By Arshad Khan The first phase of the fourth edition of Yes Bank Transformation Series witnessed participation from 10,100 teams and 16,000 participants from premier business colleges across the world including Yale University, University of North Carolina, Asian Institute of Management Philippines, IIMs, FMS, XLRI, and S P Jain among others. The transformation series aims to provide the brightest young minds with an "Innovation Lab" for crowd sourcing breakthrough ideas which could transform this fast-evolving and critical sector of the Indian economy. Students participating in the event are given a challenge to analyse the dynamic environment of the financial service industry and chart out a strategic roadmap involving digital innovation in financing and payments for Professional's Bank of India (PBoI). To affirm the position of Transformation Series, an advisory council comprising of eminent personalities from across the world has been convened. The advisory council of Yes Bank Transformation Series comprises of Bibek Debroy — economist, member-NITI AYOG, Arvinder Gujral —director (APAC), Twitter, Sanjay Swamy — managing partner, Prime Venture Partners, Vikas Agnihotri — director, Goggle India, Chaitanya Kamat — CEO, Oracle Financial Services, Vipul Parekh — Founder, Bigasket.com among many. A total of 45 teams will be chosen basis rigorous evaluation for the upcoming campus rounds across India. After multiple rounds, the advisory council and senior Yes Bank executives, will extract the top 10 teams for the jury round. The jury will ponder on the proposed solutions by the teams and decide on the three winning teams. The three winning teams will receive prize worth Rs 5 lakhs and pre placement interview opportunity with Yes Bank.
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Robo-advising is fast replacing agents and financial counsellors. Feed your future goals into your computer and it will tell you where and how to investBy Sunil DhawanThe young generation buys practically everything online, from grocery to gadgets. The Internet allows users to search, select and make decisions independently. Soon, buying financial products online will be no different.Making the right investment is key to meeting financial needs of every stage in life. In the absence of somebody qualified, dedicated and professional at picking suitable financial products, most decide for themselves or take advice from friends and relatives. And in doing so, they often end up buying products that fail to meet their long-term needs such as child’s education, marriage or one’s own retirement. This happens because people invest without properly estimating the requirement, or creating separate portfolios, or reviewing and adjusting as per the changing environment. It’s all on an ad-hoc basis.This is set to change with robo-advising. Individuals can now seek advice on all financial matters online. Today, there is a handful of robo-advisers in the market. Arthayantra, AdviceSure, ScripBox, Funds India, My Universe and BigDecisions are some of them.Simply put, robo-advising involves letting the machine (software) know about an individual’s goals for it to create an investment portfolio using various algorithms and automated processes. It further assists with investing in recommended products, schemes and, subsequently, reviews the portfolio to suggest changes. Manish Shah, co-founder & CEO, Bigdecisions.in considers his platform to be a step-up version as it helps in providing mathematical answers to financial decisions. “Robo-advising is essentially combining data that you don’t normally have, with algorithms that you would not be able to assign yourself, by a firm less focused on end-product sales to give the power to customer to take the financial decision. The whole process — from advising to actual transaction — is automated, with minimal human intervention. “Normally, most investors are emotional, which leads them to react irrationally to market changes. The same does not happen in robo-investing.” says Sameer Aggarwal, co-founder, AdviseSure.com.What It Entails When creating an investment portfolio, robo-advising factors in various elements of a client’s requirement including horizon of the goals to be met, risk profile and taxation amongst others. Specific portfolio for each goal is created taking into account asset allocation and diversification, so goals are met through a robust risk-adjusted approach. In the case of robo-advising, it’s important that processes, and especially the advice, are consistent and standardised. Aggarwal says, “Complete investing and the advisory process are system driven and based on analysis of financial data, which is back-tested by us under various market conditions and scenarios. The advice offered by these robo-advisory firms may however vary as all these firms use their propriety software. Nitin Vyakaranam, founder and CEO of ArthaYantra, India’s first robo-adviser, says, “Advice may vary as it depends on the financial prowess of the advisor putting various techniques of financial econometrics in the back-end.”Existing ModelMost people in India still invest on the recommendation of individual agents and financial advisers or as per the market flavour. What robo-advising attempts to do is eliminate all possible anomalies that arise in the case of human advising on financial matters.Besides, robo-advising can also come handy as the number of advisers in the market is insufficient to service the growing needs and aspirations of the investing population. Sanjiv Singhal, CEO, Scripbox says, “The way we see it, there are no advisers in India. There are less than 300 registered investment advisers with the Securities and Exchange Board of India and fewer than 2,500 certified financial planners. We believe the automated advice is going to fill this gap.” According to a Boston Analytics report, 33 per cent of individuals in tier II cities don’t not know how or where to invest in assets. “Today, we have 2-3 lakh wealth management accounts that get advice, but we have 250 million middle class people in India. Where would they get cost effective advice from,” adds Vyakaranam.Financial products, by their inherent nature and structure, are prone to mis-selling. Plus, with thousands of schemes and products available, it becomes humanly impossible to zero-in on the right scheme. The financial advisory space too is scattered. Several agents and advisers are pushing products without proper and complete financial planning. Vyakaranam says, “Most first ask how much one wants to save and then tell where to invest; the whole structure of the industry is product centric.” On the other side, are the fee-only advisors who are not allowed to sell products. To a large extent, the fee-based advisory can curtail mis-selling, but the reach and scope to handle large number of customers could be a challenge. Aggarwal says, “An adviser can’t service a customer investing Rs 100 per month. Robo advisory can be useful to the 35 crore Internet users in India.” Robo-investing In IndiaSinghal says, “Somebody who only helps in investing online is not a robo-adviser, but just a transaction platform.” Essentially, only-advisory, of which financial planning is a part, and investment advisory, where actual investment options are suggested, make a robo-adviser. According to Srikanth Meenakshi, founder and director at FundsIndia.com, “Robo-advisory is basically a service backed by system and automated processes that reduces the burden on humans to a certain extent thus enabling these services to deliver on a large scale. Calculations, portfolio, design, portfolio maintenance, rebalancing and securing assets — whichever service does these five things, it is a robo-advisory.” Most robo-advisers in India are currently catering primarily to mutual funds. Vyakaranam says, “We are a robo-advisory and we look at everything such as life goals, insurance, loans and our aim is to increase the investible surplus of the customer.”Before subscribing to the services of a robo-adviser, it is important for an investor to understand what products the firm is dealing in. Presently, such firms rely heavily on mutual funds and thus earn from them mostly as trail-commissions. For some, it could be different. “Our model covers those products too where advisors don’t make any commission,” says Aggarwal. The model is set to mature in time to come. Aggarwal says, “Presently, there are only two-three robo advisers in India in the true sense. All of them together have not more than 1 lakh active customers and the expected asset under management of $100 million maximum.” ALL ABOUT ROBO-ADVISING • Online service for advice on financial and investing needs of investor• System-driven analysis and creation of portfolio for each goal through automated processes• Offers an online platform for estimating the requirement for goals through calculations• Automated design, maintenance and rebalancing of investor portfolio • Provides a transaction platform for investing across asset classes• Uses the concept of artificial intelligence in building a financial plan• Provides an unbiased and robust solution minus the emotional quotient• Takes into account investor’s requirement including horizon of the goals to be met, risk profile and taxationRobo-investing AbroadIn developed nations, robo-advisory firms are more customer-centric. Therefore, instead of actively managed mutual funds where the scope to curtail costs in favour of investor is less, their offerings include ETFs to a large extent. Indian firms may charge a low annual fee, but by not investing in low-cost ETFs, investors do not stand to gain much. A mix of ETFs and actively traded funds can be a solution. Singhal informs, “In the US, the market is different, and so the advice is also different. So, if we don’t have REITs here and ETFs don’t make sense, we at Scripbox recommend active funds as in India they still beat market by 3-4 per cent over time even after expenses. But as market matures and ETF becomes more important and a better product, even we will recommend those products. Scope for products will evolve as market evolves, but what we are doing now is filling in the gap for advisory.” Also, regulations are different in the US when it comes to making changes in portfolio. Meenakshi says, “In the US, regulations allow robo-advisers to take mandate from customers and do rebalancing on behalf of customers, but in India it’s only the PMS (portfolio management service) which is allowed to do so.”LimitationsPreparing towards a goal may not be very simple. There could be extraordinary events related to spouse leaving job, parent’s property to be accounted for, a second career option. Will robo-advisory be able to address all that? Rajiv Jamkhedkar, founder and chief executive officer, The AZAD Programme, a financial advisory firm says, “Robo-advisory is helpful for someone with no planning at all. When there is multiplicity of goals and a detailed plan is to be made taking into account full details of clients, then you need an offline process.”Restoring TrustThe disruption we are witnessing in the online shopping space is spreading to other domains as well. The e-commerce wave has struck financial services too and could bring a change in the way people invest for their goals. Its early days and robo-advising is yet to see the downturn in markets. Will it be able to bridge the human-trust deficiency? FIRM APPROACHTo be a smart robo-investor, it is very important to know about the company’s overall approach and philosophy. Here is how you should be running a check onthe service provider…1 CHOOSE A ROBO-ADVISORY firm that provides comprehensive services and not just a platform to invest2 AT THE VERY OUTSET, find out about the services and the modalities from the firm3 GET A FIX OF HUMAN intervention to the entire process and how much of it is automated4 BASIC UNDERSTANDING OF THE BACK-END processes employed by the firm including various models that they employ5 LOOK AT COST-EFFECTIVENESS taking into account the products that the firm deals in6 SERVICES DIFFER as per the amount of investment. Understand how the firm differs in offering services7 MAKE SURE the online platform takes into account your taxation status while creating and suggesting portfolios8 UNDERSTAND HOW MUCH of changes can be done by you as an investor and what all investment decisions will the firm undertake on your behalf9 GET TO KNOW the review process — how and when that will happen sunil@businessworld.in @dhawansunil(This story was published in BW | Businessworld Issue Dated 02-11-2015)
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Paramita Chatterjee Deal makers seem to be in the hub of action of late, thanks to opportunities springing up for risk capital investors such as private equity (PE) and venture capital (VC) funds. The number of PE/VC investments jumped to 302 in the third quarter of this fiscal (July-September period), close to double the number of investments that were sealed during the same period last fiscal, thanks to the rise of new age sectors such as internet and mobile that are increasingly evincing investor interest these days. In the corresponding quarter last fiscal, as many as 157 PE deals were sealed, as per data available with Grant Thornton. In terms of value, PE firms infused $5,675 million, 82% jump from the July-September 2014. The increase in PE deals comes at a time when the overall M&A market remained tepid with the number of deals showing a decline during the previous quarter of this financial year. The total number of M&A deals dropped to 152 in the July-September period 2015 from 165 in the same period last year. “Indian assets are expected to remain in focus as Inbound and Domestic M&As accelerate on the back of pickup in alternate buy out financing by PEs, and increased capital market activity – both volume and value will clearly be on an uptrend here,” said Prashant Mehra – Partner at Grant Thornton India. “More visibility, on-ground action, visibility of economic growth and reforms will push domestic corporates to look at inorganic growth means. Government’s actions on key policy issues and reforms such as GST, the new Companies Act, ITP for Tech start-ups, land acquisition, unblocking stalled projects, etc. should improve the ‘ease of doing business’ in India,” he added. This, he opined, will further accelerate the transaction activity in India. So far, year 2015 seems to be the year of startups with young entrepreneurs increasingly churning out winning ideas and attracting huge dollars in funding. So much so, that in the risk capital market, there is growing chatter that venture market is the place to watch out for. While this area has always belonged to angels and venture capital firms, now private equity firms which typically provide growth capital to companies are also increasingly looking at the sector. Apart from IT/ITes, the other sectors that saw investments flowing in from risk capital investors are banking and financial services, real estate and healthcare, among others. Boom or Bubble?It is reasonable to expect that many of today’s minnows will be the big fish of corporate India tomorrow. Never before has the Indian startup space seen so much action. Many budding entrepreneurs are looking to ride the domestic consumption wave, and eyeing the immense potential in e-commerce. It is the underpenetration in the sector that is providing opportunities, and that sounds like good news. After all, it means innovation, revenues, jobs, and economic growth. Right? But industry analysts caution that the situation may be not be as rosy as it seems. There are too many startups, and many are ‘copycat startups’, chasing money-making opportunities and leading the boom. In other words, the success of one startup is prompting another to follow the same dream, resulting in fewer original ideas and inflated valuations. Considering that, there is reason to remain cautious about a bubble. Of course, that is not to say that all startups will fail. Some 20 to 30 per cent of ideas are sound, they are the ones that will stand out. “E-commerce companies that will be successful can be classified into two categories,” says M.K. Sinha, managing partner and CEO of IDFC Alternatives, a leading multi-asset class investment manager in the country. He adds that one category is those that address underserved areas, and the other helps extract economic value by improving capacity utilisation of idle assets.
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The Reserve Bank of India (RBI) is forecast to cut its main lending rate just once more over the next 18 months, despite weak inflation and a slowing economy, according to a Reuters poll. Weakening inflation and concern that a China-led global slowdown was weighing on Asia's third-largest economy pushed India's central bank to cut the repo rate to a 4 1/2-year low of 6.75 per cent last month, taking many by surprise. But the RBI is unlikely to move again any time soon, according to the poll of over 25 economists taken in the past week, and the next cut of 25 basis points won't come until the April-June 2016 quarter. September's cut reflected the RBI's "comfort with the path of inflation in the next 12-15 months, while recognizing the need to support the economy in an increasingly challenging global backdrop," wrote economists at Deutsche Bank. In his statement after the policy meeting, Governor Raghuram Rajan said the Bank chose to front-load policy easing due to widespread concerns about growth worldwide and in India. However, economists predict growth this fiscal year and next will be slower than estimated three months ago, just 7.5 per cent and 7.8 per cent respectively, although faster than China's, where growth will be 6.5 per cent in 2016. A July poll predicted a 7.6 per cent expansion this year and 8.2 per cent next, but those forecasts came before official data showed economic growth slowed to 7 per cent in the quarter ending in June. New Delhi is targeting 8 per cent over the next two years. "For India to meet its true potential, reforms will need to be bolder. Until then, GDP growth is likely to recover more gradually," Pranjul Bhandari, chief India economist at HSBC, wrote in a note. Despite the slowdown, India's economy remains a favourable destination for global investors, although reforms in taxation, land acquisition and labour markets are pending in parliament and political opposition has so far stalled them from coming into force. Oil prices have slumped over 50 per cent since June 2014 and inflation has cooled sharply in India, falling to 4.41 per cent in September from double-digit rates just two years ago. Inflation is likely to accelerate, the poll showed, limiting the RBI's scope to ease policy as aggressively as it did in 2015, when it cut the repo rate four times. Economists expect inflation to average 4.9 per cent to 5.5 per cent in each quarter until the end of next year, much lower than the RBI's January 2016 target of 6 per cent. It is also likely to meet Rajan's 5 per cent by March 2017 goal.(Reuters)
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The rule to claim deduction on medical treatment has been relaxed by allowing non-government specialist doctors to issue certificate, writes Sunil Dhawan There's good news for taxpayers on the health front. Meeting documentary evidence in case of claiming deduction on medical treatment has been relaxed. Certain specific medical expenses are allowed to be claimed as deduction from income under section 80DDB of the Income tax Act, 1961. To claim such a deduction, one however has to furnish a certificate from a specialist working in a government hospital. This has been done away with. Central Board of Direct Taxes has issued a Notification relaxing the condition of obtaining the certificate for claiming expenditure under section 80DDB in respect of specified ailments from a specialist working in a Government hospital. So, now onwards, the certificate can be issued by any specialist from a non-government sector too. The limits for deduction: Amount incurred on medical treatment of certain specific ailments on self or dependant is allowed as deduction up to Rs 40,000 in a year. Dependant in the case of an individual would mean, the spouse, children, parents, brothers and sisters of the individual. For senior citizens who are above age 60, the limit stands at Rs 60,000. As announced in this year's budget of 2015-16, the limit in case of very senior citizens (above age 80) had been raised from Rs 60,000 to Rs 80,000. Importantly, the amount of deduction claimed under this section will be reduced by the amount received under section 80 D from any insurer. Ailments covered: The specific ailments on whose treatment, the deduction is allowed is as per the Rule 11DD of Section 80DDB of the Income Tax Act, 1961. These are: (i) Neurological Diseases where the disability level has been certified to be of 40% and above, and including Dementia, Dystonia Musculorum Deformans, Motor Neuron Disease, Ataxia, Chorea Hemiballismus, Aphasia, Parkinsons Disease.(ii) Malignant Cancers (iii) Full Blown Acquired Immuno-Deficiency Syndrome (AIDS) ;(iv) Chronic Renal failure ;(v) Hematological disorders like Hemophilia and Thalassaemia. Certification: The certificate however still is to be issued by the specialist but can be a non-government hospital. For example, for Neurological Diseases a Neurologist having a Doctorate of Medicine (D.M.) degree in Neurology or any equivalent degree, can issue the certificate. Similarly for Malignant Cancers an Oncologist having a Doctorate of Medicine (D.M.) degree in Oncology or any equivalent degree can issue it. At times, government hospitals might not have the specialist available with them. This move helps those who can benefit by claiming tax benefit.
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Rs 1 L: The sum a depositor is legally entitled to if his bank goes bankruptBy Raghu MohanYou may have crores in your bank account, but did you know that as a depositor you are legally entitled to only Rs 1 lakh if your bank goes belly up? The colour of the bank ‘s capital (state-run, foreign, private or urban co-operative bank) is of no consequence. It’s a different matter that the political class may be shielded, and that Mint Road may not let things come to such a pass.For some time now, there has been a clamour that this cover be increased — the last revision was on 1 May 1993 to Rs 1 lakh. And the attendant debate is: should all banks be treated equally? Because all of them don ‘t have the same risk profile — some are good, others bad, and a few, downright poor.Change is under way. A Reserve Bank of India (RBI) committee chaired by Jasbir Singh favours what is known as a “differential premium system” for banks in India. Oh, and by the way, the entity that insures bank deposits is the Deposit Insurance and Credit Guarantee Corporation of India (DICGC), which is an arm of RBI set up in 1962, and Singh was its executive director.What’s the issue here?At its heart is the concept of ‘moral hazard’. Economist Paul Krugman described it as “any situation in which one person makes the decision about how much risk to take, while someone else bears the cost if things go badly.” In the context of deposit insurance, you can have a situation wherein insured banks have an incentive to accept more risks, while the depositors loosen their monitoring of risk in the banks they hold the deposits in. And both glibly hold the view that costs emanating from the excess risk will be borne by the insurer or even the exchequer (taxpayer), and that the depository institution will not normally be allowed to fail.The RBI committee, therefore, felt that “a hike in cover without calibrating the premium rates to the risk profile of the insured banks only exacerbates the moral hazard. Recognising this, it has been felt that introduction of RBP (risk-based premium) may be taken up to make ground for considering raising the insurance cover from the present ceiling of Rs 1 lakh.”It’s not an altogether new concept. The Jagdish Capoor Committee on Reforms in Deposit Insurance in India (1999), and the Committee on Credit Risk Model (2006) constituted by DICGC, also recommended introduction of RBP for banks and urban co-operative banks. But it did not see forward movement, as co-operative banks and regional rural banks, which account for over 90 per cent of insured banks to the extent that there are more of these types of deposit-taking entities, were under what many will term “perpetual” restructuring until recently. So too, the absence of a robust supervisory rating for all insured banks, especially co-operative banks.So do you have the right to know the risk profile assigned to the bank where you keep your money? We now step into a delicate area.The Committee says the practice with different deposit insurance agencies is that, at the minimum, a basic rating framework with input variables and their weights is disclosed to the banks at large. “However,” it notes, “a bank’s actual rating is shared with only the bank concerned, the latter being important as a disclosure of rating in public may have negative consequences for a bank such as fears of bank runs if the rating is low on the scale”. It begs the question why do such weak banks even exist.Let’s view the weak-versus-strong-bank argument from the ownership perspective. Are state-run banks to be perceived as relatively less risk-prone? The Committee held that internationally, the preponderant view is that all safety-net tools should apply uniformly across all classes of institutions, and taxpayers’ money should not be used in resolving institutional problems. “In similar vein, implicit guarantees in the form of government ownership should not be given weightage in the risk-profiling of institutions”. The Committee also took note of the fact that, over time, government ownership of state-run banks “may be diluted substantially”. The Committee, therefore, recommended “that in all fairness, the rating system should, as far as possible, be ownership-neutral”.So why should stakeholders, and taxpayers in particular, remain in the dark about the exact risk status of a state-run bank that is weak, when the Committee itself notes that government ownership of these banks “may be diluted substantially”? Isn’t it better to quarantine weaker banks — whatever their hue — through “narrow banking”. Let them raise deposits and invest largely in government securities.(This story was published in BW | Businessworld Issue Dated 02-11-2015)
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Sarita and her husband Shiva earn an income by working as a maid and a driver in my office. They invest a part of their income in the MahaLakshmi Chit fund that is run by a local jeweller. When the first meeting was called for the auction of the fund, Sarita and her husband did not participate and chose to wait for better returns. However, by the time Sarita was ready to bid, the jewellery shop was busted and the owners were caught by the police for fraudulent transactions. The police assured Sarita and other investors of the fund that their money would be returned; however, it has been over a year and they have still not received any news. And it is likely that they never will.The story of chit fund investments going bust is nothing new. The Kolkata Saradha Group financial scandal is something that is still fresh in everyone's mind. Chit funds can enforce monthly investment discipline on small savers and can be crucial for financial inclusion. But unfortunately, chit funds are also used by fly-by night operators to defraud semi-literate investors.Chit Fund BasicsA chit fund is a traditional savings and borrowing mechanism. Here, members pool in a specified amount every month and one of them gets the entire sum. This process is repeated every month till all members get the booty. The winning member is not chosen by a draw of lots, but through an auction. A chit fund means many things to many people. For some it's a personal loan, and others a recurring deposit. To people that are seeking a loan, it is a source of costly, but convenient, form of credit. Chit funds are indigenous saving mechanisms that is unorganised and run between friends, families and known persons. Chit funds are easy to join as there is very little paperwork to be submitted and the entire set up is based on trust. They have been around for over thousands of years and are present in other countries too where they are popularly known as Rotating Savings and Credit Associations. Take for example a group of 24 members who come together and contribute Rs. 3,000 every month for 24 months. The corpus will collect about Rs. 72000 in the first installment. Every month, an auction will be held in which the members are allowed to bid for the chit fund amount collected that month and the person offering the lowest bid will be awarded the bid. The bid will begin at a minimum discount of 5% (foreman fund or commission).ExamplesNo of people in the chit : 24Amount contributed per month: Rs. 3000No of months to contribute: 24Total corpus of chit fund per month: Rs. 72,000Commission for front runner / agent: 5%Commission for front runner / agent: Rs. 3,600Net Fund Available for Bid: Rs 68,400Take for example that the first bid goes for 35% discount or for 46,800. The discount amount of Rs. 25,200- minus the 5% commission to the foreman will be distributed as dividend amongst all the members. So, once the foreman is paid Rs. 3,600 as commission, the balance amount of Rs. 21600 is distributed among the 24 members and each member is entitled to get Rs. 900. Hence his net contribution will be Rs. 2100.Here is another example:Net fund available for Bid: Rs 68,400Lowest Bid Amount: Rs 46,800Net saving in First Bid: Rs. 21,600No of People in Chit : 24Each Member share: Rs. 900Net Contribution: Rs. 2,100The winner of the bid, also known as the "prized member" will have to continue contributing to the chit fund for all 24 months even though they are not allowed to bid again. The members who wait till the end for lower discounts will be the ones who really make a profit in the fund. The returns are not assured as it depends largely on the bidding interest.Popularity FactorChit funds are one of the most popular investment vehicles in the country even though it is unregulated and the entire set up is built up on trust. Small businessmen and low income group individuals can avail funds on time at nominal rates through bids. Individuals who bid early in the chit funds do not earn any returns and end up paying an "effective" interest to avail the funds on an urgent basis. It is difficult to assess the profit or loss a person makes from chit funds as the outcome is largely dependent on the bid results. Often, persons who have bid early have been able to avail funds at lower rates than what they would have had to pay the bank on availing a loan.RegulationThe Chit Fund Act, 1982, has been framed to regulate and control chit fund operation by various state governments, but unorganised chit funds are rampant in the country. Since the chit fund needs to deposit 100% value of the "pot" with the Registrar of Chits prior to commencement of the chit scheme, small funds do not register themselves as they will have to forgo the auction for the first month and the foreman will have to be paid the first month's fund to compensate him/her for the deposit made.Caution AlertChit fund frauds have thrown up problems for various reasons, such as the foreman/fund manager disappears with the corpus amount. A member could default in installment payment or disappear after winning the first bid. The discount rate might be rigged and a desperate member might end up paying a higher discount. It is advisable to invest only in registered chit funds that have completed many chit fund issues in the past. The Ministry of Corporate Affairs has an exhaustive list of registered chit funds; however, many chit funds get unlisted, so do your research before investing. Secondly, only invest in a chit fund if you are confident that you will be able to complete all the installments or you might end up paying a penalty. Considering the risks, it is inadvisable to invest in chit funds, but if you intend to join one, do your homework thoroughly as there is very little scope of recovery in case of a scam. If you have access to opening a bank account and investing in FDs or taking loans from Banks, this should be the preferred option. If you don't bid for the money till the end, it is like a recurring deposit. You get your money back at the end of the chit's term. Though the sum received will be fixed, your returns will depend on the distributable surplus over the months. There is no assurance of return, nor a fixed formula for how much you can gain.Number CrunchingLet's assume with the same example mentioned above with first bidding amount from Rs. 54,450 and the bidding amount increases Rs.600 every month. The person who waits till the end of 24 month pays Rs 64,956 over the entire tenure and gets Rs 68,400 in the end. The return works out to 5.7%, which is not very attractive when most banks are offering yields of up to 9% on recurring deposits. The bidding amount increases, since number of bidders reduces every month. The low returns from a chit fund are basically due to the very high commission that goes to the organiser. At 5% of the pool value, it is perhaps the second highest commission earned on any product after life insurance policies. Now you know why chit fund companies try to lure investors with freebies and gifts. If no commission was payable to the organiser of the chit, the return in the 24thmonth works out to 11.55%, which is superior than that offered by debt mutual funds. Additionally, the chit fund is an easy way to borrow, but the rate of interest is prohibitively high. Though no interest is charged, it is possible that the contribution keeps rising every month and the total outflow is more than that received. In our example, the member who bid in the first month received Rs 54,450, but had to pay Rs 64,956 over 24 months. The annualised interest rate works out to 20.09%.Weighing The Pros and ConsChit funds provide both the flexibility to save as well as borrow and are like a compulsory savings tool which earns dividend every month. One gets finance/loan without much documentation which is very important for the lower income group, vendors etc who have no access to banks and institutions. Finance options through chit funds are easy to re-pay through remaining monthly installments. These investments are not affected by market fluctuations and are suitable for unorganized economy group or people unsure of their cash flows. On the flip side, one has to be very careful with regards to unregistered chit fund companies. Commission given to Chit Fund Organizer is too high which eats on the profits and there is no guarantee on fixed returns as these are based on auctions. There is a high degree of risk involved. Despite these shortcomings, investors flock to chit funds in large numbers. This is because the option offers tremendous flexibility to the member. He can treat it as a recurring deposit till he needs the money, just like an overdraft facility with a bank. Most people use chits to save for short-term goals, such as buying a vehicle or setting up a business. They are especially useful for goals that can crop up anytime during the tenure of the chit, such as a child's wedding or the purchase of a house. Even though the cost of borrowing is very high, because of the ease of transacting and funds are available without any surety or paperwork, people prefer these chit funds.Beyond Chit FundsIf the same person needs the funds from bank or other financial intuition they ask for surety or mortgage or you have to go for a Gold loan which offers interest rate of 14% to 18% but you need to deposit your gold with them. With the government introducing the Jan DhanYojna account with the banks, this should transform the way those who did not have access to the main banking system to invest and borrow. The Pradhan Mantri Jan Dhan Yojna is a National Mission for Financial Inclusion to ensure access to financial services .Accounts can be opened in any bank branch with Zero balance.Fixed deposits are far more efficient and secure than Chit funds and this should be used more by many. And access to loans and better interest rates is also part of the scheme. Some Benefits under Jan DhanYojna include interest earned on deposits, accidental Insurance cover of Rs. 1 lakh, no minimum balance required, life insurance cover of Rs. 30,000 and access to pension, insurance products and loans with ease. This will surely be a great boon to many in India and will also help in understanding other investments options available rather than blindly trusting chit funds.The author, Mimi Partha Sarthy, is MD, Sinhasi Consultants
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As WPI inflation rate edged up to (-)4.54 per cent in September, India Inc lon Wednesday (14 October) said there is scope for banks to slash interest rates further and the green shoots of economic recovery are "visible". Expressing concern on the rise in prices of food articles, industry bodies said the government must take steps to ensure the prices of essential commodities remain in check. "Following the cut in the policy rate by RBI, several banks have revised downwards their base rate. However, there is room for further cuts in the lending rate by banks. "As the gains of a lower interest rate regime get transferred to both consumers and investors, demand would pick up and we hope this brings pricing power back into the hands of producers," Ficci president Jyotsna Suri said. WPI inflation rate rose marginally to (-)4.54 per cent in September, with pulses, vegetables and onion turning costlier, even as the overall deflationary trend persisted for the 11th month in a row. Assocham president Rana Kapoor said WPI inflation and IIP data indicate that "green shoots of economic activity might finally be becoming more visible". Moreover, he said, swift policy action is desired for reviving investments and business confidence. "Continuous negative growth of WPI inflation is facilitating the businesses in terms of increased price cost margins vis- -vis decreased cost of raw materials. Also there are signs of revival in demand scenario," PHD Chamber president Alok B Shriram said. "With inflation remaining on a comfortable trajectory, easy monetary policy stance would expand further in terms of more repo rate cuts as there is a strong need to boost demand in the economy," he added. The wholesale price index-based inflation was (-)4.95 per cent in August. It has been in the negative zone since November. In September last year, inflation was 2.38 per cent. Inflation in food articles inched up to 0.69 per cent in September, from (-)1.13 per cent in August. "The central and state governments need to take proactive steps to contain any further rise in prices of essential commodities like pulses and onions," Kapoor said. Onion and pulses turned dearer, with inflation at 113.70 per cent and 38.56 per cent, respectively, in September, as per official data released today. The rate of price rise in vegetables was at (-)9.45 per cent as against (-)21.21 per cent in August. Besides pulses and onion, the food items which became dearer in September were eggs, meat and fish (2.02 per cent), milk (2.16 per cent) and wheat (3.34 per cent). The Reserve Bank mostly tracks the consumer price index- based inflation for its monetary policy decisions. CPI, or retail inflation, for September rose to 4.41 per cent, from 3.74 per cent in the previous month.(PTI)
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