Mutual Funds Performance vs Benchmark Performance

How would you judge whether you have scored good marks in an exam? How do you define “good”? If you had very very easy test and most of the questions were easy, would you call 80/100 a great score? NO! . In the same way, if the exam was very very tough and made everyone cry, but you scored 75/100. Would you call it a great score then? Yes! So the point I want to make is there’s always a benchmark in any area to decide if the performance was good or bad. If you have done better than the benchmark, you did well, else you did bad.  This is exactly how mutual funds are to be judged. You can’t just say a mutual fund has performed bad or good based on the returns it has given in a time frame.

What is a Benchmark?

Each and every mutual fund has a mandate and rule defined on where will it invest and in what proportion. Like if a mutual fund says that it will invest in all the large cap companies in India, then its benchmark would be mostly NIFTY, because NIFTY is the indicator of the large cap companies. And the whole point of investing in a large cap mutual fund is that it should give you better returns then NIFTY because you can always invest in NIFTY and get the returns without any fees or risk. So only if a large cap equity mutual fund beats NIFTY, you can say that it performed Good. Because if it does not then it has performed badly even after you paying him the fees, what’s the point of paying the fees and getting returns lesser than the Index which gives you some returns anyways.
In the same way a Small Cap Mutual Fund would have CNX MID CAP. One can just buy that Index and get returns from it based on the movement of the stocks in that benchmark. A mutual funds tries to take a call on what stocks to select and when to get rid of them to generate superior results and only if it can beat its benchmark, we can say that the mutual fund performed better that it’s benchmark.

Bad Market Performance in last few years

So in any mutual fund, there is a benchmark and you can say that the mutual fund performed good or bad in a time frame only if the returns from mutual fund is better than its benchmark for that particular period. Now based on this very simple rule, lets see some cases. In the last few years, stock markets have performed badly. This bad performance from markets will obviously affect mutual funds performance too. So if a mutual fund has not given double digit returns, can we conclude that mutual funds are bad investments? No.
Sandeep asked a question related to this 

I was told that HDFC Top 200 is an excellent fund . But I invested around 50,000 in that fund last year and now my fund value is near 46,000 . Is this fund really good ?

This kind of questions come to all the investor’s mind, this happen when you dont know how exactly you should judge a mutual fund’s performance. The only way here to say is HDFC Top 200 did good or bad in last 1 yrs is to see if its return is more than its benchmark or less than its benchmark and to what extent?
HDFC Top 200 example 
If you look at HDFC Top 200 returns in last 1 yrs from today (27th Apr 2012) , its return has been -9.8% . Now anyone hearing that kind of return will scream – “Oh .. thats really bad” . But when you look at its benchmark (which is BSE 200) , you can see that its benchmark has given around -12.06% So you can clearly see that HDFC Top 200 has outperformed its benchmark by 2.26% which means that it has done a better job.
Note that mutual funds have stocks as the underlying assets in which they invest, so mutual funds performance will depend totally on stock markets performance and in last 5 yrs, its not mutual funds which have performed badly, its actually stock markets, Mutual funds just mimick the portfolio’s in some manner and the real parameter of how good or bad they have done is to see how they have performed compared to the risk-free benchmark they are following.
Now coming back to the same example of HDFC Top 200 , it has given around 22.6% returns CAGR in last 3 yrs , but its benchmark (BSE 200) return was just 16.2% , hence you can say that HDFC Top 200 has done a good job and outperformed its benchmark by 6.2% on yearly basis, thats really a good number.
Escorts Tax Plan Example 
Now lets look at 5 yrs performance of a tax saving fund called Escorts Tax Plan , The fund has give -15% return on absolute level in last 5 yrs (1 lac became 85,000) and an agent can say – “Sir – markets were doing badly in the same time, thats the reason the fund has given bad return’s , in future it would do great” . In this case all you need to ask is – “Fine, I can understand that market performance affects fund performance, but has it performed better than the risk-free benchmark it was following ? “
If you look at its benchmark “Nifty”, it has given 24% positive return in the same period. Means that the fund has performed worse than the index which is totally free, while the fund has not performed even after bring run by professional fund managers. Then whats the use of that fund.
So now you have a simple rule to judge a mutual fund performance

• If Fund Performance > Benchmark  - The fund performance was good
• If Fund Performance < Benchmark  - The fund performance was bad

Note that the duration should be good enough like more than 1 yr atleast to say anything and the gap between the fund performance and benchmark performance should also be considerable. You can say that a fund was bad just because its returns were 8% and benchmark was 7.8%. that is very much close and does not conclude much.
Now a fairly good way of choosing a mutual fund is just based on how it has performed in last many years compared to its benchmark. So I am putting up some top funds which has done very good compared to its benchmark

Some Top Mutual Funds vs Benchmark Returns

Following is some of the very good potential mutual funds for 2012 and they are really doing good overall . Lets see their returns overall for 5 yr and 3 yr timeframe along with their benchmark returns. You can see some funds outperformed their benchmarks with huge margins . For example Quantum Long term equity fund has return 28.38% in 3 yrs compared to just 14.78% from its benchmark which is Sensex . Thats 100% more , really brilliant .

So overall the learning is that if you want to find out some good performing mutual funds , you should be looking if a mutual fund has outperformed its benchmark over several years with a good enough margin or not . If it has consistently done that , you can be clear that the fund management is going well

Best Mutual Funds House

Which is the best mutual fund House ? Is HDFC better than DSP Black Rock or Reliance ? A very good way of looking at it is to see all the equity oriented mutual fund schemes of a fund house and check how many of them have outperformed its benchmarks in different time frames like 3 yr, 5 yr and 7 yrs?
For instance, Birla Sun life which has 16 equity funds with more than 5 yrs of history, but out of those 16 funds almost 8 of them have not outperformed its benchmarks, which is not very encouraging. The same kind of scenario is with SBI & UTI mutual fund houses.
On the other hand if you see HDFC , Franklin templeton, Reliance & ICICI Prudential Fund house, they have done much better, a higher percentage of their schemes has outperformed their respective benchmarks. Its a very clear indicator of a AMC overall performance . So its very important to understand which AMC’s are doing better over their whole basket of mutual funds and which are not. Below is an info graphic which I have re-aligned using a PDF document published at Livemint article here . Credit goes to Kayezad E. Adajania from Livemint who has done this research. Good show !

100% of HDFC Funds outperformed their benchmark

You can see in the above graph that only HDFC is one fund house which has all its equity schemes outperform its benchmarks in 3 yr, 5yr and 7 yr category. Which Mutual funds are you invested in? Do you feel you should move to the fund houses which have shown better performances ?

6 changes in mutual funds done by SEBI recently – Good or bad ?

Recently, SEBI has made some of the biggest changes in mutual fund regulations to revive the mutual fund industry.  Some of the measures which are made are said to be helping AMCs and distributors more than investors. We will look at 6 major changes done in the meeting and the full detailed circular will come in few days.

1. Higher expense Ratio allowed

Do you know that close to 45% of mutual funds money comes just from Mumbai? Around 87% of AUM in mutual funds comes from top 15 cities in India, which means that only a minuscule 13% of the mutual funds money belongs to small cities in India. Penetration in other parts of country is very, very small and not encouraging. Now SEBI has proposed to increase the Expense ratio by 30 basis points (0.3%) if the mutual funds are able to increase their reach to smaller towns in India and increase their contribution to 30% . In short, if a mutual funds is able to get more than 30% of its AUM from other than top 15 cities in India, they can charge a 30 basis points expense ratio higher than its current expense ratio. Lower contribution means proportionately lower expense ratios.
The big effect, is that now there will be higher expense ratio for everyone. So inflow from smaller cities will affect investors from bigger cities. Investors from big cities will have to bear the burden of increased expense ratio.

2. No internal limits in Expense Ratio

A very big change which goes in favor of AMCs is the removal of internal limits on the expense ratio and for what it can be used. Earlier there was a limit on the AMC to charge up to 2.5% expense ratio (up to 100 crores AUM), but it was allowed to charge only 1.25% as Fund Management Charge and 0.5% as distribution charges. The rest was taken as their profits.  So earlier suppose a Mutual Fund charged 2.25% as the expense ratio, then they compulsorily had to allocate 1.25% as Fund Management Charge and 0.5% for distribution.
But now, that sum limit has been removed and mutual funds are allowed to allocate expenses the way they want. This means you can now see more advertisements, more commissions to the distributors and more aggressive selling. While this is a very big change which will make AMCs happy, they will still have to keep a check on the expense ratio because of competition from other AMCs.

3. Putting Exit Loads back into the scheme

You must be wondering what happened to exit loads earlier, where did it go? When a investor got out of a mutual funds , he was charged an exit load if he quit before 1 year. That money was not transferred back to mutual fund, nor was it the profit of the mutual fund. It was actually transferred to a separate fund, which was used for sales, distribution and marketing. But now, when a investors exits prematurely, the entire exit load money will be credited back to the scheme account and will not be treated as AMC profit. However an equal amount (capped at 20 basis points) can be included in expense ratio back to compensate the AMC loss due to outgoing investors, which means that overall, for the investors on one hand,  the AUM gets increased (NAV increased marginally because of exit load money coming back to them), while at the same time they’re paying more in expense ratios, so the net effect of this would be, no gain no loss to both the parties.

4. Direct Plans with lower expense ratio

SEBI has directed that for each mutual fund, there has to be a equivalent Direct Plan with a lower expense ratio. So for every mutual fund XYZ, now you will see XYZ and XYZ-Direct options. So XYZ will come with higher expense ratio, and XYZ-Direct will have lower expense ratio. Many people who research mutual funds and like to buy it on their own directly from AMC by passing agents and other online distributors, this option will be cheaper and makes sense. However, many distributors are not happy with this move and think this will “kill” their business, all because investors will then just invest into the direct options.
Note, SEBI has not yet clarified by how much lower, the expense ratio of the Direct plans will be and if it will be mandatory for each and every plan or just some categories. We’ll need to wait for the final circular, to find out.

5. Service Charge will be paid by Investors directly

Earlier the service tax was borne by mutual funds themselves. But now service tax can be passed to investors and charged from the AUM of the Fund. Srikanth from FundsIndia wrote on his blog why it seems fair

SEBI has ruled that service tax that has thus far been borne by the AMCs can now be passed through to the investors. Basically, this is how it is done in all other industries. Anybody who has received an invoice for a service will be familiar with the “Service tax extra” caveat to the quoted amount. AMCs provide a service (fund management service) to investors and will rightfully start charging the investors the requisite amount. This charge, however, is apparently likely to be 2-3 bps (according to the press release). My thought is that this 2-3 bps is more likely to be the blended overall impact across schemes. For equity schemes, it is likely to be higher, more in the 7-8 bps range for big funds and 10-12 bps range for smaller funds (service tax is charged on the amount that an AMC gets to keep from the expense ratio, so it will differ from AMC to AMC and scheme to scheme).

6. Financial Advisers and Distributors separation

Very soon, financial advisor regulation will come into effect. This means, now there will be some minimum qualification, registration and guidelines for financial advisers. They will have to register with SEBI and a separate body of regulators will soon be created for this. A financial advisor is a professional who advises his clients on investments for a “fee.” The important distinction being, he wont be able to earn any money from commissions by selling financial products. If a person wants to sell financial products and earn commissions out of it, then he will not be able to “advise” the clients. But CA, MBA, and several other professionals are kept out of this rule and even mutual fund agents who have a valid ARN code are kept out of this rule because their basic advice is seen as the extention of their work. There is still more clarity required on this, so don’t conclude anything yet.

What does it mean finally ?

If you are wondering what it means overall in single sentence, then it means increased costs (expense ratio) and lower returns for investors, but it may not be that bad as you think. Dhirendra Kumar of Valueresearchonline feels that the expense ratio increase will be in range of 0.1% to 0.4% range.

All in all, investors could see a 0.1 to 0.4 per cent increase in the fee that they effectively pay to have their funds managed. Any increase ends up reducing the returns that funds generate but all in all, this has been a deftly managed round of reforms that could get a decent bang for the buck.

Lets see all the changes and what effect it had finally on different aspects

Criteria	Before	Now
Expense Ratio Charged	Maximum 2.5% allowed (depending on the AUM)	Now additional 30 basis points is allowed if the fresh inflow’s from smaller towns
Internal Limits on Expense Ratio	Internal Limits of 1.25% for Fund Management Charges, 0.5% for distribution costs	No internal limits now
Where did Exit Load go ?	Earliar it went to a seperate fund used for marketing and sales	Will be added back to Scheme AUM, but will not benefit investors because of equivalent increase in expense ratio (limited to 20 basis points)
Direct Scheme of Mutual Funds	Earliar there was no distinction between a investment made by agent or directly with AMC	A new category called “Direct” will be introduced which will have a lower expense ratio.
Service Tax	Borne by AMC	Borne by Investors
Distinction between Adviser and Distributor	There was no distinction earlier	The regulations are now coming in . Advisor and Distributer will be separated.

What do you think about these changes ? Which changes do you think are in favor of investors and which are against them. How will this affect your investments in mutual funds in coming months and years ? Are you happy about these changes ?

સરકારે અદાણી સેઝ રદ કર્યોઃ કંપની ફરી અરજી કરશે

સરકારે સેઝના ત્રણ નિયમોના કથિત

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ભંગ બદલ મુન્દ્રા ખાતે અદાણી ગ્રૂપનો દ્વારા ડેવલપ થઇ રહેલો 1,840 હેક્ટરનો મલ્ટિ - પ્રોડક્ટ સ્પેશિયલ ઇકોનોમિક ઝોન રદ કર્યો છે .

વાણિજ્ય મંત્રાલયના અધિકારીએ જણાવ્યું હતું કે , અદાણી પોર્ટ એન્ડ સેઝ ( એપીસેઝ ) નો પ્રોજેક્ટ ડિનોટિફાય કરવામાં આવ્યો છે કારણકે દરખાસ્ત ઇન્ટિગ્યુઇટી નિયમનું પાલન કરતી નથી અને ટેક્સ ફ્રી ઝોનની મંજૂરી માંગતા પહેલાં સેઝની સાઇટ ખાલી હોવી જોઈએ તે નિયમનો ભંગ કરે છે .

વધુમાં સાઇટ પરિવહનના યોગ્ય સાધનો વગર ચારે બાજુથી ઘેરાયેલી છે . તેમણે વધુમાં જણાવ્યું હતું કે , કંપનીએ આ ત્રણ નિયમોનો ભંગ કર્યો છે . આને કારણે અમે તેમનો સેઝ ડિનોટિફાય કર્યો છે .

અદાણી પોર્ટ એન્ડ સેઝના પ્રવક્તાએ જણાવ્યું હતું કે , ' કંપની 6,473 હેક્ટર જમીન પર મલ્ટિ - પ્રોડક્ટ સેઝ ધરાવે છે જેને ઉપરોક્ત સેઝ સાથે કોઇ સંબંધ નથી . અમે ભવિષ્યમાં વિસ્તરણ માટે વધારાની 1,840 હેક્ટર જમીન માટે મંજૂરી માંગી હતી .

મંજૂરી નકારવામાં આવી હતી કારણકે સત્તાવાળાઓને લાગ્યું કે સૂચિત વિસ્તારમાં કન્ટિન્યુઇટીનો અભાવ છે . અમે ટૂંક સમયમાં આ વધારાની 1,840 હેક્ટર જમીન માટે મંજૂરી માંગીશું .

સરકારી અધિકારીએ પણ જણાવ્યું હતું કે , જો પ્રોજેક્ટ ડેવલપર આ ત્રણેય વિસંગતતાઓ દૂર કરે તો તેઓ નવેસરથી મંજૂરી મેળવવા માટે વાણિજ્ય મંત્રાલયમાં બોર્ડ ઓફ એપ્રુવલનો સંપર્ક કરી શકે છે . મંગળવારે નેશનલ સ્ટોક એક્સ્ચેન્જ પર એપીસેઝના શેર 3.12 ટકા ઘટીને 119.60 ના સ્તરે બંધ રહ્યાં હતા .

સેઝ માટેના કન્ટિન્યૂઇટીના નિયમ મુજબ ડેવલપરે જમીનના એક જ પટ્ટામાં ઝોન ડેવલપ કરવાનો હોય છે . વધુમાં , જમીન કોઇ પણ વાણિજ્યિક માળખા વગર ખાલી હોવી જોઇએ .

તાજેતરમાં ડેવલપર્સની વિનંતીને પગલે કેટલાક અન્ય ટેક્સ - ફ્રી એનક્લેવ્સ ડિનાટિફાય કરવામાં આવ્યા છે . મુખ્યત્વે મિનિમમ અલ્ટરનેટ ટેક્સ ( મેટ ) લાદવા જેવા કર લાભ પાછા ખેંચાવાને કારણે ડેવલપરોએ તેમના ઝોન સરેન્ડર કરી દીધા છે .

દરમિયાન સરકાર સેઝને વધુ આકર્ષક બનાવવા માટે સેઝ માટે નવા નિયમો લાવવાનું વિચારી રહી છે . સરકારે 2014 થી પ્રોફિટ લિન્ક્ડ ટેક્સ ઇન્સેન્ટિવ દૂર કરવા જેવા નિર્ણય લેતા ટેક્સ - ફ્રી એક્સપોર્ટ ઝોનની ચમક ઝાંખી પડી છે

How LIC policy Works ?

There are so many LIC policies with different names ? For example – LIC Jeevan Saral , Jeevan Anand , Jeevan Tarang and many more LIC policies. So almost every person in India holds a LIC policy, but majority of them do not know how these LIC policies works ?

How LIC Policies Work ?

Most of the investors just take things for granted and keep dragging the policies assuming it would be the best thing in their financial life. In this article I will show you how Life Insurance Corporation (LIC) policies work and talk about few aspects like LIC bonus, LIC premiums and different other aspects which will help you in understanding how these policies work.

Moneyback Plans or Non-Moneyback Plans

A lot of LIC policies pay you on a periodic basis like at the end of 4th, 8th and 12th year, and then finally at the end of the maturity period. These policies are Money back policies, the example can be LIC Jeevan Surabhi or LIC Komal Jeevan. A lot people get attracted to these moneyback plans because they get money “many” times in between and it looks attractive to them, but the premiums are generally higher for these policies.
Then there are LIC policies which do not pay you back periodically but only pays you at the end of the maturity period. They are generally termed as normal Endowment plans. Some examples are Jeevan Anand and Jeevan Tarang

LIC Bonus & Additions to your Policy

The biggest confusion I see is generally in Bonus by LIC. One thing which investors in these policies don’t know and don’t care for to find out is that there are different kinds of bonuses in LIC policies and they are calculated differently. Let’s see them one by one.
1. Simple Reversionary Bonuses
Generally when we say “Bonus”, it is this “Simple Reversionary Bonus”, which is declared per thousand of the Sum Assured on annual basis at the end of each financial year. This bonus is declared today, but is paid at the end of maturity period only or on death, whichever is earlier. So for example if you hold a policy of Rs 10,00,000 Sum assured and the bonus for this year is Rs 60 per thousand sum assured, then your bonus amount is Rs 60,000 for this year, but you will only get it at maturity (after many many years) or on death, but by then it’s worth would be much lesser than today (this 60,000 today and 60,000 after 20 yrs).
A very important point to note here is that, if you surrender the policy, you don’t get the actual accrued bonus because it’s the future value, you will only get its reduced amount in today’s term and its very less. Also note that you are eligible to get reduced Accrued Bonus only if your policy has completed 5 premium paying terms. (This thread on our forum discusses Jeevan Anand in good detail)
2) Final Additional Bonus (FAB)

There is another kind of bonus in LIC which is generally called as “FAB” or Final Additional Bonus and it’s paid to those policies which are of a longer duration and has run for more than 15 yrs (The premiums are paid for all 15 yrs). This is generally a token of appreciation for being with the policy for long duration. The FAB is generally not paid for policies which have “Guaranteed Additions” (explained below). Here is an indicative list of FAB.

3. Loyalty Additions
This is again a bonus which is declared for being loyal to the LIC and completing a longer tenure. Generally it’s declared at the end of the policy, but for some policies it might be applicable after completion of 5 or 10 yrs. For example – In Jeevan Saral, the policy holders will earn such additions after a minimum of ten policy years have been completed.  This is usually an amount declared per thousand of sum assured depending on the corporation’s performance. Loyalty additions are totally non-guaranteed.
4. Guaranteed Additions
For a lot of LIC policies there is a term mentioned like “Guaranteed Additions”. These are assured sums which are given to policyholders for a specific period at start or end of some event along with the sum assured at the end of the term. Like for example, , Jeevan Shree-1 policy provides for the Guaranteed Additions at the rate of Rs. 50/- per thousand Sum Assured for each completed year for first five years of the policy. The Guaranteed Additions are payable along with the Basic Sum Assured at the time of claim.

Surrender Value

Most of the people who buy any Traditional Policies from LIC or any pvt companies’ don’t think a bit about terms and conditions on exiting the policy much before maturity. A general assumption is that they will at least get their paid premiums back with sum interest. I have seen so many cases like that where people are literally shocked to hear that they will get peanuts or nothing from their policy if they choose not to continue the policy. Surrendering of the policy works this way -

You will not get anything back if you stop your policy without paying for 3 years. Almost every traditional policy attains minimum surrender value after the policy has run for 3 yrs.

After 3 yrs, if you surrender your LIC policy, still you will only get a small fraction of your total paid premiums that too excluding first year premiums. So suppose you have a policy which has Sum assured of 10,00,000 for 20 yrs term with Rs 50,000 premium per year. If you have decided to surrender your policy after paying 5 premiums (you paid 2,50,000 in 5 yrs i.e. Rs 50,000 each year), then you will get around 30%-40% of 4 premiums paid (first year premiums are excluded), hence the total would work out to be only Rs 60,000 – Rs 80,000 only + proportionately reduced amount of accrued bonus if any (only because you completed 5 yrs, else you will not get this also).

A very important point to Note : A lot of people do not like to close their LIC policies after paying for 1-2 premiums because they will not get anything back for the 1-2 premiums already paid. They think that they will surrender the policy after completing 3 yrs, so that they will get at least something back. This is total emotional decision and not mathematical, because if you do maths you will see that surrendering the policy after 3 yrs is the worst decision if you have already realised that you should not continue with the policy. For example, if you are paying Rs 10,000 premium per year and completed 2 yrs, you paid Rs 20,000, If you close this policy now, you will lose all money (Rs 20,000), but you can save Rs 10,000 as third premium. If you choose to complete 3 yrs and then surrender, then you have paid Rs 30,000 and you will get back 30% of 2 premiums (first year premium not included), so you get back Rs 7,000 (loss of 23,000 as you paid 30,000 and got back 7,000). Do the math if you completed 1 yr only yourself, its more worst!

Note that surrender value is nothing but your future maturity value reduced to today’s value, so if the maturity value is Rs 10,000 after 20 yrs and if you want it before LIC will pay you the Net present value as per today’s term.

Paid up Policy

A lot of times when you have completed 3 yrs of policy, you might not want to get your money back immediately, in which case you can made your policy paid up (just stop paying premium and it becomes Paid up). When you do this, you can stop paying further premiums but you will get your total premiums paid + accrued bonus any at the end of the maturity period. This might work out better sometimes compared to surrendering if you were going to invest the proceeds in some debt instrument.

What are mortality charges

A lot of agents advertise these policies under the head “Free Insurance Cover“, But all the policies charge premium or charges for providing Insurance cover and it’s called “Mortality Charges”, these are the same charges which are there in Term plans and ULIP’s, but may be in a different way, so nothing is free, some part of premium goes in covering you and rest of it is invested in Debt instruments which can give you assured returns at the end of the maturity.

Loan on LIC Policy

You can also get loans at the time of crisis on your LIC policies, but the maximum loan amount available under the policy is 90% of the Surrender Value of the policy (85% in case of paid up policies) including cash value of bonus. The rate of interest charged on loans is at 9% to be paid half-yearly. Is there any other terms and conditions which you dont understand in your LIC policies ? We can all help you understand it in comments section .

Are you looking for surrendering your LIC Policies ?

By now you must have got a good understanding of your LIC policies and how they work. You can find out the return of your policies using the IRR method taught in this article. If you feel that you want to continue your Policies then well and good. But if you feel that you want to close your policies, do it soon because delaying the decision will cost you a lot in long run. I hope its clear to you how your LIC policy works for you .

How is interest on saving bank account is calculated

A lot of people do not know interest is calculated on their savings bank account.In this article I will explain all the aspects of interest on a savings bank account. Earlier all the banks had the same interest on their saving bank accounts, which was 4% , so a person had no choice in terms of interest rate, you would have got the same return with any bank. But, RBI has recently de-regulated interest on saving bank account and now banks can decide the interest they want to pay on saving bank. This has had a positive impact for customers, because now due to competition, banks like Kotak Bank and Yes Bank have started offering higher interest rates like 6% or 7% and using that parameter to attract lot of customers.

How is interest on saving bank is Calculated ?

Coming to the main question, the procedure to calculate saving bank interest, we will first see how it was done earlier and then we will see how its done now.
Old Method
Earlier, Banks used to pay 3.5% interest on the minimum balance between 10th and last day of the month. This was not a very customer friendly method because if you kept Rs 5,00,000 in your saving account for the whole month and on 26th, & let’s say you take out 4,90,000. You would have got interest only on Rs 10,000 @3.5% , which is just Rs 28.
New Method
Now a new method is used to calculate the interest on saving bank account which is very fair.  From April 1, 2010 , as per the RBI circular on new guidelines on saving bank interest calculation; this is the rule for interest calculation.
“The interest has to be calculated on daily basis for the closing day balance” – It’s that simple. So let’s say the interest rate is 4% , then you will get interest @4% on daily basis for your closing balance and it will get accumulated , but it will be paid back to your account only after 3 or 6 months. While RBI wants all the banks to pay the interest every quarter, each bank has its own criteria , like ICICI Bank pays it twice a year right now in Sept and March.
So now, if you see the same example we discussed above, with the new method of interest calculation, the interest will be 4% on 5 lacs (Rs 1,369) for 25 days (from start of month to 25th) and on 10,000 for next 5 days (Rs 5) (26th – 30th) . So the interest would be total Rs 1,374 . In the old method it was just Rs 28 . Can you see the gigantic difference?

High Interest on Saving bank from some banks

You must have seen some banks are now offering 6-7% of interest rate and they have dual interest rates, like 5.5% below 1 lac and 6% above 6% (in case of Kotak Bank) , which means that you will be getting 5.5% on the amount below 1 lac and only on the difference amount above 1 lac, you will get 6% interest . So if you have a balance of Rs 1,50,000 in your bank (lets say kotak bank) , you will get 5.5% on 1,00,000 and 6% on 50,000 .

You should be more interested in interest below 1 lac

If you see the average amount kept in saving bank account , it should not cross 1 lac for most of the people . While there are people who park their money in saving bank account for some time, but it does not happening with most people. So if some bank is giving higher interest for amounts above 1 lac, that’s a secondary benefit for you, not the basis of selection of bank. Because if you are anyways ready to keep a balance of more than 1 lac, why not just create a short term deposit online,which can be broken anyways or just activate your sweep in account option, so that an amount above a target amount automatically gets converted to FD and earn more money.
Do you now understand how interest on saving bank account is calculated? Will it help you manage your bank money in a better way?

IMPS – Online Money transfer in 30 seconds from your Mobile Phone

IMPS or Interbank Mobile Payment Service is a technology which offers an instant electronic fund transfer service through mobile phones between two banks in India. There are other two money transfer systems called NEFT and RTGS already in India, but they are not a mobile payment system like IMPS and they’ll  take some time to get settled. IMPS is a real time system of money payment.  The service has been developed by National Payments Corporation of India (NPCI), a section 25 company formed by Reserve Bank of India (RBI) and Indian Bankers Association (IBA). Here’s a testimonial from Harsh, who transferred money using IMPS…

Recently I issued a cheque from one of my account and did a NEFT transfer to build balance but NEFT failed to do the job in 48 hours, in the middle of night i started searching for how to do a instant transfer and then I got to know of IMPS. Registration happened instantly in matter of minutes and shockingly money transfer happened in micro seconds even faster than a google search – (via)

The transfer limit through IMPS is defined by RBI in the Mobile Payment Guidelines issued to banks. The customer can transact on IMPS subject to a daily cap of Rs. 50,000/- per customer overall for transactions through mobile for the funds transfer.

How to do Money Transfer using IMPS

All you need to make a transfer through IMPS system is your mobile number and MMID number . MMID number is a 7 digit random number which you get by registering for IMPS facility with your Bank. But make sure your mobile phone is activated before you register for MMID. Note that both sender and receiver should have their phone and MMID number from their respective banks. Once you have that you can transfer the money using sms or internet banking . A lot of banks also provide a mobile application which you can download from bank website and install on your phone. Note that before sending the money to the receiver, you should register them once as you do for any bank account.  The image below gives you good idea on what needs to be done for carrying out an IMPS transfer.

What happens with your do a IMPS Transfer through Mobile ?

When you make a IMPS transfer, your sender mobile first sends this information to the sender bank , which checks the data; whether your MMID is correct or not and if it matches with what it has in its system. If it’s all correct, it debits the money from your bank account and transfers this to the NCPI server, which then transfers it back to the receiver’s bank. The receiver bank goes about checking everything again and then sends the status of the whole transaction to NCPI, which passes it back to Sender’s bank. Both Receiver and Sender are then updated about the transaction through SMS. All this normally takes just about  15-30 seconds for everything to happen and the money gets transferred near instantaneously.

5 Advantages of IMPS over NEFT and RTGS

Let me enumerate 5 major reasons why you want to register with your bank for IMPS and generate your MMID as soon as possible. IMPS offers some major advantages over NEFT or RTGS money transfer and here they are

1. Instant Transfer of Money

When you do an IMPS transfer, it happens instantly within few seconds, so it’s practically real time money transfer, unlike NEFT or RTGS which works in batches and takes time in money transfer. Which means in case of emergencies, you can use IMPS and it will act like a fast money transfer mechanism

2. Transfer without Internet Connection You dont need a internet connection or a computer for IMPS transfer, you can just do the transfer using your mobile phone through SMS or using the mobile application, hence you can do the money transfer even when you are travelling, all you need a mobile connection 3. Money transfer even on Holidays and outside working Hours

You can transfer the money anytime, 24X 7. With NEFT or RTGS , you can’t do money transfer on holidays or even Sundays. You can’t do it outside the working hours defined by the banks. But with IMPS you can literally make transfers in early morning, midnight or whatever time you want.

4. No Need to disclose Bank account number and other details

All you need for making the transfer is mobile number and MMID , so you don’t need to disclose your actual account number or even the bank name.

5. Easy, Simple and Secure

Making a IMPS money transfer is so easy.  All you need is the MMID, Phone number and the amount. The money gets transferred easily so fast. It makes easy for those who fear technology and do not want to deal with it . You can teach this to your parents or some one who is not that technologically advanced.

IMPS Charges

The charges depends from banks to banks . While exact charges details you can find from your respective bank, it seems the charges are extremely low and are on per transaction basis, not on the limit of money. It seems to be Rs 5 per transaction (not confirmed) yet. Apart from the charges from banks for using the service, if you are doing the money transfer using SMS , you will have to pay standard sms charges . However if you use internet or the mobile application, there will be no charges apart from the service charges.

Money Transfer Limit under IMPS

The limit is defined by RBI in the Mobile Payment Guidelines issued to banks. The customer can transact on IMPS subject to a daily cap of Rs. 50,000/- per customer overall for transactions through mobile for the funds transfer. Transactions up to Rs. 1000/- can be facilitated by banks without end-to-end encryption.

Which Banks are part of IMPS Facility

As of now 52 banks are the members of IMPS facility. Some of them have started the IMPS service and some will start it very soon. Those are

• ICICI Bank
• Axis Bank
• State Bank of India
• Indian Bank
• Kotak Mahindra Bank
• Oriental Bank of Commerce
• Union Bank of India
• Andhra Bank
• Canara Bank
• HDFC Bank
• Lakshmi Vilas Bank
• Bank of Baroda
• Indian Overseas Bank
• Bank of India
• Punjab National Bank
• South Indian Bank
• Vijaya Bank
• IndusInd Bank
• UCO Bank
• Federal Bank
• State Bank of Hyderabad
• Citibank
• State Bank of Bikaner and Jaipur
• Punjab and Maharashtra Co-operative Bank
• The Thane Janata Sahakari Bank
• Development Credit Bank
• Dombivli Nagari Sahakari Bank
• State Bank of Travancore
• Catholic Syrian Bank
• Syndicate Bank
• Yes Bank
• State Bank of Patiala
• Allahabad Bank
• Karur Vysya Bank
• The Greater Bombay Co-operative Bank LTD
• Corporation Bank
• IDBI Bank
• Tamilnad Mercantile Bank
• United Bank of India
• Standard Chartered Bank
• Bank of Maharashtra
• Central Bank of India
• Dena Bank
• Dhanlaxmi Bank
• ING Vysya Bank
• Janata Sahakari Bank, Pune
• Karnataka Bank
• State Bank of Mysore
• The A P Mahesh Urban Co-operative Urban Bank
• HSBC Bank

you can look at the latest list of all the banks and their details here  What do you think about this technology ? Will it help in your financial life ? Are you going to use IMPS facility to money transfer through your mobile ?