NO COST EMI; Is it Beneficial?

EMI stands for Equated Monthly Installments. It is a fixed amount lender pays to the borrower each month until the principal and interest are fully paid. No Cost EMI is where the consumer “thinks” there is no extra cost other than the price of the product.

Loan without Interest:

According to RBI circular from 2013, Banks should refrain from offering any zero-interest loans on retail products.

“some banks were loading the expenses incurred in sourcing the loan (viz DSA commission) in the applicable RoI charged on the product. Since the very concept of zero per cent interest is non-existent and fair practice demands that the processing charge and RoI charged should be kept uniform product / segment-wise, irrespective of the sourcing channel, such schemes only serve the purpose of alluring and exploiting the vulnerable customers. The only factor that can justify differential RoI for the same product, tenor being the same, is the risk rating of the customer, which may not be applicable in the case of retail products where the RoI is generally kept flat and is indifferent to the customer risk profile”.

Now-a-days, Online Shopping Portals offers a discount equivalent to Interest, so the effective price seems to be the same as without Loan to Customer.

Here, the retailer offers discount equivalent to Interest, It seems like a good deal in first look, but there is a reason retailer’s offer this.

One reason is where you lose money since you have to let go of the discount which would have been yours (If you pay upfront amount). That discount is higher than the interest which retailers have to pay to Banks. In the second case, the Company might not want to devalue the product as it will affect the brand value.  So instead of offering a direct discount, they offer No Cost EMI to increase sales.

No Cost EMI is usually offered on the credit card associated with the bank making the offer. This way, they are betting on consumers paying credit card interest too!

Let’s understand it with a example. Kiran is a Professional Outdoor Photographer. He wants to buy OnePlus 7T Pro Smartphone worth 53999 INR. He doesn’t have to pay the upfront amount, but can manage to pay off in 6-7 months. He found a deal on ecommerce portal where he can pay 9000 INR for 6 months. He is delighted to purchase the product without opting for EMI. Isn’t it a great deal? Let’s find out.

Such loans carry 18% to 30% interest. Let’s assume for the case study, it’s 18%. Here’s the break-up:

  • Original Price 53,999
  • Discount Offered -1990
  • Interest on Loan 1990
  • Amount to be paid 53,999

The problem with such deals is, online sites never provide such breakdown upfront; otherwise very few people will fall for it. If you randomly search any site at any time there are 5% off offers available. But if you wait a couple of months (Which most people like Kiran hate to do), you can find a deal worth 10% off + Additional Cashbacks which means Kiran could have got the phone for 51,000. You can take any product at any time and do this math you will find out paying money upfront is a better option.

Even if there is no other discount available, remember you are buying things on loan at more than 15% Interest.

That’s a matter of choice; people should make.

The real problem is when Interest is added to the Price, and then it is offered on No Cost EMI. Any company paying Interest from their pocket to increase sales is a bit difficult for me to digest.

Summary: Even though many examples prove that No Cost EMI is harmful, there is an even bigger risk present when you opt for such plans. If you often have this habit of buying things on EMI, you are essentially spending before you earn. If you do not pay attention to this habit, it will not take long to turn into spending more than you earn.

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Is it Time to Exit Icici Prudential Value Discovery Fund?

Icici Pru Value Discovery Fund has not outperformed its benchmark BSE 500 over last 5 years.

Is it time to exit the fund? Answer could be “YES / No” or “With some considerations”, Let’s find out which can be the option.

For any Mutual Fund Strategy, Investment Mandate is of critical importance. Hence, the fund manager of the scheme cannot go against the mandate to improve the performance.

Value Discovery Fund strictly belongs to Value Category with Blend Portfolio. Value is used to diversify the portfolio. Make sure you understand truly the meaning of Diversification.

All funds in your portfolio will never generate returns at most times. While some funds will have upside & some at lower. Value Funds will help you regain your losses over longer period.

Investment Objective of this scheme says: To generate returns through dividend income & capital appreciation by investing primarily in a well-diversified portfolio of value stocks.
It also says, “However, there is no assurance or guarantee that the investment objective of the Scheme would be achieved.”

This might be a warning bell according to me.

In this fund’s case, inflow has stopped & redemptions has increased. In Sept 2018, AUM of this scheme was 16477.28 Crores, whereas, in Sept 2019 it was 15095.61 Crores. Can you think what would be the reason for this?

Source: ValueResearch

Through above image, you can understand the fund has underperformed its benchmark & category for 1 yr, 3 yrs & 5 yrs duration.

Rolling Returns of the fund V/s. Benchmark
Rolling Risk V/s Benchmark

The fund has outperformed the index by only 2044 times as compared to 2113 times.

To understand it more clearly how the fund has performed vis-a-vis with other fund of same category i.e. Value Style, view the comparison.

Rolling Returns for 4 yrs
NAV Growth for 4 yrs

What should you do as an Investor? Is it time to Exit?

What will be your call:- If the fund manager deviates from investment mandate to improve performance

OR

Is the Mandate Important?

  • If Mandate is important, Can you Handle Value Strategy? If the answer is YES…then stay invested. If NO, then Exit.
  • If returns make you happy….then you are investing in wrong strategy & hope some strategy will be created in future.