/balanced funds, may be appropriate. If one is enterprising and willing to take calculated risk, funds with relatively high-risk exposure, such as growth funds, may be appropriate.
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