Decoding Demat accounts

What is a demat account?
A demat account, also known as the dematerialized account, is similar to a bank account but is meant to hold financial instruments in electronic form. Financial instruments include shares, bonds, government securities, mutual funds etc. A demat account functions similar to a bank account where securities are held and are debited or credited according to the trading activity conducted.
Before we delve deeper into the basics of demat account, let us discuss what is dematerialization.
Dematerialization is the process by which shares in physical form is converted into electronic form. Dematerialization of share is an important step to ensure seamless trading.

Why is a demat account required?
Prior to demat mode, the trading in securities was done by way of physical shares which was time consuming, lengthy, and came along with other risks such as theft and loss of share certificate. With dematerialization, the transparency and execution are faster and the risk is minimized to a great extent as transactions are now done electronically. In fact, the shares issued by way of corporate action such as the rights shares or the bonus shares also get credited to the beneficiary account seamlessly. Thus, to achieve seamless trading and investing activity along with minimal process and risk, it is important that dematerialization of securities is done. Also, it has now become a prerequisite to trade with India’s stock exchanges.

How does demat account work
A depository is similar to a bank where the investors hold shares in electronic form through depository participants (DP). India has the following two depositories –

·       National Securities Depositories Limited (NSDL) – 16-digit demat accounts with the depository starts with alphabets ‘IN’ followed by numeric digits. For example, IN23000012345678 has IN230000 is the DP ID (eight digits) while 12345678 is the client ID (eight digits).
·       Central Depository Services Limited (CDSL) – 16-digit demat account number is 16 digits long with digits in its entirety. For example, demat account number 1234567800000123 has 12345678 as DP ID with 00000123 as Client ID.

An investor has to open an account with the depository, through a DP that acts as an intermediary between the depository and the investor. A number of banks (HDFC Bank, ICICI Bank, etc.), brokers (India Infoline, Motilal Oswal etc.) and institutions function as DPs. Whenever an individual/entity buy or sell shares, respective depository participant debits/credits the account as per the trading activity carried out.


How can you open a demat account?
For investing, you need to have these three in place - a bank account, a trading account and demat account. Demat account can be opened with any bank/brokers or financial institutions. DPs charge a nominal account opening charge, annual maintenance charge, transaction charges, etc. This fee differs from DPs and customized offer for individuals is also available depending on the kind of relation the individual is willing to maintain with the DP. Opening a demat account is very easy. All you need is a form of opening account along with the following documents:

·         PAN card
·         Proof of identity
·         Proof of Residence
·         Bank details (to be supported with a canceled cheque, it is mandatory that the branch has MICR code)
·         Photograph


For seamless trading, it makes more sense to have a 3-in-1 account. For example, if the savings and trading account and demat account are with different financial institutions, making a transfer from savings to trading account for executing trade takes long and the possibility of an investor losing on good investment opportunities increases. For 3-in-1 account the fund transfer and execution is comparatively seamless:

·         Transfer fund from savings account to trading account
·         Buy/sell securities from a trading account
·         The actual credit of shares is shown in the demat account

How has demat account penetrated over the years in India?
We believe, in the last decade, the Indian capital market is moving towards paperless trading at a rapid pace. Of late, not having a demat account has now become the biggest entry barrier for participating in Indian equities. Since 2012, the number of accounts has increased significantly by 1.5x a depicted in the table below.

Year
CDSL
NSDL
Total
Y-o-Y Growth
2012
7.92
12.04
19.96
--
2013
8.33
12.68
21.01
5%
2014
8.78
13.05
21.83
4%
2015
9.61
13.71
23.32
7%
2016
10.79
14.57
25.36
9%
2017
12.27
15.58
27.85
10%
2018*
14.62
16.99
31.61
14%


We hope we have covered most of the basics. Please feel free to reach us at Connect@orowealth.com in case you have any queries or signup at www.orowealth.com/signup and we’d be happy to help! 

Happy investing! J

Portfolio Re-balancing - An Overview.

Why is Portfolio Re-balancing necessary?

Rebalancing is the process of changing the portfolio underlying holdings with an objective to restore the portfolio to its target allocation.
While some investments perform well and take up more share in the portfolio, other due to comparatively underperformance lose share in the portfolio. Due to this, it is required to readjust the portfolio to ensure its original balance provided financial objective/goals is not altered.

Let us understand rebalancing better with an example:

Assume you are a 25-year-old with a target allocation of 90% equity and 10% bonds. While equity continues to grow at a faster pace than bonds, the share of equity changes to 95% over time. Given you are still young you can continue with higher allocation to equity, however, with time as your age increases your risk appetite reduces and thus your allocation to equity reduces and by the time you are in the senior citizen group you tend to allocate nearly 50% of the portfolio to liquid funds with minimal risk.
Thus, in essence, rebalancing is the process by which you seek to modify your asset allocation as each investment fluctuates with the market.

Source: ORO Wealth
Note: The above is a generic pictorial representation on how portfolio allocation changes with time and in nowhere provides correct representation. An allocation is also a function of risk appetite, horizon among others. Liquid investment here indicates investment in liquid funds and fixed deposits, recurring deposits that are highly safe and liquid.

How do we rebalance our portfolio?

In order to ensure our portfolio depicts our conviction at all times, rebalancing is important and it can be achieved by the following:

·         Manually — through buying and selling of securities
·      Automatically — through dynamic asset allocation funds or through third-party   vendors that use robo-advisory platform

Manual portfolio rebalancing: 

This might appeal you given you will have a better control on your portfolio and all the rebalancing trades will be made by the investor keeping in mind his/her strategy but the process might get a little too boring provides you have a long-term fundamental investing approach. Anyhow, we believe, you need to adopt the following steps in order to rebalance your portfolio:

·      Determine your target allocation for each asset class such as equities, bonds, cash etc. In the example above, asset allocation target was 10% bonds and 90% stocks to start with.
·      Compare your current portfolio allocation with target allocation.
·    If there is considerable change in the portfolio and any asset class has become bigger, it needs pruning.
·      Accordingly, buy/sell instruments in order get your target asset allocation.

Once you reverted your portfolio allocation to its target, you have successfully re-balanced.

Automatic portfolio rebalancing: Another way of re-balancing is to opt for auto-balancing of portfolio offered by third-party companies such ORO Wealth that uses technology to provide the best solution based on your profile.
Also, you could opt for dynamic asset allocation (AA) funds. Dynamic AA funds switch between equities and debt completely and invest depending on market behavior to ensure the holdings depict conviction at all times.

To recap, asset allocation and periodic balancing are important to ensure the portfolio risk is controlled and the portfolio generates stable returns over the long term. Rebalancing is required given that the different asset classes provide different returns. For example, Nifty shot up 31% in 2014, closed 2015 with a 4% loss, increased 3% in 2016 and amplified to 29% in 2017. Likewise, returns from fixed income products have remained largely while on the other hand returns from gold have fluctuated significantly. Over time, the differential returns generated by these asset classes have resulted in significant change in asset mix of a portfolio. We firmly believe that rebalancing not only helps to generate stable returns over time but also provides an opportunity to sell positions at a higher price and buy at a lower price over time. While there are no specified timelines for rebalancing, we believe, it should be done at least once a year or during times when there has been significant market movement.

Lastly, we believe an investor should pay much-needed attention to the tax consequences he/she may face due to rebalancing. Any redemption of investments could result in tax implication and thus it is important to take into account the cash outflow a person is likely to incur towards taxes. One of the ways to remain tax-efficient is to invest in instruments that are comparatively underperforming. If you are invested in mutual funds particularly equity type, it is wise to ensure the investment is in growth plan rather than dividend re-investment as it attracts dividend distribution tax.

Drop a mail to connect@orowealth.com for any queries! We'd be happy to help. 

RBI Monetary Policy - April 2018

RBI maintains status quo; surprise with a downward revision of inflation

The Monetary Policy Committee (MPC) of the Reserve Bank of India, in its first bi-monthly policy meeting of fiscal 2018-19, kept the repo rate unchanged at 6 percent. While five out of six members supported the decision, one voted for a 25 bps hike. The decision was in line with the neutral stance of the policy with the objective to control inflation (marked by consumer price index (CPI)) at 4% within a band of +/- 2% and equally supporting growth. The decision of maintaining status quo was based on the uncertainty surrounded around the inflation trajectory due to 1) revision in minimum support price (MSP), 2) revision in house rent allowance (HRA), 3) fiscal slippages and monsoon.

The decision of MPC was in line with the street expectation, however, the RBI left the participants with a surprise when it downward revised its inflation outlook for fiscal 2018. The downward revision in inflation was supported by recent moderation in food prices and statistically downside impact of pay revision related to seventh pay commission. The inflation forecast was revised as under:

Source: RBI, Centre for Monitoring Indian Economy and Livemint

We believe the status quo was expected and there could be no further change in rate on account of upside risk. Also, while inflation revision was expected but a reduction in the forecast for fiscal 2019 in its entirety was a surprise. Let us look at the upside risk:

The pressure around inflation building up; remains monitorable– Since the last MPC meeting in February 2018, the crude oil prices and metal commodity prices have been inching up. Also, if the announcement of 1.5x of the cost of production for MSP is implemented the food inflation could go high. Lastly, any deviation in the distribution of monsoon could impact on yield thereby the prices.
     
     Lending rate tightening– Rising fiscal pressure resulted in an increased yield on the 10-year G-sec that increased from 7.2% in December 2017 to 7.6% in March 2018. Also, the banks started to increase lending rate due to expected non-availability of surplus in the banking system and the return of demand of bank borrowings from corporates.

We also believe that with subdued growth and tight liquidity, the RBI inflation risk seems to be overdone. However, there is no likelihood of rate revision until the monsoon spans out normally which could ease inflation to some extent. While there could be no revision for the next two quarters, we could see some prospects of revision towards the end of CY2018.


There has been a consistent improvement in the macroeconomic conditions as seen with the revival of manufacturing output, industrial production, healthy automobile sales and pick-up in credit. We believe the revised inflation from the RBI is a clear signal that developments are moving in the right direction and we could see growth propelling in. We believe accumulating good quality companies and adding up to current exposure with correction in valuation and price point could be a good investment strategy. We continue to remain bullish on the India strategy and believe the domestic theme currently playing is expected to stay and we would be able to see much-improved growth in earnings. 

The ORO edge for NRI Investors



NRI (Non-Residential Indians) are set of Indians that live abroad and are actively looking for avenues to invest in India’s growth story. Better macros, stable government and reform agenda has led India to being one of the fastest growing emerging economies leading to a better investment proposition than developed nations. 

There are a lot of regulations around NRI’s investing in India (especially if you’re USA & Canadian Based NRIs). Historically, NRIs have only invested in physical assets like Real Estate, Gold or NRI-Fixed Deposits on account of convenience and stable return profile. However, with reform like demonetization, Mutual Funds have fared well in terms of posting better returns compared to other traditional products. In the recent years, Indian investors have moved their money from Real Estate and other investments into Mutual Funds, which led to a significant amount of flows to Mutual fund industry of about USD 22 bn. This is all due to low net yields in Real estate (about 4%) and fixed deposits or traditional savings account. Similarly, NRI’s are looking to invest in Mutual Funds. We at ORO Wealth, in our constant endeavor to ease out the whole process related to investment, have tried to address various issues faced by NRIs

We’d like to tell you why we claim to be the best at this,

1.      Operational Hiccups with NRIs:
Over the past two years of our existence, we have successfully helped thousands of NRI investors to invest through our platform. We have tackled every problem which comes with NRI investments and worked our way around it.

a.      Onboarding: All Online with ORO Wealth

b.      KYC: Most NRI’s have invested in Mutual Funds when they were still residing in India, but regularly fail to update their Residential status when they move aboard. This creates great problems at the time of redemption or switching or rebalancing. During our onboarding process, we update KYC under every existing folio to avoid such issues.

c.       NRE & NRO: NRI’s can invest through two different tax statuses, NRE and NRO. NRE investments are fully repatriable into foreign currency. Whereas NRO is INR based investments, NRO is generally used when the user still has income generated in India. Furthermore, if you invest through NRE you will need to physically submit FIRC (Foreign Inward Remittance Certificate) from your bank to the AMCs at the time of redemptions. But at ORO Wealth you will simply need to upload your bank statement to avoid these hassles.

d.      US & Canada & FATCA agreement: USA and Canadian Investors have the biggest drawback in terms of any Indian Investments. As per the FATCA agreement, all AMCs must report any investment done by US/Canadian investor to their respective governments. To avoid such compliance only a handful of AMCs are open to US/Canadian investors, them being:

-          Reliance Mutual Fund
-          Aditya Birla Mutual Fund
-          L&T Mutual Fund

The above AMCs allow NRI investments, but there are additional declarations that need to be submitted to them at the time of investments (physically). But with ORO Wealth you can simply send us a scanned image of the declaration and we will take care of the rest.

2.      End to End paperless platform:
There are a lot of onboarding processes for an NRI to invest in Mutual Funds, most platforms require physical forms, printing documents and couriers. But ORO Wealth is an end to end paperless platform. You can onboard on our website or app in 4 simple steps: Signup, Login, fill necessary information and Upload documents. In addition, these steps take care of KYC, all online.

3.      Analytics and Live Tracking:
      Our state of the art “Portfolio Health Check” feature gives user deep insights on their existing portfolio or the one transacted through us. Some of these features include:
-          Annualized Returns
-          Returns against Benchmark Index (or the Market)
-          Switch Analysis: One click switch from “commissioned” Regular Mutual Funds to “Direct” Mutual Funds
-          Tax Analysis, and capital Gains report
-          Portfolio level allocation amongst different asset classes
-          Sector and Stock level exposure of the overall portfolio
-          Risk Profiling

4.      Goal Based Advisory:
ORO Wealth helps users to create goals and track them. These goals are investments that can be made for retirement, child’s education, holiday etc. In addition to this our “customizable Goal Advisory” will allow user to assign existing investments against different goals and track them to a “Target Value”. Our propriety Algorithm automatically prompts users to re-balance their portfolio if they are off track from the goals. It also tracks their goals against the market and prompts to rebalance in events of any drastic market movements, which will protect our users from extreme capital loss.


5.      Financial Planning:
       The financial Planning product intertwines all other products, where it takes detailed input about user’s asset, liabilities, income, and expenses and creates goals based on those inputs. These outputs cover every aspect of user’s financial health, from Insurance to Fixed deposits. A user can assign priorities to different goals with ease.                      

6.      Ease of Use & Around the clock support: 
       Our focus at ORO Wealth is on Ease of use and quality customer support. Due to our investors sitting in different time zones we have around the clock WhatsApp access for all our NRI investors, additionally, investors can reach us on our chat, email, sms or call.
We are currently launching our latest versions of IoS, Andriod and Web platform that will make the investment process easier and more accessible.

Our motto at ORO Wealth is two simple things; Convenience and Unbiased advisory for our users. We are trying to simplify the investment processes and portfolio management in this overly complex Financial Market by eliminating large commissions and intermediaries and we’re glad that we’ve been very successful so far.

In case of queries reach out to us at connect@orowealth.com. We’d be glad to help! Happy Investing J

An introduction to the term "Expense ratio".





Did you know expense ratio actually impacts your returns from mutual funds?

We all have come across the term expense ratio of varied percentage levied on our investments but we have seldom put in efforts to flip through the fund document or the web to understand the mechanism behind expense ratio and the potential impact it could have on our own investments. We, at ORO, believe it is a good time to touch base this topic that is gaining much importance since the SEBI circular has put a cap on the expense ratio.

What is an expense ratio?

An investor just buys and sells mutual funds but in the process of doing so, there are many expenses that are incurred by the asset management company in the background. Some of the expenses that are generally incurred include fund management fees (salaries of fund managers, and research team), commission to distributors, registrar fees, trading cost (brokerage for buying and selling of the securities), administrative expense (sending fund statement, etc.), and marketing fees (advertisement, media etc.). As per the recent SEBI guidelines, the maximum expense ratio that can be incurred by an equity fund is capped at 2.5% and for a debt fund, it is 2.25%.

Who pays the expense?

This expense is ultimately borne by the investors like us and the amount is deducted from the investments on daily basis. Thus the NAV reported for funds on a daily basis is net of the expense ratio.

Let us understand this with an example:

Amount invested
Rs 1,00,000
Number of units allocated
1
Net Asset Value (NAV)
Rs 1,00,000
Expense ratio cap
2%
Date of investment
11-Apr-2018
1-day return (as on 12-Apr-2018)
0.5% = Rs 500 on the invested amount
Current value
Rs 1,00,500
Daily expense to be paid
(2%/365) of Rs 1,00,500 =  Rs 5.5
Final value
Initial amount + (profit/loss) – expense ratio
Rs 1,00,000 + Rs 500 – Rs 5.5 = Rs 1,00,494.50

As seen from the computation above, the final one-day growth after expense ratio is 0.49% instead of 0.50%. One of the questions that arise now is “Does this small deduction makes any difference to the fund returns?

The answer is neither Yes nor No as the answer is a function of time horizon. If investment horizon is less than 12 months, then the expense ratio doesn't really make much difference. However, if the investment horizon is long-term of 5-7 years or more, this small deduction will certainly make a huge impact given the compounding impact that happens to this amount.

Expense Ratio – Impact Explained

Let us explain you the importance of expense ratio clearly with the help of example where we have Fund A which doesn't have any expense and we have Fund B, C, and D with varying expense ratio but similar returns to Fund A.


A
B
C
D
Monthly
10,000
10,000
10,000
10,000
Tenure
10 years
10 years
10 years
10 years
Return (%)
12
12
12
12
Invested amount (Rs)
12,00,000
12,00,000
12,00,000
12,00,000
Expense ratio
0%
0.5%
1%
2%
Final Amount
23,58,550
22,84,135
22,12,146
20,75,144
Difference in profit when compared with Fund A
--
74,415
1,46,404
2,83,406

How does the fund determine expense ratio?

A fund does not just use dart mechanism to determine any random figure as the expense ratio. The expense ratio is the actual cost that is incurred by the fund house towards a fund. Once the expenses are added up, the percentage of the fund’s AUM representing the expense is called expense ratio. With tightening guidelines from the market regulator SEBI, fund houses cannot charge any random expense. The regulator has specified the expenses that can be charged and has put a cap on the spend. In order to ensure, a fair treatment is done for all the investors and also to ensure liquidity is high, the fund house does not charge these expenses at once but spread it over a period 365/366 days thereby compounding on daily basis. Also, to ensure a high degree of transparency, the expense ratio is published regularly by the found house and is made available on the website of the fund house for public access.

Some points to ponder:
  • Expenses are charged to the fund as a whole and is irrespective of the number of transactions made by the investors in the fund or the analyst team while buying or selling of securities.
  • At the time of making an investment, the entire amount goes towards the purchase of units in the fund. However, the NAV computation from the 2nd day is net of the expense ratio.
  • These expenses are operational in nature and thus has been to incurred irrespective of fund performance.


Also,
Every fund has minimum two plans for investment – direct plan and regular plan. The regular plan comprises of distribution expenses paid out as commission to distributors, this results in comparatively higher expense ratio for regular plan compared to direct plan. 
(Refer chart below for Axis Long Term Equity Fund).
Source: ORO Wealth


Last but not the least, while an investor should always pay importance to fund performance, sustainability of returns, alpha generation, track record of fund manager, performance against category average and its peers, risk profile against category and peers etc. they should also give due consideration to expense ratio to understand the expenses incurred by the fund as these funds, when accumulated over a long-term, has the potential to grow and become sizeable.

Thus, it is advisable to switch to direct plan. Should you have any queries with respect to switching to direct plan, feel free to drop in a line at connect@orowealth.com and we'll be glad to assist you.