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Friday, October 29, 2010

What you should know about company fixed deposits

1. Company fixed deposits offer better interest rates than banks

You probably know this already but it is an important enough point to be on top of the list. Company fixed deposits will give you a higher return than comparative bank fixed deposits. This is because of the additional risk, for example the DHFL fixed deposit that was concluded a few months ago offered interest rate of 9% per annum, when the highest any bank was offering was 7%.

2. Additional risk

Company fixed deposits have higher risk than bank fixed deposits because these type of deposits are unsecured, if the company goes bust you will lose your money, and unlike banks, they don't have any backing of the RBI. A lot depends on the performance and reputation of the company of course. A strong company that regularly pays out dividends and has no losses is perhaps a good bet, whereas a company that has made regular losses should raise eyebrows.

3. Company fixed deposits are rated by Rating Agencies

The rating agencies hand out ratings to the particular offering, and that can help you make a decision. For example, The Shriram Transport Finance FD scheme was rated tAA (investment grade) by Fitch. These ratings can help raise flags if any offering is rated low, and you can possibly avoid such fixed deposits.

There was a comment that asked what the RBI rating of a fixed deposit was, but RBI does not rate company fixed deposits, and in case of default by the company – RBI is not going to back them in any way.

4. Company fixed deposits are unsecured

Company fixed deposits are unsecured debt, which means there is no underlying collateral, and in case of default, you won't get the funds back by selling off your documents.

5. TDS on Company Fixed Deposits

If the interest you get from the deposit is less than Rs. 5,000 in a year, then there won't be any TDS on it. You can think about spreading your investments in multiple fixed deposits if you foresee a situation where your interest is going to be larger than Rs.5,000 from one fixed deposit.

6. You could keep a shorter horizon

Normally, a  higher time period will get you higher interest rates, but if you are not very comfortable with investing money in a company fixed deposit then you can select a shorter time frame like a  year.

Like most investing decisions, whether you invest in these things or not, and how much money you do will depend on your particular circumstances. If you prefer safety over everything else, then it is best to leave these things alone. If you have a moderate risk appetite then you might as well try investing money with some of the better known companies.


Diversification brings stability to portfolio

There has to be debt investments in a portfolio that provide some regular income

A INVESTOR must weigh the available investment options due to various reasons. A rise in the value of the investment means good tidings for the investors but it also raises the question of what is the next step forward. This is probably the time when alternative investment options should be considered actively as these can provide an element of diversification for the investor. In reality there is a need that the portfolio of every investor has a mix of the different options available as this will make the portfolio well rounded.
What is also significant is how investors can maintain some variation in their investments and here are some examples along with the benefit that they bring for the investor.
Regular income option: There has to be some debt investments as part of the portfolio so that there is some regular income that is constantly being generated for the individual. A distinction has to be made between a debt investment that accumulates earnings and one that generates regular income. There can be debt options that have no regular payout as the amount is accumulated and paid at the time of maturity.

Examples include Provident Fund, Public Provident Fund, National Savings Certificate, Deep Discount Bonds, Cumulative fixed deposits etc. An investment that generates a regular income pays this out so there is a cash flow that is received here.

A common situation that is witnessed is where there are a lot of debt or fixed income instruments in the portfolio but there is little amount that generates a cash flow. This can be a problem for several kinds of people including those who need some cash flow for running their household or those who are retired. There can also be another situation where most of the investment is locked up in assets like real estate and equities and the exposure in regular return options is very low which robs the investor of a good option to ensure that there is some regular return that is generated.

Golden option: There is also the option of gold that investors need to consider when they are constructing the portfolio. The exact proportion of the precious metal in the portfolio can differ depending upon the nature of the investment and also the size of the portfolio. The proportion of gold also has to be such that this does not go too high because once again it would mean concentration of risk and depending upon the nature of investment can also impact liquidity. There is a benefit if a small proportion of the portfolio has this kind of exposure as it would mean a hedge against inflation and also a diversification route. So anything up to 10-15 per cent of the portfolio is fine for most investors.

The nature of the end use of the gold is also important as over a period of time the precious metal requirement can be built up by making systematic purchases in the form that is required. Thus there could be a situation where a person is buying jewellery in different forms to meet the requirement of a marriage while another one is accumulating gold bars that can be put to the required use at a later date. There can also be an investment in a gold exchange traded fund (ETF) when the idea is to gain from a rise in gold prices but one has to be careful on this front as in case prices fall contrary to expectations then there can even be a loss of the capital involved.

Variations in equity: Most people think that there once there is an exposure to equities in the portfolio then this will complete a part of the overall requirement for an investor. This is not correct as there are various types of equities based on the risk element involved and its behaviour on the stock exchange and it makes sense for a person with a larger portfolio to ensure that they have a wide range of exposure to the equities. This will mean that the equity portfolio will have to be further subdivided into different segments.

This will include large cap and mid cap equity exposure which is the most common type of equity exposure along with areas like international equity or even micro cap equity through mutual funds or direct holdings. These will ensure that there is a differentiation in the mode of the holdings along with an exposure to the asset class as a whole.

Long-term view: There has to be a part of the portfolio that is present in long-term assets. These are those assets that cannot be accessed immediately but will be present for use at a later date. Again the nature of the asset could be varying and it could be a mix of debt and equity. The basic nature of the investment is such that once this is completed then there is no need to keep looking at it on a regular basis. The other thing is that is most likely that there will not be a regular payout that is received on the investment so the money is accumulating.

Cashing out: There also has to be some assets that should be set aside that can be put to use on an immediate basis to ensure that there is some cash that is available for effective use as and when this is required. These are amounts that are in addition to the emergency fund and they represent some assets that can be liquidated quickly and invested in another area for better returns or it could be those that can be used for undertaking some spending. It would be better for some investments in the portfolio that can be designated for such short term use.


RBI has asked banks to shun Brokers seen pushing zero-coupon bonds to retirement funds


Since, with returns, their credit risk also gets compounded


   ZERO-COUPON bonds, which were considered unsafe investments for banks by their regulator, are now being pushed on to retirement funds by bond brokers. The Reserve Bank of India (RBI) had asked banks to stay away from these bonds because, along with returns, their credit risk also gets compounded.

   Zero-coupon bonds are debt instruments where the interest, instead of being paid out in regular half-yearly installments, is ploughed back and the compounded return is paid out on maturity.

   The central bank had recently said that since the issuers do not pay any interest regularly, the credit risk of such bonds goes unrecognised till the maturity. In case of banks, if a borrower does not pay his loan installment within 90 days of the due date, banks have to make provisions for bad loans.

   A similar debate on zero-coupon bonds had engaged the financial sector a decade back and some of the concerns highlighted then persist. According to the RBI, since a quarterly review does not take place in zero-coupon bonds, such issuances and investments, if done on a large-scale, could pose systemic problems.

   Investment banking sources say that bond brokers who play the role of arrangers are now selling these papers to retirement funds such as exempted provident funds, gratuity funds and superannuation funds.

   Market players believe that the RBI should do more to protect the end-users of such instruments, which plagued the investors earlier through deep discount bonds of weak issuers. It is finding its way into PF investors' portfolio via cooperative banks. Recently, a financial institution with the lowest investment grade with no guarantee launched such an instrument a few months ago. These securities are lying in the books of the cooperative bank and waiting to be dumped in the books of pension funds.

   The RBI has said that banks can henceforth invest in zero-coupon bonds only if the issuer builds up a sinking fund for all accrued interest and keeps it invested in liquid investments/securities (government bonds). Banks have also been asked to put in place conservative limits for their investments in such bonds. The move is in line with corporate debenture redemption fund but the RBI did not specify any amount that banks may invest in such bonds.

   However, for retirement funds, no such restrictions exist. For instance, the manager of a provident PF can invest in any bonds issued by PSU even if the bonds are not rated. But, most PF investors insist on a rating even in case of PSU issuances. There is a requirement for an issuance by a private company to be rated by two agencies.

   While many institutions have been raising bond issuances, in case of zero-coupon bonds, there is a systemic risk in the absence of a provision of interest. For instance, in 2003, IIBI issued a 25-year deep-discount bonds worth 150 crore. The bonds with a purchase price of 16,000 had a face value of 1,00,000. An interesting aspect of this bond was that the interest for the first four years, which worked out to be 1,430 per annum, were stripped from the bonds and given to investors as separate zero-coupon securities. Interest from the fifth year onwards was cumulative and compounded to yield the redemption amount of 1 lakh at the end of 25 years. Taken together with the strips, the yield on IIBI's bonds worked out to 9.06%. The peculiar structuring of IIBI's deep-discount bonds has resulted in some brokers raking it in by selling the instrument in the secondary market.

   A zero-coupon bond (also called a discount bond or deep-discount bond) is always bought at a price lower than its face value with the face value repaid at the time of maturity. These investments are extremely popular. Examples of zero coupon bonds include the US T-Bills among others.


Mutual Fund Review: Canara Robecco Income


Till this fund was taken over by Ritesh Jain, it had a tough time meeting the expectations.

Under Jain, the fund has made a complete turnaround. Both the assets and the fund's performance have taken a turn for the better. In 2008, the fund was the best in its category, with a return of 29.95 per cent (category average, 13.92 per cent). In 2009, it was fifth in terms of performance. So far this year, the fund has matched its category's return of 3.69 per cent (as on September 30).

This average performance could be attributed to its bet on longer maturity paper, while the category is going the other way on rate cut expectations. Since May, the fund has gone for longer tenure debt, while the rest of the funds in the category are going the other way. From 2.99 years in April, it has gone up to 12.82 years in July. Currently, it is at 9.39 years (as of August).

Unlike many, the fund has actively invested in more volatile GoI bonds. At the end of August, it had a 41 per cent exposure to GOI securities and another 32 per cent to debentures, issued by financial companies. It has at times invested in papers issued by telecom and automobile companies as well.

On expenses, the fund is not the cheapest in its category. Till June, it had disclosed that its expense ratio was 1.89 per cent, 33 basis points higher than the category average.

Mutual Fund Review: Birla Sun Life Dynamic Bond


Birla Sun Life Dynamic Bond has been around since September 2004 and since its launch, it has maintained a record of positive returns in each and every quarter. Its three-year annualised returns (ended August 31), stands at 9.98 per cent, 289 basis points ahead of the category average. At its worst, the fund has given ayearly return (June 8, 2005 - June 8, 2006) of 4.54 per cent, still better than quite a few of its peers.

The fund attempts to maintain a highly liquid portfolio. The manager, Maneesh Dangi, achieves this by maintaining a diversified portfolio of different maturities. Over the years, the fund managers have varied the portfolio maturity with the prevailing interest rates. In the past year, Dangi has kept the average maturity at 1.32 years. The fund manager generally populates the portfolio with certificates of deposit (CDs) and debentures issued by financial companies. Currently, the portfolio's exposure to financial companies is at 69.03 per cent.

But such an impressive performance comes at a cost; the fund's expenses have been on the higher side. Though it has gone as low as 0.15 per cent, it has also gone up as high as 1.58 per cent. Currently, it is one per cent.

Overall, a definite winner.

Thursday, October 28, 2010

Some tips for investors looking at investing in an Initial Public Offers (IPOs)

   The domestic stock markets have been through a spectacular rise over the last few months, and the trend is rubbing off in the primary markets as well. There is a flurry of initial public offers (IPOs) and follow-on public offers (FPOs) by private as well as public sector companies. Strong inflow from foreign institutional investors (FIIs) has resulted in ample liquidity in the markets. The corporate sector is trying to cash in on the liquidity situation and bullish market sentiments to raise capital from the markets in the form of equity.

   There are many takers for the good and reasonably priced public offers. There has been a good participation by individuals, high net worth individuals, domestic institutional investors as well as FIIs. On the other hand, many offers struggled to get complete subscription due to over-pricing issues or weak fundamentals.

   Earlier, investors used to invest in IPOs in anticipation of listing gains. However, the primary market is getting more mature with time.

   These are some points you should keep in mind while deciding on investing in an IPO:

Objectives of IPO    

This is one of the first points to analyse on a public offer of shares. Usually, the companies that go for public offers have certain objectives behind the offers. These include raising the funds for business growth, retiring/reducing debt, stake sale by some of the promoters etc.

   Investors should analyse these objectives carefully and get an idea about the future of the business and company's growth. It is important to keep in mind the expectations of future earnings' growth of a company is the prime driver of its stock prices in the market.

Pricing of the issue    

The pricing of an IPO is very important. Investors should look at various ways to determine the pricing of an offer. The simplest way is to read various reviews. Investors can do their own due diligence of an IPO by comparing its price with respect to its peers in the industry, checking various ratios, order books, future growth plans, risks etc.

   It is advisable for investors to look at investing in an IPO with a medium to long-term perspective.

Market sentiment    

This is another factor that drives subscription of the issues. However, investors should analyse the reason for subscriptions of an offer carefully - whether driven by fundamentals or driven by speculation. Investors should not get carried away by the reports of subscriptions to an issue. They should concentrate more on the fundamentals and pricing of an issue.

   There have been many over-priced issues being over-subscribed during good market conditions, but they lose value sharply after listing and result in heavy losses for individual investors.

Personal financial condition significant    

It is always advisable for investors to invest only their risk capital in the markets. Investment in an IPO is also an investment in equity. Even if the primary markets are looking much better than they were a few months ago, it is not advisable to borrow money to invest in IPOs for the sake of listing gains. Investors should keep in mind that even a large IPO may not list very high after the allotment as it draws a lot of liquidity from the market.

   On the other hand, a good small IPO may get subscribed many times over and hence the allotment becomes very small, reducing the chances of a high listing gain. Investors looking at listing gains should also keep in mind that the stock markets are trading close to their all-time high and there are chances of a correction in the short to medium terms.


Don’t rush to prepay your housing loan

   RECENTLY, I met a very savvy businesswoman who had just received a windfall and she was in a tearing hurry to prepay her loan taken at a very attractive rate of interest. Her income is extremely high and EMIs were comfortable and technically there was no rush to prepay the loan. However, there was an emotional urge to pay off the loan. When I inquired further, I realised that she might require some funds in the next 18 months. I told her that she had already paid a lot of interest in the first two years and considering her financial need, she should really think whether it makes sense to prepay the loan.

   She didn't have a clear answer to it. I went on to demonstrate how her loan repayment is scheduled.

   The interest paid per year is 5.36 lakh. That means at flat rate of interest it works out to be 5.36%. This is excluding the tax benefits that she would have received on the interest payments. In her case, the entire interest can be claimed as expense. This translates into a savings of 53.63 lakh * 0.309 (tax rate) = 16.57 lakh. Hence, the actual interest payout post tax benefits will be 53.63 lakh – 16.57 lakh = 37.06 lakh. This means that 3.7 lakh will be the interest paid per year on a 1-crore loan and hence, the interest rate paid per year works out to be 3.7%. If she is able to pay more than 3.7% on this loan she should retain the loan.

   Now, if one invests 1 crore for a period of 10 years, the number will speak for itself. 1 crore invested for 10 years at a compounded rate of even 6% will be 1.79 crore, which is 26 lakh more than the total payouts she would have made (without factoring any tax benefits). On a 8% return, the corpus jumps to 2.15 crore, which is 62 lakh more than the loan payout, whereas on a 10% return the corpus will be 2.5 crore, which is 1 crore more than the loan payout.

   There were two key mistakes the lady had committed and I have seen many learned people making the same mistake.

Case 1:

Looking at this loan in isolation without understanding it's impact on overall financial requirements.

   The lady made a very basic calculation and decided to pay it off. However, she forgot to take stock of her fund requirements in the coming months. She wanted to buy a piece of equipment for which she would have to borrow at 13%. A loan with an interest rate of 9.25% is a very attractive rate of interest, considering that rates of interest have gone up in recent times. For most people who have home loans, keep this in mind that a home loan is the cheapest form of loan and if you have secured it at a low rate of interest it does not make any sense to pay it off especially if you have any liquidity needs in the near future.

Case 2:

Not understanding the compounded returns needed to justify the loan.

   Most people do not calculate the compounded returns required to justify a loan. They also forget to add the tax benefits that a business or home loan can provide and sometimes do not accurately calculate the returns they need to earn to keep the loan. As seen in the example above, even a compounded return of 6% justifies keeping the loan of 9.25%.


Importance of Financial planning for young professionals



Financial planning is important for young professionals to ensure sufficient funds to meet their goals, both short-term and long-term


LOOK after the pennies, and the pounds will look after themselves.

   The age-old adage highlights the importance of the habit of saving for a rosier tomorrow. And with the domestic economy booming and jobs mushrooming across diverse service and financial sectors, like BPOs, brokerage houses, media and telecom, young professionals are earning increasingly attractive packages. As per various estimates, nearly 3 to 5 million youth under the age of 25 years enter the workforce each year in our country, and for them it becomes important to quickly get in place a financial plan. This would help to ensure that these young professionals have sufficient resources to meet both their goals.


As part of the strategy, one needs to draw up a budget, and take into account the monthly expenditure for a single person, living either with his parents or independently. These would include rent (if one is living alone), groceries, transport and allied costs, coupled with other incidental expenses. Also if one is living in a flat independently, one would need to buy furniture and other necessary items. Financial planners argue that for a young professional under the age of 28 years, and earning say 35, 000 – 40, 000 per month, could typically save 15-18% of his income in various instruments.

   These could include instruments like shares, mutual funds, ULIPs and more secure instruments like fixed deposits in banks. However, financial planners say that for the "younger" workforce, they could take a more aggressive approach as they have comparatively fewer responsibilities at this stage of life.


A young person may find it easy to get a job, but in the event of a downturn in the economy or his sector, he may be the first to be laid off. To ensure that he has sufficient resources during a possible lay-off period, young professionals need to ensure that they have a contingency fund in place. Lay-off periods can be up to 3 months for younger professional, and to build this corpus, typically requires 5% of a person's monthly income to be set aside, in safe instruments, like fixed deposits or debt schemes of mutual funds. A young professional also has longer-term aspirations, like buying a house, getting married and starting a family, coupled with holidays overseas. And each of these objectives requires a substantial amount of savings, especially in the case of buying a home in metro cities, where property prices are close to their all-time highs. To meet these goals, financial planners argue for investment in equities, directly or indirectly, through mutual fund units or ULIPs becomes key.

   As a result, financial planners reckon that one could set aside 8-9% of his total income for investment in shares and allied instruments. In addition, a small portion of ones income could be put in safe instruments. In the table above we have taken three salary brackets for individuals. We have proposed the amount that one should keep aside from his savings to build the contingency fund. The table further provides both an aggressive and a conservative investment strategy for investors to chose from and expected returns under each strategy.

   However, for young professionals who are married, they would also need to consider purchasing a term insurance policy, to meet any unfortunate demise. This policy can be purchased at substantially lower premiums when one is younger, say financial planners. Young individuals have to learn to avoid unnecessary expenditures and invest wisely for the long term. Clearly, while the first few years of one working life are the most enjoyable, one would also need to ensure that one has a long term financial plan to meet ones goals.


Bonus shares or dividends in case of Mutual Fund



They are added to fund NAVs of Mutual Fund.


If the stocks in a portfolio are the beneficiaries of bonus shares or dividends, it is ploughed back into the portfolio and hence, ultimately, reflected in the fund's Net Asset Value (NAV).

NRI Realty Investment Norms Eased

   The rights and entitlements as well as the limitations and restrictions on the acquisition, holding and transfering of immovable property in India by a Non-Resident Indian (NRI) or Person of Indian Origin (PIO) have been much simplified.

   NRIs and PIOs are permitted to purchase residential and commercial property in India without seeking any prior permission and without any limitations on the number or size of such properties. When purchasing a residential/commercial property, an NRI/PIO can make requisite payments only from funds that have been remitted to India through normal banking channels or from funds held in an NRE/NRO/FCNR (B) account maintained in India. They are not permitted to make payments against such purchase in foreign currency or by traveller's cheques or any other mode except those specified by the RBI.

   However, NRIs/PIOs wishing to purchase agricultural land/plantation property/farmhouse in India have to seek the specific permission of the Reserve Bank of India (RBI) which considers such proposals in consultation with the government of India. Where a person has acquired agricultural land/ plantation property/farmhouse when he was a resident in India, such person may continue to hold these properties even after becoming an NRI/PIO without the approval of RBI.

   Further, NRIs and PIOs may acquire residential and commercial property (not being agricultural land/ plantation property/farmhouse) by way of gift from a person resident in India or another NRI/PIO. NRIs and PIOs can acquire by way of inheritance any immovable property in India, including agricultural land/plantation property/farmhouse. It is crucial that the person from whom the property is inherited (who could be a person resident in India or person resident outside India) should have acquired such property in accordance with the provisions of foreign exchange law in force or FEMA regulations.

   A citizen of Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal or Bhutan is not permitted to acquire / transfer any immoveable property in India (except by way of lease for less than five years) without prior permission from RBI.

   Holding immovable property

   NRIs and PIOs do not require any prior approval for leasing / renting out residential/commercial properties owned by them (irrespective of whether such property is purchased from rupee/foreign exchange funds). The rental money received can either be credited to an NRO/NRE account or remitted abroad. If current income such as rental income, pension, interest, etc. is being remitted abroad, NRIs and PIOs need appropriate certification by a qualified chartered accountant, certifying that the amount proposed to be remitted is eligible for being remitted and applicable taxes on it have been paid for.


The restrictions and prescriptions on transfer of immovable property by a PIO/NRI differ with respect to the nature of immovable property being transferred and mode of transfer viz. sale and gift. (See table)


Outward remittances by NRIs and PIOs of proceeds obtained from selling their property in India are also regulated. The immovable property being sold should have been acquired as per provisions of applicable foreign exchange law in force at the time of its acquisition. Secondly, the amount to be repatriated should not exceed the amount that was paid for acquiring such property.

   If the property was bought out of Rupee sources and its sale proceeds deposited in an NRO account, NRIs and PIOs may repatriate an amount of up to US$ 1 million per financial year out of the balances held in such NRO account, for bonafide purposes, subject to satisfying the authorised dealer bank and compliance with taxes. In the event the property being sold was acquired by way of gift/inheritance from a person resident in India, the sale proceeds should be credited to an NRO account only. Upon production of valid documentary evidence supporting such gifting/inheritance of property along with tax clearance certificate, NRIs and PIOs may repatriate an amount of up to US$ 1 million per financial year out of the balances held in such NRO account, subject to the satisfying the authorised dealer bank. Also, remittances exceeding US$ 1 million per financial year requires prior permission of RBI. On the other hand, if the property being sold was acquired out of foreign exchange sources, the amount that can be repatriated should not exceed the amount that was paid for it in foreign exchange received through normal banking channels. Here, it is important to note that sale proceeds from only a maximum of two residential properties can be repatriated. When contemplating purchasing or selling property, NRIs and PIOs must refer to the latest guidelines released by the RBI from time to time. Carrying out transactions in accordance with prevalent laws undoubtedly helps minimise chances of property and tax litigation in the future.


Primary insured person’s importance in Health Cover of family floater


   YOU can go without a life cover. Provided you don't have anyone financially dependent on you. However, there is no excuse for not having a health cover. This is not just because of the mounting health care cost. Financial advisors are justifiably concerned that an unforeseen hospitalisation can upset your financial health beyond repair. So, don't wait for a good time to buy a health cover. Just grab it. However, if you are planning to combine your need with your family's, it is better to check these points before zeroing in on one health plan.

   Individual versus family floater :


You should ideally buy an individual policy for every family member you are financially responsible for rather than a family floater. This is because if you buy an individual policy of, say, 5 lakh each for all members of your family versus buying a family floater of 5 lakh each, the cost differential is not too much. Also, it becomes very small as the age of the senior most member crosses 45 years.

   Let us consider the family of four members – father, mother, son and daughter — to bring out how the individual and family floater plan really works.

Example 1 :

If you take a family floater policy for 5 lakh or take individual policy of 3 lakhs each for each of the members. If the mother falls ill and is hospitalised and the eligible hospitalisation expenditure is 4 lakh, then in the family floater the entire sum will be payable versus in the second alternative, where only 3 lakhs will be payable.

Example 2:

If individual policy had also been for 5 lakh each, then there would have been no impact on individual claims but the overall cover will be much higher. To understand this, let us say apart from the mother (who fell ill and incurred eligible hospitalisation expenditure of 4 lakh), the father was also hospitalised and incurred an expenditure of 3 lakhs. Now, in this case the family floater of 5 lakh will only pay a total of 5 lakh versus the full amount of 7 lakh being paid if the members had taken individual policies of 5 lakh each.

   The cover is not the only problem. Whatever little you save on premium also comes at a high price. In case the primary insured member of the family reaches the maximum age of renewability or he/she dies, the whole policy is closed and even the members who are still younger/survive cannot renew the same policy and have to buy a fresh policy that they may or may not get. After a certain age, the children cannot be a part of the family floater. The age generally varies from 21 to 25. After this age, the children have to buy a separate policy for themselves which they may or may not be able to get.

   Both these conditions can leave the family uninsured for any risk arising out of hospitalisation. And it is quite a possibility that getting insurance at a higher age is not possible anymore due to various health conditions that may developed in the meanwhile


Asset allocation is the answer for investment Puzzle



If you list the goals you are saving for, attainting them becomes easy

VARIETY is fast emerging as a bitter pill for investors. Just like shopping in a departmental store becomes tedious with dozens of choices on offer, the same often occurs in the investment market, but the effects are even more substantial with bigger consequences. Financial Chronicle talks to experts to tell you how to simplify and choose from the array of mutual funds, insurance products and company deposits available in the market.

The cornerstone of any good financial plan is a sensible, personalised asset allocation strategy.

For a common investor, the classes of investible asset are – real estate, gold, equity and debt. Each of them have their own distinct track record of risk and reward.

Understand yourself:


If you list the goal for which you are saving, attainting the target becomes much easier.

However, understanding one's risk appetite may be difficult.

Your ability and willingness to lose some or all of the original investment in exchange for greater potential returns is your risk appetite.

Slot yourself as a conservative investor (not at all comfortable taking risk) or a moderate investor (can take reasonable risk) or an aggressive investor (very comfortable taking risk to earn extra return). Based on your risk appetite and your investment horizon, you can figure out the allocation of your savings into equity and fixed instruments.

For example, if the tenure is very less and risk appetite is very low, then the proportion of fixed income instruments will be more and that of equity will be less. Simultaneously, if the tenure is long and if the risk appetite is more, then the proportion of equity will be more as equity is known to perform better in the long run.

Keep it simple:


Depending on the time frame, risk appetite and liquidity needs of the investor, a plan should be formed and any investment should be made within the parameters of this asset allocation plan.

Many investors holding dozens of MF folios and several deposit products in their portfolio… What investors should do is select a handful of 'best-of-breed' products and stick to them (in terms of additional investments) for the long-term rather than going after 'flavour-of-the-month' products that will invariably keep coming up.


Know what you eat:

You must completely understand the investment that you are making. All pros and cons must be thoroughly understood before making any investments.

It's not that every new product will be better in terms of performance unlike the existing ones. It is good to diversify, but do not over diversify. Diversify as much as you can track and manage. As they say, too many cooks spoil the food.

Consult a wealth doctor:

Your financial advisor is your `wealth doctor'. Be true to him/her to get the best investment solution.

Trust your financial advisor and ask him why you are investing in what is suggested and how it suits your investment criteria.

Speak to a financial planner. If he starts recommending (selling) products within five minutes of your conversation, avoid him/her.

Products after everything should fit your financial plans, which have to be simple, easy, flexible and devoid of any charges or commitments.

Evaluate your investment at least once in a quarter. If the committed or expected returns are not visible, then change your advisor. Haven't we heard of `second opinion'?


Know your compliance

Duplication of paperwork makes the procedure of buying financial products cumbersome


There is no escaping the paperwork while investing in financial products. Be it, opening a new bank account, demat account or buying insurance, filling the Know Your Client (KYC) documents is a mandatory procedure today. KYC is a client identification program that verifies and maintains records of the identity and address of investors.

KYC norms were introduced in 2002 by the Reserve Bank of India (RBI). It directed all banks and financial institutions to put in place a policy framework to know their customers before opening any account. The purpose was to prevent money laundering, terrorist financing, theft and so on.

Today other regulators too have made KYC mandatory. The Securities and Exchange Board of India (Sebi) has mandated it for mutual funds and broking accounts, the Insurance Regulatory Development Authority (IRDA) while buying insurance and the Forwards Markets Commission (FMC) for commodity trading. You need to submit it even for making post office deposits.

Documents needed: The mandatory details required under KYC norms are proof of residence and identity.

A person's ration card, passport, utility bills or a letter from the employer or his housing society is accepted as residence proof. For proof of identity, passport, voter ID card, Permanent Account Number (PAN) card or driving licence too could work. Now a days, most institutions ask for the customer's PAN too.  

Impact: Although the effort towards strengthening identification norms has helped in preventing money laundering and reducing fraud, it has had a negative impact in an unexpected quarter. The growth in investor numbers in various instruments is either stagnating or reducing. Apparently, the KYC norms are proving restrictive because of the hassles of documentation.

The KYC requirement sometimes leads to unnecessary and repetitive work, delaying operations. Customers complain about the paperwork involved. Ultimately, it means customers have to run from pillar to post for complying with the KYC norms. Investors complain of being asked to provide details repeatedly or face a freeze on their accounts.

Impact for service providers:

Companies and distributors say, KYC requirements have burdened them with substantial administrative obligations. The verification rules place a financial burden on banks, insurance companies and mutual funds due to the involved costs. Currently, every entity has to individually conduct this verification which results in duplication of effort for customers as well as the institutions.

There is a need to simplify KYC requirements. The authorities could opt for centralisation of the KYC norms to make investing easy for those not well versed with paperwork. Mutual funds have done this at an industry level by giving the mandate to a single entity, CDSL Ventures. A uniformity in requirements for KYC prescribed by all authorities would help make the filing easier. One important document that will make life simpler is - 'Aadhar', the unique identification number to be provided to each citizen by Unique Identification Authority of India (UIDAI), a government initiative. But there is still some time before it will be implemented. By making KYC norms simpler, it will make investments simpler. It is especially required if investing is to become more inclusive.


KYC is mandated by most regulatory authorities

Documents for proof of identity and address are needed.

Certain investments may need PAN card details

Duplication of documents in some cases is possible

Investee firms may also incur compliance cost

Mutual Fund Review: HDFC Monthly Income Plan

The HDFC Monthly Income Plan – Long Term Plan (LTP), launched on December 26, 2003, is the largest fund among Monthly Income Plans (MIP), with assets of 8,358 crore as of August 2010. This is higher than most of its peers in the category, which have assets under management (AUM) of less than `1,000 crore. The fund is hybrid in nature, with a predominant investment in debt. It is designed to provide regular income to investors in the form of dividends.

The fund is ranked Crisil Fund Rank 1 (top 10 percentile of the peer set) over the last three quarters. It is managed by Shobhit Mehrotra (debt portfolio) and Prashant Jain (equity).

Investment style MIPs are debt-oriented hybrid funds with a portion of the AUM being invested in equity and the rest in debt and money-market instruments. The investment style is classified as conservative or aggressive based on the weightage given to the equity component. This proportion can vary between zero per cent and 30 per cent. According to this classification, HDFC Monthly Income Plan-LTP's risk profile is aggressive, since its allocation to equity is higher i.e. between 16 and 30 per cent.

The risk profile of the fund falls between a pure debt fund and a balanced fund (greater than 50 per cent allocation to equity). This is beneficial to investors looking for a small equity exposure but with stable returns on a monthly basis. The higher debt component seeks to provide the necessary stability in returns for the fund.

Performance The fund has given CAGR (compounded annual growth rate) returns of almost 13 per cent since its inception in 2003. The performance over the last one year has been notable with the fund delivering close to 14 per cent returns vis-à-vis 7.8 per cent returns of the benchmark index (Crisil MIPEX) and 8.2 per cent returns by peers. In other time intervals, too, the fund delivered better returns vis-à-vis the benchmark index and peers

Active duration calls The fund manager actively varied the duration of its debt portfolio albeit conservatively in response to the interest rate trend. For instance, when yields started hardening in 2008, the fund reduced the average maturity of its debt portfolio to about two years in August. This ensured limited erosion of AUM during the credit-cum-liquidity crisis of 2008. Funds benefit by reducing the duration when yields harden and vice-versa.

The fund subsequently capitalised on the debt market rally (the benchmark 10-year yield dropped from around 9 per cent to below 5 per cent in January 2009) by increasing the average maturity of its portfolio to 6.16 years in January 2009. Further, the fund gradually reduced its average maturity (when interest rates hardened again from January 2009 till August) to settle around two years in August.

The disciplined portfolio management can also be inferred from the superior returns generated by the fund since its inception. If an investor had invested `1,000 in the fund in December 2003 (at inception), the initial capital would have grown to `2,284 vis-à-vis `1,623 in the benchmark index.

Consistent dividend payouts Over a five-year period, the fund has distributed dividends in 51 out of 60 months, indicating its consistency in terms of regular dividend payouts. The average dividend yield of the fund over this period is 0.62 per cent.

Portfolio analysis HDFC Monthly Income Plan –LTP has had an average equity exposure of 24 per cent over the last three years. Over the said period, the fund has consistently maintained its equity exposure above 20 per cent. The fund varies its allocation dynamically between equity and debt based on the fund managers' view on equity and interest rates.

Wednesday, October 27, 2010

Post Office MIP vs Mutual Fund MIP



If regularity of income and safety of capital are your prime concerns and you do not have any other source of income to meet your monthly expenses, then you should invest in a secured avenue that provides stable return. In this case, you may invest in Post Office MIP that is backed by the government. This scheme will enable you to earn a fixed return of 8 per cent per annum. You may even invest in Senior Citizens Savings Scheme (SCSS) that allows you to invest a maximum of Rs15 lakh and earn a higher return of 9 per cent per annum (compounded quarterly).


Alternatively, you may go ahead with your plan to split your corpus between Post Office MIP and Mutual Fund MIP Long-term.  The mutual fund MIPs aim to generate regular returns through investments primarily in debt and money market instruments (minimum of 75 per cent of its total assets). But remember that a fund such as this involves risk and does not come with a guarantee of either assured returns or capital protection.

The yellow metal (GOLD) is the easiest way to borrow money



GOLD is considered to be one of the most liquid assets in the world. The reason is simple — it is accepted as a universal currency and finds a buyer in virtually any corner of the earth. So, when you want to borrow in case of an emergency, the yellow metal is one of the easiest way out.

   The traditional and ancient method was to pledge your ornaments with a jeweller and borrow from him. He would, in turn, keep the ornaments and lend you a certain amount of money, depending on the valuation. Typically, he would lend you an amount equivalent to 50% of the value of gold you pledge and charge you a hefty interest, which could start from 30% and go up to 50%. However, these days, there are several different options available. Individuals can avail gold loans from private sector banks or even NBFCs.

   There are companies like Manappuram Finance and Muthoot Finance that specialise in gold loans and claim to offer you finance against gold in five minutes, with minimum documentation. All you need is either one of these: voter ID, passport, ration card or driving licence, and you could walk away with the needed emergency cash. In fact, some NBFCs are also open on Sundays and claim to give a higher percentage of loan against ornaments.

   While banks would typically not give more than 75% of the gold value as loan, NBFCs may give as much as 95% in case of high-purity gold. Gold loan is typically sanctioned by accepting the ornaments as pledge. Based on its value, a personal loan is sanctioned on the basis of the applicant's income and repayment capacity. The interest rate could depend on the tenure of the loan, its duration and amount. It could vary from 12-18% in case of banks, while in the case of NBFCs, it could go up to 24%, depending on the scheme you opt for. There is no minimum period for the loan and if need be you can return the loan amount the very next day.


Citibank PremierMiles Credit Card

ONE problem frequent flyers often face is limited choice – while spends on airline tickets earn them loyalty points, they do not have the freedom to redeem them against their choice of airline tickets.

   To cater to this segment of flyers, Citibank has come up with PremierMiles credit card that helps them accumulate reward points – in the form of 'PremierMiles' – and redeem the same against flight tickets of close to 50 domestic and international carriers. In that sense, the loyalty scheme is airline-neutral. Deutsche Bank and American Express also offer similar programmes linked to their specialised credit cards. Such programmes help those who opt for low-cost carriers, which mostly do not offer such schemes, to earn frequent flyer points.

   Under the program, card members earn 10 premier miles for every 100 spent on airline ticket bookings made at airline-owned websites, airline booking counters or through the PremierMiles portal. For each non-airline spend worth 100, the card holder can earn 2.5 miles. Upon activation, the card account is credited with 5,000 premier miles. If you incur expenses of 4 lakh using this card in a year, you will be entitled to a bonus of 2,500 premier miles. The points so earned cannot be clubbed with the frequent flyer points you may have earned.

   The card membership also entitles the holder access to VIP lounges at airports across the world and offers on accommodation at hotels in the network. The card comes with a built-in overseas medical insurance and fraud protection plan.

   Those wishing to obtain the card will have to shell out an annual fee of 5,000, which could be seen by some, particularly those looking for a diverse rewards program, as trifle expensive for a primarily airline focused card.

   To redeem the points collected, card holders will have to visit the bank's designated portal. They can also make their flight ticket bookings through the site.

Why go for it:

The rewards program is not restricted to any particular airline. Miles accumulated can be redeemed for tickets of several international and domestic airlines, including low-cost carriers.

Why not:

While the choice is not limited in terms of airlines, the travel-focus of the card means that points earned can be redeemed only against airline tickets and hotel accommodation – something that may not appeal to those keen on variety.


Mutual Fund Review: DSP Black Rock Equity



DSP Black Rock Equity has proved to be an impressive long term performer with its sound portfolio management strategy


LAUNCHED in 1997, DSP Black Rock Equity is one of the oldest schemes in the DSPBR basket. The rise in its asset base and the popularity of this fund is an outcome of the fund's exceptional strategy and impressive performance over the years. Its asset base has grown four-fold to 2,130 crore since 2006.


Given its presence in the mutual fund industry for over a decade now, DSPBR equity fund has performed well in both bullish and bearish phases. The fund's track record over 13 years appears impressive when compared with the benchmark and other major market indices. The fund featured in the GOLD category for three consecutive quarters

   It did underperform during the dotcom bubble of 2000-01 but managed to stage a quick recovery subsequently. In 2003, it posted a return of 130% compared to gains of 72% in the benchmark- S&P Nifty. Since then there has been no looking back for this fund. It has been consistently outperforming its benchmark as well as major market indices such as the Sensex and BSE 500. This fund has clocked a return of close to 50% over the past three years. If you had invested 1,000 in this scheme about three years ago in October 2007, that would be worth 1,500 today. These returns have been far more superior to those of the Sensex and the Nifty, whose gains were 17% and 20%, respectively during this period.


DSPBR Equity has traditionally not been a large-cap defined fund, even though it is benchmarked against the S&P Nifty. In 2006, the fund's portfolio was restructured by taking two portfolios and combining them into one. Essentially, the fund is a combination of DSPBR Top 100 Equity and DSPBR Small & Mid Cap. The strategy adopted then has helped the fund build a diversified stock holding. Out of the 87 stocks in its portfolio, its single stock allocation has never crossed 5%, barring a few large caps. While this does put more pressure on the fund manager, the sheer size of the fund probably justifies this kind of a diversification. The fund has an exposure of close to 22% in high beta sectors such as financial services and oil and gas. However, in the financial services segment, the fund is overweight on state-run banks, which are quoting at decent valuations and show growth prospects. A good proportion of its portfolio is invested in steady stocks such as BPCL, SBI, Glaxo Pharma, ONGC, Tata Steel, Bharti Airtel and others.

   The fund manager is positive on the consumption sector, infrastructure, capital goods and agriculture for now. As a result, the fund has increased its exposure in automobiles, healthcare, metals and communications sectors. Even though the fund manager claims to be positive on the infrastructure sector, the fund's exposure is limited to the realty segment. It is also swiftly reducing its exposure to the power and logistics sectors. It is interesting to note that DSPBR Equity fund has rarely sat on cash. Even during the financial meltdown, its cash holding was limited to 10%, while some of the diversified equity funds had more than 35% as cash in hand. DSPBR fund manager Apoorva Shah says that churning of the portfolio has been restricted to large-cap stocks rather than mid-cap stocks. He believes that a large-cap portfolio needs to be consistently changed tactically while mid caps can be held till there is a growth opportunity in the stock. Currently the portfolio turnover ratio of this fund is 2.05 times. This means, on an average, the fund holds a stock for six months.


The fund's sound portfolio management strategy has helped it generate consistent returns in varying market conditions. As a result, it has proved to be an impressive long-term performer. DSPBR Equity, which is perceived as a low-risk and high-return diversified equity scheme, is an attractive option for those looking to invest in mutual funds.


A second home can be a good investment avenue


   IT HAS become more or less a set pattern now for middle-aged people, mainly above 40 years, to consider seriously, buying what is called a 'second home' or a 'holiday home'. In fact, many exhibitions are being organised by builders and developers urging people to go for their second home, a little far away — may be at an hour or two drive — from their homes.

   A second home is not a bad idea. It can serve the purpose of a change from the routine, once in a while, and leave you refreshed and energised. It can be a wise investment. But nobody should go overboard on this. It would be wiser to consider the following points before one goes for a second home:

1. These properties are not exactly cheap. Realty prices can slide.


2. Often, it is difficult to ascertain if the quoted price is reasonable because of a lack of benchmark rates. Many places are being developed for the first time and, as such, there is no way to determine if any previous deals have been done and if so, at what price.


3. It is easy to buy such property but it could be very difficult to sell it. Hence, if you are considering a second house as an investment then you should be careful about liquidity.


4. If you are buying the property out of borrowed funds then you should ensure that monthly outgoings by way of EMIs and such other fixed commitments on borrowed funds do not exceed 50% of your income net of taxes. Otherwise, all your life you will be forced to work for EMIs and you may not, in the real sense, enjoy this second property. An asset acquired through borrowing can turn out to be a liability if the asset prices were to fall or if the interest rates were to rise.

The intelligent option would be to decide on an asset allocation plan keeping with your age and risk appetite. While the first house is a necessity, the second house is taken into account in one's net worth. This is a risky asset in the sense that the returns on this asset — rent, if any, and capital appreciation — are uncertain and hence a second house is classified as "equity" while working out the asset allocation plan. If your age is around 40 years and if you are not wary of taking risks then your asset allocation can be along the following lines:

Fixed Income options like PF/PPF/Bank FD, etc. 30%

Equity/real estate  (shares/mutual funds) 60%


Gold 5%


Liquid investments like bank deposits 5%

   If you are conservative in your attitude and approach, then the ideal equity allocation, including investment in a second house, could only be around 40-45% of total assets with increased allocation to fixed income options and gold.

   You can definitely consider investing in a second house keeping in mind the factors of price, liquidity, affordability from EMI perspective, access from your current home and most importantly, whether it fits in your asset allocation depending on your risk profile.


Tuesday, October 26, 2010

Single Premium ULIPs


   SEPTEMBER 1, 2010 can truly be described as a watershed date for life insurance companies in India. It was on that day that the Insurance Regulatory and Development Authority's (Irda) new rules regarding various aspects of unit-linked insurance plans (Ulips) came into effect.

   Quite expectedly, several insurance companies have adopted new strategies to align their business in line with the sweeping changes that have come into force. And 'cost control' and 'rationalisation' have become the new buzzwords in the life insurance industry today.

Eyeing Singles:

Some insurers have hit on single-premium plans as one of the ways of reducing costs. While most policies offer a single- premium option, last month saw the launch of a few single premium-focused unit-linked insurance plans (Ulips). Many see this as a cost-controlling measure, as single-premium policies eliminate the cost of pursuing as well as the risk of lapsation.

   In case of regular premium policies, product pricing factors in a degree of lapsation. In comparison, single-premium products cannot lapse. Also, companies incur lower costs on servicing of single-premium policies compared to regular pay policy. The companies that have recently announced such policies include ICICI Prudential Life, ING Life and Bajaj Allianz Life. While the idea of total liberation from the chore of paying premiums at regular intervals seems tempting enough, you need to evaluate your current financial situation and future requirements before taking the decision. Here are some points you need to ponder upon:

The Upside…:

The obvious one is that for a one-time payment, your family gets a protection cover throughout the policy tenure, provided of course, you can afford the lump-sum payment. That is the reason why it is considered better suited for those with an unpredictable, seasonal or irregular income flow and beneficiaries of windfall gains. Such a bonanza could either be in the form of sales proceeds of a property, bonus or other payouts. Such customers may want to deploy funds on a one-time basis rather than commit to long-term regular investment. We see single premium policies as fulfilling the customer need of a single-time investment without the obligation to pay subsequent premiums. We believe this is a significant market. Regular premium policies, on the other hand, are targeted at regular, disciplined investors who intend to save money for realising long term financial goals like buying a house or planning for their retirement or their children's education.

   Since all Ulip policies have a lock-in period of five years, policyholders who discontinue their renewal premium payments in regular term policies in the first five years, cannot retrieve their investments before the lock-in period. While the lock-in period is applicable to single premium policies too, there is no possibility of the funds getting locked in to a 'Discontinuance Fund' at a minimum guarantee of 3.5%, and the customer continues to enjoy the investment opportunities of his/her chosen fund and strategy as planned.

   This apart, in a single-premium policy, the maximum commission is capped at 2% under the Insurance Act, 1938. This means the policyholder will have to shell out lower charges when compared to regular premium Ulips (even after their post-September 1 makeover). Also, as against a regular premium policy, single-premium ones do not entail a recurring policy administration charge over the long term.

   Says Anil Rego, CEO of financial planning firm Right Horizons: This is also an interesting way of increasing one's life cover by lump-sum investment, if one is able to time the entry or exit (invest in debt fund when the market is at it peak and switch to equity when it troughs), one can make significant upside. Single premium also appeals to youngsters who are wary of long-term commitment and also to all categories of people with irregular income. Single premium plans could also be apt for individuals who want to gift their children or grand-children on important occasions, and non-resident Indians (NRIs) who want to repatriate part of their income back into the country.

…And The Downside:

If you are looking at directing your money to life insurance to save on taxes, this product may not necessarily fit the bill. According to financial planners, though Ulips have been extremely popular vehicles for making investments, life insurance should never be used as a tool for reducing your tax burden. Nonetheless, if you still want to put your money in Ulips in order to claim deductions under Section 80 C and have identified single premium plans for the purpose, you need to know you will be entitled to the benefit on the premium amount only up to 20% of the sum assured. Therefore, if you are paying a single premium of, say 50,000, and a sum assured of two times the amount, your cover will amount to 1 lakh. The amount of deduction, in this case, will be only 20,000, as it is restricted to 20% of the sum assured.

   Single premium Ulips qualify as a good means of increasing your cover. However, if one were to look at the long-term perspective, if the fund growth fails to sustain mortality or fund management charges, there
could be considerable erosion of corpus built.

   Regular premiums may work better for someone who has a long-term investment perspective.

Single premium Ulips are again a means of haphazard investing. They could lead to fragmentation of the portfolio, which will be tough to manage. Moreover, Ulips, including single-premium policies, come with a lock-in period of five years under the new guidelines. Should you require the money in the interim, you will not be able to encash the amount to fund your needs.

   Remember, if you have a lump-sum to invest and protection cover is not what you are looking for, you can always explore other, more liquid, options like mutual funds (particularly by adopting the systematic transfer plan route), stocks and other investment avenues before finalising single premium plans.


Case for…

Eliminates the rigmarole of paying premium every year

Suited for those with irregular income who are not confident of servicing premium payments regularly

Windfall gains like bonus or sale proceeds from property can be directed to the single premium policy to enhance life cover

… And Against

Tax benefit on premium paid under section 80 C is available only up to 20% of the sum assured

Since Ulips, including single premium policies, come with a lock-in period of five years, you will not be able to withdraw the money during the period, should the need arise

If protection cover is not your objective, then evaluate other more liquid investment avenues like mutual funds and equities



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