In your interest.
Online Personal Finance Magazine
No beating about the bush.
NSDL says smart investors choose the demat route for mutual fund. But the really smart investors would not want to waste their money, or get into unnecessary hassles which the demat system involves
Two years after the regulator pushed mutual fund investors down the stockbroker-demat route, the strategy is beset with high charges and low customer interest. Undaunted, the National Securities Depository Ltd (NSDL) is still pushing it hard.
An advertisement blitz just released reads: "Be a smart investor. Hold your mutual fund units in demat." Investors are indeed smart. Demat is a costly affair and many smart long-term investors actually do not demat even their old shares. Since holding mutual funds in demat form is not compulsory, unlike shares, investors exercise the smart choice, avoiding NSDL's pitch to go the demat route.
A demat account for mutual funds is similar to that for shares. Now, the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE) are offering a platform to buy and sell mutual funds. You can subscribe to mutual fund units through your stock broker using the stock exchange platform. On subscription, the asset management company (AMC) or registrar and transfer agent (RTA) will credit the mutual fund units to your demat account. For existing mutual fund holdings, you have to obtain a conversion request from your depository participant (DP) and after appropriate verification, the AMC or RTA will credit the mutual fund units to your demat account.
Demat does have its advantages. It helps consolidate all of one's holdings and allows a view of investments in a single snapshot, rather than having to go through several statements issued by different mutual funds. Earlier, if one had 20 schemes in 15 different fund houses, there would be as many statements. You one can get a simple statement for all holdings with all the AMCs. Also, holding mutual fund units in the demat format enables one to manage a portfolio better. One can monitor all the schemes at one go. Buying and selling in dematerialised units is supposed to be faster and simpler.
But if one does not trade in fund units, is it really worth the cost? There are several layers of costs associated with holding mutual fund units in demat form: the depositories and brokers are both out to claw some money from you. One would have to pay a charge to open the demat account, as well as the annual demat fees. Sales of units would also involve a charge of Rs20 on each occasion. This charge varies from DP to DP. And if the DP is not the bank that is directly linked to the AMC, it could take around 7-10 days for the money to be credited to your account. Sometimes, there's confusion regarding the differences in the name, or the initials in the name in which the demat account is opened and the one in the bank records. If the demat account has the name Anjali R Shah and the bank account has the name Anjali Shah, getting the amount credited could take months together. Banks have a habit of putting these kinds of small disputed amounts mindlessly in a suspense account and making you run around for it. At that time, you will not look smart and NSDL will surely not be anywhere to help.
The demat route has brokerage costs as well. The broker charges his normal commission at the time of purchasing or selling MF units (generally 0.30-0.40% of the value of units bought or sold). Again, the brokerage is negotiable and depends upon the broking firm one chooses. An investor using an online brokerage portal will be charged by the online trading company. Most importantly, while dealing through stock brokers, you cannot do SIPs/STPs, which are very popular with mutual fund investors. In fact, when we called a broking company about opening a demat account to buy mutual funds, we were dissuaded to do so because of the unnecessary costs involved.
So, while NSDL claims that it is smart to use the demat route for mutual funds, the problems on the ground and the cost of taking this route for no added benefit will continue to keep investors away. Keep your financial life simple–avoid mutual fund demat as long as it is not compulsory.
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The scheme will invest mainly in debt. Therefore, it will not beat inflation and will not help your child much!
Peerless Funds Management Co Ltd has launched an open-ended scheme called Peerless Child Plan. The Plan, a hybrid scheme of debt, equity and gold, was launched quietly two weeks ago and closes on Friday. Is it worth looking at?
The benefit is that an investor gets a combined investment option in three asset classes. But sadly, it is an exact replica of Fidelity's India Children's Plan. Before this, Taurus Mutual Fund launched an open-ended income scheme called 'Taurus MIP Advantage' fund and Canara Robeco launched a hybrid plan called 'Indigo Fund'.
Religare Mutual Fund was the first fund house to enter this asset allocation product in April 2010, with a scheme called Religare Monthly Income Plan (MIP) Plus that seeks to generate income through a portfolio of fixed income securities, gold and equity-related instruments.
The investment objective of the Peerless Child Plan is to generate long-term capital appreciation through a portfolio of fixed-income securities, gold exchange traded funds (ETFs) of other mutual funds and equity and equity-related instruments. The Plan will invest 60%-80% in debt and money market instruments, 5%-35% in equity and 5%-35% gold ETFs. The scheme carries a 1% exit-load if redeemed before one year. It is benchmarked against the CRISIL MIP Blended Index and the price of gold (neutral allocation: 85:15).
Saving for a child's future is high on every parent's agenda. Since the best long-term investment products are equities and equity funds, it is a valid marketing idea for fund companies to come up with a pure equity fund that secures your child's future. Thus, a simple equity diversified fund held over the long term would be good enough. But Peerless will divide its investment in debt, equity and gold ETFs.
Debt and gold will only drag down the performance. Returns from debt cannot keep up with inflation. And while it is a common belief that gold offers good returns over the long term, this is simply not true. Since 1991, gold is up just 8.9% on a compounded annual basis. That hardly beats a recurring deposit scheme.
Suppose 60% is invested in debt, 35% in equity and 5% in gold. If the debt part gives a maximum return of say 9%, the return from the debt part of the portfolio will be around 5.4%. If equity gives a return of around 15%, the return from the equity part of the portfolio would be 5.25%, and if gold crashes the return from gold will be zero to negative. Thus the overall return from the portfolio would be just 10.65%. Thus for just that extra 1.65% return more than the bank fixed deposits, you would pay 2% fees to the fund manager, with the only advantage that the return from the scheme may fetch a slightly lower tax.
Equity mutual funds are the best financial product to beat inflation in the long run. Certainly there is a huge risk involved in equity investment too, such as entry/exit timing, stock selection and as well as portfolio churning. But in the long run it gives the highest-inflation adjusted return. That apart, it is bit strange to see a long-term objective fund investing a majority of its asset in debt. After all, debt is one of those assets which have no growth factor. The return from debt is completely dependent on the prevailing interest rate.
We think the fund is merely designed to attract safe money. Since gold prices are rallying, the fund house has decided to add it to the fund. But gold has been rising for years now. To extrapolate that trend into the future would be imprudent. With so many flaws, we are simply not sure who the fund is meant for. Asset allocation schemes may claim that through one scheme you are able to invest in three asset classes. But this will always lead to sub-optimal returns. It's always good to invest in specific products based on your expectations from that particular asset class that is in line with your financial goals.