December 2010 – Page 2

How to select a credit card in India?

This is yet another post from the Suggest a Topic page, and this time I am going to talk about how to select a credit card. Radhika had asked this question once quite early on as well, but I didn’t feel that I have anything really useful to say on it so never got around to writing the post.

However, searching online made me feel that in general this is an area on which not much has been written about in an Indian context. So, I thought I’d write this post and at least start off the discussion, and present you views on how I would go about searching for a credit card if I had to do it.

The first thing I did was to look at cash back credit cards in India, which give you one percent or two percent cash back every time you make a purchase, but unfortunately I couldn’t find any good cash back credit cards in India. Some of them have a high annual fee, others make you jump through too many hoops, and a lot of them have some sort of a limit on them which considerably reduce their appeal.

In the US, people with a good credit history can get a good cash back credit card which doesn’t have any annual fee and to me that’s the best kind of credit card.

Let’s see what you can look at in the absence of such a credit card.

No Annual fee

The first thing to keep in mind is that your credit card should have no annual charges. There are a lot of good credit cards without any fee, so there is no reason for you to go and get a credit card which has an annual fee.

I believe this to be true for most people, however there will be some folks out there who feel that the benefit of a particular credit card outweighs the annual fee, and if you have such a credit card in mind then that’s fine, but if you are just looking out for a new credit card, then I’d say look for one that doesn’t have any annual fee.

No Renewal Charges

Another fee I see with some credit cards is renewal fee that has to be paid at the end of every year. So obviously this is nothing but a credit card with an annual fee, but the annual fee has been waived off for the first year.

You may want keep away from such credit cards also.

Convenience to pay off your balance

If you get a credit card from your bank then you will probably be able to link the credit card with the bank account and pay off your credit card online, and that is a big convenience. Making it easy enough on yourself to pay off the balance will ensure that you don’t miss any payments because your check reached late or you were out of town or something else like that.

Keeping no balance is an extremely good financial habit, and I’ve written about how I myself got into a bit of a credit card issue early on, and you must do everything possible to keep your credit card balance zero, and the ease of paying it off is just one factor that adds to it.

What do you spend the most on?

In the absence of a cash back credit card the next best thing to do is to look for a credit card that has no annual fee, and has good reward points in the area where you spend the most.

For instance if you are working away from your home town, and visit home say thrice a year then probably a good chunk of your credit card spending in a year is on air travel, and you should look for a credit card that has got good reward points. On the other hand if you don’t expect a lot of air travel but drive a lot then a card that helps you get rewards on petrol purchase will be beneficial to you.

Selecting a Credit Card

Given the criteria above, say you want to select a credit card now, here is an example of what you could do.

Say you have a bank account with ICICI Bank, and travel a lot. In this case go to Rupee Times Compare a Credit Card section, and select the Issuer as ICICI, Reward as Airline, Annual Fee as Zero Annual Fee, and search for your options.

In this search I got only two results, and if I don’t travel a lot by those two airlines (Kingfisher and Singapore in this case) then I will have to broaden my search by going back, and removing the issuer from the criteria.

That shows up some more options and you can see if any of them are of any interest to you or not. If you are still not satisfied then take another category and do a little more research.

Eventually you should find something that is of interest to you, and can explore that option more.

Why am I ignoring Interest Rates?

Because they are so ridiculously high.

Paying interest on a credit card should really be the last thing you do, and is the worst kind of debt because it can easily snowball into a much larger number, and is generally spent on stuff that you can easily avoid.

While it is preferable to have a lower interest rate to a higher one, you should make all attempts to have your credit card balance zero.

There is really not a lot of science behind this, and it boils down to evaluating a lot of options, and choosing one that suits you the best. I hope this post can help you give some ideas on that, and as always comments are welcome.

Oh, and since we are on the topic, Ask Mr Credit Card, who is a prominent US credit card blogger did a guest post on OneMint early this year about silly ways of using a credit card, and I highly recommend you read that post.

Bad publicity, L&T bonds and MOIL Issue Price

One of the strangest stories that I’ve read in quite some time is how one online retailer is (or was?) using bad publicity to boost his business online.

The way Google works is that they place a lot of weight on sites linking back to you. So, if New York Times publishes a story, and I link to them that is a small credit to NYT in the eyes of Google because a small blog has linked back to them. If on the other hand a big publication like NYT links to OneMint that is a big credit to OneMint because an established online entity has linked to it. So, the reputation as well as number of back links make a big difference when judging if a particular story should be displayed in search results or not, and what it’s order should be.

An online retailer started harassing people deliberately in a bid to get them to write bad reviews about them, which will have links back to his store, and help his store rise in search rankings, and trick other people to buy from him who don’t actually bother to read the reviews! He even goes as far as to threaten the customers, and doesn’t seem like he cares much.

The story is quite fascinating, and a little strange as well. Google’s response is also interesting, but not as much as the original story.

Now, let me share a really awesome video with you which shows the world history in the last 200 years in terms of life expectancy and average income. It goes in the way of a 3D animated graph, and I won’t be able to do justice to it if I describe it more, so watch for yourself.

On to other stuff – Reader Ravi has reported that he got an SMS about the credit of L&T Infrastructure bonds yesterday, so please check your demat accounts in the days to come, and leave a comment if you see that the bonds are credited because that will help other people know what’s going on there.

The MOIL issue price has been fixed at Rs. 375, and according to Business Standard, the listing is likely to be around December 15h.

For all the news about how retail investors are exiting mutual funds – 2010 was the most profitable year for mutual funds.

I’m sure you’ve read about the new Document Information Number (DIN), and I wanted to post about it too, but Raag has done a good post about what it is, and what it means to you.

Some out of the box Retirement Income Options by the Digerati Life.

Enjoy your Sunday!

Win a free copy of One Up on Wall Street by Peter Lynch

One of the best investing books I’ve read is One Up On Wall Street by Peter Lynch, and I’ve decided to give away three free copies to OneMint readers.

I’ve been toying with having this idea of a give-away on OneMint for some time now, and have finally decided to hold it today. Here is how you can enter it.

As you know OneMint has a Facebook page which has got 107 people liking it as of now. I’d like to grow this number, and to enter this give – away you have to do the following:

Think of someone who will benefit from OneMint, and ask them to like the page, then leave a comment here telling me that you have done so.

If you don’t have a Facebook account, and are interested in the book just leave a comment, and you are eligible.

I will choose three winners at random next Sunday, and get them the book from Flipkart or Amazon or somewhere. You have to be either in India or US to be eligible for this because those are the only two countries I know how to order the book, and also because the majority of the existing readership is in these two countries.

The thought behind this

Scams have been raining on us from the past few months, and frankly all of this has become quite depressing, but at the same time you see people helping out each other without any expectation of return in your daily lives as well, so it’s not as if all of humanity has become corrupt.

So I thought what would happen if I ask people to enter this give away purely on the basis of good faith?

I’ve been wondering about this or long, and I am sure now that you think about it you are curious too. So, there you go – that’s my reason – suggest OneMint to a friend, and leave a comment on this post.

I’ll close the entries next Saturday the 11th of December, 2010, and declare winners on Sunday the 12th of December, 2010. The winners will be chosen randomly, and please use a valid email address in the email field to allow me to contact you.

Edit: You don’t actually need to mention the name of the person who you have recommended the site to. Just leaving a comment that you did so is enough.

Edit 2: Please leave a comment on this post, as I will create a numbered list out of all the comments, and use a random number generator to pick up winning entries from the comments on this post.

Replying by email will not suffice because that’s only visible to me.

Leaving a comment on Facebook makes it difficult to create the numbered list without any intervention from me, so please leave a comment here, and not on the Facebook page.

What is a Demat account and how can you open one?

What is a Demat Account?

I got an email last week from someone asking about opening a demat account, and in the SBI and IDFC thread you might have noticed that there are several people who don’t have demat accounts, but will have to open one soon because nowadays you need one even to invest in these bond issues.

Let’s start with what a Demat account is, and then we can move on to the several options currently available in India.

My grandpa used to have a black briefcase where he stored all his physical share certificates.

Eventually he dematerialized all his shares and moved them to an electronic briefcase, which is how he described his Demat account, and I think this is quite apt to understand the concept.

A Demat account is like a brief case where you store your shares and bonds electronically.

In India there are two Depositories – NSDL and CSDL – and you can think of these depositories as banks that hold your shares and bonds in electronic form.

A regular investor can’t deal with a depository directly, and you have to deal with their agents which are called Depository Participants (DPs).

There are hundreds of DPs in India, and you can open a demat account with one that suits you in terms of price and convenience. Normally, people open a Demat and a trading account with the same institution as it makes transactions cheaper, and is more convenient to get started as well.

So you could have a trading account and a DP account with SBI or ICICI Direct. It is in fact better to have trading and DP account with the same organization because in those cases you are waived off the DP transaction fees.

Effectively, you are using an agent in the form of a depository participant to avail the services of a depository which are storing your shares and bonds electronically.

There are hundreds of DPs in India, and NSDL provides a very comprehensive list of DPs along with their fees here and here (this data might not be up to date though).

Partial List of Depository Participants in India

If you clicked through the above links to the entire list of DPs then you’ll notice that there are a large number of DPs in India, so for this post I’m trying to create a list which has got some of the better known DP names with only their annual maintenance charges covered.

There are several other charges, but including all of them here will make comparison difficult. I have included a link to the source in this table so you can go check the details there. Since these prices are relatively low – you should think about convenience also, and see if your bank offers demat services, and if you can open one there.

Name	Annual Maintenance Charge	Detailed Charges
SBI	Rs. 400 Rs. 350 for customers receiving statements by e-mail	Link
ICICI Bank	Rs. 500 Rs. 450 for customers receiving statements by e-mail	Link
HDFC Bank	Rs. 750 for less than 10 transactions Rs. 500 for 11 â€“ 25 transactions Rs. 300 for greater than 25 transactions	Link
Citibank	Rs. 250	Link
HSBC	Rs. 750	Link
Sharekhan	Rs. 75 per quarter (300 annually) Deposit of Rs. 500	Link
Axis Bank	Rs. 500 p.a. for customers authorizing Bank to debit DP charges from bank account maintained with Axis Bank, and 2,500 for others.	Link
Karur Vysya Bank	Rs. 250 per annum	Link
Sharekhan	Rs. 300 under two plans, and Rs. 500 under another	Link
Bank of Baroda	Rs. 350 per annum	Link

How to open a Demat account?

Once you decide where you want to open your Demat account – contact their representatives, and they will get you started.

You will need the following documentation in order to open a Demat account, so keep this handy while contacting the DP.

Proof of Identity: This includes PAN card, driver’s license, passport, voter card etc.

Proof of Address: This includes the above documents and bank passbooks, identity cards issued by Centre or State governments etc.

Passport size photo

Pan card copy

You will need the following details while opening the demat account:

Name of account holder
Mailing address
Bank account details
Guardian details for minors
Nomination declarations
Standing instructions

When you contact the DP – their agent will let you know if they need any specific documentation, or if you need answers to any other specific questions.

It used to be that only equity investors cared about having a demat account, but with a lot of bond issues coming out in only demat form – I think more and more investors will need to open a demat account, and if you don’t already have one, then do think about spending this four or five hundred bucks per year to take advantage of electronic stock and bond holding.

This post should get you started on what a Demat account is, how and where you can open one, as well as the documents required to open it. Please leave a comment if you have any questions or other feedback.

Thoughts on MOIL IPO Subscription Numbers and IPO Investing

The MOIL IPO subscription closed with a bang yesterday, and I think it’s a very good example of why investors should be really careful and skeptical while investing in IPOs, especially if you’re new to the market.

Before I get to the MOIL numbers, let’s revisit a chart I have used here earlier.

The graph on the lower right corner of the image shows you that the number of IPOs rose in September when the market itself was doing quite well.

This makes sense when you think about it because promoters of companies want to sell their stock when the sentiment is up, and when they can extract the maximum price – there’s nothing wrong with that, just the way markets, and people work.

A couple of days ago Khalid posted the returns of IPOs launched in September of this year, and I was amazed to see the number of companies that are currently trading below their offer price.

A quick look at that table shows that only Career Point, VA Tech Wabag, and Tecpro are trading above their listing price! That’s just 3 out of 16!

I think a large part of this can be attributed to pricing the IPOs to the full, and not leaving anything on the table for retail investors, and to that extent it is easy for long term investors to take a look at IPO grades, and decide that the fundamentals don’t excite them, or that the pricing is too high based on comparison with peers, and this way you can avoid most of the high priced IPOs.

But, what when fundamentally good companies that have been decently priced hit the markets?

They get oversubscribed to insane levels, and the number of shares that you get allocated is so less that the whole exercise itself doesn’t seem worth it’s time. Here is how MOIL IPO over-subscription looked just for the retail category.

When the IPO is over-subscribed so many times then you hardly get any shares at all.

So, at one hand you have IPOs that are already priced fully, and you’ll probably be able to buy them later at a much cheaper price, and at the other hand you have IPOs that are decently priced, but will get over-subscribed so much that you will not get any significant amount of stock at all.

What does this mean to you?

It means that while there are opportunities to initiate positions in fundamentally good stocks at decent prices, the positions themselves may not be as significant, and in terms of absolute numbers – IPOs can lead to losses much more often than the other way round.

Also, if you are drawn towards the stock market for the first time by IPOs – know that there is a lot of excitement around them, but they may not help you build as much wealth as boring concepts like saving and investing regularly will.

Don’t be turned away from them completely, but don’t be dazzled by them either. They are just one of the many ways of investing in the stock market, and are in no way a sure shot way of making money.

If you’re punting and want to sell to make a quick buck – all the best to you – you will probably lose in the long run because that’s what happens to most retail investors who engage in trading and punting. I understand that you are probably not going to be convinced to stay away from IPO punting because some random blogger on the internet told you so, but I ask you to be cautious because it’s your hard earned money after all.

What are the different types of debt funds in India?

This is the second post from the Suggest a Topic page, and in this post I take a look at the different types of debt funds available to Indian investors.

1. Monthly Income Plans: I start with MIPs first because I have already written a post about them in the past, and these are funds that primarily invest in debt instruments, and try to give you a monthly income in the form of dividends. The income is not guaranteed of course, and they only pay out a dividend if they are profitable for that time period.

This type of a debt fund is for people who have a big corpus initially, and would like to generate a monthly income for them with low to moderate risk. When I wrote that last post about MIP I got an email asking if you could do a SIP in a MIP. While that rhymes together nicely, I don’t see merit in investing monthly in a product whose premise is generating a m0nthly income, so I’d avoid that.

2. Capital Protection Plans: Capital Protection Plans are debt instruments that guarantee your capital, and then invest a portion of the funds in equity in the hopes of generating excess returns. I personally don’t see any compelling reason to invest in these type of funds because you can create such a portfolio yourself fairly easily, and avoid paying the mutual fund fees that they will charge you.

3. Gilt Funds: Gilt Funds invest in government debt viz. the debt issued by Reserve Bank of India on behalf of the government. They also invest in securities issued by state governments. The investments are done in ultra safe paper because they are backed by the government itself but that doesn’t mean the Gilt Funds are risk free. They can go down in value because when interest rates rise the value of the debt goes down. So, there could be a possibility that the debt funds lose some part of their NAV also.

Gilt funds can be short term gilt funds, or long term gilt funds. The short term Gilt Funds are meant for people looking to invest their money for shorter durations of say 3 – 6 months.

4. Fixed Maturity Plans (FMPs): Fixed Maturity Plans (FMPs) are quite similar to fixed deposits in the sense that these funds are usually close ended, which saves you from interest rate risk, and even if rates move upwards the fund NAV doesn’t go down. The way the fund works is that a fund house announces a new fund offer specifying the duration of the fund say 18 months or so, and then they collect money from investors which is then invested in debt of the same duration.

These funds have become popular because of a sort of a tax advantage where interest on fixed deposits are charged at a higher tax rate than dividends from FMPs for individuals who are in the higher tax bracket.

The risk of investing in FMPs is that they might invest the money in lower quality debt, and then during times such as the last crisis might come under pressure, and in that sense your capital is not really assured as it is in the case of say a fixed deposit with SBI.

5. Liquid Funds: Liquid Funds are funds that are used by investors for extremely short time durations, and in most cases instead of a savings account. The current savings account interest rate is 3.5% per annum, whereas funds like the SBI Magnum Cash Liquid Float, LIC MF Liquid Fund and JM High Liquidity Fund have returned over 5% since last year. These funds are not meant to keep money in for longer durations because these same funds return in the range of 6.5% when you look at their returns for the past 3 years.

6. Floating Rate Funds: Floating rate funds are funds that invest in predominantly floating rate debt instruments, and can invest in government and corporate securities.

You can have a short term floating rate fund, or a long term floating rate fund. A look at the top floater plans on the Moneycontrol page shows that the 1 year return for the funds that performed in the last year range in 5.3 to 6.1% area, and the 3 year returns range between 6.9% to 7.9%.

Other long term and short term funds: Outside of the categories mentioned above there are debt funds that target long term debt, or short term debt, but may not be strictly a liquid fund, or a floating rate fund. If you look at a bond fund, and by its description its not clear how it fits in the earlier categories then you will have to dig in deeper into the fact sheet or information document or just the returns over the years to see how it did, and get a feel for the nature of the fund. An example would be the SBI Dynamic Bond fund – you will have to look at the information document to dig deeper and see what the fund is all about as the name alone doesn’t indicate what this is all about.

I have tried to cover all the major categories, and if you think that I have left out something then please leave a note, and I will update the post with that information.

Next week, I am going to make a comparison between the debt funds and fixed and savings deposits.