[Investors Please Listen] Beware - Personal loan borrowers

Financial News. Simplified. Weekly Facts Close Change %Change BSE Sensex 13,736.5 1,863.6 15.7% Re/US $ 47.4 2.4 4.8% Gold Rs/10g 14,435.0 455.0 3.1% Crude ($/barrel) 58.6 2.3 4.1% Weekly change as on May 21, 2009 Beware - Personal loan borrowers PersonalFN Impact Indicator CIBIL - Credit Information Bureau (I) Ltd. and TransUnion (a global leader in credit and information management) have launched the Personal Loan Score in India - a product that will keep a tab on personal loan defaults. This score will predict the likelihood of delinquencies by personal loan borrowers. The score will enable lenders to watch out for potential defaulters as they expand their retail lending operations and thus provide them with the tool to filter out these applicants. On the other hand, individuals with low "probability of default" scores, will actually be able to expect lower interest credit, as their lower risk profile, is attempted to be quantified. A mortgage frauds list , which will have a database of all frauds committed on lenders will enable lenders to ensure they do not lend to such individuals, will be launched soon. Yet another product will list all mortgages created against loans taken, enabling lenders to confirm that the property they were lending against was free and available as security. The rules and processes of consumer lending and specifically mortgage lending, in India, are about to change. The disciplined borrower will have life easier and defaulters will find that continuing to borrow will become increasingly impossible. Overall, the credit culture will improve and lenders risk will reduce. Credit flow can actually increase. MIPs back in form - post attractive returns PersonalFN Impact Indicator Monthly Income Plans (MIPs), which were loathed by investors some time back for skipping dividend, are showing impressive returns at the moment. The graph below depicts the average returns of top 10 MIPs over 1-Yr period. Their average return over 6-Mth period have been around 17% pre-tax, which is much higher than what fixed deposits offer. (Avg. returns of top 10 MIP's as on May 20, 2009) MIPs generally invest 80% of the corpus into debt instruments and remaining in equities. The pick-up in their performance can be attributed to the recent rally in the equity markets and also improving debt market condition. Investors should consider adding MIPs to their portfolios if they wish to clock higher returns than those offered by fixed deposits or bonds; at the same time they should be willing to take on commensurately higher risk as MIPs are market-linked. Fund houses push infrastructure funds again PersonalFN Impact Indicator With the optimism surrounding the stable government and anticipation of huge spending on the infrastructure sector, fund houses are now busy pushing infrastructure funds. Besides, few fund houses are also planning to launch infrastructure funds. Risk and return of infrastructure funds vis-à-vis diversified equity funds Diversified Equity Funds Std. Dev Return in Yr 2008 (%) Return in Yr 2007 (%) DSP Equity 7.9% -50.35 68.71 HDFC Growth 7.8% -48.76 65.02 Birla Frontline 7.8% -49.00 59.93 HSBC Equity 7.7% -48.10 57.38 Fidelity Equity 7.6% -50.45 53.64 HDFC Top 200 7..8% -45.49 53.17 Reliance Equity 6.9% -45.52 50.98 UTI Equity 7.1% -45.81 45.68 ICICI Dynamic 7.6% -45.33 39..46 Infrastructure Funds Std. Dev Return in Yr 2008 (%) Return in Yr 2007 (%) ICICI Pru. Infra. 9.5% -51.71 91.57 Canara Infra. 10.1% -59.34 88.26 Sundaram CAPEX 9.1% -62.55 88.18 Tata Infra. 9.3% -57.90 82.28 DSP T.I.G.E.R. 9.3% -58.38 81.00 Sahara Infra. 8.6% -55.00 78.62 Birla Infra. 9.1% -60.64 72.41 UTI Infra. 8.6% -56.64 70.52 JM HI FI 11.2% -72.38 65.25 From above table it is apparent that the returns clocked by infrastructure funds were relatively higher as compared to diversified equity funds in year 2007. At the same time they posted higher losses in the year 2008 as compared to diversified equity funds. Hence, these funds do not really merit inclusion in your core portfolio. Second, even diversified equity funds have exposure to the infrastructure sector as a whole. Third, the infrastructure funds offer a high-risk proposition (compare their Standard Deviation with that of diversified equity funds in the tables above). In other words, the risk-return trade-off for investing in an infrastructure fund may not be in your favour. In our view, investors would do well to understand that although infrastructure could be the buzzword for some time now, single-sector or thematic funds carry a huge risk especially when the particular sector or theme runs out of favour. SIPs prove their worth PersonalFN Impact Indicator Investors who had discontinued Systematic Investment Plan (SIPs) last year have missed the recent rally. Consider two scenarios, one where the investors had started the SIPs in Jan 2007 and have continued till date. Second scenario where they had started the SIPs but discontinued them in June 2008. The graph below highlights the return clocked by investors who had continued their SIPs were much higher than investors who had discontinued them.. The reason? The average purchase cost was lower by 8-13% for investors who had continued their SIPs as compared to investors who had discontinued them. The other important point to note here is that some of these schemes have given positive returns to investors i.e. these investors will find their portfolio in positive territory. Investors who had continued SIPs v/s investors who had discontinued SIPs. Circuit filters trip the rally PersonalFN Impact Indicator With the UPA back in 'power', equity markets opened with a big bang ensuring that 'circuit filters' were activated. Trading on both the exchanges had to be halted for the entire day on Monday (May 18, 2009). Mutual funds, like other investors, could barely buy and sell on that day. Most fund houses declared the day as 'non-business day', which means that NAVs for equity funds were not declared for that historic day. Although it was a great day for the equity markets, scores of investors felt left out yet again, as they could neither invest nor redeem their units. By failing to prepare, you are preparing to fail. - Benjamin Franklin Please Note: Impact indicators indicate the news that will impact investors in the long-term or short- term © Quantum Information Services Pvt. Ltd.

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