Saturday, April 30, 2011


SIP is an investment process which allows you to invest a fixed sum every month very much like a recurring fixed deposit with bank.

SIP is an automatic mode of investment which removes the ills of market timing from investments. Investors usually desist buying mutual fund when the markets are down and rather buy when markets are high, in other words retails investors buy high and sell low—just the opposite of what they should be doing.

We have realized that the retail investor has gradually built some mis-conceptions about equity investments via the SIP mode.

Myth 1:- Equity investment is all about SIP

Investors have started to believe or rather they have been made to believe that equity investment should always be done in SIP mode. We believe that if the investor is mature enough to understand the nuances of equity investing and is willing to stay invested for 10 years or so then lump sum investing may be made rather than SIP mode. SIP mode can be beneficial if say the investment horizon is about 5 years or thereabout.

Myth 2:- SIP works in direct equity

We have come across many articles which advocate buying shares of a certain value every month saying and terming it as SIP. Sadly enough this is not SIP.
Take Himachal futuristic Co. Ltd. (HFCL). The script had moved from about Rs. 20 to Rs.2500/- in a matter of a year and back to Rs. 20 levels in following year. Or for that matter take the case of Silverline Technologies which moved from Rs. 30 to Rs. 1300 to Rs.7/-. The moot point is whether you would have had the strength to continue buying through this period. Imagine starting purchases at Rs. 1300/-. You would be cursing stock market today (nobody likes to believe that they have made a mistake). SIP or concept of rupee cost averaging works with a portfolio and not a single stock.

Myth 3:- SIP works For Anybody But Me.

SIP works well in a well diversified equity fund and that too over long term. It may not work well only for people who either have a short term horizon or have not chosen a fund with good track record.
Myth 4:- Markets are at all time high and so not a good time to start an SIP.

We do not know whether 3000 is the right index level or 18000 is the right index level to start an SIP. However, what we do know is that SIP works. SIP returns vis-a-vis lump sum returns of select funds between the period December 2007 and March 2011 have been stated here below:-

SIP return (CAGR)
Lump Sum return (CAGR)
DSP BR Equity Fund
1st. December 2007—1st.March 2011
HDFC Equity Fund
1st. December 2007—1st.March 2011
Reliance Growth Fund
1st. December 2007—1st.March 2011
IDFC Premier Equity Fund
1st. December 2007—1st.March 2011
Franklin Prima Plus
1st. December 2007—1st.March 2011

So, it is time we break the myths about investing in general and SIP in particular. Let SIP be the second earning member of your family.

Happy SIPing!!

Thursday, April 14, 2011

Difficult Times for EPFO account holder

Can you possibly imagine how would an EPFO investor be feeling today?

His hard earned money being parked with and managed by an organization which

  • Still has archaic accounting system
  • Poor Management of funds  
  • Allows withdrawals in contraventions of law.
  • In all likelihood, the EPFO is running a deficit!
 According to an article in The Economic Times of 8th. April, 2011, Income Tax department has slapped a demand notice on EPFO to the tune of whopping Rs. 7,000 crores. The said demand has been made due to the inability of the EPFO to prevent pre-mature withdrawals which are not allowed under the Indian Income Tax Act, 1956. The liability could have been more had the EPFO maintained proper and updated records. Present system of accounting and recording transactions, does not allow EPFO to track pre-mature withdrawals.

Pre-mature withdrawals—of retirement funds—is allowed—without any taxes-- under Indian Income Tax Act, only under the following situations:-

  • The employee should have been working or had worked for 5 years continuously for the same organization.
  • Had the service been terminated before 5 years, then it must have been for reasons beyond the employee’s control.
  • The accumulated balance standing to the credit of the employee should be transferred to another RPF account only.

Hence, there is no provision for pre-mature withdrawals of EPFO money—tax free unless one of the above conditions arises.

Employees are able to withdraw their PF balances, only because EPFO has not upgraded/modedrnised its accounting system.

The only solution to plug tax leakages lies with EPFO—aggressive fundamental reforms are needed to change the way a corpus of Rs. 170000 odd crores is managed by EPFO. Record keeping has to be improved—and so should the returns being generated by it.

EPFO presently has no system to track workers (or account holders) who have switched jobs. The archaic records do not offer seamless portability. These handicaps negate the very purpose of EPFO—provide & manage retirement money!! In absence of portability, the worker switching jobs is most likely to withdraw his PF dues rather than have it transferred to the new employer.

The only solution to EPFO woes is to offer workers an option to move to NPS (New Pension Scheme) which not only offers seamless portability with restriction on withdrawals, but also has institutional framework to generate superior returns-an obligation--of both the government and EPFO trustees—which is more often overlooked for short term benefits—viz; 9.5% interest only for 1 year (which in all likelihood will be taxed by government)