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Monday, November 30, 2009

MIP – A good avenue for risk averse investors

How these monthly income plan (MIP) plans serve the needs of those looking for capital preservation with a steady income
A monthly income plan (MIP) is a good investment option among mutual funds. Individual investors are perpetually in search of investment avenues that yield good and regular returns. MIPs have been floated by various mutual funds. These plans are picking up fast. Investments of these plans in equities have increased. They have increased their allocations towards equity in their portfolios. Mutual funds have been focussing on the individual investor segment. A MIP is among the best products available to the individual investors.

Most of these plans offer three options -

  • Monthly income,
  • Annual income, and
  • Cumulative income

The face value is Rs 10 per unit. Generally, the minimum investment is Rs 10,000 in case of the cumulative option, while there is no maximum limit.

As is applicable to other schemes, the returns from these schemes are not guaranteed. The rate of return is as uncertain and variable as in any other scheme. However, going by the nature of these schemes, investors can expect them to yield a reasonable rate of return. The returns are dependent on the performance of the economy and the corporate sector, as well as the movements in the stock markets. There are no guaranteed returns. However, the equity component of the fund could make all the difference. With a healthy growth in the corporate sector, the returns on MIPs will also go up.

These are income-oriented plans, which aim at meeting the needs of investors by providing a regular income on a monthly, annual or cumulation of income basis over a specified period of time. Income distribution rate is reset every year and announced. In some cases, the rates are assured for the full tenure of the plans as per provisions of the schemes.

For cautious investors, it is best to either invest in balanced funds or in a MIP. The plans have the option to invest up to a particular percentage of the corpus of the fund in equity. The balance is set aside in debt products. Investors can expect a decent return from the investment. MIPs are good for all - working and retired investors. MIPs also come with various options. You can either opt for a monthly income or for the growth option.

MIPs are suitable for conservative investors, who along with an exposure to debt, do not mind a small exposure to equities. These funds aim to provide consistency in returns by investing a major part of their portfolio in debt market instruments with a small exposure to equities. These are suitable for conservative investors, who along with protection of capital seek some capital appreciation, as MIPs have an exposure to equities.

Sunday, November 29, 2009

How to wedding costs down

Wish to cut down on wedding costs? Don’t have a clue from where to start. Here are ways to rationalise the huge expenditure for making the event not only a memorable one but also affordable

Marriages may be made in heaven but if only they could be solemnised there too. Every bride and groom could fulfil their vision of a perfect wedding, in an idyllic setting with as many guests and fanciful embellishments as they desired, without spending a penny on it. However, it only gets this good in dreams. In real life, a wedding means weeks of nervous anxiety for all concerned, starting from the day the dates are decided to the moment when the final reception is over. Compounding this anxiety is the dip that you can see in your bank balance, every time a ceremony takes place.


Most financial planners agree that as parents, the first step you should take is to chalk out what you can afford to spend on the wedding. Be realistic and do not allow yourself to be guided by emotions at this critical stage. This needs to be followed up with an estimation of the different areas of expenditure such as clothes, jewellery, gifts, food, décor and how much you want to allocate towards each of them. Meanwhile, keep your eyes open to over-spending on any particular element. Always keep the bride/groom privy to your plans at every stage to prevent misunderstandings.

However, if you find yourself worrying over where you can cut costs, then here are a few practical alternatives.


Step back and ask yourself just how many ceremonies you actually need before and after the wedding. Both brides and grooms have had as many as six-seven ceremonies each in the past but wedding planners say that it is possible to bring this number down to about three or four. For instance, many families are now combining ceremonies such as the wedding and the reception to save unnecessary expenses. Also if the relationship between the families is extremely good, you could decide to have joint functions and divide the expense equally.

Here’s another game you can play with numbers. Inviting 1,500-2,000 guests to your wedding may make you the talk of the town, but tapering your guest list by about 200-300 people could give you that little extra you needed to add an exotic element to the décor or dessert in the wedding buffet. If you are worried about hurting sentiments, divide your guest list such that different people are invited to different ceremonies. Also, keep your invitation card simple and classy and cut out the huge hampers and gifts accompanying the card. If you are extremely particular, then you could send a traditional item like a box of sweets with your card. Limit the number of cards printed and send online cards to as many as possible.


Also remember that it’s not always necessary to spend huge sums to have a glamorous or a classy look. If you have a good wedding planner, he/she definitely has the skills to achieve the same look at a far lesser cost. Over the last two years, wedding décor has taken a more minimalist turn. So if you don’t want to use hand-embroidered velvet for your tents, then there are simpler and cheaper alternatives such as using velvet with prints on them or even thick satin. Similarly, creating the basic paraphernalia for a wedding like the mandap, a small backdrop, a well-decorated entrance, using domestically available flowers and props is possible at a mere Rs 50, 000 while it could even go beyond Rs 10-15 lakh.

Jewellery is yet another segment where you are likely to see huge spends, especially for wedding. With gold prices at an all-time high hovering around Rs 15,000 (per 10 grams) mark, you could consider looking for alternatives like using jewellery that has been handed down in the family or use gold-polished jewellery or even switch to silver. In fact, this year, many brides have actually decided on fake jewellery owing to the higher prices of gold. Shah also recommends that in addition to giving children gifts in the form of money and gold, parents should also look at making investments for their children, which will compound and provide for his/her goals in a shorter time.


Coming to wedding destinations, current scenario, it would make greater economic sense to limit your weddings to Indian soil or even to your hometown. This allows you to enlist the services of contacts that you have made in the past as well as the specialised skills of people in the family. However, with hotel rates and flight rates having dipped drastically, you have the chance to explore your options, provided you have the time and the ability to evaluate them carefully. However, many NRIs who were looking at arranging a wedding in India are now conducting marriages in their hometown, as this would help them cut numbers.

The best bit is that with the slowdown many people, even those who can afford it, have become careful with their spending and have stopped the ostentatious display of wealth. In an atmosphere like this, a few less bells and whistles may not seem to be as grievous an error as it would be in normal times.

Saturday, November 28, 2009

Have you insured your home loan? - Home loan insurance

IT sounds the same, you might say, but there's a difference between home insurance and home loan insurance.

The difference

When you opt for home loan insurance, you will be insuring the home loan and not your home. That is, God forbid, if something were to happen to you (borrower), home loan insurance will take care of repaying the remainder of the loan to the bank. So, the burden of paying off the loan will not fall on the shoulders of the surviving family members. It will also prevent a situation where the home may need to be given up to the bank to help loan recovery.

For instance -

One takes a home loan worth Rs 30 lakh for 20-year loan tenure. He/She also takes an insurance cover for this loan. On the 18th year of his loan, Insured meets with an untimely death. The insurance company will pay the remainder of the principal, approximately Rs 9 lakh, to the bank. Thus foreclosing the loan.

What’s my premium?

Premium for this insurance cover varies for different insurance companies. However, the basic aspects that impact the premium required to be paid include: age, loan amount, loan tenure and the health of the individual taking the loan.

Usually, premium can be paid as a single payment or it can be added to the loan amount. The bank will factor this amount in the equal monthly instalment (EMI). Some insurance companies have the “limited pay” option, which means even if the loan cover is for 20 years; you could opt to pay the premium only for a period of 10 years with the actual cover extending for the entire loan tenure.

Smart tip: You are eligible to claim tax benefits under Section 80C for the premium paid.

How does it work?

The bank, where you take the home loan, usually, has a tie-up with an insurance company that provides the insurance cover for the home loan.

The bank will take care of all the requirements on your behalf. All you need to do is merely provide a letter of consent and make the premium payment or have it added to the loan amount.

What if I have a joint home loan -

In case of a joint home loan you can apply for a joint insurance cover. In this case, even if one of the co-borrowers dies, the remainder of the outstanding loan amount will be repaid to the bank.

Friday, November 27, 2009

Tax deduction on HRA

Some conditions to avail a tax deduction on HRA
Employees usually get a house rent allowance (HRA) from employers. HRA is given to meet the cost of rented premises taken by the employee for his stay. A person can claim exemption on his HRA under the Income Tax Act, if he stays in a rented house and is in receipt of HRA from his employer.

The exemption of HRA is covered under Section 10(13A) of the Income Tax Act and Rule 2A of the Income Tax Rules.

The conditions for allowing the exemption on HRA are - the assessee for the rented premises, which he occupies, and he must not own the rented premises, must actually pay the rent.

The amount of HRA exempt is the least of - the actual amount of allowance received by the assessee for the period during which the rental accommodation was occupied in the previous year, and the amount by which the actual rental expense incurred by the assessee exceeds one-tenth of the salary in the relevant period.

If the accommodation is situate at Mumbai, Calcutta, Delhi or Chennai, 50 percent of the salary in the relevant period. If it is situated at any other place, 40 percent of the salary in the relevant period.

Salary, for the purpose of arriving at eligible deduction, means basic salary and includes dearness allowance and commission based on a fixed percentage of turnover achieved by the employee.

The deduction for HRA is not available in case the employee lives in his own house. It is also not available in case the employee does not pay any rent for the accommodation used by him. It will be available only for the period during which the rented premises is occupied by the employee and not for any period after that.

Arriving at HRA

To take an example, during the year 2007-08, an employee resides in Bangalore and gets a salary of Rs 5 lakhs as basic salary and Rs 2.5 lakhs as HRA. He pays an actual rent of Rs 2 lakhs.

In such a case the amount of HRA exempt would be calculated as:

1) Actual HRA received - Rs 2.5 lakhs
2) Excess of rent paid over 10 percent of salary - Rs 2 lakhs less Rs 50,000 (10 percent of salary) - Rs 1.5 lakhs.
3) An amount equal to 40 percent of salary, as the accommodation is in Bangalore - 40 percent of Rs 5 lakhs - Rs 2 lakhs.

As out of these Rs 1.5 lakhs is the least, it will be allowed as a deduction from salary for the year.

In case the accommodation is situated in Delhi the limit of 40 percent is increased to 50 percent. The deduction on HRA is available even in case an employee has his own flat and has rented it out.

Thursday, November 26, 2009

Non-life insurers may raise premium rate from next year

Non-life insurance companies say premium charged on policies sold by them is likely to increase from next year because of a proposed change in the way their income is calculated.

The Union Budget for 2009-10, presented on July 6, wants to classify profits or gains made from their investment as business income, which would be taxed at the corporate tax rate. Similarly, loss from the sale of investment can be set off against taxable income.

At present, profits from the sale of investment by non-life insurance companies are not included in their business income. State-owned general insurance firms make a profit of Rs 2,000 crore from the sale of equities on an annual basis.

“It will mean a capital loss of Rs 600 crore. Therefore, the only way insurance companies will deal with it is by increasing the rate of premiums,” said M Ramadoss, chairman and managing director of state-owned Oriental Insurance Company Ltd, at a conference organised by industry body Ficci.

Analyasts say that the intent of the exemption was to provide boost to the market and was intended to be temporary in nature. Adding to this, the recent de-tariffing of insurance companies has made the market open to private players and has led to competitive pricing so the effect on customers, if any should be very limited.

“When the exemption was introduced there was only the government-operated insurance industry, now that there are private operators in the fray,the government has probably chosen to review the exemption in this changed context,” said Amit Agarwal, principal consultant, Price Waterhouse Coopers.

IRDA to come up with revised IPO norms

IRDA Chairman J Hari Narayan on Friday said the regulator would come up with revised guidelines on allowing insurance companies to sell equity under Initial Public Offer (IPO). At present, IRDA norms prohibit insurance firms from tapping the IPO route in the first 10 years of their operations.

Wednesday, November 25, 2009

Pre-Tax Yield

My brother says that the investment in public provident fund (PPF), which gives 8 per cent, is the best. Isn't 8 per cent a low rate of return?

An investment's pre-tax yield tells us if its return is high or low. The return on PPF (8 per cent) is tax-free. Also, this has to compared with returns of a taxable income to estimate its worth. For someone paying a tax of 30.9 per cent, the pre-tax yield in PPF is 11.57 per cent. At present, there is no fixed, safe and assured-return option that has 11.57 per cent return and a post-tax return comparable to PPF's 8 per cent.

Formula: Pre-tax yield = ROI / (100-TR)*100

Type in: =8/(100-30.9)*100 and hit enter. You will get 11.57%.

ROI: rate of interest,

TR: tax rate, (depends on tax slab)

Also used for: Calculating the yield on an Employees' Provident Fund or any other tax-free instrument.

Tuesday, November 24, 2009

Insurance firms set to adopt uniform Policy lapsation definition

Policy Lapses In Ulips Higher Than In Traditional Products: Irda

DOMESTIC life insurers may have to adopt a uniform definition for lapsation of insurance policies to give more leeway to policy holders on premium payments. The insurance regulator Irda has recommended a uniform grace period of 30 days for policy holders paying their premium every quarter, half-year or every year. A 15-day grace period has been suggested for policy holders paying monthly premium.

An insurance policy lapses when the subscriber does not pay the premium within the grace period. IRDA has recommended re-instatement of a policy if the premium is paid within the revival period of two to five years, as per the internal practice of the insurer.

Currently, companies have varying definitions on lapsation of policies and this creates a lot of confusion.

The suggestion for life insurers to adopt a uniform “grace period” and “lapse definition” has been made in Irda’s first occasional paper on “Lapsation of insurance policies and its impact on the domestic industry”.

Lapsation of insurance policies is of worldwide concern and impacts all stakeholders. Irda chairman J Hari Narayan reckons that results thrown up in such research studies could help stimulate a policy debate and make course corrections, if need be.

The occasional paper has been authored by a team led by R Kannan, member, actuary, Irda. The recommendations, if adopted by insurers, would give more leeway to policy holders and curb policy lapses.

The study reveals that the lapse rate — in terms of the number of policies — increased from 5.62% in 2002-03 to 6.64% in 2006-07. The lapse rate by premium rose from 4.4% to 6.95% during the period under review.

number of policies and 10% by premium — was also much higher compared to most traditional plans. Ulips are popular savings instruments that offer flexibility to the policy-holder in terms of investment and also a life cover. A part of the premium is invested in equities or government bonds, depending on the choice of the policy-holder. Term assurance products showed the highest rate of lapse, while pension policies had the lowest lapsation rate. The lapse rate for non-medical policies was, however, higher than that of medical covers. When a policy lapses, the policy holder forfeits the premium paid and the insurance cover.

Monday, November 23, 2009

Equity portfolio mix is determined by Risk appetite, investment horizon

A well-known fact about equity investments is that it doesn't rob you of your returns in the long run. In fact, equity has always been kind to those who have showed patience and the perseverance to be invested during tough times. While such a strategy is gainful in the long run, it also needs a careful selection of funds. Diversification of risk among different schemes is an unwritten rule for a perfect investment strategy. In addition, one has to follow a few tips for building a good equity portfolio.
Diversify according to risk appetite

While diversification is a prerequisite, divide your portfolio according to your risk appetite and investment horizon for the portfolio. For instance, splitting the corpus among five diversified funds will be meaningless as all funds will have similar investment strategies. Hence, diversification has to be according to your needs. One of the smarter options could be to divide the portfolio into short-term and long-term, and then choose funds according to the tenure. While higher allocation is recommended towards debt for the short-term fund needs, equity can be for the long-term corpus.

Regular review

Within a long-term portfolio, the choice of equity options needs to be monitored more regularly, as the prospects of equity is associated with the prevailing economic environment. While equity can be expected to generate 12-15 percent returns over the long term, they can vary during the intermittent periods and hence need a close watch. In the case of stocks, the monitoring will have to be more regular as not many companies have the potential to run a cycle of 10-15 years without hiccups.

In the case of mutual funds, the monitoring may be less demanding though funds too have been going through cycles with respect to their performance. Investors can be more relaxed when they opt for diversified funds as the basket of stocks is much wider in the case of these funds. Also, your portfolio is less prone to sectoral risks, which is the case with a sector fund.

Hence, a long-term investment allocation can focus on diversified funds with good track records. Choose your funds carefully, and rely on their past performance and investment strategies. The allocation in favour of diversified funds could be towards large and mid-cap.

Combination of themes

For mutual fund investors, the advantage of investing in a fund is that they have a wider range of products to choose from as mutual funds have a wide basket of schemes. Besides dividing the portfolio between long-term and short-term, build the portfolio across themes. For instance, a larger portion can be towards large-cap funds in the current environment. This share can be as high 60-75 percent. The balance can be in favour of balanced funds, gold, debt and income funds. However, income funds need to be for a period of 1-2 years as their performance is directly dependent on the interest rate environment. Since interest rates go through cyclical performance pressures once in 5-7 years, they should not be considered for long term wealth creation. In fact they should be looked at only during interest rate peak seasons as has been the case at present. Also, they should be avoided when the rates are in an up trend.

In the case of stocks, the portfolio creation should be a combination of growth and cash flow. The latter is met by dividend stocks which have a good track record. Typically, these companies should have a history of good dividend record over a period of 2-3 decades and should be priced well. A high dividend-paying company with a huge market price may not be of any help as they will not allow you acquisition in large numbers.

Sunday, November 22, 2009

Must Know about Stocks

What are stocks and shares?
Many people fall in to the misconception that stocks and shares are different things but they are just different ways of saying the same thing (stocks generally used in America, shares used in England). A stock or share is basically just a stake in a companies capital, ie if you have own a share you own basically own a tiny bit of that company.

What is a dividend?

A dividend is nothing more than a share in the underlying profit's of a company. Most companies pay dividends quarterly (four times a year).Its generally the larger especially blue chips stocks which pay dividends. The choice of buying and owning a stock that pays a dividend is up to the individual investor. There are both positive and negative aspects that come with receiving dividend. A company offering dividends is likely to be a larger stable one offering a lot less potential for growth.

Share Types

When consider to purchase stocks and shares it is handy to know that there is generally two different types of shares that you can purchase.

  • Preference shares/preferred stock

The first is known as preference shares/preferred stock. Preference shares provide a specific dividend that is paid before any dividends are paid to common stock holders. They also take precedence over common stock in the event of a liquidation. Disadvantages are that preference shares do not enjoy any of the voting rights of common stockholders also the dividend never fluctuates even in times of prosperity.

  • Ordinary shares/common stock

The second type are known as ordinary shares/common stock. They are the most common form of share. An ordinary share gives the right to its owner to vote at the annual general meetings of the company. Since the profits of any company can vary from year to year, so can the dividends paid to ordinary shareholders. In bad years, dividends may be nothing whereas in good years they may be substantial.

ADR's (American Depositary Receipts)

Put simply an American Depositary Receipt (or ADR) represents the shares of a foreign company trading on US financial markets. The stocks of a variety of non-US companies trades on US exchanges through the use of ADRs. They enable US investors to buy shares in foreign companies without having to undertake cross-border transactions. An investment bank will generally buy the shares on the foreign exchange and then apply to list them on the U.S market's.

Share Status

When you are evaluating shares potentially to invest in, it is important to understand that different shares have different status'. Generally there are two different types

1) Blue chips
2) Penny share.

Blue chip shares will generally have proven track record's, as well as having a track record of proven dividend payment's.

Penny shares are generally new companies that generally have recently been bought to the market. As a result they are generally smaller companies and as a result have a higher element of risk.

These are the 5 main elements that you need to be aware of when you are looking at evaluating potential investment opportunities with reference to individual stocks and shares.

Saturday, November 21, 2009

Motor Insurance - Think Street Smart

Motor insurance is not just a legal requirement. Read the fine print before signing on the dotted lines to save money
AT A TIME when motown customers are facing heat over high fuel prices and soaring interest rates, shouldn’t they strive to extract every penny they spend on their automobile purchase? Valid question, you may say, but most customers choose to ignore an important component while purchasing a vehicle — motor insurance. They just consider it a legal requirement without which they can’t bring their new vehicle on road. Indeed, motor insurance is a necessity which covers you against damage to your own vehicle and damage to the third party.

Broadly, there are two types of auto insurance —
1) Comprehensive policy and
2) Third party insurance.

1) Comprehensive policy

In comprehensive insurance, you get full cover for every possible damage, including dents, technical problems, repair, accidents and even for car theft.

To make sure that an individual gets the best deal while buying an insurance policy, he/ she should make sure that the policy is a comprehensive one. The policy should have cover for the loss or damage to the vehicle or accessories due to natural calamities such as fire, explosion, self-ignition or lightning, earthquake, flood, typhoon, hurricane, storm, tempest, inundation, cyclone, hailstorm, frost landslide, rockslide, burglary, theft, riot, strike, malicious acts, accident by external means, terrorist activity, any damage in transit by road, rail, inland waterway, lift, elevator or air and others, head, motor insurance of ICICI Lombard. Too exhaustive a list, but you never know when an emergency would strike.

2) Third party insurance

In third party insurance, your cover is limited to the claims payable to the third party in case of an accident. Incidentally, third-party insurance is the only insurance compulsory under the law. The other type of insurance is called ‘third party theft’ insurance. Here the premium is less than comprehensive cover and you get insured for the theft of the vehicle. But make no mistake here. Consumers opting for this type of insurance don’t get any cover for repairs and other damages.

Consumers should also keep in mind that third party insurance is mainly offered by government-owned companies such as General Insurance, New India Assurance, United India Insurance and Oriental Insurance. Though private companies such as Iffco Tokyo, Baja Allianz, ICICI Lombard, Royal Sundaram, Tata AIG and others also offer third party insurance, they generally don’t push these since they are not very lucrative for them. Though none of the policies cover medical expenses, the Motor Insurance Tribunal covers medical claims on account of loss of salary income due to hospitalisation or any other disability. There exists a personal accident cover for individual owners under optional accident cover.

Now, once you have decided on which type of insurance you plan to take, you should be clear on some issues to enable you to take informed decisions. Though almost every dealer from where you buy your vehicle offers you insurance at the showroom only, you have the right to choose your own insurance company. You may be able to save some money by choosing a company different from your dealer as now different companies offer different rates and discounts with the de-tariff regime in place.

In this regime, insurance companies have the option to offer you rates lower than other players. Of course, you just don’t have to jump the gun. Check various companies for the rates and discounts and then negotiate with your dealer. If you have a good history — like your vehicle has had no accident in the past or if you haven’t claimed bonus in the previous years — then the auto insurance companies will give you further special rates. The region where the vehicle is bought also plays a role in deciding premiums as some locations have higher risk profiles.

Continuity of your vehicle insurance is also important. The gap in your insurance policy will not go well with insurance companies and you may have to shell out more premium. Also, always check if you have cashless facility and make sure that your nearby workshop or garage is covered under it. The cashless option will save you from the hassle of tedious claim reimbursement procedure.

Another must is that you should never take the agents’ word for granted and ensure you get the best deal. Incidentally, companies such as ICICI Lombard and Bajaj Allianz also offer interest-free instalments for the premium payment if you are paying online.

So the next time you buy your dream car, don’t forget to look into the finer points of insurance.

Friday, November 20, 2009

Mutual fund dividend options

Mutual Funds growth schemes may have provided higher returns than their dividend counterparts during the bull run. But not any more! Dividends paid in the past five years have not only saved investors from the market tsunami, but also ensured higher returns

Mutual fund (MF) houses and their distributors often use dividends as a carrot to lure investors to their schemes. Dividend, in common parlance, is understood to be a share in the profits of the company in which the investor has a stake (shareholding). However, in case of an MF scheme, dividend is nothing but a part of the capital appreciation of the investment returned back to the investor in piecemeal. It is for this reason that the net asset value (NAV) of a scheme stands reduced to the extent of dividend declared by the MF scheme.

Dividend and growth are the two basic options that an investor can choose from while investing in an MF scheme. Unlike the dividend option, growth invests any appreciation of initial investment back into the fund and allows it grow further instead of repaying to the investor. It is for this reason that returns generated under the growth option have been higher than those from the dividend option, especially in the bull run. But not any more! The changing tides in the market have made ‘dividend’ an attractive investment option as compared to a growth one. An analysis of returns for the period January ‘04 - December ‘08 of nearly 64 equity diversified schemes reveals so. Returns under the dividend option of more than 60% of them have been higher than those of the growth option. Thanks to the regular dividend payouts, investors have managed to save some of their capital appreciation from the market tsunami. The schemes considered for this analysis are those that have been in existence as on January ‘04 for both the dividend as well as the growth options.

Ignoring the entry loads, we have assumed the returns generated under both the options — for the selected equity schemes — for an initial investment of Rs 1,000 on January 1, 2004. We have also assumed that the investor has held onto the investments till December 2008 — covering the entire period of bull-run and even the disasters unfolding thereafter. All the dividends declared in the five-year period (January ‘04 - December ‘08) have been taken into account to arrive at the total value of the initial investment of Rs 1,000 as on January 1, ‘09.

In this list of schemes where returns from dividend option supercede those of growth ones, Sahara Taxgain and SBI Magnum Taxgain ‘93 are in the forefront . Having paid a total dividend of over 500% in the last five years, their returns under the dividend option are 3.4x and 2.4x higher vis-à-vis their growth ones. This is followed by DBS Chola Growth and UTI Master Value whose returns from dividend option exceed those of the growth option by 2x and 1.6x, respectively. Investors would however do well to note that declaring dividends is the sole discretion of the fund house and the same is never guaranteed. In fact, in the light of the current market situation, only a handful of equity schemes have declared dividends so far in 2009. Dividends should thus not be construed as a decisive factor for selecting a mutual fund investment.

Past performance and the risk appetite of the scheme are the major criteria for selecting a right MF scheme. An investor would also do well to take into account the number of years for which a scheme has been in existence and measure its performance at both the highs and lows of the market.

Thursday, November 19, 2009

Stock Market: Using Stop-Loss Order

Stop-loss orders are like health policies for stocks, which come at zero premium. Besides reducing your losses, they also help you to lock in your profits
Talk to investors and we find thousands of instances where people just ignored one basic principle of investing: Setting stop losses and sticking to it.

What is stop loss?

It is a pre-defined order to automatically sell a stock when it falls to a certain level. When the stock reaches the point, the stop-loss order becomes a market order and the trade is executed. It’s a very important investment tool, especially if you are typically trading in a bullish market situation, which helps to save the larger part of the pain in case the sentiment turns

How it helps?

Stop loss is an important risk-management tool used to exit a stock before it falls any further. This not only helps in reducing your losses but also to lock in your profits. Consider you bought a stock sometime ago at Rs 100 and the stock is now trading at Rs 140. Now some negative news on the company follows bringing the stock to 120 levels. In this case, fixing an order at, say, Rs 130 may help retain a large part of the profit. It also comes handy when you go on a vacation or holiday and are not in a position to watch your investments regularly. Setting stop losses is all the more important for traders, who deal on a day-to-day basis and who have to generate returns with a limited pool of capital. Here, it helps to restrict their losses

How to set a stop loss?

This depends on the way a particular stock behaves. If any stock fluctuates 4-5% in usual market situation, stop loss should not be fixed too close to it, or else the order will be triggered in day-to-day stock movement.

Setting stop loss for a particular stock is interplay of one’s risk-taking ability, the stock market situation and how that stock behaves. The idea here is setting a stop-loss percentage that allows it to fluctuate day to day while preventing as much downside risk as possible. And for investors who bel i e v e s t o p losses n e e d be adjusted from time to time, Stop losses have more to do with discipline, so I don’t think adjusting them from time to time is a good idea.


Stop loss is a double-edged sword. It might be that one had bought fundamentally good stock but the price falls because of reasons other than fundamentals. So if the stop loss was fixed in that case too, the order would be triggered, which is not justified. Hence, stop losses are good for momentum buys and not for fundamentally good stocks. This tool is like health policies for your stocks which come at zero premium. It doesn’t require much to set it but rewards in return are plenty.

Wednesday, November 18, 2009

Transfer of property

Transfer of property is handing over possession from one person to another. The Transfer of Property Act 1882 contains specific provisions on what constitutes transfer and the conditions attached. According to the Act, transfer of property means, 'an act by which a person conveys property to one or more other persons, or to himself and one or more other persons'.

The transfer may be in the present or for the future. Further, 'person' may be an individual, company, association or a body of individuals. Under the Act, property of any kind may be transferred.

Every person who is competent to contract is competent to transfer property either wholly or in part. He should be entitled to the transferable property, or authorised to dispose off the transferable property if it is not his own. The right may be either absolute or conditional.
A transfer of property may be made without writing in cases where it is not expressly required by law. It can be transferred either absolutely or conditionally. Such transfer can be only to the extent and in the manner allowed and prescribed by law. The property may be movable or immovable, present or future.

Unless a different intention is expressed or necessarily implied, a transfer of property passes forthwith to the transferee all the interest which the transferor is capable of passing in the property and in the legal incidents.

In case the property is transferred subject to a condition which absolutely restrains the transferee from parting with or disposing off his interests in the property, the condition is void. The only exception is in the case of a lease where the condition is for the benefit of the lessor or those claiming under him.

Sale of property

Sale is a transfer of ownership in exchange for a price. Such a transfer can be made only by a registered instrument. Delivery of property is made when the seller places the buyer in possession of the property. Thus, delivery of property can be only by handing over actual possession to the buyer or to a person authorised by him.


Where the property of one person is made security for payment of money to another and the transaction does not amount to a mortgage, the latter person is said to have a charge on the property. This can be by the actions of parties or by operation of law. The provisions of simple mortgage will apply to such charge.

Lease of property

A lease of property is the transfer of the right to use the property, made for a certain time, express or implied, or in perpetuity. Such a transfer of right should be in consideration of a price paid to the transferor by the transferee, who accepts the transfer on the terms offered. Lease of property from year to year or for any term exceeding one year can be made only by a registered instrument.

Tuesday, November 17, 2009

10 Technology tools you Can not do without

CRM: Lets you interact with your customers efficiently. Also includes employee training.
Knowledge management systems: Your employees will be able to readily access company facts and information.

ERP: Helps you manage all the information and functions of a business or company from shared sources.

Online collaboration: ZOHO & Google Docs can manage tasks involving multiple people, deadlines and activities.

Information security: Data security and protection of information and systems from unauthorised access.

Social networking sites: Excellent low cost marketing tools such as Twitter, Linkedin help you reach customers.

Payroll management tools: Let you handle complicated payroll systems and create a good compensation system.

Search engine optimisation: Improves volume or quality of traffic to a web site from search engines.

Online conferencing: Uses the Internet as a conference venue which means that participants can be anywhere.

Software as a Service: A pay per use model where companies can host the application on their own web servers.

Monday, November 16, 2009

Mutual Fund industry

MF industry, which survived a major crisis after the stock market crash, can grow in the coming years. Excerpts...
Market risk ratings

Until now, we have had only one form of rating for money-market funds — credit rating. Internationally, money-market funds are rated on two parameters – credit rating and market-risk rating. Market-risk ratings are dependent on the duration of the portfolio and the liquidity of the underlying assets the fund holds. While we do not have a full fledged dual rating system in the country, the recently introduced ceiling on the maturities of the fund may be the first step. A dual rating system may make functioning of the industry robust like it has in western countries. But let’s not forget that, even if that is done – you may continue to have problems during abnormal months, like the one we have already witnessed in October 2008. The market risk ratings can only reduce the risk for investors, but it cannot eliminate it completely.

Retirement investment in MFs

Today, only 14% of the Indian population has secured itself with the retirement benefits. However, globally, people have shown a very conscious approach towards securing their retirement needs. MFs have proven to be the best savings vehicles for individuals. Exemplary to this case is the 401(K) plan in the US. Consider this, if you have been putting money into equities since the age of 20, by the time you are 55 you have made a lot of money, irrespective of how the market behaves in between. And, this is what the 401 (K) has done for US investors. It invests into a universe of funds chosen by trustees. Employees are given an option to choose the funds they would like to invest in by allocating a proportion of their savings to the debt/equity depending on the risk appetite. Similarly, in India, too, we have got to allow MFs a greater degree of penetration into financial savings.

Fund of funds structure

As the industry grows, we will see a large number of funds spread across different asset classes. We already have commodities, gold, international, fixed income, arbitrage and equities in India. Real estate products will be available one day and you will see the emergence of fund of funds (FoF). Currently, FoFs have a different tax treatment as to the underlying fund. They should have the same tax treatment as the underlying fund. So, if FoFs are predominantly equity, it should have tax treatment like that of the equity fund, which does not exist. The reforms and regulations have to evolve with the growing markets.

Insurance companies to outsource fund management

Insurance companies have not proven to be good fund managers globally. There thus evolved the practice of outsourcing the fund management to MFs. In India, however, these insurance companies are compelled to manage investments themselves as outsourcing is not allowed. These companies are thus creating inefficient and expensive investment products, without a global expertise in investment management. Call it the outcome of a multiple regulatory environment that persists in out country. There is a complete regulatory arbitrage in India. While there are no issues in having multiple regulators, we should not allow these arbitrages to exist. India should also allow insurance companies to outsource fund management.

Tax benefits

The debt-fund market in India also needs to grow and we need to have a higher degree of retail participation on this front, too, just like the equities. The existing tax benefits, in respect to income and liquid funds, thus need to stay. We, however, would appreciate the dividend distribution tax (DDT) and also the capital gain taxes to come down. In the next couple of years, we are going to enter into an environment of very low interest rates. Hence, if we can reduce the tax element, it would leave higher savings in the hands of the investor.

Sunday, November 15, 2009

Loan to buy a site

Some conditions usually applicable to avail a loan to buy a plot of land
A loan to buy a site is available if you want to purchase a plot of land and construct a house on it later. Usually, the bank insists that the site be purchased from a recognised authority like a development authority such as the Bangalore Development Authority, from a society or from a recognised developer. In addition to the normal documentation, some additional documents are required to avail a land loan.

These include:

  • Original documents of ownership of land
  • No encumbrance certificate from the registrar's office certifying that the land is not already mortgaged
  • Layout drawing (approved by the city development authority) of the location where the land is, giving details of the precise location of the site and its surrounding areas
  • NOC from the society for sale and transfer of land
  • Latest revenue receipt confirming payment of land dues to the government and tax receipt for tax paid by the owner of the land

Also, most banks finance the purchase of a site only if it is in a location within the limits of the municipal corporation.

Most banks have a minimum and maximum loan amount that they lend for the purchase of a site. This differs from one bank to another. Most banks specify a limit on the loan-to-value ratio that they maintain. It could vary from 60 to 70 percent of the registered value.

The loan amount offered has no relation to the market value of the property. Any premium paid by the purchaser has to be out of your own resources. Some banks charge a higher rate of interest on loans for purchase of a site. The rate of interest on these loans may be higher by about 25-50 basis points.

The disbursement of the loan amount is always in favour of the seller of the site unless the purchaser has already paid the amount to purchase the land. Typically, the charges applicable to normal housing loans are applicable to land loans as well. Further, the age norms for a customer to be eligible for a land loan and the eligibility calculations for computing loan amount are the same as that of a regular home loan. Most banks also have a minimum income criterion. The repayment for the loan is through equated monthly instalments (EMIs) just like other home loans .However, the tenure of these loans is usually lower – up to 10 years.

The interest paid on the money borrowed for the purchase of land is not eligible for income tax deductions. However, once the borrower converts the land loan into a housing loan to finance the construction of the house, he can avail the tax benefits available under the Income Tax Act.

The security of the loan is an equitable mortgage of the site. It is done by depositing the original title deeds of the site with the lender. The lender may also insist on additional collateral security depending on the type of land.

Financing purchase of sites is a bit risky because of difficulty in documentation. Further, there is risk of security of the property. This is compounded by the fact that there may be delay in commencement of construction. One necessary requirement is that the land should be developed and clearly demarcated, and should have been approved for residential buildings

Saturday, November 14, 2009

Investment Strategy: How to refine your judgement while investing?

KEYNES, the most talked-about economist in these days of bankruptcies and bail-outs, once said, “markets can remain irrational longer than you can remain solvent.” While this theory is applicable to both bears and bulls, the underlying message is undoubtedly clear that rational investors can succeed if they can keep irrationalities out. The broader investment decision of whether to invest in equities as an asset class at a given point in time should depend on the prevailing stock market activity. While I also agree with the learned view that a retail investor should not try to time the entry and exit in a particular stock, I strongly argue that every investor can time the market to enter/exit equity markets.
Stock markets historically have peaked at a time when interest rates also peaked or tended to peak due to higher demand for market related credit fuelled by over confidence. There is an example of this not so “knowledgeable” investor friend who sold all his equity investments whenever the interest rates moved up and he used to then shift to traditional FDs and income funds. This investor started moving his fixed income investments into equities in the early days of this decade when the interest rates were at its lowest. The same investor again started shifting from equities to FDs in mid 2008, although he missed the peak of the markets in January 2008. Today this conservative disciplined investor has had the last laugh again while conceding that he has no great knowledge of economics. What moved him is sheer common sense and a strict control on emotions.

During the 25 years that I have spent in the market I have often noticed this correlation between interest rates and market peaks/troughs. I have no hesitation in siding with this investor who uses less of market information and more of common sense to time the market when one is bombarded with an unprecedented supply of market “information.” If the interest income is relatively high compared to the low risk associated with the product then there exists an opportunity to shift from equity depending on one’s risk appetite.

In contrast, I have this highly educated friend of mine who was brilliant enough to spot this particular multi-bagger stock when the price was Rs 150 around 10 years ago. When the price went up to Rs 1,500 in 2007 he decided to wait despite being advised to sell and book profit, at least partially. The stock started going down in the bear market in 2008 and after waiting for more than year through a bear market he got tired and sold the stock at Rs 200 while claiming that he was able to protect his capital. This is a mistake many people make particularly when they are credited with identifying a multi-bagger stock. Such investors most of the time fail to exit at a superior profit as they get emotionally married to the stock and refuse to recognise an impending market peak/trough. Contrast this with an investor who purchased the same stock at Rs 500 and sold at Rs 1,100. Wrong entry and wrong exit but made huge profit compared to the other friend who entered right and exited wrong.

While it is relatively easy to spot market cycles through a disciplined approach, it becomes extremely difficult for retail investors to do stock picking due to an oversupply of unreliable information. Unscrupulous manipulators abuse information to take unlawful advantage in the market often trapping the innocent investor.

There are two universes of stocks in the market. One with high liquidity and that are covered by researchers from many institutional brokerages. Due to continuous and intense competition between analysts it will be an efficient market for these stocks by all conventional academic definitions of efficient market. The theory says that in such a universe of stocks the market price reflects all publicly available as well as private information making it difficult to make any superior return from any research or information/analyst’s report. In this universe of say Nifty stocks one should try to just time the market cycle rather than pick stocks unless there is a definite strategy behind that.

However, the trap lies in the large universe of so-called mid caps and small caps in which there will not be any serious competition between analysts and hence the information, both public and private, may either be unreliable or misguiding. Retail investors should only buy stocks of companies that they know from this group. If an investor doesn’t know either the business or its management how can that investor be a co-owner in that business? Hence a disciplined investor who knows his stock will only be successful in this universe. Many investors who start equity investment with goals and discipline often end up as speculators but will never accept the fact. Very few want to be successful traders. Every investor wants to be a successful investor and many of them turn into unsuccessful traders losing their hard earned fortune to hungry brokers.

Friday, November 13, 2009

Financial Planning: Secure your financial future in volatile times

The volatility in markets only underscores the need for taking a financial planning decision based on sound risk as well as time horizon considerations
OVER the last six months, the Indian equity market has seen a huge fall after a long period of spectacular returns. The fall in the equity market indices on one hand, and poor returns in fixed income funds due to rise in interest rates on the other, have led to some confusion among investors. The concerns plaguing the markets are partly global and partly cyclical in nature. The cyclical issues could lead to a temporary slowdown in the pace of growth, but the long-term uptrend will prevail as India is in the midst of a long investment-led growth phase supported by high domestic savings rates and very favourable demographics.

While the long-term picture warrants considerable optimism on equities, investors have been concerned about falling value of their past savings, and confused as to where to put their incremental savings. ULIPs (unit-linked insurance plans), which have garnered a sizeable share of retail savings over the last few years, are also being looked at by many in this light.

There are several ways to approach the question of right investing. Most intuitive, and certainly a popularly held belief, is to put one’s savings or investible surpluses into the asset class that has given best relative return in the recent past, and of course avoid those that have yielded poor returns recently.

So investing viewed thus boils down to looking at recent trends and choosing sometimes equity, sometimes fixed income securities and at other times alternate assets such as real estate, gold and others.

There would be indeed a merit in investing that way if only one can predict when a recently outperforming asset will start yielding poor relative returns. Unfortunately, none of us can predict trend changes consistently and therefore should not subject our financial future purely to our ability to predict changes in trends, also called timing decisions.

Fundamentally, such an approach ignores two essential aspects of sound financial planning —

1) An understanding of how much risk you should be taking and
2) Whether there is something to be gained by not putting everything into just one basket, more popularly called diversification gains.

Both these issues are addressed when one invests as per one’s desirable asset allocation that can be arrived at based on one’s risk bearing ability and investment horizon.

There has been considerable research on the merits of various styles of investing, and there is a particularly useful study for long-term investors. Brinson, Singer and Beebower did an in-depth study of investment returns of a large basket of US pension funds across long periods in time to determine which decisions are more important in investing. The key finding was that 91.5% of the long-term performance was attributable to how a portfolio was allocated among various asset classes — stocks, bonds, cash, and only a small contribution came from stock selection and timing decisions.

The asset allocation decision depends on:

A) Age: A young person will usually have a higher risk bearing ability on one’s savings when compared to an older person; because of lesser responsibilities and a longer investment horizon. For most of us, our age is the single greatest indicator of risk appetite.

B) Investment horizon: People of the same age may not have the same risk appetite if their investment horizons are different. For example; a 30-year-old with a 10-year investment term would have a lower risk appetite when compared to a 30-year-old with a 25-year horizon. Investment return is nothing but the reward for foregoing current consumption and postponing it to some point in future. All things remaining equal, simplifying a bit, the longer you can wait the more you get.

If one has invested as per one’s correct asset allocation after due consideration for the above explained factors, one will worry less about short-term rises and falls in any single asset class.

A ULIP is a financial instrument that, in addition to providing a life cover, enables investors to save in a systematic and disciplined manner as per desired asset allocation to achieve one’s long-term goals. Typically, ULIPs also have flexibility for changing asset allocation, as and when required. For instance, a change in risk appetite with gradual increase in age or dependents. Some ULIPs also have automatic asset allocation as per one’s life stage.

Such a strategy automatically allocates assets based on one’s age bracket and continuously re-balances one’s investments with changing age. These innovative products help passive consumers to meet their long term investment objectives effectively.

The volatility in markets in the recent past only underscores the need for taking a financial planning decision based on sound risk as well as time horizon considerations. For those who have invested in sync with desirable asset allocation, interim volatility does not impede one’s ability to reach one’s goals and the financial future will be more secure.

Thursday, November 12, 2009

Be realistic in your financial objectives with Mutual Funds

The events of 2008 should be quite enough to cure anyone of either making or believing in predictions. Of course, there’s no shortage of people who claim to have foreseen bubbles in this or that asset class. Some of them are even right. However, no one, absolutely no one, foretold the inter-connectedness and the mutual reinforcement of the various disasters that overtook the world’s economy during this past year.
I could argue, with some justification that the carnage of 2008 is over and various investment markets have already discounted a very dismal picture indeed. On the other hand, I could also argue that much of the good news is merely a side effect of factors like the oil price crash and suddenly lower prices which themselves foretell even deeper trouble ahead.

Some analysts will guess one way and some the other and the lucky ones will get to pretend that they knew something that others didn’t. However, if you are a retail, non-professional investor, then none of this should actually matter to you. The only useful approach would be one that doesn’t have to be fine-tuned to market conditions. The right strategy for 2009 has to be one which would also have been the right one for 2007 or 2008 and will be the correct one for 2010.

Here’s what I think that strategy is. Take a look at your own life and try and make a liberal estimate of how much of your savings you would need to tap into over the next five to seven years. This would include some sort of an emergency amount, plus predictable big-ticket expenses like weddings, education, the down payment on a house and such things. This is the amount you should hold in debt investments which could be anything from PPF to short-term debt mutual funds. The rest should be in diversified equity mutual funds with a good long-term track record.

Any fresh investments into equity funds should be done gradually and continuously regardless of the state of the markets. Don’t invest in too many funds — four or five is enough diversification. You’ll have to do a little bit of homework to find funds with a good long-term track record but it’s not difficult.

As for insurance, make a liberal estimate of the amount of money your dependants will need if you die soon. For this amount, buy an inexpensive term insurance for the longest period possible. As for ULIPs, avoid them like the plague. They are an expensive and non-transparent mis-mash of insurance and mutual funds that appear to be designed solely to enrich insurance companies and agents at your cost.

I know all this sound too simple, but good investment strategies are generally much less complex than bad ones. And they don’t change just because a number on the calendar changes.

Wednesday, November 11, 2009

Gaining from futures currency

Trading in currency futures helps you speculate and hedge against daily market volatility. But you should be aware of the associated risks as well
WORRIED over your investment growth in the light of volatile currency exchange rate? Put your fears aside. After a long wait, currency futures’ trading was launched on NSE (India’s largest stock exchange) at 8.45 am, on August 29, 2008. Currency future is a standardised futures contract with currency as the underlying instrument. Put simply, it is a contract or an agreement to buy or sell any currency at a specified future date before contract expiry date.

For those who are new to futures trading, the key factor to understand is the leveraging character of the product and the associated risk. The currency movements in the last few months bear out the importance of having currency in your portfolio and how the futures platform, with the availability of the one-year contract, makes it possible.


If you want to trade in currency futures as a retail investor, then you need to get yourself registered with a trading member of the exchange after entering into agreement and KYC (know your customer) details. Currency futures’ trading is similar in form and structure to equity and commodity futures trading. Therefore, anybody already having exposure to either of these can make a seamless transition.

With regard to the costs, there are two primary costs involved in trading on currency futures — brokerage fees and transaction costs. Although there are no transaction charges from the exchange to promote the product at present, this can change soon. The brokerage structure that is applicable to currency derivatives is 0.05% on carry forward trades and 0.025% on intraday trades. The transaction cost involves service tax, stamp duty and SEBI turnover fees. STT is not charged.


You may enter into currency futures trading with the objective of hedging and speculating. As retail traders, you can enter the market to benefit from day to day volatility. Currently the currency is moving in a band of 50-60 paise and the volumes are also increasing. Therefore, the small investors can benefit from it. Besides with the currency futures getting launched on MCX in October, one can even indulge in arbitraging.

Experts believe that traders who would like to pursue a high-risk-high return strategy will find that currency futures are a very liquid and potentially rewarding market to be in, if they have the right analysis and view on currency movement. Investors should also consider diversifying their portfolio by adding currency to their current asset allocation by taking advantage of the 12-month contract facility. Given the dynamic financial situation globally, diversification will be the single best strategy for investors for a safer investment horizon.


Trading in currency derivatives brings a whole range of benefits for you. Currency futures’ trading is a transparent mechanism wherein you receive contract notes for the trades done in your account. Besides the rate and price are determined by the exchange and you even have the option of verifying your trade on the exchange site, thereby leaving no scope for default. You are not required to have any underlying exposure to trade in currency derivatives as in the case of an OTC market. As long as you are willing to pay margins, you can trade in currency futures. Commodity analysts believe that accessibility is also high because of the similarity with existing equity and commodity futures markets.


Just like equity and commodity markets, currency futures pricing is decided by those who put a buy or sell price in the market. Price discovery in the currency futures market reflects the OTC market at the moment, considering the high volumes and liquidity in that market, but eventually as volumes will pick up, price discovery will be more vibrant, liquid and transparent in the futures market.

Commodity analysts feel that currency exchange rates are affected by global happenings in addition to local events and information on such events is available on real-time basis. “For those who have the ability to convert the local and globally available information into a directional price call on currency, there is no better market to trade in. The currency futures markets help benefit financially by analysing such information.

Research analysts suggest that in order to trade effectively and profitably in currency futures, you need to strategise your investments. Since the currency futures are denominated in dollar and globally the dollar is traded as commodity, one needs to track the international commodity index while developing the outlook of rupee.


Currency Pairs - Only USD/INR
Contract Size - 1000$ per lot (contract).
Contract Maturity - Maturity period from one month to 12 months period
Quote - Quoted in INR with a tick size of 0.25 Paisa
Eligibility - Only resident Indians are allowed to trade in currency futures
Margins - NSE specifies initial margin and maintenance margins as per its existing practice of levying SPAN (Standardised Portfolio Analysis of risks)
MTM (Mark-to-Market) - Involve daily MTM margins worked out on the basis of daily closing prices declared by NSE. Settlement of MTM takes places on T +1 basis. NSCCL (National Securities Clearing Corporation) is responsible for clearing, settlement and risk management
Settlement Price - Final settlement price is decided as per the RBI fixed exchange rate on last trading day of the contract. Settlement in cash in terms of INR
Position Limits - Maximum permissible open position capped at $25 million

Tuesday, November 10, 2009

Current Markets good for ULIP investors

A joke in the personal finance industry is that investors are more willing to buy insurance policies than mutual funds. When quick profits become more challenging or losses become the order of the day, it's probably natural for investors to take shelter under safety. But then can insurance be a supplement for investors.
The question assumes significance, as it is not the job of an insurance policy to provide capital or yield comfort. However, in the last 3-4 years, insurance is being sold as an investment option rather than as a risk cover and hence, investors too have begun to expect insurance to do the job of wealth creation. One of the reasons could be due to the fact that the middle income segment, till the current decade, used insurance as a savings product. The legacy seems to have passed on over the years and products like the unit-linked insurance plan (ULIP) have only strengthened the belief of investors that insurance is for investment. However, investors can go for their insurance product according to their comfort. Analysts reiterate the word comfort because there has always been a debate on the differences between ULIPs and traditional products. While ULIPs are more expensive than many other products like term plans, increasing awareness of ULIP should end the debate. Hence, for those who prefer ULIP over other insurance products, this should be the perfect time.

The biggest advantage with ULIP is that it allows the investors to take advantage of the equity market besides providing insurance cover. While these policies get sold on their own during boom market conditions, investors with a long horizon should actually look at a higher equity component in the current market environment. While it may be tough for investors to plunge into the stock market during tough market conditions, they have little to worry when are investing for the long term. The added advantage with ULIP is that the fund manager takes a long term call on his stocks and the fund management style too is more passive when compared with mutual funds. As a result, in a weak market, the fund manager has the advantage of buying stocks cheap which has been the case in the present environment.

Unfortunately, investors more often tend to take cues from the sentiment surrounding them rather than their individual needs. For instance, a higher equity component in an ULIP is a risky proposition for an investor who is closer to his retirement irrespective of the market environment. On the other hand, a young investor can afford to go for complete allocation towards equity since he has a long innings ahead of him. As a result, the choice of investment option in an ULIP needs to be driven by individual needs rather than pure market sentiments.

Coming back to the choice of the ULIP option in the present market environment, the investors have the added advantage of low PE ratios, due to the recent corrections. For an investor looking at an ULIP with a payment term of 10-15 years, the downside risk is limited as markets have discounted a good chunk of bad news. While it is a difficult task to invest at rock bottom prices, insurance investors can look at the option of monthly payments for their premium payments, if they don't have the appetite for short-term losses. While no one likes to see negative returns in their portfolio, the equity markets demand a tolerance for losses and ULIP is no exception. One may argue that the investor has the choice of debt too in an ULIP but such investors are better off with traditional products. Not only does it save them from the trouble of market exposure but also ensures lower cost for their policies.

Monday, November 9, 2009

How to pick the right Mutual Fund?

Mutual funds are a convenient way to invest in the markets. Numerous fund houses offer a wide platter of schemes. The choice before the investor is so wide, that he is often baffled. Some investors who have tasted attractive returns in the past believe that all funds can work the magic for them. When they get mediocre results, they realise that their time and money are wasted.

Today, the stock markets are badly beaten. People with low risk appetite are locking away their savings in debt instruments. Some investors consider mutual funds a safer route to remain invested in the markets. How does an investor evaluate the performance of mutual funds? How do you ensure that your money is not locked in a low or no return scheme?

Don’t rely on past performance

A fund that was yielding consistent returns over the past few years can disappoint the investors next year. Past performance is no guarantee for good future performance. Compare its performance over varying timeframes against the benchmark index and its peers. How well it fares in a bad market condition or a downslide indicates the true potential of the fund.

Get to know the fund manager

The management team led by an adept and skilful fund manager takes crucial investment decisions for you. A well-experienced team that has seen both downslides and upswings in the market can deliver a commendable return.

Check the investment philosophy

Ensure the fund's investment philosophy is in sync with your investment interests. If the fund has a well defined philosophy, the management team will work towards it.

Pick the right funds

Funds can be classified into different categories. Select from equity funds (that invest in equity), debt funds and balanced funds (invest both in debt and equity markets). Investors much match their risk appetite with the right fund category.

Read the fund’s portfolio

In order to understand a fund's performance, compare its portfolio and strategy with other similar funds. Stock allocation, sector-wise allocation, and asset allocation tell investors about the level of diversification. Some funds may have different names but invest in the same sector. If you invest in them, your holdings may not be well-diversified.

Don’t ignore expenses

Some funds charge entry and exit loads. It could be as much as two percent charged when you buy (entry load) or sell (exit load) units of the fund. Further, investing in funds has different tax implications.

Investors must put their money in the right funds. Different investors have varying risk tolerance thresholds. A conservative investor with low risk tolerance level can invest in debt funds. A high risk appetite person can invest in equity or sector funds. Closely match risk appetite and goal with the fund scheme.

Sunday, November 8, 2009

Hedge Funds

This article explains how hedge funds use different strategies to mitigate risk
Hedging means managing risk. A fund manager employs a particular hedging technique in order to mitigate a particular type of risk.

For example, a market risk can be hedged against by selling a broad collection of securities short, in equal proportion to one's long exposure or by buying put options on an index. You can hedge against interest rate, inflation, currency etc.

Tools for hedging include raising cash, selling short, buying or selling options, futures, commodity and currency futures etc.

A hedge fund is a private investment partnership. Hedge funds tend to be skill based investment strategies that attempt to obtain returns based on a unique skill or strategy. The primary aim of most hedge funds is to reduce volatility and risk while attempting to preserve capital and deliver positive returns under all market conditions.

It designs a strategy to reduce investment risks using call options, put options, short selling or futures contracts. The hedge insures against the possibility of a future loss. These funds have the potential to deliver positive returns under all market conditions. Further, they have access to highly specialised strategies.

The hedge fund managers adopt different strategies to multiply returns on investments. They invest both long and short, in the securities of companies which are expected to change in price over a short period of time due to an unusual event. By pairing individual long positions with related short positions, the market-level risk is reduced significantly. Investments are made in securities that have the potential for significant future growth. The portfolio is made after considering factors like interest rates, economic policies, inflation etc.

The fund provides an investment portfolio with lower levels of risk and can deliver returns not correlated with the performance of the stock markets. Hedge funds have historically offered higher returns than stocks and bond markets.

There are different investment strategies used by hedge funds, each offering different degrees of risk and return. A macro hedge fund invests in stocks and bond markets and other investment opportunities, like currencies, in the hope of profiting on significant shifts in global interest rates and countries' economic policies. A macro hedge fund is more volatile but potentially faster-growing. An equity hedge fund may be global or country-specific, hedging against downturns in equity markets by shorting overvalued stocks or stock indices.

Hedge funds invest using different strategies. These strategies include investing in asset classes such as stocks, bonds, commodities, currencies, and returns enhancing tools such as leverage, derivatives, and arbitrage.

Some hedging strategies used by these funds:

Selling short: Selling shares without owning them, hoping to buy them back at a future date at a lower price in the expectation that their prices will drop.

Discounted securities: Investing in deeply discounted securities of companies about to enter or exit financial distress or bankruptcy, often below liquidation value.

Derivatives: Trading options or derivatives - contracts whose values are based on the performance of any underlying financial asset, index or investment.

Arbitrage: Seeking to exploit pricing inefficiencies between related securities. For example, can be long convertible bonds and short the underlying issuer's equity.

Investing: Investing in anticipation of a specific event - merger etc.

All hedge funds are not the same. Returns, volatility, and risk vary enormously among the different hedge fund strategies. Some strategies which are not correlated to equity markets can deliver consistent returns with extremely low risk of loss, while others may be as or more volatile than mutual funds.

Saturday, November 7, 2009

Maintain a household budget sheet

Though maintaining an expense sheet and budgeting looks mundane, it is a very critical step in personal money management and can help reduce worries in an uncertain economic scenario.

The main objectives of maintaining a budget sheet is to track and control the day to day expenses, to provide and prepare for the priority needs and to create financial backups to counter any unforeseen needs. Ideally one should do this exercise for at least 6 months if not more which will definitely give a lot of food for thought.

The budgeting process has two main steps. First, preparation and maintenance of an expense sheet, and second, deriving a cash-flow statement. The simplest way to do this is to create a template on Excel and regularly update the same.

Steps to create a budget sheet

Define the basic heads of expense and list all the expenses under each head

Committed expenses: Includes expenses, which are a must and are recurring in nature. Rentals, groceries, school fees, telephones, fuel, vehicle servicing, etc.

EMIs: Sum of all the EMIs including any credit card payments.

Personal expenses: Are expenses which are personal in nature like clothing, cosmetics, toys, grooming etc. These are expenses which are mostly variable and can be controlled to some extent.

Contributions to dependents: Would include financial support to elderly parents and less fortunate relatives, etc.

Saving expenses : Includes payments made towards insurance premiums, mutual fund SIPs, RDs, post office savings etc

Luxury expenses: These are spending to maintain one’s lifestyle. Includes expenses which are not a must and can be done without. For eg: Restaurants, clubs, vacations, hosting parties, purchase of gadgets etc. 2. Assign frequency for each expense: The frequencies can be monthly, quarterly, half yearly and yearly. The idea of this would be to be prepared for all non monthly expenses which could be very worrisome if not planned for.

With the budget sheet ready, the next step is to create a cash-flow statement which will give us the break-up of income v/s expense — frequency wise and tell us exactly the surpluses which can be channelised into the investment portfolio.

Sample cash-flow statement

In the chart below you can see the break up of the income v/s expenditure. Though the monthly surplus reflects as Rs 12,000, the actual surplus taking into consideration the quarterly, half yearly and yearly expenses is Rs 8200.

Friday, November 6, 2009

Junior bank accounts

IF YOU’RE one of those who started a bank account when you were 18 and about to leave home for college, refrain from passing on this piece of information to a young person if you want to protect your dignity. Otherwise, be prepared to see the smirk and hear the condescending tone of a four-feet something person, elaborate on how he/ she was exposed to banking at the age of 10.

Exposure comes early these days. Kids aren’t content with paper money or being the banker in a game of Monopoly. They want to be a part of the real financial system and enjoy the benefits that their parent’s have- like having an account of their own, using an ATM card to withdraw cash, having a debit card to occasionally go shopping and so on. Most banks in India now provide the opportunity to start a savings account in a child’s name.


Junior accounts in most banks are available for children up to 18 years of age. However, the minimum age to start such an account could be as low as one day. Before going any further, it must be clarified that while this may be in the child’s name, operating this account is possible only under the guardianship of a parent or a legal guardian. While the parents may ask for a particular amount to be diverted to this account on a steady basis, children also have the opportunity to depositing their savings into this account. Depending upon the bank, a minimum balance may also have to be maintained.


Starting such an account is not just about providing your child a source of cash and making him/her feel good. The attempt is to ingratiate the child into learning how the financial system works and to inculcate a sense of discipline especially when it comes to using ATM and debit cards. The child also inculcates the habit of savings and budgeting, by ensuring that surplus money they receive through various sources like pocket money, gifts, scholarships etc is deposited in their bank account. Moreover, it also gives children, particularly those in middle school, to practically understand the concept such as interest. For parents, this is also seen as a way of building up a cash store not just to deal with your child’s current needs but also for the future needs. This also ensures that a steady income is diverted on a regular basis.


To prevent parents from worrying about the misuse of money and cards, banks provide parents/guardians with scope to exert a great deal of parental control over a children’s account. It is predominantly up to the parent whether he/she wants an ATM or debit card to be issued. Even when such cards are issued, the bank allows the parent to determine limits regarding the amounts that can be withdrawn using an ATM or spent using a debit card. Moreover, for any transactions done using cheques, the signature of the guardian on the cheque is essential. The passwords necessary to conduct transactions online or over the phone are also given to the guardian and they are encouraged not to divulge these readily to their children. Apart from sending a quarterly physical statement or a monthly e-mail statement to the parents, the bank also sends free SMS/e-mail alerts to parents if the transactions conducted by the child crosses the threshold level.


In some banks, there are certain benefits that you are offered if you have a children’s account. HDFC’s Kids Advantage Plan offers free education insurance cover of about Rs 1,00,000 in the event of the parent’s death in a vehicular accident. Also, when the funds in the account exceed or reach a particular amount, then the bank automatically transfers some part of it into a fixed or term deposit.


  • To start such an account, you will need documents which prove the child’s date of birth
  • The guardian also needs to submit documents to prove his identity, address and his relationship with the child

There are specific accounts which can be operated by children alone but the age and the mode of transaction varies from bank to bank. At Punjab National Bank, students above the age of 10 can open zero-balance accounts and are given both ATM cards and cheque books. However, at HDFC, the self-operated account for minors is available for children above 12 but the minor will be forced to conduct all transactions at a bank branch.

Thursday, November 5, 2009

Thematic mutual funds

Thematic funds should be considered only if you have built up a sizeable portfolio and allocated your assets appropriately


Strictly speaking, if you’re a first-time investor, then a thematic fund may not be the right kind of product for you. For a first time investor, diversified equity funds should be the first step. Thematic funds are generally seen as more of a product for informed investors. An investor should look at investing in thematic funds only after one has built up a sizeable portfolio and has allocated one’s assets appropriately. What this means is that you should explore thematic funds only after you have an adequate exposure to both small cap and mid-cap stocks and have the capacity to bear a sizeable amount of risk. Even then experts recommend minimal exposure.


At any given time, there is generally one segment in which more interest is shown than others, which then becomes the flavour of the season. Investors immediately begin clamouring for it. However, the fallout of this is that some themes or flavours get taken to unwarranted heights and the effects are immediately on the price. The prices of stocks go skyrocketing in such a situation and much beyond their intrinsic value. Too much money begins chasing too few stocks and they immediately get overvalued.


Investors looking at putting their hard-earned money into thematic funds need to be aware that there is a sufficiently high level of risk associated with them. It is a classic case of putting all your eggs into one basket and by investing in concentrated segments, you are perhaps putting yourself in a precarious position.

However, mutual fund houses strategise as much as they can to reduce the level of risk involved. The method is simple and involves a small amount of diversification. For instance, when a mutual fund house comes out with a theme fund on infrastructure, it does not solely invest in the stocks of infrastructure companies but also puts money into stocks of allied sectors like steel. When a particular sector then takes a hit, the fund relies on these stocks to support it, if not bail them out of the situation.


The key to deciding whether or not to invest in a particular theme fund lies in asking yourself the crucial question of why that particular theme is enjoying the importance at the moment. Once you have a satisfactory answer, the next thing you need to ask is the prospects of that particular theme. Queries on that front are generally addressed by doing a thorough search and taking into account all stocks, private equity, earnings and possibilities of growth associated with that theme.

The performance of your theme also depends on the fund manager’s skill to identify the funds with growth potential. Only about 20 in every 100 themes are known to give positive results. Moreover, you cannot decide your theme based entirely on the positive results shown by the theme in other markets and need to check for its viability in your market.

One should not give undue importance to looking at the track record of that particular thematic fund. Given the vacillating nature of theme funds, investors should take a more holistic view and look at the track record of the fund house also by the performance of the other funds that come under its purview.


Timing is crucial in terms of investing in thematic funds and experts recommend that investors need to give the thematic fund a period of three to five years to pan out and begin to perform well. As for the performance of thematic funds in India, experts say the early entrants into the industry, which invested a few years ago, have a definite advantage.

Looking ahead, experts have a few recommendations in terms of sectors or theme that could possibly yield good returns. Infrastructure is perhaps the top of the list, followed by financial services and the energy sector. Investors should look at putting their money in these sectors through a systematic investment plan over 5-10 years.

Wednesday, November 4, 2009

Indemnity insurance

With rising awareness and courts getting consumer friendly, more aggrieved clients are taking professionals to court.

How indemnity insurance minimises the financial impact of such adverse rulings? Read on……….

SAMPLE this: An Illinois jury recently awarded the parents of a seven-year-old boy $12 million in a medical malpractice case against the doctor who delivered the ‘disabled’ child. In another case last year, an elderly man’s death brought a $5.25-mn malpractice verdict against a Texas doctor, while a Washington, DC, judge filed a $67-mn lawsuit against his drycleaner just for losing his favourite pair of pants!

If you, however, thought such things can happen in western world only, think again. For, India’s premier medical institution AIIMS was also some time back ordered to pay Rs 5 lakh in damages to a woman for surgically removing one of her body parts after wrongly diagnosing that it was affected by cancer. And that’s not the ‘lone’ case of medical negligence or error where the victim or the victim’s family had been awarded compensation.

In fact, with rising consumer awareness and courts becoming more consumer-friendly, several other patients have sued doctors and hospitals, and it is only a matter of time before disgruntled clients take other professionals and professional bodies — such as CAs, lawyers, architects, consultants, law firms, IT companies, BPOs and financial institutions — to court. Currently, no matter what professional business you’re in, client expectations of service and quality of advice continue to grow. The downside, however, is the increasing number of claims for alleged negligence or breach of duty, the cost of which, in some cases, can be exorbitant.

One saving grace, however, is that the extent of damage can be reduced if someone has already opted for professional indemnity insurance, and any loss or damage caused to the victim is not the result of any deliberate act or willful neglect. Broadly speaking, professional indemnity insurance — commonly known as PI insurance — is a financial instrument that indemnifies professionals against any legal liability such as injury, loss or damage, caused due to their professional negligence, or, in other words, an error or omission committed while performing a service. This also covers the legal expenses that a professional has to incur to defend such court cases.

One salient feature of indemnity insurance is that the scope of cover varies with each profession. Registered medical practitioners such as surgeons, physicians and cardiologists, for instance, are protected against legal liability claims made by any of their patients that may be based on bodily injuries and/ or death, while engineers and architects are protected against liability arising out of design defect, inappropriate design leading to construction damage, and loss of life to the third party. The policy also deals with professional liability exposures of accountants and lawyers who hold themselves out to the public as professionals who are willing to perform professional services, for a fee, as independent contractors or their employees, partners or shareholders. The three conventional theories of recovery against accountants and lawyers are breach of contract, tort and statutory violations.

Indemnity insurance, however, doesn’t cover liabilities arising out of criminal acts or any act committed in violation of any law or ordinance, besides services rendered while under the influence of intoxicants. Likewise, fines, penalties, punitive or exemplary damages are not covered, nor any third party public liability or losses arising out of war and nuclear perils. Similarly, breach of confidentiality or prior knowledge or anticipation of a claim will only lead to the rebuttal of a claim. In fact, each insurer has its own list of exclusions which must be carefully taken into consideration before taking any cover.

Currently, apart from state-run insurers such as United India Assurance, New India Assurance, National Insurance and Oriental Insurance, private players such as Bajaj Allianz General Insurance, Tata AIG, ICICI Lombard, Reliance and Iffco Tokio are offering this cover to professionals. Some insurers even have separate policies for doctors, CAs, engineers, lawyers, architects and stock brokers.

There is no fixed limit of indemnity though and this depends on the insured’s perception of risk and the area of operations. Generally, however, individuals buy liability limits in the range of Rs 2 lakh to Rs 5 crore, while this can go up to Rs 500 crore in the case of professional bodies and companies. For determining the indemnity limit, thus, the insured has to assess his risk, the probability of the occurrence, and the maximum loss he can bear without jeopardising his business. US, European and Australian companies usually mandate that their Indian service providers have at least $1 million limit of indemnity, but some large BPOs or IT companies may have $10m or higher limits; a financial services company may have a minimum of $100m limit of indemnity.

So far as the premium rates are concerned, they are based on the risk profile of the insured and can cost up to 2.5% of the limit of indemnity. Broadly speaking, the premiums can range between 0.2% and 2.5% of the limit of indemnity, depending upon the type of coverage and the quality of risk.

Whatever be the case, the sum insured should be chosen in a manner that it covers any legal obligation that the insured may face at any given point of time based on The adequacy of sum insured and the coverage with extensions opted are the most important factors to be borne in mind while taking the cover.



Professionals such as doctors, CAs, engineers, architects, consultants, lawyers, advocates and professional bodies


Protection against claims brought in respect of negligent acts, errors or omissions in the performance of professional services. Defence expenses and damages arising because of judgements and arbitration awards are also covered


Prior knowledge or anticipation of a claim; intentional loss; breach of confidentiality; services rendered while under the influence of intoxicants; fines, penalties, exemplary, punitive damages; dishonesty of employees; etc

LIMIT OF INDEMNITY - No fixed limit

PREMIUM RATES - Between 0.2% and 2.5% of the limit of indemnity

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