Tricks developers play

Posted on October 29, 2007

Tricks developers play

Builders have a variety of ways of catching the unsuspecting homebuyer on the wrong foot. Here are eight common ones and ways to counter them

by Urmila Rao for OUTLOOK MONEY

Everybody wants a piece of real estate. The sector has been growing at 25-30 per cent a year since 2003, fired primarily by low interest on housing loans and the rising affluence of homebuyers. Those who had bought stocks of real estate companies, whose valuations have gone through the roof, are a happy lot. However, the same cannot necessarily be said of scores of financially and emotionally bleeding homebuyers. The developers play lord and master to middle-income individuals, who often live like monks to fulfil their dream of owning a house. Most sale agreements are heavily loaded in favour of builders in the currently unregulated market.

This disillusionment is reflected in the rise in the number of complaints that has accompanied the growth of the sector. In the first 25 days of August 2007, the Delhi-based National Consumer Helpline, a consumers’ body, received 33 housing-related complaints. The Consumer Guidance Society of India (CGSI), Mumbai, says it gets two-three cases a day. In this scenario, what chance do you have of safeguarding your interests as a buyer?

In 1993, the Supreme Court ruled in favour of M.K. Gupta in his case against the Lucknow Development Authority for not delivering his flat on time. This landmark judgment brought housing construction under the purview of the Consumer Protection Act, 1986.

This, however, hasn’t done much to change the unscrupulous ways of builders. Owing to the bonhomie between developers, the authorities and the contractors, projects get sanctioned easily but the quality of construction goes unquestioned. Supreme Court advocate C.M. Srikumar says: “Even in cooperative societies, the contractor, the architect and the office-bearers of the society dupe the public.”

Rahul Todi, managing director, Bengal Shrachi Housing Development, says: “Unlike other consumer products, here we sell a concept first. If there is a gap between expectation and reality, then we are not doing our job properly.”

What are the most common games that developers play? Here are eight common tricks and ways in which you can guard against them.

I. When do I get my house?

Most agreements do not clearly specify the date of delivery. For instance, one says: “Completion of the building is expected to be delivered by the date mentioned in the covering letter of this allotment. The delivery of the possession is subject to force majeure.” What this means is that you cannot hold the developer responsible if he does not stick to the promised delivery date.

There have been cases when the delivery has been delayed by 12 months or more. Typically, the buyer would have paid 95 per cent of the price by the time he reaches the expected delivery date. If he is living in a rented house, delays will drive his calculations awry as he would not have factored in this additional rent (see Double Bite). Mumbai stockbroker Bhupendra M. Pitroda, 58, fought a legal battle against Megha Property Developers for five years. Reason: delayed possession.

Pitroda was promised delivery of the flat he booked in 1998 in Navi Mumbai’s Madhuri Cooperative Society Housing Project within 18 months. The builder later said that delivery would take another six months. When Pitroda visited the site six months later, he felt that the delivery would not happen soon. So, he instructed his bank to stop payment of the balance 37.5 per cent of the apartment’s cost to Megha Developers.

The developer promptly sold off the flat. An aggrieved Pitroda then moved the State Commission in July 2000. Three years later, the commission asked Megha Developers to refund Pitroda the money he had paid with 15 per cent interest. Pitroda was also awarded a compensation of Rs 15,000 for the mental agony caused and Rs 5,000 for legal costs.

The developer appealed in the National Commission, which upheld the State Commission order but cut the interest to 9 per cent. The developer then moved the Supreme Court. “The Supreme Court judge flung the papers in the face of the builder’s lawyer and asked the builder to compensate me immediately. The judgment was over in a minute,” says Pitroda. Through the legal battle, Pitroda made 25 appearances in the State Commission, three in the National Commission and one in the Supreme Court.

Many agreements have penalty clauses for delayed delivery, but they are without bite. For example: “If the company fails to complete the construction of the said building/apartment within the period as aforesaid, then the company shall pay to the allottee compensation at the rate of Rs 5 per sq. ft of the super area per month for the period of such delay.” What this means is that for a 1,000-sq. ft flat, you would get a compensation of Rs 5,000 per month—a pittance (see Double Bite).

In most cases, buyers put up with the delay quietly rather than ‘antagonise’ the builder. Most fear retribution, harassment and further delays in delivery. This is not entirely baseless. For one, agreement papers are designed to protect the builder. Two, your intention to fight the builder may look like a joke given your handicap in terms of financial prowess and influence. Three, there is no industry regulator you can turn to for redressal. Suresh Virmani of National Consumer Helpline says: “We generally encourage a dialogue between buyers and sellers to settle disputes. If that fails, the matter is taken to the regulatory body. But we can’t even suggest this in real estate because there is no regulatory body.”

What to do. Don’t just take the builder’s word on the progress of construction. Check it out from time to time, as Pitroda did. If you feel a delay is likely, start building up pressure on the developer. The best way to do this is to form a society, says Virmani. Usually, builders have many projects running at the same time and they push the ones where the pressure is higher. “The more the number of buyers, the greater is the pressure,” says Bharath Jairaj of Consumer Action Group, Chennai.

II. Where are my papers?

A lot of builders are evasive about giving the completion certificate at the time of handing over the flat. A completion certificate is issued by municipal authorities and establishes that the building complies with the approved plan. A developer would not get the certificate if he deviates from the plan.

You cannot prove ownership over your house if you don’t have the certificate as you would not be able to get the house registered. Also, you may not be able to get utility connections. You will have problems selling, mortgaging or reverse mortgaging the house as it will not be in your name. In the worst case,the unapproved parts of your house would be demolished by the municipal authorities. Not a happy state of affairs.

Businessman Mohammed Haroon, 45, got his flat in Tulip Garden, Gurgaon, six years ago, but he has not got the completion certificate yet. The same goes for the other 59-odd flat owners there. Together, they took Sarvapriya Developers, which built Tulip Garden, to the consumer court. “After four years, in mid-August this year, the court directed the builder to hand over the completion certificates within a month, or pay Rs 5,000 each as compensation to all the flat owners,” says Haroon. “But we know that none of the two will come our way and are prepared to approach the Delhi High Court in this matter.”

What to do. Sale agreements often don’t mention the completion certificate. If yours doesn’t and you notice it before signing the papers, insist on the inclusion of a clause that you will be given the completion certificate when the flat is handed over to you. Ask the builder for it as soon as he announces that the house is ready for possession. If, like Haroon, you move into the house without it, the court will probably be your last resort.

III. What’s the guarantee of quality?

Within a month of moving into his apartment in Mahagun Manor, Noida, Rajiv Raghunath, 41, got trapped inside the house as the door lock failed. In six months, the plaster started peeling off and the fans stopped working. In another few months, water started seeping in as the pipes had corroded. “I felt cheated. This wasn’t worth my money,” says Raghunath.

As of now, there is no way for a buyer to check the building materials used or the quality of construction. Says advocate Anupam Srivastava, who is with law firm Chambers of Law: “Quality is a subjective matter. Buyers should enter into an agreement on the kind of material that the builder will use.”

In October 2005, Pune’s Gera Developments started a trend by providing a 5-year warranty on its buildings. The warranty, however, is subject to the conditions that no structural changes be made to the house and that there be no misuse.

What to do. Don’t fall for the builder’s glib talk. Insist on including the sanctioned plan of the building and the specifications of the raw materials to be used for construction in the purchase agreement. If you are already facing quality problems, you can go to the consumer court. Says Anand Patwardhan, a consumer activist and lawyer: “If you want to approach the consumer court, move it within two years from the day you take possession.” Alternatively, flat owners can form a Residents’ Welfare Association (RWA) and get the builder to fix the problems, as Raghunath, an RWA member, did.

IV. What is the price really?

Nishit Babyloni, 38, mech-anical engineer in BHEL, Bhopal, had booked bungalow No. 105 with Ansal Housing and Constructions (AHC) in Pradhan Enclave, Bhopal, in 2004. On a visit to the site five months later, he found that his bungalow was not being built. He asked AHC to give him bungalow No. 120 instead, as construction was in full swing on that. AHC formally changed the allotment in February 2005, but sent him a letter eight months later asking for Rs 3.15 lakh more.

Atit Arora, general manager (marketing) and project head, Ansals Pradhan Enclave, Bhopal, says: “The bungalow’s specifications were changed. Babyloni was required to deposit the amount if he wanted the new specifications.” Babyloni retorts that AHC did not tell him about the additional work and the changes in specifications. “We were not told that we would have to pay 25 per cent more for the new bungalow till 18 October 2005.” He is thinking of moving the consumer court. But, it is not unusual for an agreement to say that a builder can ask for additional payments if specifications are changed or there are cost overruns.

There are legal loopholes as well. The Maharashtra Ownership of Flats Act, 1963, protects buyers against malpractices in the sale and transfer of flats. It gives homebuyers the right to inspect the builder’s documents such as the specifications that he has obtained from the authorities. The Delhi Apartment Ownership Act, 1986, however, is a different story. Although it was published in the Gazette of India over a decade ago, brought on the statute book by Parliament and given the President’s assent, it is yet to be notified.

What to do. The last stop is the consumer court. Says Srikumar, “Many malpractices are offences under the Indian Penal Code, for which the responsible party can be prosecuted.” Keep checking with the builder if any changes are being made to the specifications mentioned in the agreement and the allotment letter.

Also, try to get it mentioned in the contract that if a sum higher than the original price has to be paid by you, the builder would give you additional time for that. You must also ask for a copy of the sanctions that the builder has taken from the authorities to carry out the alterations.

V. What else do i pay for?

To make your house liveable, you will need electricity, water and sewage connections. You will also need electrical wiring, appliances like fans, lights and a water pump, which are unlikely to be part of the package and generally won’t be mentioned in the agreement. These will be additional costs that you will have to bear. You might also have to keep some speed money aside for registration so that it gets done in a decent timeframe. In some cases, the builder may make a verbal promise to get it done for you.

What to do. Builders generally have a take-it-or-leave-it attitude with conscientious buyers while striking a deal. Even so, it pays to be scrupulous and to read the agreement and its fine print. “Get a lawyer, an architect or an evaluator to determine the correctness of the purchase,” says Srivastava. Finally, do some quick math and keep aside some funds to get your house up and running.

VI. How big is house?

A typical home purchase agreement states: “The plans, designs, and specifications are tentative and the developer reserves the right to make variations and modifications…” Simply put, in most cases, you won’t know the final area of the house till you get it. The agreement will further state, “In case of change in area, the difference in cost of area shall be adjusted at the time of making final payment.”

Shikhar Saxena, partner, Ace Equity Solutions, a leading housing finance franchisee of ICICI Bank, had booked a fully-furnished, air-conditioned service apartment measuring 650 sq. ft (super area) in Cabana Service Apartments in Indirapuram, Ghaziabad, which was being built by Assotech Realty. He got an allotment letter mentioning this area. However, when the builder offered possession, the super area of the flat had increased to 671 sq. ft. “Once the authorities approve of the floor space index, how can the builder change it?” he asks. After holding out for over 18 months, the choice before him now is to either accept all the terms of the builder or seek cancellation of his allotment. Further, he was informed that the maintenance charge, which was to be Rs 1.50 per sq. ft per month, has been increased to Rs 7 per sq. ft per month. The agreement shields the builder. It says “the monthly maintenance charges will be subject to revision from time to time”.

Assotech’s Elegante project, also in Indi-rapuram, was to have terrace gardens on the seventh and thirteenth floors. “There is only a patch of green; the developer has built units on these floors too,” says a buyer. Srikumar says there is nothing one can do unless the size of the garden is specified in the agreement.

What to do. Builders usually follow the same practices through all their projects. So, before buying, check out the builder’s earlier projects to see if he plays fair. Start a blog or join one to share your experiences with others, though this doesn’t guarantee redressal. You can read about the mistakes and experiences of other people on websites like mouthshut.com.

VII. What’s the carpet area?

Most residential units in India are sold on the basis of the super built-up area, which includes open spaces like space for lifts, staircases and parking, among other things. But, what you really get is the carpet area, which literally means the area that you can carpet. This can be 15-35 per cent less than the super built-up area. In 2005, HDFC chairman Deepak Parekh had said the company would provide loans at cheaper rates to developers who sell their flats on the basis of carpet area. But, there has been little headway on this front. Some developers, especially in Bangalore, sell on the basis of carpet area. In Pune, too, the builders’ association has decided to increase the carpet area by 25 per cent to arrive at the saleable built-up area charged to the buyer. In both these cases, buyers are aware of the area they will get. Though there is still a long way to go, experts believe that soon properties all over India would be sold on the basis of carpet area.

What to do. Buy property on the basis of carpet area, although the builder will not like the idea. Argue with him that if the super built-up area is mentioned on the basis of the approvals and sanctions, the carpet area can be quantified. Says Srikumar: “There should be a provision for termination of the contract and resumption of the property so that builders don’t have an upper hand. However, in the absence of rules, buyers should be vigilant.”

VIII. Will I get a well-managed property?

The developer may promise to maintain the building or complex in the initial years. The service, however, may not be satisfactory. Residents of Mahagun Manor in Noida have taken over its maintenance. “The homebuyers cannot even use the Right to Information Act, 2005, to their advantage because it doesn’t apply to private builders or even group cooperative housing societies,” says Srivastava.

What to do. You are unlikely to get relief through correspondence and phone calls. You can go the e-way to attract the builder’s attention. For months, Delhi-based developer Unitech ignored the complaints of the residents of one of their premier offerings, Uniworld City. Then, a resident shot a nine-minute video that captured the visible flaws of the project, and posted it on YouTube.com, a broadcast site. Their grievances were soon attended to. You can use websites like http://www.consumerhelpline.in and http://www.cgsiindia.org to seek further guidance.

Though the dice is clearly in favour of the builder, the buyers can still fight back and many of them are doing so. Now, the government urgently needs to put a regulator in place to ensure proper disclosures and protect the buyers.

It pays to have time on your side

Posted on October 29, 2007

It pays to have time on your side

Your portfolio should reflect your needs. Your asset allocation strategy should take into account the goals you want to reach with your funds, your investment horizon and your age

Sunita Abraham for Outlook Money

V Ravindran, a 56-year-old retired businessman, is planning to invest Rs 20 lakh in equity funds. Investment advisors may balk at this, as traditional wisdom suggests that the older you are, the lower should be your equity exposure. However, with the stockmarkets soaring and the benchmark indices more than tripling in the last three years, this wisdom has rendered many older investors mute spectators while equity investors ring in unanticipated profits.

Secular bull markets, like the one we are riding currently, warrant a relook at asset allocation. Maybe, your investments would be optimised if you moved from using age as a fulcrum to determine your equity exposure to using holding period to determine how much risk you should take. That is Ravindran’s logic too. The money he is investing in equity funds now is meant as a gift for his granddaughter when she turns 18. He reasons: “She will not need the money for the next 15 years at least. Risk cannot be totally eliminated if you want to earn good returns. You can only try to reduce it to acceptable levels.”

Analysis of the returns from the Sensex show that in the 13 blocks of 15-year holding periods since 1979, there was no period when the Sensex gave negative returns. For a holding period of 10 years, there is a only a 5.5 per cent chance of making a loss and in case of five-year holdings, there is a 13 per cent chance of losing money. This builds a strong case for using holding period as a basis of allocation of resources between various asset classes.

sourirajan 44
Business executive, Gurgaon

He is just a few years away from the goals he has been investing for—his daughter’s MBA and marriage—and wants to move away from equity to fixed income securities to avoid volatility in the period that is left.
“I’m moving from equities to safer products since my goals are now short term.”

Goals and holding periods. Holding period is the length of time for which you stay invested to achieve a goal. Longer holding periods reduce and even eliminate risk in equity. This can be the case when somebody plans for his retirement when it is more than 15 years away, new parents save for the college education of their child, someone saves to buy a holiday home, or elderly people manage wealth for inter-generational transfer of wealth. In all these scenarios, the money that is being saved and invested is for an event in the distant future and gives the equity investment sufficient time to ride out short-term volatility. Since mutual funds are the most efficient way for individual investors to participate in the stockmarkets, equity funds must form the core of the portfolios of such investors. On the other hand, investors who have a short holding period must look at fixed income securities that exhibit lower volatility in the short run.

Sourirajan, a 44-year-old general manager of Becton Dickinson India, is looking forward to his younger daughter Gopthri completing her MBA and subsequently getting married. He estimates Rs 25 lakh will be needed to meet both targets and has money invested in direct equity holdings, mutual funds and bank fixed deposits. However, even though he is fairly young, Sourirajan is looking to move away from equity and invest more in fixed income securities. He has accumulated and invested over the years to meet his goals and now that the event is just a few years away, he wants an investment avenue that will not exhibit volatility in the period that is left.

Does this mean that the age of the investor loses relevance in the asset allocation process? Not quite. Age would define the investor’s risk tolerance and should be used to identify fund categories for him. A matrix can be created to help you identify your investing profile using the concept of “payout period”, the time interval after which the funds must be available for the investor to meet his goals, as the pivot of the asset allocation process and the age of the investor as the barometer of the risk that he can take (see Holding Period Matrix).

Investors with long holding periods, but a low risk tolerance level must invest in the market through index and exchange traded funds that eliminate fund managers’ risk from the investing process. Diversified equity funds concentrating on large-cap stocks and having some exposure to well-established mid-cap schemes are also a good option. Investors willing to take greater risk can invest in aggressive equity funds such as Franklin Templeton’s Flexi Cap Fund and Prudential ICICI’s Dynamic Fund, both of which look for investing opportunities across market capitalisations. Thematic and sectoral funds can also be considered since there is sufficient time for the stories to show results. But, if your holding period is shorter, it is best to invest in the index, diversified equity funds and balanced funds. You could include mid- and small-cap funds if you are willing to take more risk.

A look at the returns from diversified equity funds which have been in existence in India for at least five years bolsters the case for long-term equity investing. These schemes have consistently beaten their benchmarks and have exhibited low volatility. The presence of a scheme in the markets for at least five years means that it has managed funds in bull and bear markets. Such schemes pass the holding time test and can form the core of any portfolio.

Strategies for asset allocation and portfolio construction are as unique as thumbprints. Time frame, income needs and tolerance for short-term volatility define the asset mix that each investor will adopt. If you have taken care of short-term cash needs and want to save for goals that have a long holding period, your investments should go into equity. You should invest in fund categories according to your risk and return parameters. Building a portfolio in this manner will ensure that it reflects the actual risk associated with an asset class and you do not lose out on returns merely because of your age. Time, not age is the key here!

How many are enough?

Posted on October 27, 2007

How many are enough?

The more life covers you have, the tougher they are to manage. A smart investor buys a term cover for life insurance and invests in funds independently. But for those who cannot, Ulips are the best bets

by Sunil Dhawan for Outlook Money

Consider the following grim statistics. Almost eight of every 10 Indians are without any kind of life or health insurance. But the irony is that even those with insurance policies, especially life covers, maybe underinsured.

On the other hand, there are individuals who have bought insurance policies for the sake of investment only. Take the case of 38-year-old Minoti Desai, a former member of the Indian women’s cricket team, who is now self-employed. She has 23 life insurance policies, mostly money-back, endowment and Ulips (unit-linked insurance plans) with a total life cover of Rs 40 lakh and an annual premium of Rs 3.4 lakh. She can have the same cover at a premium of about Rs 21,000 in a term plan till age 65, a life insurance plan that only provides your dependents with the sum insured during the tenure of the policy and not returns. The remaining annual contribution could have been invested in a range of pure investment products ranging from low-risk products like public provident fund to high-risk investments such as equity mutual funds (MFs). This combination provides higher cover as well as higher returns.

Why people have too many policies. There are many like Desai who have a portfolio of insurance policies much like a portfolio of MFs. Much of it has been because putting their money in traditional products such as endowment and money-back, has been their preferred investment. “I have been buying traditional plans almost every year for the last 13 years. It keeps a check on my spendthrift ways and helps me save money,” says Desai.

Since traditional products didn’t have the flexibility to adjust to changes in one’s life, such as the need for enhanced cover after the birth of a child, people had to buy fresh policies. There are other reasons as well. Insurance was sold as a tax-saving option and access to it was relatively better, thanks to a larger number of insurance agents as compared to, say, MF agents. Many people treated insurance products as the only investment tool to achieve life’s goals, such as children’s education and retirement.

Problem of plenty. A pile of policies comes with a pile of problems. To name a few, it may be difficult to keep track of premiums, updating nominations and maturing policies even if your agent is helpful. Since you are committed to premium payments, you remain vulnerable if your commitments are large, especially in exceptional times, such as a job loss, or when you want to take a sabbatical without pay. The other major problem arises when you realise that your agent has sold you a policy whose features don’t fit your needs and even the returns are not endearing. Life insurance policies being long-term contracts, the exit costs are high (see The Right Policy: Pick Live Covers, Drop Dead Ones, 15 January), which forces one to stay put.

How Ulips can prevent pile-up. For those who can’t actively track and manage investments and would like to rely on investment-cum-risk insurance products, Ulips are an alternative to holding large number of policies. You can buy a Ulip that ensures adequate insurance cover, gives flexibility in premium payments, and has a decent fund performance. You can even attach a critical illness and a disability rider. This way you could cover a lot of risks in a single policy. More savings can happen in the same Ulip through top-ups. Thanks to this flexibility and hardsell by agents, Ulips have become popular. “I have almost stopped buying traditional plans since 2001; now my insurance pie also features Ulips,” says Desai. If you want greater risk cover or find the premium unmanageable, you can even rely on a combination of a low-premium, high-life cover term plan along with a Ulip.

Even as you search for the best Ulip, you need to be on your guard. This product is meant for long-term investment, since much of administration and other costs are levied in the initial years of the policy term. However, unscrupulous agents have been hawking Ulips to those looking to park money in equity-related instruments and getting them. There have been instances where new Ulips have been sold to the same customer just because the insurer has launched a new fund option at a lower net asset value. Worse, some agents, after having switched insurers, urge policyholders to exit existing Ulips to buy newly launched ones by their new companies. Therefore, zeroing down to the right agent is essential (see Finding The Right Partner, 15 September). Also, check whether the exit costs of the Ulip are manageable.

How many policies should you have? “There is no thumb rule for the number of policies that one should buy,” says Debashis Sarkar, director (marketing), Max New York Life Insurance. Opt for Ulips that give both the sum assured and fund value as death benefit, instead of those that provide the higher of the two. Choose Ulips that offer life cover till age 100. You can increase or decrease the cover whenever the need arises. A periodic review of life risk cover also helps. “Do a ‘needs analysis’ at periodic intervals; it may so happen that one of your risks may increase or decrease and your calculation may change completely,” says Anand Pejawar, country head, Bancassurance, SBI Life Insurance.

What do you do if you have already accumulated a pile of policies that you might now want to reduce? In Ulips, you need to stay invested for the long-term, given the commonly front-loaded cost structure. For traditional plans, depending on exit penalties, you could take a call to minimise your losses. Buying life covers is all about knowing how much cover you need and figuring out when it is enough. The good news is that with the ever-expanding choice in insurance-cum-investment options, you can actually strike a balance.

Questions to ask your wealth manager

Posted on October 27, 2007

Questions to ask your wealth manager
Go through this checklist before entrusting your wealth to someone, because it is important to ensure that your money is in the right pair of hands

by Moinak Mitra for Outlook Money

The name’s Bond! Plain, vanilla, old-fashioned bond. Or trust. You have worked hard to build yourself a plump financial portfolio, the least you can demand is ‘trust’ from the person or organisation you assign to manage your wealth. Moreover as a busy professional, you might be unable to devote the kind of time needed to take care of the money you earn and would, ideally, like to outsource your money management to a trusted person or organisation. So where do you go?

India is still at a stage where the wealth manager is not necessarily a certified entity and the term itself is used rather loosely. With banks and distribution houses, insurance agents, mutual fund distributors and chartered accountants liberally calling themselves ‘wealth managers’, there is a mindboggling array of people to choose from. So, it becomes imperative to first identify the type of people you can sign on as your wealth managers.

Manager Conundrum

There are wealth managers in banks who will eagerly do your financial planning if you fall in the HNI (high net worth individual) block. The banks assign a relationship manager (RM) to you, who is expected to manage the relationship with you by proactively using his knowledge to tailor unique and innovative financial solutions that will create value. However, he is restricted by the number of distribution tie-ups he has—not all of them can sell all products. Besides, as banks and distribution houses increasingly compete with each other with a similar set of products, an RM may end up just pushing his own brands instead of delivering long-term advice.

The high churn among RMs in banks often leads to sudden breaks in “relationship” building and a whole lot of miscommunication between the customer and the bank ensues. Take the case of Piyush Singhal, 40, managing director at a Delhi-based software firm, Infoedge Solutions. In 2001, an RM from a prominent MNC bank offered to take stock of his investments. Singhal was advised to invest in 15 debt mutual funds (MFs). Within a year he had burnt his fingers and exited when his portfolio crashed. Singhal held on to the bank, but this time opted for another RM. He then fell prey to the New Fund Offer (NFO) churn game that banks play with their HNI clients. From 2003 to 2004, Singhal invested in NFOs recommended by the bank. “There was a 50 per cent churn within the very first year, and there was at least one instance when we sold one fund and bought it back within a month,” he says.

When Singhal looked at his return, net of the short-term capital gains tax and commissions, he found that he had barely made 8 per cent in a market that topped 40 per cent. So, why is Singhal still with the bank? “They are all the same,” he says. His strategy now is to diversify across banks and he has signed up with another bank a year back.

Other ‘Wealth Managers’

Then there is everyone else keen on getting a slice of your pie with assurances to make you richer than you are today. Your friendly neighbours who sell insurance and mutual funds may not always be the right source. After all, their interests in selling you a particular product is the commission that they earn through selling you a financial product. Besides, your accountant or stockbroker may not adopt a holistic approach to all your financial planning needs.

If you strictly go by the book and look for a qualification that befits a wealth manager, then you should go to the 150-odd certified financial planners (CFPs) who have been certified by the Financial Planning Standards Board (FPSB), India. Remember that a true wealth manager uses the financial planning process to help you figure out how to meet your life goals through the proper management of your financial resources.

Once you have identified the category of your wealth manager, it boils down to choosing one. Here are nine questions to ask before you hand over that cheque. And remember to keep asking as you go along.

What is your experience and qualifications?

Wealth management requires hands-on experience and a strong technical understanding of topics such as personal tax planning, insurance, investments, retirement planning and estate planning and, how a recommendation in one area can affect the others. Ask the planner what his qualifications are to offer financial advice and if, in fact, he is a qualified planner. Ask what training he has successfully completed. Ask what steps he takes to keep up with changes and developments in the financial planning field. Ask whether he holds any professional credentials including the Certified Financial Planner certification, which is recognised internationally as the mark of a competent, ethical, professional financial planner. Find out how long the planner has been in practice and the number and types of companies with which he has been associated. Ask about work experience and its relation to current practice. Choose a financial planner who has experience counselling individuals on their financial needs.

What value added services do you provide?

Ideally, your manager should offer complete financial planning. He should be able to give you advice on equity investment, debt, commodities, art, insurance, international investment, which home loans to take and why, tax planning, estate planning, filing tax returns, superannuation, real estate, and do a cash-flow analysis. If you don’t see a mix of different asset classes, it is a red flag. Diversification is the essence of wealth management. Apart from regular services, it would be nice to get some more value out of your advisor to update your own knowledge. Look for the factors that differentiate one wealth advisor from the others. Check whether your advisor organises any client education seminars, gives you free research reports and regular updates on your wealth portfolio.

What plan can you suggest that suits my needs?

It is important that the plan made for you is unique to your income, your financial goals and your station in life. Each person’s financial plan is significantly different from the others. Your financial planner should be able to consult with you, draw out your financial dreams, and make a plan that will help them come to fruition. The plan changes depending on your income, the size of your family, what you consider necessary expenses, your luxuries and others.

Some financial planners have a few blueprints that you have to choose from, with pre-determined asset allocation ratios. While following this financial plan may be better than no financial plan, a custom-made plan that suits just you is ideal.

How much do you charge and on what basis?

It is better to be clear on this one. These charges are over and above any other charges like an entry and exit load charged by mutual funds when you invest in them. Ask if the fee structure is available in writing. They can charge you in different ways.

Fees: They are based on an hourly rate, a flat rate, or on a percentage of your assets and/or income. At times, it is on the nature of the work done.

Commissions: Though commissions are not paid by you, but by a third party (like a mutual fund house or insurance company), it does come out of your pocket. Fund houses and insurance companies use their entry and exit loads to fund these commissions for their brokers and distributors.

Combination of fees and commissions: Here you are charged fees for the amount of work done to develop the financial plan and commissions are received from any products sold.

What is your investment philosophy?

Don’t put all your eggs in one basket. Spread them around so that a downturn in the life of one asset class does not affect the overall returns of your portfolio. Sure, everyone knows that but your wealth manager should be able to put it down on paper and actually tell you how to do it.

He should be able to tell you the structural risk inherent in a product. For example, he should be telling you that within equities, mid-cap funds are riskier than large-cap oriented funds. In addition to a strategic allocation, your planner should also be able to advise on the tactical allocation of your assets. For instance, within the debt space when the interest rates are tightening, he should advise you to stick to floaters and should be able to tell you to shift your money into gilts in a scenario of falling rates.

If he has not mentioned the words ‘asset allocation’ and ‘risk reward’, stay out. The expected returns from various asset classes he mentions should also sound realistic. If your wealth manager’s promises sound too good to be true, they usually are. Again, if the wealth manager promises no downside, there is something wrong. Since all asset classes pass through varying life cycles, you should ask your wealth manager the downside of investing in a particular asset at that point of time.

Can you give references from existing clients?

You will get one only if there are satisfied clients. Trust is the first and foremost factor that you need to establish before choosing a wealth advisor. Talking to an existing client and knowing his experience will certainly help you take an informed decision.

How can I be assured of good service?

Look for an advisor who has good support staff and a manageable client roster. You also want to get an idea upfront on what his service policy is. How often will he sit down with you to review your financial plan and investments? How will he communicate with you in the meantime? A regular annual review should be the minimum. Semi-annual or quarterly vetting, depending on the complexity of your portfolio, is also important.

Do you recommend your own products?

This might happen when a bank is your wealth manager. If all it is doing is pushing its own group company’s products, there is an inherent conflict of interest. The wealth manager should be able to impartially say which product is best suited for you among a range of them and why. The planner should study the costs and returns of various products and recommend the most efficient among them. He should not recommend a product just because he gets fatter a commission by selling a particular one, or his internal targets are skewed to selling a certain kind of product.

if i am not satisfied, What’s the exit route?

The planner is a pure wealth advisor or broker—so you are never invested in him; you invest through him or on his advice. You have to talk to him and understand the fee structure and other details at the time the relationship is being evolved. That alone can guarantee a safe, hassle-free exit in case you feel the service is below par.

These nine questions should help you narrow your options down to the most suitable wealth manager. Review the answers every once in a while, it helps you keep track of why you hired him in the first place and whether he is still the right manager for your wealth.

Watch your steps – Check the hidden cost of opening bank account, using credit card or taking loan

Posted on October 27, 2007 Updated on June 6, 2015

India gyrates as World and his wife want in:James Saft

Posted on October 24, 2007

India gyrates as World and his wife want in:James Saft

(James Saft is a Reuters columnist. The opinions expressed are his own)

By James Saft

London, October 18 (Reuters) – Efforts by India to control massive flows of money into its markets have prompted two sharp falls and one new all-time high, all in two days. Welcome to emerging markets, the world’s new favourite asset class.

India on Wednesday shocked investors by announcing planned new curbs on investment in its equities by anonymous overseas funds, sparking a selloff in Bombay of as much as nine percent.

But after the panic selling, it was back to panic buying, followed shortly by more panic selling. India’s benchmark Sensex (.BSESN: Quote, Profile, Research) index hit another all-time high on Thursday before falling again to end the day 5 percent down.

The Sensex is now up 30 percent this year and almost 15 percent since the Federal Reserve cut rates in September.

Expect the wild ride to continue, as recent data show that the World, his wife, their milkman and the neighbourhood stray cat are all going long emerging markets at the same time.

A Merrill Lynch poll of global fund managers controlling $671 billion of assets showed a stampede into emerging markets in October. A total of 61 percent of funds were aggressively or moderately overweight emerging market equities, up 50 percent since August and the most since April 2004.

Twenty percent of funds were “aggressively overweight” emerging market stocks, compared to just 4 percent on U.S. shares and 1 percent on UK shares.

What’s more funds in all regions outside of emerging markets said they were looking for stocks with exposure to overseas demand, a strong indication that even those unable to buy emerging markets are seeking to get exposure to growth there.

Why? Investors are worried that growth in the developed world will be crimped by the bursting of the housing and credit bubbles and see emerging markets as the sole hope.

“People have become more pessimistic about the developed world and emerging markets are seen as the oasis,” said David Bowers, an independent consultant to Merrill Lynch on the survey.

“There is a cast-iron belief that emerging markets and China are bomb proof when it comes to the rest of the world slowing.”

“The bull case is that there is a shortage of organic growth anywhere else because companies have been run for cash and not for growth the past five years (in the developed world),” he said.

WORLD TO EMERGING MARKETS: MAKE MORE SECURITIES

India’s experience in the past couple of days is an object lesson in the distortions and strains this phenomenon is causing.

India is concerned about flows into its economy and share markets, partly because some of the flows are so-called hedge fund “hot money” and partly because it has driven a rise in the value of the rupee which is complicating Indian authorities’ attempts to manage the economy and monetary policy.

The Securities and Exchange Board of India said it would over 18 month wind down participatory note programmes, which are used by foreigners, often hedge funds, to invest in shares anonymously.

Foreign institutions have put more than $17 billion in Indian shares this year, as against a record $10.7 billion in 2005.

There is a lot of money that wants in, but not enough to invest in. Initial public offerings were $6.8 billion through September, a new record on even a full year basis, but you can expect that there will be much more securities issuance to come throughout emerging markets, and not just in equities.

A host of emerging market bonds have been launched to warm receptions in recent days, despite continuing difficulties in many other debt markets.

Sri Lanka, which is contending with a long-running rebellion and 17 percent inflation, found that not only was it able to make its debut issue, borrowing for a long five years, but that the $500 million deal drew commitments of $1.25 billion.

India included, it is very hard to ignore the possibility that we are seeing the latest relay in a long run of bubbles.

But, it is also true that the scope for productive and profitable investment in emerging markets is higher than in developed markets.

Look for lots of new issues, wild swings and continued outperformance.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund)

Geojit Financial Services launches Mutual Funds online

Posted on October 22, 2007

Geojit Financial Services launches Mutual Funds online
16 Oct, 2007, 1813 hrs IST, PTI

KOCHI: Geojit, a leading brokerage firm, on Tuesday announced the launch of online investing in mutual funds.

The company has also entered into an agreement with SBI and Franklin Templeton Mutual funds, A P Kurian, chairman, Geojit Financial Services Ltd and Chairman of the Association of Mutual Funds in India told mediapersons here.

“The service will be available to all online customers of Geojit, except NRIs, in the first stage. In another ten months NRIs will also get the facility,” he said.

Customers can purchase, redeem and switch mutual fund schemes through Geojit’s trading portal. The new features also enable them to do non-financial transactions including updating registrars/AMCs, changing of bank accounts and changing of addresses etc, he said.

Kurian said the mutual fund (MF) industry is in a robust growth path, with Asset under Management of Rs 4.76 lakh crore at the end of September 2007, registering a 64 per cent growth over the year.

“There is a growing recognition of Mutual Funds as a suitable investment vehicle among households,” he said, adding that Geojit was promoting sale of MF schemes through its branches. Clients investing in Mutual Funds have registered a 67 per cent growth in the last one year.

C J George, Managing Director, Geojit said the initiative of selling MF’s through Internet was in line with the company’s continued focus to expand its reach through the medium.

You Can Bank On Them

Posted on October 9, 2007

You can bank on UTI, Reliance Banking Fund
8 Oct, 2007, 0544 hrs IST,Bakul Chugan, TNN

The banking and financial services sector has been in the limelight of late, thanks to the sustained momentum in the domestic economy. The sector has gained the confidence of foreign institutional investors (FIIs) and fund managers alike. Even though the sector has been an important component of many equity diversified schemes, currently only two funds completely focus on this space.

This week, ET met up with Gautami Desai, fund manager, UTI Banking Sector Fund, and Sunil B Singhania, fund manager, Reliance Banking Fund, to gauge their views on the sector and the composition of stocks in their respective portfolios. It is interesting to note that while both these funds differ in their stock composition, the returns they have generated are more or less similar. Here are excerpts from the interview:

What is the ideal number of stocks you hold in your portfolio?

GD: On an average, we hold 15-20 stocks.

SS: The ideal number of stocks at any given time is 15-20 stocks.

How come the participation of finance companies appears to be low in your portfolio?

GD: We have non-banking finance companies (NBFCs) in our portfolio, but one may not find brokerage firms, since we feel the valuations are overstretched in that segment.

SS: We invest wherever we find opportunity. The banking sector itself is very huge and the percentage of NBFCs is very small. As such, we look for a proper mix of public and private sector banks, as well as NBFCs.

Reliance Capital has been doing pretty well on the bourses, but it does not appear in your portfolio.

GD: We are not very comfortable with the valuations of this scrip.

SS: Reliance Capital is the immediate parent of the fund holding group. So, we dissuade ourselves from investing in this stock. We believe we are sacrificing our returns by not investing in Reliance Capital, but we intend to maintain our stand on ethical grounds.

How come outperforming stocks like Axis Bank, HDFC and HDFC Bank are not part of the portfolio of Reliance Banking Fund?

SS: Not investing in these stocks was a big mistake on our part. We believe our returns would have been much higher if we had invested in these scrips.

UTI Banking Sector Fund appears to be bullish on Karnataka Bank. It has been in your portfolio since a very long time now.
GD: Karnataka Bank has good valuations and moreover, it is a part of the merger & acquisition story. We expect its merger in the near future.

What is the outlook for public sector banks?

GD: Private sector banks are doing better than PSUs. Hence, we are gradually reducing our exposure to PSU banks. However, State Bank of India (SBI) is an exception and we do intend to hold it since it has attracted a lot of FII interest.

SS: I think public sector banks are doing well. We have PSUs like Dena Bank, South India Bank, Bank of Maharashtra and Andhra Bank in our portfolio, which have generated good returns and SBI is doing exceptionally well too.

What are your expectations from September quarter results?

GD: The second quarter results are expected to be a slight disappointment, mainly on account of the slowdown in credit growth in the past six months. The margins looked good in the previous quarter, but this time round, we expect margins to be a little compressed as the deposits will be re-priced. However, there is a positive element in the market in the form of expectations of rate cuts and people are factoring this in. Thus, stock prices should not be adversely affected.

SS: We do not expect anything negative from the results. The banking sector has to keep pace with the growing economy. We expect at least 15-20% growth in this sector in the next 5-10 years.

What are your views on the current market volatility?

GD: We are a little cautious on the banking sector. Currently, we are holding on to the existing portfolio and gradually look forward to reducing our exposure in PSU banks, but we are not too keen on investing in brokerage firms.

SS: The market will always remain volatile. In fact, volatility is a good opportunity to buy good stocks.