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Sunday, January 31, 2010

Check your goals before reviving Life Insurance policies

THOUSANDS of life insurance policies lapse for a variety of reasons every year. Policyholders may not pay the renewal premium either because of a change in their financial circumstances or because they discover later that the policy was mis-sold to them and it does not meet their requirements. They may also inadvertently skip renewals because of a job transfer. While lapsed policies result in a loss for policyholders, they are also a drag on the books of life insurance companies, contrary to popular perception. This is why life insurers often make special efforts to revive lapsed policies.


Typically, a policy can be revived within six months of its lapsing through a simple revival. If the lapse has occurred more than six months ago, a personal health declaration needs to be submitted. The policy is then revived subject to underwriting decisions. Additional medicals may be triggered depending on underwriting decision. The policy can be revived within one, two or five years of lapsation depending on the terms and conditions of the policy, as specified in the policy document.


While reviving a policy and continuing with the protection cover seems like a sensible idea, particularly in uncertain times like these when life insurance seems indispensable, you need to carry out a cost-benefit analysis before going ahead. You need to ascertain whether the arrears payable by you outweigh the benefits. Reviving a lapsed policy will make sense only if it is an investment-oriented policy as it will help you to reap the returns on investments made. Also, you should consider reviving a policy only if it has acquired the surrender value.


The time that has passed by since the lapse also needs to be taken into account. It is not advisable to revive a policy which is in lapsed condition for more than three years as the policyholder will have to pay huge amount towards the arrears of premium and interest. This is despite the fact that the insurance company was not at risk during the period the policy was in lapsed condition. It is better to go in for a new policy as per his/her financial needs. However, if the policy guarantees far exceed the interest component, the person may opt for revival.


Many a times, policyholders claim to have been victims of mis-selling by insurance agents, who talk them into buying unit linked insurance plans which may not be congruent with their investment or protection objectives. Many find wriggling out of ULIPs at an early stage quite difficult due to the quantum of money committed by them during the initial years. However, instead of continuing with such policies, it is better to exit the same and redirect the premium amount to a policy that helps you achieve your goals.

Saturday, January 30, 2010

Get your Life Insurance policy right

Here are some tips to help you choose the ideal insurance policy that meets your needs

Numerous insurance products such as children's education plans, life insurance plans with huge death benefits, and accident insurance covers are marketed aggressively. Often, people aren't aware of the actual insurance coverage. They jump onto the bandwagon, without reading the fine print.

Tax payers make hasty last-minute insurance purchases to avail tax benefits under Section 80C. Though you may be saving a small amount of tax money, you could be stuck to a worthless policy for long years.

Here are a few points to ponder over while buying an insurance policy:

Insurance is not investment

Insurance products are designed to provide protection. A term cover usually offers insurance protection but no benefit in case the insured survives the term of the policy. A unit-linked insurance policy (ULIP) on the other hand provides dual benefits of insurance protection and a flexible investment option. A certain part of the premium is invested in equities, debt funds and bonds. The rest is used to provide for life insurance and fund management costs.

Some experts advice against mixing insurance and investment. You can always invest in some mutual funds that meet your goals and risk appetite.

Keep in mind inflation - You might be setting aside substantial amounts of money towards your premium. But wouldn't you feel cheated if what you get after a long term is worth nothing? In an inflationary economy, products and services are bound to cost more than what they do today. Hence, will the benefits or returns cover your needs completely? Or will it only form a small portion of your actual requirement at the end of many long years?

Roughly compute how your benefits will look like after 10 or 20 years. It is advisable to stay away from insurance products that do not have inflation protection. Cost of living, education expenses and medical costs are bound to swell up after 10 years owing to inflationary pressures. See that the policy you opt for has insurance protection or hedge.

Friday, January 29, 2010

Mutual fund Tax – Demystified

The tax treatment in the mutual fund is categorised on the basis of:

i) Equity and Debt funds

ii) Long term and Short term Capital Gain

iii) Dividend and Capital Income

Equity, debt & the tax impact

Equity oriented funds are those funds where more than 65 per cent of the corpus is invested in stocks of Indian companies. Debt funds are those which invest more than 65 per cent in the debt market. Now let's say you hold the units of an equity scheme for more than a year, in that case you are eligible for long-term capital gains, which is zero. In other words, you pay no tax. But if you sell the units within a year, you have to pay short-term capital gains.

In the case of debt funds, if you sell the units after a year, you will have to pay a long-term capital gains tax, either with or without indexation, whichever is lower. Indexation is used to calculate tax when inflation is taken into account. This is good because it reduces the amount of capital gain and subsequently, the amount you end up paying as tax. If you sell the units within a year, the short-term capital gain will be clubbed with the income of the individual investor, to be taxed as per the prevailing slab system

Insurance Distributors see reduction in commissions from Jan 1st 2010

IRDA Has Capped the difference between the gross yield and the net yield at 3 per cent for 10 years and at 2.25 per cent for more than 10 years. Within the overall cap, fund management charges were capped at 1.35 per cent for all tenures

The New Year may bring challenges for distributors of financial products who had found solace in unitlinked insurance products (Ulips) after the Securities and Exchange Board of India (Sebi) had banned entry load on mutual fund instruments from August this year.

From January 1, the Insurance Regulatory and Development Authority (Irda) guidelines capping overall charges on Ulips will come into force.

Irda had capped the difference between the gross yield and the net yield at 3 per cent for 10 years and at 2.25 per cent for more than 10 years. Within the overall cap, fund management charges were capped at 1.35 per cent for all tenures.

We expect the commission to fall from 20-40 per cent to 920 per cent. A bulk of the products we sell give us 20 per cent commission. Looking at the new charge structure after the products are re-launched, we may shift to more traditional products. Big distributers may not be affected as much as individual agents.

Most distributers and mutual fund agents had shifted to Ulips, from selling mutual funds, after Sebi had capped commissions on mutual funds.

After entry load ban, the commission for distributers had shrunk significantly from 2.25 per cent earlier by 50 basis points to 1 per cent now.

But distributers might shift from Ulips to either traditional products by insurance companies or mutual funds products.

With lower commissions and consumers recognising the issues like high fees, mixed exposure to equities and insurance, misaligned incentives, distributors will have to shift back towards selling mutual funds.

"There will be slight rationalisation in the commissions being paid by the insurance companies on Ulips now. Most of the companies have re-filed their products and we expect to see the changes in the charging structure in the first week," said Bajaj Capital CEO and Director Anil Chopra.

"In order to reduce the charges, insurers can reduce either commissions paid to the agents or the management expenses. In our case the reduction in commission will not be much," said Bajaj Allianz Life Insurance CEO and Allianz Country Manager Kamesh Goyal.  

Since the commissions are embedded in the product, policyholders might not directly benefit from lower commissions paid to agents.

To generate new business annualised premium (NBAP) margin of 13-15 per cent for aregular premium low-charge policy, insurers will have to bring first year commission rates below 10 per cent and cut renewal commission rates by 1.5-3 percent.

In addition insurers could also reduce policy administration charges and premium allocation charges to manage a difference of 3 per cent between the net yield and gross yield.

Both the term of Ulips and the minimum ticket size had increased in the new products launched by the insurers. Insurers had also raised surrender charges significantly to ensure high persistency.

DBS Chola Mutual Fund Turns Into L&T Mutual Fund

In the wake of engineering behemoth Larsen & Toubro taking over DBS Cholamandalam Asset Management Ltd (DCAM) through its arm L&T Finance Ltd for Rs 45 crore in September, 2009, changes will be happening that investors need to keep a track of. 


All regulatory approvals have been taken from authorities (December 23, 2009 from SEBI), and now DBS Chola Mutual Fund will be renamed as L&T Mutual Fund, while DCAM will be renamed as L&T Investment Management Ltd, while DBS Cholamandalaam Trustees Ltd will be renamed as L&T Mutual Fund Trustee Ltd.


The full responsibility of management, administration and trusteeship of the schemes and assets too will fall into the realm of the new entity.

Also subject to change will be the names of the various schemes, with L&T replacing the pre-fix DBS Chola on all schemes.


The fund house is offering its unit holders a chance to exit at applicable net asset value (NAV), without paying any exit load from January 15, 2010 – the offer is valid for one month after that date.


However, the exit option shall not be open for those unitholders whose investments have not completed the statutory lock-in periods under Section 80C of the Income Tax Act.


Also, unitholders of DBS Chola Infra Fund and DBS Chola Smallcap Fund, which are close-ended, will have to pay an early exit charge equivalent to the unamortized new fund offer expenses, if the withdrawal is before the 3-year period from the date of allotment.


The fund house has also intimated that there will not be any fundamental changes to the ongoing schemes, including investment objectives. 

DBS Cholamandalam was formed in 1996 and has over 200,000 customer accounts. The AMC was a joint venture between the Chennai-based Murugappa Group and Singapore's DBS Bank.


L&T had taken over the AMC after paying Rs 45 crore for just 1.56 per cent of its assets in August, which were then at Rs 2,893.16 crore. As of December 31, 2009, the assets are Rs 2,901 crore.

Cholamandalam AMC had reported a loss of Rs 38 crore for the fiscal ended March, 2009. 


The intent, by L&T was to effect greater synergies in its own financial services business. L&T has two wholly-owned subsidiaries in the form of L&T Finance and L&T Infrastructure Finance, servicing mainly the construction equipment finance and commercial vehicles as well as tractors segment. Their asset size was then reportedly Rs 9,000 crore


Thursday, January 28, 2010

Medical Insurance for Elderly citizens / senior citizens

HOSPITALISATION is something that most people hate, irrespective of the age they are. There is a sense of helplessness that overcomes you as you lie prostate on the bed, the subject (and victim) of the close study by doctors, nurses and the topic of discussion of those around. The irritation only magnifies itself in the case of an elderly person who is more prone to such emergencies. The sense of helplessness is compounded by a fear that rising medical expenses will force you to look at close relatives (mostly children) for support.

Many elderly persons are unwilling to let go of their pride and request either financial or physical help from close relatives. To give elderly citizens the privilege of being independent and keeping their ever-increasing needs in mind, a few health insurance companies in the country have launched specific health insurance products for senior citizens.


A standard complaint of many elderly people approaching companies for health insurance used to be that companies were unwilling to issue fresh insurance policies after the age of sixty, when the need was most acute. Senior citizens’ health policies fill this lacuna by offering fresh insurance policies to people between the ages of 60 and 70 years (the person should not have completed 70 years though). But if you are an existing policyholder who has crossed the age of 70, you don’t need to worry as your policy can be renewed even after this. However, watch out as some companies have restrictions like 75 years even for policy renewals. Some companies have also lowered the bottom limit to include people who are less than sixty in their elderly insurance product. We have launched a separate cover exclusively for people aged 46 years to 70 years with renewals up to 75 years of age.


If you are possession of health insurance policy, a sizeable chunk of your medical expenses is guaranteed to come down. For every claim, an individual needs to pay only about 30% of the expenses, the other 70% will be taken care of by the insurance company. Hospitalization resulting from sickness or injury is the major component that is covered under most health insurance policies. Some policies make it possible for you to avail of cashless treatment. So keep yourself updated on the hospitals that are in the network.

Under senior citizens’ policies, insurance coverage is also available for pre-existing diseases; however, the coverage on the part of the insurance company will generally be limited to about 50% in this case. In addition, there may be a clause regarding the time period after which pre-existing diseases come under the purview of the policy. You also need to watch out for company-based specifications regarding diseases you have acquired or conditions that you have been hospitalised for, in the 12 months before and after the policy.


The sum insured in such a health insurance policy could range anywhere between Rs 50,000 to a maximum of Rs 5 lakh. However, the premium you pay could vary depending on your age. Premiums are based on the anticipatory risk which an insurance company covers. But the premium increases with increase in age slab/SI. However, the process of getting the policy is not very difficult. A proposal form generally needs to be accompanied by an age-proof, details of any insurance cover in the past. While most companies insist on pre-medical tests, there are a few who ask for a declaration form showing the absence of certain diseases. EXCLUSIONS Major exclusions to our health insurance policy are cancer, kidney problems, brain stroke, Alzheimers disease and Parkinsons’ disease. Similarly, conditions arising from war, self-inflicted injuries that have undertaken intentionally, AIDS or sexually transmitted diseases, cosmetic treatment and so on come under the framework of excluded diseases. Generally, the list of exclusions does not vary during the renewal of a policy unless a person has applied for an increase in the sum insured. However, if a person is found to have a certain ailment (which can be traced to a period before the policy is taken) and has not declared it in the form at the time of policy application, there could be certain steps taken by the company either in terms of further exclusions or at the time of renewing the policy.


Sum insured typically ranges between Rs 50, 000 and Rs 5 lakh Coverage may be available even on pre-existing diseases Major exclusions include cancer, kidney problems, brain stroke, Alzheimers and Parkinsons’s diseases

Reliance Life Insurance company introduces 17 ULIPs

Reliance Life Insurance company has announced the launch 17 unit linked insurance plans (Ulip). The new range of Ulips encompasses several categories including child plans, pension, protection, savings and investment, which are available in two versions — basic plan with tenure of over 15 years and another with a 10-year-term. According to an official release, these Ulips are primarily targeted at customers paying a premium of over Rs 10,000. All these schemes come with features such as capital guarantee, loyalty additions, higher internal rate of return and several fund options. The plans also offer riders, including payment of lump sum on diagnosis of specified critical illnesses, surgeries and additional life cover. Policyholders have the option of choosing between automatic asset allocation, systematic transfer plan and return shield options. Recently, the company launched two traditional insurance plans — Reliance Jan Samriddhi plan (RJSP) and Reliance Traditional Super InvestAssure Plan (RTSIP), targeting urban and rural customers in the premium segment of Rs 500-10,000.



Life insurers’ new business grows 22% to Rs 55,355 crore in April-Nov

Market Share Of LIC Jumps To 66% During First Eight Months Of FY10

   THE new businesses of the life insurance companies grew 22% to Rs 55,355 crore in the first eight months of the current fiscal, compared to the corresponding period last year. The industry mopped up Rs 45,337 crore during the same period last fiscal, according to IRDA data. 

   The market share of LIC among 23 players in the sector jumped to 66% at Rs 36,448 crore during the first eight months of 2009-10, from Rs 25,219 crore during the same period last fiscal. However, the private life insurance industry has registered a decline of 6%. The 22 private insurers have collected Rs 18,905-crore first year premium during April-November this fiscal, compared to Rs 20,116 crore during the same period last year. 

   Private insurer ICICI Prudential was the worst hit as its premium declined 28% at Rs 3,031 crore in the first eight months of the current fiscal from the corresponding period last year. The insurer mopped up first year premium of Rs 4,246 crore in the corresponding period last year. 

   The country's largest private life insurer SBI Life garnered a first year premium of Rs 3,523 crore compared to Rs 3,290 crore last year, registering a 7% growth. In the first eight months of the current fiscal, non-life or general insurance industry grew 9.40% in premium collection, with state-run players performing better than the private ones. 

   During April-November period this year, four public insurers registered a growth of 11.05% by mopping up a premium of Rs 13,127 crore compared to Rs 11,821 crore during the corresponding period last year. 

   New India managed to mop up the highest premium at Rs 3,929 crore in the first eight months of this fiscal. On the other hand, private players grew 7.1% during April-November period this year by collecting Rs 9,075 crore premium.
   The worst hit was ICICI Lombard among the private players registering a degrowth of 13.6% and collecting Rs 2,135 crore premium in the first eight months of the current fiscal. 

   Another big player Bajaj Allianz's premium also declined by 11%. The general insurer mopped up Rs 1,603 crore premium during April-November period this year compared to Rs 1,801 crore in the corresponding period last fiscal.


Max Newyork Life offers new Ulip

Private sector life insurer Max New York Life on Monday launched Shiksha Plus, a unit-linked plan, to facilitate a child's aspirations and goals over different phases of student life. "Shiksha plus is a 360-degree child plan that provides resources for over all development of your child under all uncertain circumstances," said Max New York Life director V Viswanand. Along with addressing the increasing cost of education, the plan also provides an option to secure the future of second child, he said. In case of death of the parent, the nominee or beneficiary is entitled to receive 10% of initial sum assured every year, subject to a maximum of 100% of sum assured, to provide for yearly education expenses of the child, Mr Viswanand said. It provides control over uncertainties of life and inflation, he added. Available with seven investment fund options, the plan has the option for upgrading premium for sibling on birth/adoption of second child, he said, adding, one could also increase the premium option to counter the impact of inflation. With a minimum premium of Rs 5,000, the fund allows partial withdrawal after completion of three years.

Wednesday, January 27, 2010

Mark-to-Market Rule

THE mark-to-market accounting rules are being brought a little closer to economic reality — accompanied by misplaced howls of outrage. True, the ostensibly independent Financial Accounting Standards Board agreed to alter a portion of the rules only under extreme pressure. Still, the standards have forced many financial institutions to overstate losses on trillions of dollars worth of assets, intensifying the global financial crisis.

Defenders of the rules say they protect bank investors and changing them will allow institutions to hide future losses. To the contrary, they have helped drive down the value of bank stocks, made shorting the shares much easier and caused bank stockholders to lost hundreds of billions of dollars in such companies as Citigroup Inc. and Bank of America Corp. William M. Isaac, a former chairman of the Federal Deposit Insurance Corp., told a House Financial Services subcommittee “MTM accounting has destroyed well over $500 billion of capital in our financial system.”

Since capital can be leveraged about 10 times in making loans, the rules have destroyed over $5 trillion of lending capacity.

The problem with mark-to-market accounting is that it officially has presumed there’s a functioning market in whatever asset is being valued — and that means a deal between a willing buyer and seller that isn’t being forced to sell. Actually, no such market exists for many mortgage-backed securities.


Nevertheless, according to testimony, accountants have required many banks to calculate values based on distressed sale prices. That has meant large write downs even on mortgage-backed securities that the institutions intend to hold to maturity.

Take the case of the Federal Home Loan Bank of Atlanta. Following the mark-to-market rules, it wrote down the value of its portfolio of mortgage backed securities by $87.4 million in last year’s third quarter. Its actual projected loss on the securities: $44,000. For the fourth quarter the bank recorded a further $98.7 million loss on the securities.

That result makes no sense when the bank doesn’t trade such assets. However, if the current market value declines significantly and stays down for an extended period of time — a condition known as other-than-temporarily-impaired — mark-to- market has been required, a bank spokesman said.

A writedown might still be required under the changes FASB approved yesterday. Yet auditors can now use “significant professional judgment” when valuing illiquid securities. That’s what they should have been allowed to do all along.


The change will make it harder for accountants to continue to protect themselves from lawsuits by using some trade, no matter at what low price, to determine a security’s value. With the new leeway, the Atlanta bank should be able to value its mortgage-backed securities by calculating the expected cash flow — the monthly mortgage payments from homeowners — and applying an appropriate discount. That’s the approach the bank used to determine the $44,000 third-quarter loss.

The key points in this example are that almost all the mortgages involved are still performing and the bank plans to hold the securities to maturity — and yet large writedowns were required.
Think of it this way. There are millions of U.S. homeowners who are “underwater” with their mortgages. That is, they owe more than the value of the home in today’s depressed housing market.


That’s hardly good news, and it might make it impossible to refinance the mortgage because of the lack of equity. On the other hand, the house hasn’t changed. It’s still providing the same shelter and other amenities to the household, and if the family’s financial circumstances haven’t gone into a tailspin, the monthly mortgage payments can still be made.

The family doesn’t have to put up money to cover the difference between the mortgage and the lower market value. Nor should the Atlanta bank have to take a big hit on its reported income because some other mortgage-backed securities owner sold in a depressed market.

FASB wisely backed away from a tentative proposal to allow auditors to assume that limited trades in an inactive market were always distressed sales. That would have gone too far.

Now accountants are supposed to use their judgment in assessing the meaning of such trades. That’s a big improvement over just using the last transaction price, as many auditors have been doing.


Now FASB has to deal with how banks deal with recoveries of previous write downs due to other than-temporary-impairment losses when there’s evidence that loss is no longer there.

A March 27 letter sent jointly by the five federal regulators of financial institutions — the Comptroller of the Currency, the Federal Reserve Board, the Federal Deposit Insurance Corp., the National Credit Union Association and the Office of Thrift Supervision — urged FASB to add such a recovery to current earnings.

Since the losses were subtracted from earnings, that would be an equitable way for FASB to go — and soon.

Oriental Bank of Commerce looking to acquire a south Indian bank

FIVE years after acquiring the Hyderabad based Global Trust Bank, state-owned Oriental Bank of Commerce has begun the hunt for another lender to expand its footprint in south India. 

   The bank has a strong presence in the northern region. To strengthen its position in the south, OBC would go in for inorganic growth if some good opportunity come up, a senior bank official said. 

   "We are a strong bank. We can take over a south-based bank having synergies to expand business in the region," the official said. In 2004, OBC acquired Global Trust Bank, which helped establish its footprint in South India. OBC merged about 100 branches of GTB as part of an amalgamation process along with non-performing assets of Rs 1,362 crore at the end of March 2004. 

   Asked how the bank would fund the acquisition if it happens, the official said the capital adequacy ratio (CAR) is close to 13%, and given the balance sheet size it could raise further capital through bonds. 

   The car is the amount banks keep aside against various risks. In a bid to strengthen its CAR, OBC raised Rs 300 crore from bonds during the month. The bank has also requested the government for capital support of Rs 1,000 crore for the credit growth in the coming years. OBC has a licence to open 117 branches across the country in the current fiscal. Focusing on semi-urban and rural areas, the bank aims to have a network of 1,500 branches by the end of March, 2010. 

   Also, the bank plans to expand its network, opening around 200 new branches each annually in the next three fiscals. OBC currently has 1,429 branches in the country, apart from 59 extension counters with 891 ATMs. The Delhi-based bank opened a representative branch in Dubai in March this year, making its overseas presence for the first time after being established in Lahore in 1943.


Franklin Templeton Fixed Tenure Fund – Series XIII – Plan A

A Fixed Income Fund

Scheme Seeks To Reduce Interest Rate Volatility & Generate Returns By Investing In Fixed Income Securities

AFTER unprecedented gains in 2009, Indian equities still look promising, especially from a long-term perspective. However, with the government expected to tighten the monetary policy, fixed income investors, especially of long-dated paper, are likely to lose out. 

   At this juncture comes a scheme from Franklin Templeton AMC that seeks to reduce interest rate volatility and generate returns by investing in a mix of fixed income securities, which mature on or before the maturity of the scheme and equities. 

   Franklin Templeton Fixed Tenure Fund – Series XIII – Plan A, a three-year closed-ended scheme intends to invest 80-100% of its assets in fixed income instruments, which includes money market instruments. Up to 20% of the money can be invested into equities and equity-linked instruments. The scheme has a benchmark comprising 20% of the S&P CNX 500, 70% of Crisil composite bond fund index and 10% Crisil liquid fund index. 

   While interest rate volatility will be managed by the fund investing in fixed income instruments, returns will be generated by investment into a diversified equity portfolio. This augurs well for investors with a desire to have an equity icing on a wellmanaged portfolio of fixed income instruments. The scheme allows investors to participate in the upside associated with equities while letting them retain the safe domain of fixed income securities. 

   However, investors will do well to note that this is not a capital-protection scheme. In traditional fixed maturity plans, investors presume that there would be no loss as fund managers invest only in debt market instruments where maturities of different instruments are equal to, or less than the scheme maturity. In this product though, money managers may contain the risk of loss due to interest rates movement by choosing instruments that mature before the scheme matures; the equity component brings in a risk of loss with the opportunity to participate in the upside. 

   Also, the scheme being closed-ended, investors cannot redeem their units before the maturity date. However, the units of the scheme will be listed on the stock exchange and one may exit the scheme by selling the units on the bourse. Investors should note that this exit may be painful as there may not be enough buyers, leading to a distressed sale. If you pre-empt an exit before maturity, you have to buy the shares in a dematerialised form, for which you need a demat account. 

The units will be allotted on February 4, 2010 and the scheme will mature on February 3, 2013. The fund offers the investors two options — growth and dividend. The minimum amount of investment is Rs 10,000. There is no entry and exit loads.

Why Invest:

To earn healthy risk-adjusted returns by investing into a portfolio of both fixed income instruments and equities.

Why Not Invest:

q       Being a fixed income dominated scheme, post tax returns will be lower than the combination of a debt and equity scheme.

q       Closed-ended structure reduces the probability of pre-maturity exit at NAV since the only exit is through the stock exchange.


Bharti AXA MF's Infrastructure NFO


Bharti AXA Investment Managers has announced the launch of the Bharti AXA Focused Infrastructure Fund.
It is an open-ended equity fund that would invest in equity and equity-related securities of companies engaged in infrastructure and infrastructure-related sectors. 
The reasoning behind the creation of the new fund, as per the fund house, is the opportunity that has been unveiled. According to the fund house, the CNX Infrastructure index has outperformed the broader CNX Nifty index over a period of 3 years. This trend is likely to continue owing to the increased outlay for infrastructure both from government and public-private partnerships.
"Our internal research has indicated that core Infrastructure stocks amongst the companies forming the BSE 100 index has outperformed the BSE 100 index by 19% CAGR over a period of 3 years. By having a focused portfolio of such sectors, we expect to derive the best for our investors through this fund," said Prateek Agrawal, Head, Equity, Bharti AXA Investment Managers.
The fund's performance will be benchmarked against the BSE 100 Index.

"India, amongst all developing countries, has the need to invest most on infrastructure development. The government is cognizant of this fact and has taken significant steps towards meeting infrastructure needs. This provides for a very good opportunity for investor participation and deriving benefit," said Vikaas M Sachdeva, Country Head – Business Development, Bharti AXA Investment Managers.

  • The new fund offer (NFO) commences January 20, 2010 and closes on February 15.
  • The fund offers both growth option for capital appreciation as well as dividend options. 
  • The face value is Rs 10 per unit.
  • The minimum investment amount is Rs 5,000, while the additional investment amount is Rs 1,000. Investments may be made in multiples of Re 1 subject to minimum investment amount.


One per cent exit load would be applicable if redeemed within one year.

The SIP/STP route is also available to investors.


Bharti AXA Investment Managers is a joint venture between Bharti Ventures Ltd, AXA Investment Managers (AXA IM) and AXA Asia Pacific Holdings (AXA APH, through its wholly owned subsidiary National Mutual International Pty. Limited).


Bharti AXA Mutual Fund has been set up as a Trust (under the Indian Trust Act, 1882) by AXA Investment Managers, sponsor of the fund. 

INSURANCE - Make sure Risks is insured

THOUGH THE YEAR STARTED WITH sentiments being down, we are ending it where a lot of ground has been recovered. The times may be challenging but everyone feels the worst is behind us, especially in India. Vehicle sales are looking up, housing loans have started picking up, lot of money continues to flow into bank deposits and Indians have again started travelling all over the world. Where does insurance stand in the scenario for an individual? 

   Let me talk about life insurance first. Whenever one buys an unit-linked insurance plan (ULIP), one should keep few things in mind. First, is the term of the policy. From January 1, new guidelines will ensure that commission and other expenses built into an ULIP will depend upon the term of the policy. Thus every customer should consciously decide the term during which he is committed to pay premium regularly. 

   Second, ULIPs offer free switching between funds. Customers should utilise this facility keeping in mind their risk profile. If one wants to reduce volatility one should opt for funds like asset allocation or wheel of fortune. Similarly single premium products offer a good option from post tax returns as compared to fixed deposits. The life cover should be decided by looking at one's income level as well as liabilities (such as housing loan). Thus, life insurance continues to be the best solution not only for protection but also for investment. One should also remember that inflation in health care sector is quite high. The cost of treatment virtually doubles every four-five years. It is important for people to buy health insurance as a serious ailment of a family member can burn a big hole in the savings of the family. Here it is important that proposal form be filled in correctly and one should continue to renew the policy from the same insurer to make the claim process simpler. We are living in a world where risks are increasing every day. The incidents of natural calamities such as flood, road accidents and thefts etc are going up. The good news is that the premium rates are lowest ever and the choice of products is quite large. This is the best time to buy long-term household insurance. One should look at opting for additional covers such as depreciation cover and daily allowance for your car. Financial planning will be incomplete without protecting oneself and one's assets against various risks. With insurance one is sure that the financial impact due to uncertainties in life gets minimised.


Tuesday, January 26, 2010

Home Loan Insurance

Some forms of home loan insurance available for borrowers

With the changing times and increasing competition, banks have come out with new and innovative schemes. This has been further boosted by the upsurge of insurance companies in the private sector. They provide an important solution - security of repayment of loan in case of untimely demise of the borrower.

Many people are a bit reluctant to go in for housing loans because of the risks involved. The risk of not being able to repay the loan, because of some unforseen event, deters them. The loan amounts are large. The loan tenures are long too - 10 to 20 years. Uncertainties in life tend to affect the decision. It makes sense to pay a little extra and be secure of the unforseen risks in the future.

Many new products are entering the market. Innovative home loan insurance schemes have been devised. These offer a wide variety of options to protect the home loan. Many products are flexible and can be tailored to meet the requirements of the borrowers. The premiums paid are eligible for tax rebate under the Income Tax Act.

Many variants of the insurance schemes are available in the market depending on the requirements .The insurance cover can be for pure insurance purposes or from an insurance and investment perspective. The premium payable and the returns vary accordingly.

Various optional add-ons can be combined. For example, critical illness and term rider covers. Once a claim has been paid, either on death or on critical illness, no further benefit is payable. These optional benefits are available to customise the policies to suit the specific needs of the individual.

In case of pure insurance products, only the risk is covered - the risk of non-payment due to unfortunate demise of the borrower. The premium is low in such a case. After the repayment of the loan, the borrower does not get anything. The insurance cover comes to an end on completion of loan repayment. In nonparticipating, pure risk cover plans, no benefits are payable on survival at the end of the policy term. The sum assured under the level term assurance plan is paid to the beneficiary. There are no maturity benefits on survival till maturity. The policy will terminate without any returns.

In case of an insurance-plus investment product, the product covers risk and also promises a return on the expiry of the loan period. The borrower gets back the sum assured along with the accumulated bonus on the expiry of the loan period. The premium is pretty high in such a case.

Some banks give free insurance cover or concessional cover. In some cases, the entire premium for the repayment period is collected in advance on the basis of the rate applicable to the particular age group. The sum assured is equal to the loan amount for which the life cover is available.

In addition, in some cases, the house itself is insured for the loan amount to prevent any loss on account of damage to the property. In case of the unfortunate death of the borrower, the insurance company pays off the balance outstanding loan amount. This avoids undue hardships to the family members of the borrower and does not lead to financial burden. One may choose the plan that is best-suited depending on the kind of risks he wants to cover.

Monday, January 25, 2010

Investing in Bonds good for risk-averse investors

It is advisable to make bonds a part of your investment portfolio if you need a steady income stream. So lets understand what are bonds and how it can help to generate returns.

Bonds were almost a forgotten word in the last few years. The stock markets were exciting and were giving anywhere between 25 to 50 percent returns per annum. Stories of investors gaining great wealth in the stock market were dime a dozen. Generating returns on an equity portfolio seemed a cakewalk.

Bonds, on the other hand, did not have the same appeal. Bonds were boring during bull markets when they seemed to offer an insignificant return compared to stocks. However, with the crash in equity markets, investors saw their capital erode by almost 50-75 percent in less than six months. Scorched by the experience, investors are now looking at other options to park their surplus funds. All it took was a bear market phase to remind investors of the virtues of a bond's safety and stability.

What are bonds?

Bonds are just like IOUs. Buying a bond means you are lending out your money to companies or the government. Just like people, companies and governments need money for their activities. A company needs funds to produce more goods, while governments need money for everything from infrastructure to social programmes to subsidies. Hence, large organisations, apart from borrowing from banks, also raise money from the public through bonds. Thousands of investors lend a portion of the capital needed.

The organisation that sells a bond is known as the issuer. Most bonds pay interest every six months, but it's possible for them to pay monthly, quarterly or annually too. The interest/coupon is expressed as a percentage of the face value of the bond. If a bond pays an interest of 10 percent and its face value is Rs 1,000, then it will pay Rs 100 of interest a year.

A rate that stays as a fixed percentage of the face value like this is a fixed rate bond. You can also have an adjustable interest payment, known as a floating rate bond. In this case the interest rate is tied to market rates through an index.

The maturity date is the date in the future on which the investor's principal will be repaid. Maturities can range to as long as 30 years. Bonds that mature in one year are much more predictable and thus less risky than a bond that matures in 20 years. Therefore, in general, longer-term bonds have higher interest rates.

Bonds for safety

It's an investing saying that stocks return more than bonds. In the past, this has generally been true for the last five to seven years. Does this mean you shouldn't invest in bonds? The answer is no. Bonds are appropriate any time an investor cannot tolerate the short-term volatility of the stock market. The easiest example to think of is an individual living off a fixed income. A retired person simply cannot afford to lose his principal, as income from it is required to run the house.

On the other hand, if money is needed for a specific purpose in the near future, fixed income securities are likely to be the best investments. In fact, for many investors it makes sense to have at least part of their portfolio invested in bonds. Most personal financial advisors advise a diversified portfolio and changing the weightings of asset classes throughout the lifetime. For example, equities get higher allocation if you are in your 20s and 30s. In your 40s and 50s bonds start getting a higher allocation. In retirement, a majority of your investments would be in the form of fixed income instruments.

Therefore, making bonds a permanent part of your portfolio will ensure higher safety of your investment surplus.

Saturday, January 23, 2010

Investment Strategy: If you have the appetite for risk...

Some good options if you have a high-risk appetite

Everybody should start their financial planning as early as possible in life. There are many facets of financial planning. These include inflow and outflow of money, planning for increase in income and expenditures, saving for future needs etc. Keeping track of inflows and outflows of money helps in maintaining financial discipline.

People save a percentage of their inflows to cater their future needs - investments. There are many investment instruments available in the market and it's important for investors to understand the various offerings, requirements, and limitations of an instrument, before entering into it. Some of these investment instruments (equity or market based) offer much higher returns than traditional instruments. However, investing in these instruments is risky as they do not guarantee the principal amount. Since the future needs are also variable in nature (some known and others unknown), it is better to create a portfolio of investment instruments by investing in multiple options.

First of all, a first-time investor should understand his risk profile. The risk profile of an investor depends on various factors such as age, earning visibility, family background, earning members in the family, number of dependents in the family etc. Basically, it is the ability to bear a partial loss of the principal amount in bad market conditions, such as the current market conditions. The risk profile of an investor is unique to him. Also, the risk profile keeps changing as and when these factors change with time.

Here are some instruments an investor with a higher risk profile can include in his portfolio:


Historically, it is proven that equity investments give higher returns than any other market instruments over the long term. However, the key to success in the stock markets is timing, patience and regular market tracking. There are large-cap (well-known) stocks, mid-cap stocks and small-cap stocks in the market. Investors with a high risk appetite can invest in mid-cap stocks that offer a higher risk-reward ratio.

Factors to watch before making investment decisions in them include financial track record of company, macroeconomic business outlook of the sector, management's track record and liquidity in the market. Investors should stay away from small cap stocks as the information available about these stocks is not much.

Small-cap and mid-cap funds

These mutual fund schemes focus on investments in small-cap and mid-cap stocks. Those who do not have the time to track the markets regularly or do not have good market knowledge can look at investing in these funds. Usually, in bad market conditions, these stocks under-perform their peers focused on large-cap stocks, but in good market conditions they do well. It is a good time to invest in such funds as the markets have corrected quite a bit over the last one year and the possibility of further downsides is limited.

Portfolio investment services

High net worth investors can choose from the portfolio investment services provided by many financial and brokerage houses. A fund manager of aggressive schemes invests in private equity and venture capital funds with a high risk-reward ratio.

Friday, January 22, 2010

Investment avenues for senior citizens

Planning investments is a challenge for everyone, and more so for senior citizens.

Choosing the right investment product per se is a difficult task for many investors. The task is even more challenging for senior citizens as they will have a limited corpus, while their need for income from the corpus does not remain constant. While a pension plan takes care of a regular source of income, life is not easy if the investor does not have a regular source of income. As a result, senior citizens have to do the balancing act between risk and returns. Needless to say, the risk element has to be as low as possible for this class of investors.

Safety over returns

As pointed out earlier, safety of capital has to be the underlying principle of investments, and risk can be a component only when the investor has the comfort of liquidity. For instance, the monthly income needs have to be met through fixed return products.

Some fixed return products

  • Senior citizens’ savings schemes:

This has been the natural choice for many as they assure nine percent returns and have the backing of the government. However, there is a cap of Rs 15 lakhs for the corpus. Hence, an investor can earn only an annual income of Rs 1.35 lakhs from this saving. This in turn relates to a monthly income of close to Rs 11,000.

  • Post office monthly income schemes:

Another traditional product, but the interest has slipped to eight percent in recent times. In the current scenario, this may not be an attractive option as bank deposits offer higher returns - in the range of nine percent. Hence, keep a track of alternate options and if the pre-closure penalty is not applicable, you can look at the option of shifting your funds from this product to another.

  • Monthly income plans (MIP):

Mutual funds too offer MIPs but they carry an element of risk as a portion of the fund is invested in equity. The allocation towards equity varies and hence investors can choose according to their comfort. For instance, during the early stage of retirement, the equity component can be 20 percent and it can be shifted to an MIP with 10 percent allocation at a later stage.

While mutual funds MIPs provide the opportunity of higher returns and capital appreciation, they also carry risk of capital reduction. So, look at MIP only if you are comfortable with your liquidity for monthly expenses and the surplus can be parked in MIPs.

  • Fixed and bank deposits:

These are the most popular options but due to the tax on the interest, you have to be careful while parking funds in this product. Though senior citizens earn a higher interest income and there is a tax free limit, a fixed deposit is one of the tax inefficient products. Hence, an investor has to keep in mind the tax angle while allocating funds for a FD. Irrespective of the corpus, park your FD with banks that have good credit rating as FD is an unsecured liability and in the event of closure of the organisation, the investor can be in trouble.

Wealth managers miss Sensex by a wide margin

PMS Providers Underperform Due To Wrong Investments, Higher Cash Calls & Capital Protection Strategies

   FUND managers overseeing portfolios of wealthy individuals are working overtime to catch up with the broader market that gained 75% since January this year.

   Mistimed investments, increased cash calls and capital-protection strategies adopted by PMS fund managers have resulted in several PMS folios underperforming the broader index. According to wealth managers, PMS providers have underperformed broader indices by around 5-15%.

   Surprisingly, PMS schemes are trailing at a time when the top-10 equity diversified mutual funds have delivered annual returns between 115 and 150%.

   Ideally speaking, PMS schemes should have done better than mutual funds. But then portfolios managed aggressively have been able to outperform the broader market.

   Mutual funds are pressurised to perform well as most funds are open-ended in nature and there is a need to bring in fresh money all the time.

   The investment mandate given to a PMS fund manager could differ with each investor. If the fund manager is asked to hold a low-beta portfolio, the scheme will appreciate gradually during a surging market and decline very slowly in times of bad markets. Currently, most PMS schemes are structured giving high weightage to investment or market risk.

   Portfolio values fell 40-60% last year as stocks plunged, prompting several PMS investors to liquidate their portfolios at huge losses. Fearing steep falls, fund managers have been keeping a higher portion of cash in their portfolios, by booking profits at regular intervals. Mid-cap stocks were sold at 15-25% price appreciation. Until a year ago, PMS fund managers invested up to 90% of their entire corpus. Cash component in portfolios, of late, has risen to 20-25%. Investment horizons (in individual stocks) have come down from 36 months to 6-8 months now.

   PMS fund managers invest a large chunk of their corpus in mid-cap stocks. These, until a few months ago, lagged large caps in terms of price appreciation. PMS portfolios will look better once mid-cap stocks get fully priced.

   Another reason for underperformance of PMS schemes is that most investors — after liquidating their portfolios at a loss in mid-2008 — re-started their PMS accounts halfway into the market rally. Almost all (new) PMS investors missed the bottom and mid-half of market rally started in the first half of 2009. Investors who have put their money in simple capital-protected schemes are underperforming by a wide margin as their exposure to direct equities has been capped.

Future Generali enables phone premium payments

Future Generali, the insurance joint venture between India's Future Group and Generali of Italy, has teamed up with Atom Technologies to offer an IVR-based premium payment and renewal facility. The policyholders can make payments over the phone with the help of their credit cards. To avail of this service, policyholders need to contact the insurer's call centre and speak to the customer service representative, who will initiate the three-way conference call between customer, atom and himself. Subsequently, the IVR will prompt the customer to enter credit card details on the phone's keypad, and read out the successful authorisation upon completion of the transaction

Read the street signs to hike in rates

Whether you are a home loan borrower or an equity/gold investor, you should be prepared for a rise in funds cost

   PINPOINTING the movement of interest rates is as difficult as forecasting that of stock markets. But there are enough signs of an imminent increase in the cost of funds. Headline inflation is close to 5% and the central bank is talking of unwinding its accommodative stance. An exit from an easy money policy is a precursor to a hike in interest rates or in cash reserve requirement for banks, which is a more direct and an immediate step to drain out excess liquidity. So, how does a home loan borrower or an investor prepare herself for such an imminent event. Here's how:


Hedge your home loan against rising interest rates by opting for a scheme that offers you fixed rates for a few years. If you already have a floating rate loan, you can reduce your interest rate burden by using available liquidity to effect a part-prepayment, on which there is no penalty.


A hike in interest rates does not augur well for equities too. Historically one has seen that equity markets correct whenever there is a CRR or interest rate hike. Yet, equities continue to be a preferred asset class when an investor intends to generate inflation-beating returns. We expect the Sensex to do an EPS of Rs 1,050 for FY11. At current levels, markets are fairly valued and we expect them to be volatile during the coming fiscal... hence, investors need to choose stocks carefully. Bank scrips are particularly vulnerable to interest rate hikes. Real estate firms also see a dip in their share prices when rates rise because they are highly leveraged and are more susceptible to interest rate risks.


Given the high chances that interest rates will rise in a few months, it makes sense to go for a short-term deposit until rates improve. Also, fixed income mutual fund investors should dump their income funds with longer-dated paper. "Stick to short-term and money market funds only for the next couple of months. In February, when clarity emerges on the government's borrowing programme, one can look at bond funds. Investors can expect returns of 100-150 basis points above money market funds in case of short-term funds," says Nandkumar Surti, CIO—fixed income, JP Morgan AMC.


High interest rates usually follows high inflation. Gold is another good hedge against price rise. As the equity markets are expected to remain volatile, the yellow metal will vie for an investor's attention. In a rising interest rate scenario, an allocation to gold is a must.


Inflation and its effects

WE all can work out our basic expenses based on how much we spend currently, but to plan for the future, we need to factor in inflation or the rate of price increase. On the face of it, India experiences a modest inflation. But that perception is quite misleading because India is possibly one of the few economies where policymakers focus on the wholesale price index rather than consumer prices. This is why even when headline inflation figures slipped into the negative zone a few months ago, prices of essential commodities and the cost of living never really fell. In fact, it rose in line with retail inflation, which was much higher at 12%.

How Does Inflation Affect You?

Transportation, dining, movies, phone bills, electricity bills comprise a substantial portion of your budget and move in tandem with inflation. These are regular expenditures which will push up your monthly outgo. Other less recurring expenses include education and healthcare, which are highly vulnerable to inflation. It's estimated that the education fees and charges can witness an annual increase of 10%. Similarly, the share of healthcare expenditure in the personal consumption basket has also increased from 4.8-6.5% in the last one year, largely due to medical inflation.

Food Prices — The Domino Effect

Prices of vegetables, rice, wheat and pulses have turned extremely volatile, thanks to extreme weather conditions. This in turn has lowered the farm output and pushed up food prices. Most restaurants and cafes have pushed prices by up to 25% to account for the rise in food-fuelled inflation. The food price inflation rose to 19.95%, the highest in 11 years for the week ended December 5, 2009.

Lifestyle — A Growing Concern

Don't forget to account for lifestyle inflation, which is a growing concern today and is much higher than the published WPI figures. Simply speaking, it indicates the rise in your lifestyle expenses with the passage of time. Lifestyle inflation can increase even if the published headline inflation figures are not soaring. For example, you would have been content to watch movies in an ordinary movie hall a few years ago. However, with hefty pay hikes and higher disposable income you've received over the years, you would have now upgraded to multiplexes. The concept of lifestyle inflation was not prevalent earlier as the income growth was usually 5% over and above the inflation. The scenario has changed now. An individual's income growth is pegged at a minimum of 10% in excess of the inflation. So the affordability is much higher, resulting in people giving in to aspirational and peer pressures.

   Reducing the impact of lifestyle inflation is all about smart spending. For instance, you don't have to travel to Europe when the whole world is visiting it at the same time. You can watch a movie after two weeks from the release date. Opt for a Sunday morning show or a weeknight show to save on ticket costs.

Inflation & Investments

Inflation doesn't even spare investments. Idle cash lying in your savings account loses value if inflation is higher than the 3.5% savings rate. Similarly, even as fixed deposits, PPF or NSC assure safe returns, they are not capable of beating the inflation. Real estate, gold, and equity are considered good hedges against inflation on a long-term basis.

Thursday, January 21, 2010

Crisil To Research Illiquid Stocks To Help Investors

Stock exchanges in an effort to seek wider participation are trying to increase the number of liquid stocks. They may introduce some innovative products for this purpose. If rating agency Crisil's efforts succeed, stock exchanges may sponsor research in some of the fundamentally strong, but less liquid counters to attract investors.

While around 200 stocks are active on the Indian bourses, the number in the US could be a few thousands.

The rating agency is now promoting a new product which grades listed companies in terms of fundamentals and valuation. The product is an upgraded one from the agency's earlier product for rating initial public offerings (IPOs). The company had approached stock exchanges to sponsor bulk research on some of the illiquid stocks, said a Crisil official. The agency had introduced the product a couple of month earlier. Volumes in listed companies covered by the report have gone up substantially, said the official.

Globally, stock exchanges sponsor research and cover only liquid companies. In India, around 170 companies are covered by more than 10 analysts. But follow-up reports are not frequent. Nearly 80 per cent of listed stocks are not covered by analysts.

Several stock exchanges, including Singapore, Hong Kong, AIM (London), and Bursa Malaysia sponsor independent equity research by outside agencies to improve liquidity in illiquid companies. Investors, wealth advisors and foreign institutional investors (FIIs) have been sponsoring research of listed firms by outside agencies such as Standard & Poor's.

Some of the well-known FIIs outsource research of listed companies. Internationally, this has been happening for quite some time now. In India, this could be the trend in coming days.

"We are able to provide unique insights, as our research business covers 52 sectors in depth. If the company is covered, it increases its credibility among investors," the official said.

Crisil's IPO grading only covers the fundamentals, but listed stocks will have additional grades for valuations. A 5/5 grade suggests potential for over 25 per cent of price rise, or strong upside, while a 1/5 grade means strong downside of over 25 per cent.

Several stock exchanges including Singapore, Hong Kong, AIM (London), and Bursa Malaysia sponsor independent equity research by outside agencies to improve liquidity

Fortis Money Plus Fund

This annual top quartile performer stands tall in the long run as well. Over the 2-year period ended October 31, 2009, Fortis Money Plus Inst delivered an annualized return of 8.48 per cent against its category average of 7.21 per cent. 
Even during its worst quarter (August 4 to November 3, 2009), the fund delivered ahead of its peers. It turned in a return of 1.23 per cent against the average return of 1.08 per cent over this period. 
While the performance is appealing, its expense ratio is not. Though on the lower side at 0.47, it has consistently risen from 0.27 (March 2008). 

This year, the fund has been heavily into Commercial Paper (CP) and Certificate of Deposits (CDs). Even then, the average maturity of the fund's portfolio has never exceeded one year and has largely been on the lower side in the category. Over the past one year, it touched a maximum of 5.64 months (September 2008) and currently stands at 3.96 months (September 2009).

Despite the fund's size falling dramatically to Rs 737 crore (December 2008), it has managed to bounce back with a corpus worth Rs 6,633 crore (September 2009).


Tracking credit footmarks - CIBIL

If in a dispute over repayment with your lending or credit card-issuing bank, can you be forced to pay up or else face an entry of your refusal in Cibil database? Borrowers must know that loan and credit card repayment details are passed on by banks to a centralised body, Credit Information Bureau India (Cibil). This information — both positive and negative — plays a vital role in determining whether a borrower’s future loan applications get accepted or rejected. As a pointer to a disturbing phenomenon, a senior official at the banking ombudsman says such ‘arm-twisting’ tactics are not unheard of.

A Delhi resident who formally discontinued his credit card in December 2005 and thus refused to pay the annual maintenance fee of Rs 826, says he was harassed by the card-issuing bank since. Not only did the card-issuing bank fail to reverse the charges, it kept levying latepayment fees, which over the years totalled Rs 3,500. In April this year, he received a call from a bank executive willing to settle the bill at Rs 1,000. To top it, the executive threatened that his name would be added to the defaulters’ list if he didn’t pay up. Fortunately, this case was resolved last week. Now, consumers may be relieved to learn that efforts are being made to put a stop to this ‘malpractice’. Steps include finding a systemic solution to the Cibil database update process. Last week, “the annual banking ombudsman conference held in Mumbai invited Cibil to make a presentation on its functioning in the context of customer complaints,’’ says a senior Reserve Bank of India official. Most credit history complaints that reach the ombudsman are over disputed amounts and unchanged status at Cibil despite repayment, says the ombudsman official. In a few cases, credit cards have never been received and yet bills sent across. Then in one case, a bank did not update Cibil records for three years. A Cibil official says, “Sometimes, a borrower would have cleared the payment, but we wouldn’t have received the no-dues information.’’ The ombudsman official seconds that banks are ‘meticulous’ in updating Cibil on negative information, but not in payment update. The official cites that sometimes a listing would carry negative connotation too. The term — written off — is one such. Banks update the credit history of borrowers on a monthly, quarterly and half yearly basis. So, even if a customer were to clear the outstanding amount, the information wouldn’t be added till the next update, says the ombudsman official.

According to a senior banker who does not wish to be identified, currently banks have individual policies on reporting disputed repayment cases to Cibil. “No bank should destroy the credit history (of a borrower) on flimsy grounds, without proper data,’’ the banker insists.

As mentioned earlier in these columns, unlike in developed countries such as US or UK, Indian borrowers cannot individually access this potent information to verify its authenticity. That’s because, according to the Cibil official, the credit bureau is still awaiting guidelines from the Reserve Bank of India to open it up to individuals.

BSE’s Mutual platform has edge over NSE’s gateway

IT may be lagging its arch rival where equity and equity derivative volumes are concerned. But there is some comfort for Bombay Stock Exchange as far as the mutual fund platform is concerned. BSE's mutual fund platform 'Star MF' is having an upper hand over National Stock Exchange's 'NEAT-MFSS' for the time being. If sources are to be believed, BSE has transacted fund units worth Rs 21 crore since December 4, when this facility was opened on the exchange, more than twice than that transacted on the NSE. Though both the exchanges have 10 fund houses listed with them, BSE has more schemes (over 130 schemes) that are eligible to be transacted through the exchange, say brokers. Moreover, BSE has gathered support from several financial advisors, who have been requested to advise their clients to trade through BSE. According to industry sources, the exchange has received confirmed participation from 15 other fund houses who are expected list their funds on the exchange over the next few days.

Goldman picks up 9.4% stake in Max India for Rs 540 crore

   GOLDMAN Sachs is acquiring 9.4% stake in the Analjit Singh-promoted Max India for Rs 540 crore ($115 million) by subscribing to compulsory convertible debentures issued by the company. 

   The debentures will be converted to shares after 15 months.
   Simultaneously, Max India is also issuing 2 million warrants to Analjit Singh for Rs 175 crore. Mr Singh is paying 50% of the total consideration (Rs 87 crore) upfront as against the stipulated requirement of 25%. These warrants will be converted into equity shares in any time during the next 18 months. 

   These decisions were taken at Max India board meeting on Saturday. ET had reported in its edition dated December 26 that Max India is looking to raise Rs 450-550 crore through a preferential allotment to a financial investor. 

   "The convertible debentures shall have a lockin period of 18 months along with a coupon rate of 12%. The instruments will be converted into equity shares at Rs 216.75 each," said Max India director Mohit Talwar.

Under the proposed agreement, Max India will give a board seat to Goldman Sachs along with information rights.
At CMP, Max India's market capitalisation stands at Rs 5,200 crore. 

   The proceeds of the preferential issue of convertible instruments will be used to fund the existing businesses of the company — insurance and healthcare. Max India operates its main businesses of life insurance and healthcare through two subsidiaries — Max New York Life Insurance and Max Healthcare. Besides, it also produces specialty plastic products such as niche and high barrier bi-axially oriented polypropylene (BOPP) films, thermal lamination films and leather finishing foils. The company also has a tie-up with Bupa for health insurance. 

   Max India has been looking at raising funds through the equity route for quite some time. It had originally planned to mop up Rs 1,000 crore through rights issue. Subsequently, it changed its plan and decided to raise only Rs 400 crore through the qualified institutional placement (QIP) route. This has also changed now. 

   The life insurance business constitutes around 84% of Max's revenues with the healthcare business accounting for another 8%. Max India reported consolidated revenues of Rs 4,166 crore in the first half of the current fiscal as compared to Rs 2,245 crore to the corresponding period last fiscal.
   Meanwhile, the company's consolidated losses have come down Rs 87 crore in the same period this year from Rs 268 crore in the 2008-09 fiscal.


Canara Robeco Equity Tax Saver

Given the performance in 2007, 2008 and the recent market run up, it is a worthwhile choice in the tax planning category. In the three years ending November 30, 2009, it has been the second best performer in tax planning category, giving 16.77 per cent against the categorys 7.31 per cent. In 2006, it delivered 31.46 per cent against the categorys 29.77 per cent. In 2007, it beat its category by seven per cent. Again in 2008, when the market tumbled, it shed 46.85 per cent against 55.67 per cent fall of an average equity tax planning fund.

The aggressive cash and debt bets taken by the fund manager in the second half of 2008 helped the fund.

In the recent rally (March 9, 2009 to November 30, 2009), the fund has delivered an astounding 125 per cent against the categorys 104 per cent rise.

Some sectoral bets worked in favour of the fund. Allocation to construction stocks was increased from eight per cent in December 2005 to 24 per cent in February 2006. The fund also benefited from allocation to the engineering sectors in 2006. Increased allocation to energy sector also worked for the fund in 2007.



Wednesday, January 20, 2010

Mutual Funds - New Commission Rules

The securities market regulator, SEBI, has proposed radical changes in the way mutual fund distributors are compensated. SEBI seems set to enforce complete flexibility and transparency into the commission paid to the distributors. The changes are long-anticipated and many ways logical. However, they are likely to lead to a deep transformation in the way mutual funds are sold, and I think many distributors will find it difficult to adjust to the new regime.

Mutual fund distributors (who are now euphemistically called Independent Financial Advisors-IFAs) are currently paid a commission by the Asset Management Company (AMC) whose funds are being sold. This commission is generally around 2-2.25 per cent for equity funds. This is deducted from the invested amount and the investor gets allotted that many fewer units of the fund. The distributor gets the commission from the AMC. Distributors are not permitted to refund any of the commission back to the investors. However, it is an open secret that many knowledgeable investors whose investments are large enough to give them some clout get discounts on the commission in the form of such refunds. Till XXX, such refunds were not a violation of the rules and were routine.

Now, SEBI wants to put an end to the practice of fixed commissions. It wants the actual commission amount to be discussed and settled between the investor and the distributor. Operationally, SEBI has proposed two methods for implementing flexible commissions. One, there will be a place in the fund purchase form for writing in the commission percentage that the investor wants the AMC to pay to the distributor. Or two, the investor will separately pay the distributor for his services without involving the AMC. In the second option, the investor will write two cheques, one for the AMC and one for the distributor.

The pros and cons of these new arrangements are self-evident. On the plus side, it does away with the administered-price regime that we have today. Different distributors provide services and advise of different quality. Some just fill in the form and deposit it, others actually give advice. Some give good advice and some bad. Some come to meet you in kurta and chappals, others come with smart ties and smarter power points. Some are self-service online systems while others offer plenty of personalised face-time. The value that the investor gets from each of these things is different and like other goods or services the money he is willing to pay is also different.

Those are the pros and they are all on the investors' side. Unfortunately, the cons are all on the side of the distributor. Many investors will underpay advisors and some won't pay them at all. Smaller distributors are often just individuals who are struggling to run their businesses alone. Now, chasing investors for payments will be a whole new source of business stress.

There's no easy balance between the two and I guess everyone will find their own price and service point in a freer market. However, the newer rules will worsen one problem-they will further increase the transparency gap between the real mutual funds and the faux-funds being run by insurance companies under the guise of ULIPs. It is ironic that fund distributors are getting squeezed on the two per cent they earn while the insurance industry gets away with their 30 or 40 per cent commissions for hard-selling funds disguised as insurance.

These changes make the regulatory arbitrage between an investor-friendly SEBI and a historically industry- and agent-friendly Insurance Regulatory and Development Authority (IRDA) even wider. And that's not good for the investor.

Fidelity Tax Advantage

Launched in January 2006, the fund is relatively new in the tax planning category but has made a mark. In the three years ending November 30, 2009, the fund delivered an annualised return of 13.38 per cent against the category return of 7.31 per cent. Although its performance during the market run-up has been average, it protects against the downside. Since its launch, the fund has guarded investors better than other tax planning funds. The bias towards large-cap stocks and a diversified portfolio has helped the fund but the trade-off has been in returns during the market rally.

In the recent bear run (January 8, 2008 to March 9, 2009), the fund shed 50.56 per cent against its categorys 56.92 per cent. While in the bull run (March 9, 2009 to November 30, 2009) that ensued, it delivered 105.57 per cent, almost equal to the categorys 104.17 per cent.

The fund largely maintains a buy and hold strategy. But, it does take short-term bets. Of the 186 stocks it has invested in so far, 66 of them (35 per cent) have appeared for five months or less.

With a large-cap bias and diversified portfolio, the fund is for the conservative set of investors who want a good nights sleep over trailblazing returns.

Amfi bars 4 Mutual Fund agents for misselling

Fund Houses Asked To Suspend Commission And Incentives To Erring Distributors


THE Association of Mutual Funds of India (Amfi), an industry body representing fund houses, has directed its members not to deal with four distributors allegedly involved in corrupt practices. 

   The barred entities are alleged to have involved in misselling fund products to investors. Misselling describes a wide array of common malpractices such as selling products which are not suited for a particular investor. Investors have also lodged complaints regarding misappropriation of money by the erring entities. However, the distributors blacklisted by Amfi don't figure among the country's top financial advisors. 

   "Some distributors were carrying out fraudulent activities due to which investors were suffering losses. After seeking explanations from the distributors, we immediately suspended them," said Amfi chairman AP Kurien. "Amfi has asked fund houses to suspend payment of commission and incentives to select financial advisors," said a senior fund official. 

   Mutual fund products are distributed by banks, independents distributors and independent financial advisors. Among the top distributors are HDFC Bank, HSBC, Standard Chartered Bank and independent entities such as NJ India, Bajaj Capital and Blue Chip. Besides institutional sellers, there are about 65,000 independent financial advisors selling mutual fund schemes to retail investors. Mutual funds compete vigorously to sell their products resulting in distributors being wooded by all the fund houses. 

   All the 65,000 mutual fund agents in the country have an Amfi registration number (ARN) and have to follow a code of conduct mandated by Sebi. Every year, Amfi takes a self certificate from all the ARN holders stating that she/he has followed the code of conduct. 

   At present, there are more than 30 lakh insurance and mutual fund agents and bank officials selling retail financial products in India.
   "They serve about 188 million investors holding financial assets. Of these, eight million investors participate in debt and equity markets, either directly or indirectly through complex and risk-bearing products like mutual funds and market-linked insurance plans. It drives home the need for order," according to a report by a government-appointed committee which was examining the financial services industry.


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