InvestmentYogi

Multi Commodity Exchange of India Ltd – IPO Note

Yogi — Mon, 20 Feb 2012 15:59:13 GMT

Company Background

Incorporated in the year 2003, Multi Commodity Exchange of India Ltd (MCX) is electronic commodity futures exchange, which provides online trading facility along with clearing and settlement operations for commodity futures across India. MCX has emerged as the market leader in India’s commodities future industry with around 88% market share as on 30^thSeptember, 2011. As on 31^st December 2011, it had 2,153 registered members nationwide with more than 296,000 terminals across India and has emerged as the 5^th largest commodity futures exchange in the world as per Futures Industry Association (FIA) survey.

Peers

In domestic market are National Commodity and Derivative Exchanges Ltd (NCDEX), National Multi Commodity Exchange of India Ltd (NMCE), Indian Commodity Exchange Ltd (ICEX) and ACE Derivatives and Commodity Exchange Ltd (ACE). In international market, the peers are Shanghai Futures Exchange, CME Group (includes CBOT and NYMEX), Zhengzhou Commodity Exchange, etc.

MCX market share against its peers (percentage) in domestic market

Source: RHP, MCX

MCX allows trading in more than 50 commodities across sectors like bullion, metals, energy and agricultural products. In the world, MCX is the largest silver exchange, the second largest in gold, copper and natural gas and third largest in crude oil futures based on the number of futures contracts traded as on 30^th June 2011.

Share in revenue of major commodities as on FY11

Source: RHP, MCX

IPO details

MCX is offering 6.4 million equity shares at a price band of Rs 860 to Rs 1,032 through an offer for sale. The key shareholders who are reducing their stakes are Financial Technologies (India) Ltd (FTIL), State Bank of India (SBI), GLG Financials Fund (GLG), Alexandra Mauritius Ltd (AML), Corporation Bank, ICICI Lombard General Insurance Company and Bank of Baroda. Through this IPO, 2.6 mn shares are offered by FTIL, 2.1 mn shares are offered by SBI, 0.78 mn by GLG, 0.39 mn by AML, 0.24 mn by Corporation Bank, 0.14 mn by ICICI Lombard and 0.1 mn Bank of Baroda. Subsequent to IPO, FTIL’s stake in MCX will reduce to 26% from around 44% they owned earlier. The issue is worth Rs 552 – Rs 663 crore. However, the company will not receive any proceeds from this offer.

IPO Grading

Credit rating agency, CRISIL has assigned 5/5 grade to the IPO of MCX which indicates strong fundamentals. However, this grade is not an opinion on whether the issue price is appropriate to the issue fundamentals. Also, it’s not a recommendation to buy, sell or hold this graded instrument.

Revenue Mix

The company originates its income from transaction fees with respect to the trades executed on their exchange, annual subscription fees, membership admission fees, terminal charges, proceeds of sale and dividend / interest income from investments.

Break-up of revenue mix

Strengths

§ Leadership position in the commodity futures industry.

§ To launch new products at regular intervals, retain existing investors and attract new investors for trading in futures market.

§ Technology infrastructure is a key factor of growth for this company and highly scalable business model.

§ Experienced Management team / board of directors to cruise the business, by adapting to newer changes in the regulatory environment and bring innovations to exchange.

Business strategy to grow in future

§ Intends to grow its market presence in new regions across India and to increase number of its participants.

§ Enhance marketing, educational and promote awareness of trading in futures industry among participants in related industries.

§ Continue to pursue strategic initiatives to open up new revenue streams. The company is looking for opportunities to invest in companies or assets in related industries, primarily in India and the pan-Asian region, which would enhance its growth, operations and profitability.

Risk factors

§ Unable to grow the turnover of commodity futures traded on exchange could affect the business.

§ Growing competition from existing players and new entrants in the industry.

§ Maximum income is derived from futures trading of some commodities on exchange. So, decline in trading volume of these commodities could affect the flow of income.

§ Failure to amend Forward Contracts Regulation Act, 1952 (FCRA) in timely manner. If this measures are not brought into force in a timely manner, and its inability to introduce new products on the exchange could have adverse affect on its operation.

§ Imposing Commodities Transaction Tax (CTT) by government could decline volumes of future trading on exchange.

Financial Analysis and Valuation

MCX has reported robust growth over past 3 years. Operating income has growth at a CAGR of 32%, EBITDA at ~31% and adjusted PAT at ~30% between FY09-11. In medium term, the company’s strong market position and continuous focus on product innovation would act as growth drivers. In long term, introduction of new instruments such as options trading on exchange and active participation by institutional players, after necessary regulatory reforms take place, are likely to drive growth in income.

Financial Summary

As on December 2012, the company registered total income of ~Rs 474 crore and net profit of ~Rs 220 crore. Since, the company has the price band of the IPO at Rs 860 – Rs 1032 it pegs the valuation of the bourse at Rs 5263 crore (around $1 billion) at the upper end of the price band. On basis of earnings multiple, the upper end of the price band puts MCX slightly on the expensive side i.e. 30 times its earnings of FY11, while it would be 25 times on the lower end of the price band. However, IPO of MCX is first of its kind stock in the market with no close peer for valuation to compare and riding on India’s potential for rapid growth in commodity trading.

Conclusion

The pricing of this IPO is attractive based on valuation and growth prospects. It’s recommended to “Subscribe” for this issue considering MCX’s leadership position in commodity exchange markets, operating profits around 60% from last two financial years and debt free balance sheet.

Author

Hiral Thanawala

Multi Commodity Exchange of India Ltd – IPO Note

Yogi — Mon, 20 Feb 2012 15:58:08 GMT

Company Background

Peers

MCX market share against its peers (percentage) in domestic market

Source: RHP, MCX

Share in revenue of major commodities as on FY11

Source: RHP, MCX

IPO details

IPO Grading

Revenue Mix

Break-up of revenue mix

Strengths

§ Leadership position in the commodity futures industry.

§ To launch new products at regular intervals, retain existing investors and attract new investors for trading in futures market.

§ Technology infrastructure is a key factor of growth for this company and highly scalable business model.

§ Experienced Management team / board of directors to cruise the business, by adapting to newer changes in the regulatory environment and bring innovations to exchange.

Business strategy to grow in future

§ Intends to grow its market presence in new regions across India and to increase number of its participants.

§ Enhance marketing, educational and promote awareness of trading in futures industry among participants in related industries.

Risk factors

§ Unable to grow the turnover of commodity futures traded on exchange could affect the business.

§ Growing competition from existing players and new entrants in the industry.

§ Maximum income is derived from futures trading of some commodities on exchange. So, decline in trading volume of these commodities could affect the flow of income.

§ Imposing Commodities Transaction Tax (CTT) by government could decline volumes of future trading on exchange.

Financial Analysis and Valuation

Financial Summary

Conclusion

Author

Hiral Thanawala

LIC Jeevan Ankur Child Plan

Yogi — Tue, 14 Feb 2012 08:27:43 GMT

We dream of a secure future for our children. But what happens to this dream, in case something untoward was to happen to the parent? To provide for the child’s financial needs at such times, insurance companies offer various insurance products. The latest offering in this category of children’s plans is LICs Jeevan Ankur Child Plan. Here is a quick snapshot of what the plan has in store.

Brief on the Plan

LICs Jeevan Ankur Child Plan is a conventional endowment plan. Its prime objective is to financially secure the child’s future even in the absence of the parent. It offers a risk cover on the life of the parent, and the child (or the nominee) receives a sum assured in case of the parent’s death.

The Basic Features

Eligibility Criteria:

Entry age of parent: 18 years to 50 years.
Maximum maturity age of life assured: 75 years.
Entry age of child: New born to 17 years of age.
Policy Term: Maximum of 25 years of age of child. Minimum policy term is higher of either 18 years of child’s age or 8 years of policy.

Premiums Payable:

Premiums could be paid as a single premium or regularly at yearly, half-yearly, quarterly or monthly basis.

Policy Lapse:

The policy would lapse if premiums are not paid within the grace period. Revival is possible from the date of first unpaid premium and before the date of maturity by paying all the arrears of premium together with interest within a period of five years.

Surrender Value:

For single premium, the Guaranteed Surrender value on the plan will be available only after the policy has completed one year. It is equal to 90% of the premium paid excluding what is paid for riders. In the case of regular premium policies, the Guaranteed Surrender value 30% of the premiums paid(excluding the first year premium and the premium for riders), and would be available, after completion of three policy years.

Benefits of the Plan

Death Benefit:

In case of death of parent (i.e. the life insured), an immediate Sum Assured is paid to the child. Apart from this, 10% of the Sum Assured would be paid out on every policy anniversary, till the end of the policy term.

Maturity Benefit:

On maturity of the policy, a benefit is paid out irrespective of whether the life insured is alive or not. This maturity benefit would comprise of the basic sum assured plus any loyalty additions.

Rebate on Sum Assured:

For Sum Assured equal and above Rs 200,000, there will be a rebate on premium available.

Tax Benefits:

As per section 80C, the premiums paid are allowed as a deduction, up to a maximum amount of Rs. 1, 00,000. The benefit received on maturity is exempt from tax as per Section 10(10) D.

Optional Benefits:

The plan offers two additional riders that could be opted for, the Accidental Benefit Rider that is available only for regular premium policies, and the Critical illness rider.

In case of death of child:

In such a case, the life assured has the option to nominate another person or child and the policy will continue under the same terms.

Reviewing Jeevan Ankur

So what makes it attractive?

Jeevan Ankur has its share of pros that make it worth investing in. The income benefit after the parent’s death ensures the child’s recurring financial needs are met. Loyalty additions are an added advantage on maturity. Plus the availability of riders and the large rebate on the sum assured make the plan an attractive option to secure the child’s future.

The Drawbacks

The loyalty addition is not guaranteed and depends on when the insurer makes a profit. Apart from this, the policy does not have the facility of a loan on it. So those seeking a refinance cannot do so. A policy surrendered in the first year will fetch you no surrender value. Even after this stipulated period, the amount received as Guaranteed Surrender Value is lesser than the amount of premium actually paid during the period.

Jeevan Ankur is a traditional endowment plan. Endowment plans offer a combination of both protection as well as savings. Thus the premiums and the mortality charges on such plans are much higher than traditional plans. Even if you hold the policy till the end of policy term, the yield on the plan works out to be pretty low. The plan is thus not for those investors who are looking purely at protection.

Single Person’s Financial Planning

Yogi — Thu, 09 Feb 2012 07:03:53 GMT

You are single, young and earning a handsome salary. All in all your life is worry free and you are enjoying it to the hilt. As there are no responsibilities on your shoulders you do not plan for things. You like spending and maintaining a good lifestyle full of monster bikes and expensive vacations. But this worry free present should not prevent you from doing a long term financial planning as you never know what’s going to happen tomorrow. If you have a prosperous present, it’s wise to take few steps which will keep your future secure too. The planning should be such that even if the time takes opposite turn you are not bereaved of the living standard you are maintaining today. Let’s focus on some dos and don’ts you should focus on as a single individual.

Your current status

Few assumptions which I am making are you are in twenties and your salary growth will be 12% per annum. You will retire at the age of 55 and inflation will be round 7% per annum.

Let’s start with the Dos

Don’t fear spending

Don’t shy away from pursuing an expensive hobby. Unless you spend you will not get motivation to earn more. 20% of your total monthly income should be used to keep you satisfied and happy. Enjoy the bike ride; go for photography or any other activity you are passionate about.

Do not be risk averse

You are young and age is by your side. Debt investment is for old people who don’t have time by their side. Maximum of your saving should go towards equity. Equity investment is risky but in long run it giver the best returns. If you invest in some good stocks they will take care of your entire future capital requirement. Golden rule is, subtract your age from 100 and allocate that percentage of your earning to equities.

Stay in Cash

Say world falls back to recession once again and you lose your job. In this volatile market, no job is for ever. Be in cash so that you can sustain your standard of living up to next six months without earning a penny.

Some common mistakes you should avoid – Don’ts

Don’t Overspend

Spending is good but getting into a debt trap is bad. Spend within your limits. Your limit is the credit card bill which you can pay in full every month while serving all your financial obligations. Mind you - you cross the limit the day there is unpaid balance left on your credit card.

Don’t increase you debt

Don’t invest in long term debt beyond your means. One car and one home is more than enough for debt payment. Owning another house on credit seems to be a bad idea. Just imagine the situation when you have no job, how you are going to pay the installments.

Invest in future

One day you will not be single and responsibility free. It’s better to do some advance planning for that day. You can roughly calculate the time frame in which you plan to marry and have a family. Capital requirement at the time of marriage and later on the child education is huge. If you don’t plan for this investment in advance you might be in trouble at that time. Start allocating funds towards these future requirements. The job is not tough as the power of compounding is on your side.

Author

Bimlesh Singh

7 Financial Facts You need to Know About Your Valentine

Yogi — Wed, 08 Feb 2012 07:18:08 GMT

Every year, 14^th February is special to celebrate love and express the feelings because it’s “Valentine Day.” Couples usually exchange the valuable gift, watch a romantic movie, plan for dinner, go out on a holiday at romantic destination, etc. However, it’s recommended you understand financial facts and behavior of each other before rushing to say “I Love You” and tie a knot. There are instances in which couples part away on account of financial infidelity. There is a prominent quote, “Finances may not be the most romantic thing to discuss, but ignoring them can create huge problems later in the relationship.”

Today, most youngsters are financially independent, have own source of incomes, assets and debts to repay. So, full disclosure of 7 financial facts would help you to understand your valentine in a better way and will keep the bitter surprises away in your relationship.

7 financial facts you need to know about your valentine are as follows:

Risk quotient

Risk quotient measures person’s risk taking capability. Each of us has different traits when it comes to taking decisions related to money while investing, spending and saving. It’s considered that people with high risk quotient tend to gamble in stock markets with the belief, “high risks and high returns.” However, if your risk quotient is low, then you would be investing in bonds, fixed deposits, post office savings, and such. So, ideally it’s necessary to identify risk quotient of each other by consulting financial experts, online services or taking quizzes. Then, plan for something in between considering risk quotient, compromising in monthly budget (if required) and take investment decisions together to stay happy.

Net worth

Net worth for an individual is the value of a person’s assets, including cash, minus all the liabilities (debt). So, the amount by which the individual’s assets exceed their liabilities is considered the net worth of that person. In case your valentine’s net worth is positive then it’s good news for you. But if it’s negative, then you could have a difficult journey together after marriage. In such situation, you both need to get income from other sources by working hard, budget your monthly expenses and improve your net worth by repaying debt on time.

Savings rate

Savings play a vital role to manage the debt and build the corpus for retirement. So, if your valentine’s net worth is negative but has good savings rate then, you need not worry about him to pay off debts in future. Your spouse would be in control of finances to build up long term corpus and simultaneously achieve set goals in future while paying off debts taken for higher education, setting up business, etc.

However, if your spouse is spending much quicker than the savings, then you would invite a big trouble post the marriage. Such persons would hide certain amounts from regular income and unnecessary purchases, so that you won’t get annoyed on them. Also, it would be difficult to manage the debts in future if spouse is not supportive and keeps secret accounts to spend. So, it’s necessary to identify savings rate and behavior of your valentine before you propose for marriage.

Emergency (Contingency) funds

Contingency fund is a fund used in emergencies or unexpected cash outflows in future due to uncertain events such as severe medical expenses on parent illness, unemployment during economic crises, etc. The contingency fund saved would ideally take care of four to six months living expenses and invested in liquid funds to use in uncertainty. If your valentine has maintained such funds for future uncertain events, then it’s an ideal sign that he/she has sound knowledge to look after finance management. Consider this as positive trait and you can manage your savings, expenses and investments in safe way.

Credit score

Your valentine’s credit score plays a critical role in the loan approval process in future i.e. when you apply to buy a house or automobile through bank loan together. The credit score gives loan providers an indication of your capability to pay back a loan, based on your Credit Information Report (CIR). Ideally, high scores mean you’ve good credit history and likely to get best deals while borrowing from bank. You can apply for credit scores to CIBIL, Equifax and Experian credit bureaus. You can also apply for credit scores online at CIBIL. As per CIBIL, 80% of all new loans sanctioned are above 750 score. However, it is important to note that some young people have low scores because they have no credit, rather than bad credit history.

Insurance coverage for uncertainty

Nowadays, the rising inflation impact medical costs. So, it’s a must to have adequate medical insurance coverage and life insurance cover for uncertainty in future. There is easy-to-use insurance calculator on InvestmentYogi website. Here, you can compute the sum assurance required and match the figure with policy taken by your valentine. If there is a short fall in sum assurance, then plan to increase the sum assurance in this policy while renewing to secure family expenses and pay-off of debts in any unfortunate event post marriage.

Sync investments with life goals

Discuss individual goals and prioritize them in your life before marriage. Analyze financial realities and start investing towards it. Each goal would require different planning and sacrifice that both partners need to take mutually. So, learn to complement eachother for commitment and sacrifices while achieving common goals set together for future.

Believe your spouse as, “Friend in need is a Friend indeed” to stay wedded happily forever.

Leaving you with a few romantic lines from a song “Nothing’s Gonna Change My Love For You” by George Benson:

If I had to live my life without you near me

The days would all be empty

The nights would seem so long

With you I see forever oh, so clearly

I might have been in love before

But it never felt this strong

Our dreams are young and we both know

They’ll take us where we want to go

Hold me now, touch me now

I don’t want to live without you.

Nothing's gonna change my love for you

You oughta know by now how much I love you

One thing you can be sure of

I’ll never ask for more than your love.

Author

The author is Certified Financial Planner and can be reached at hiralthanawala@gmail.com

Tax Saving Using Equity Linked Saving Scheme

Yogi — Thu, 02 Feb 2012 06:49:58 GMT

It’s the last quarter of the year and the Tax Man is eagerly waiting for his share. All the earning people are busy with calculations and research to find out which is the best tax saving option. We are witnessing a flood of tax saving bonds in this season and they are selling like glittering gold now a day. Even though there is a tax saving on initial investment of 20000 just because it’s over and above the investment cap of 100000 people are flocking the issues. Is there any instrument which provides an opportunity of capital appreciation together with Tax saving? We will be discussing one such instrument called Equity Linked Saving Scheme (ELSS) in this article.

What is ELSS?

Equity linked savings schemes (ELSS) are equity-oriented mutual fund schemes with an added feature of tax saving under different sections of the Income Tax Act together with the regular features of a mutual fund. Investments up to 1 lakh in ELSS funds are eligible for deduction from taxable income.

What are the Key Features?

These are equity oriented mutual fund schemes where asset allocation towards equities can go in the range of 80 to 100%. As the allocation is tilted toward high return assets like equity, the main objective of such funds is capital appreciation.

What is the Tax Benefit attached to ELSS?

When you invest in ELSS you are eligible for tax benefits under various sections of income tax act. The most important benefit is, investment up to a maximum of 1 lakh is eligible as deduction from taxable income under section 80 C. Capital gains which you get from the investment on redemption are tax-free under section 10(38). While holding the scheme the income you receive in the form of dividend is tax free under section 10(35) of income tax act.

Investment Rationale

Although ELSS has a lock in period of three years, it’s advisable to invest in this scheme as the lock in period is still smaller than other tax saving schemes like PPF and NSC. ELSS also provides an opportunity of capital appreciation if market performs well. There is absolutely no scope of capital appreciation in case of PPF and NSC schemes above the agreed interest rate. Here, the lock in period of 3 years favors you as most of the allocation is towards equities. Equities traditionally are considered as long term investment options and long term investors generally get above normal returns. The lock in period of three years keeps the temptation of selling your holding prematurely at bay. This restricting feature should be seen as blessing in disguise which is ultimately going to reward you in future. Together with this, your return percentage also gets a nice boost in the form of Tax savings. If you are not market risk averse and ready to take a little bit of risk investment, ELSS is recommended. By investing in ELSS, you also save the time and effort of researching the stock market together with enjoying the above average returns.

Author

Bimlesh Singh

How Foreign Credit Card Transaction Works

Yogi — Thu, 02 Feb 2012 06:38:06 GMT

I went on a foreign trip recently and enjoyed it a lot. Foreign currency was not a problem as I was having an international credit card. I swiped it every now and then for shopping, dining, buying tickets and number of other things. I had never used my credit card in a better fashion in past and was praising my bank for it in my conversations with my travel mates. They all were in full agreement with me on this topic. It’s not like I am habituated to mindless spending as I was fully aware of my budget. Mental calculations were on with the currency exchange rate in mind and at the end of my trip I almost spent the whole budget. I was patting my back for not overshooting the budget. After returning back, I received my credit card statement and was shocked to know that I almost overspent in the range of 5 to 6 %. I redid my calculations fearing a mistake but reached the same old figure which was 6% lesser. When I called my bank for clarification, I came to know about few interesting but not friendly charges regarding foreign transactions. In this article I will be discussing the same so that you don’t get the same shock which I got once I received the statement.

Reason for 5 to 6% deviation in credit card bill

Your credit card issuing bank and the network service provider (MasterCard or Visa) apply extra charges on foreign transaction done through your credit card. So, calculation done simply using currency conversion rate gives an understated value. Bad news for a consumer like you and me!

What is the type and amount of charges involved?

Following charges are applied by various entities involved in the transaction:

Currency Conversion fee – Whenever a foreign transaction takes place through your card network service providers (MasterCard or Visa), apply a conversion fee in the range of 1 to 2%.
Overseas Transaction Charge – Whenever a foreign transaction takes place through your card, the issuing bank applies a transaction fee in the range of 2.5 to 3.5% of the transaction amount.
Cash Withdrawal Fee- As you are already aware cash withdrawal through a credit card is costly even in India, it needs to be costly overseas too. On cash withdrawal in foreign currency your bank applies some additional charges which vary bank to bank. It will be in addition to local cash withdrawal charges.

What about the currency conversion rate?

Even though there is no additional charge for currency conversion, the currency conversion rate might not be the same as on date you did the transaction. Conversion rate applied will be of date when transaction is posted to Visa/MasterCard by the merchant. There might be a case when merchant sends this data one or two days post actual transaction date.

Can we know about the charges applied beforehand?

You can enquire the customer care of the bank regarding this data and they will tell you the applicable charges beforehand. You can use this data to do the cost benefit analysis of using your credit card for foreign transaction. One of the better uses of this data is to find out the best credit card which you can use overseas with minimum cost. If you are a frequent flier, you should choose only those credit cards for which the charges are minimal. All said and done, getting currency converted manually through some agent or bank will still be cheaper as compared to using credit card.

Author

Bimlesh Singh

Multi Asset Funds to Beat Market Volatility

Yogi — Tue, 31 Jan 2012 10:58:58 GMT

Volatility in the market is no new phenomenon for us now. In the recent months we have seen erratic behavior not only in the Indian Markets but also globally, owing to the European debt crisis and fiscal pressures in the US. We are constantly witnessing bouts of upward and downward movements of interest rates, index levels and inflation.

In such challenging market conditions, most of us generally exit investments and wait till the market shows signs of gaining stability. However by doing so very often we end up missing out on opportunities when there is a sharp decline in the market. To beat this volatility, Multi Asset Funds have gained considerable popularity in the last few months. In the light of the recent Multi Asset NFO from a mutual fund major, we do a quick evaluation of this fund option to see if it is actually worth investing in.

Introducing Multi Asset Funds

The core principle in financial planning is efficient asset allocation and diversification, on the basis of one’s financial goals and risk appetite. By diversification of assets across different classes, one could greatly reduce the risk associated with a single asset class, thereby generating superior returns from the portfolio. Multi Asset Funds work using the same principle.

These funds are typically hybrid funds that spread your investment across different asset classes. The portfolio of these funds would comprise of a mix of Equity, Gold, and fixed income securities, thus spreading the risk across different assets. The investments are switched over from one asset class to another on the basis of market situations. So depending on the rally in the market, profits are booked and funds are appropriately allocated to other asset classes, to overall generate superior returns from the portfolio.

What Advantages Does the Fund Offer?

Reduces risk- The risk associated with a single asset class is greatly reduced owing to the diversification in the portfolio.
A readymade fund- With exposure to different asset classes, it is a readymade fund for those investors who lack, the time and knowledge to diversify their portfolio on their own.
Benefits in a single fund- Investors get the benefit of multiple asset classes in a single fund, without having to hold multiple mutual funds or schemes.
Expertise of Fund managers who churn the portfolio on the basis of market situations.
Tax Efficiency- Tax applicable only if units are redeemed within 12 months.

The Current Options Available

JP Morgan was recently out with an NFO of its Multi Asset Fund. Apart from this other existing funds in the market are Axis Triple Advantage Fund, Religare MIP Plus, Canara Robeco Indigo Fund and Taurus MIP Advantage Fund. Here is a look at their past performance.

Fund Name	NAV(as on 27 Jan 2012)	Returns- 6 months	Returns- 12 months
Canara Robeco InDiGo	12.08	9.24%	16.80%
Taurus MIP Advantage	11.14	5.19%	11.14%
Axis Triple Advantage	11.00	3.51%	9.38%
Religare MIP Plus	11.27	3.60%	8.94%
Kotak Multi Asset Allocation	10.86	3.12%	8.38%

*Source: www.valueresearchonline.com

Multi Asset Funds- Should You Consider Investing?

Looking at the past returns of the fund, the short term returns (6 months to a year) have been hovering between 3 to 5%, owing to the large percentage of debt and gold component in the portfolio. Investors often find fixed deposits a better deal for the short term in comparison to the fund. What one must also remember is that diversification comes at a cost and most Multi Asset Funds come with high recurring expenses of around 2-2.5%. Funds also have an exit load of 1% if exited within 1 year and 2% if exited within 6 months. This charge is much higher when compared to other funds.

Multi Asset Funds are typically suited for low to medium risk appetite investors, and may prove beneficial to those with a long term investment horizon. These funds could generate superior returns in the long run, as they make use of the highs and lows across various economic cycles. Investors should also look at the fund manager’s expertise, track record and the reputation of the fund house before investing.

Author

Ramya Ramachandran

Gilt and Corporate Bond: To Invest or to Avoid?

Yogi — Mon, 30 Jan 2012 10:23:48 GMT

If we look into the future perspective of government securities and corporate bonds, then the latter is expected to provide better return in coming days.

Investors were attracted towards investment in bonds during the year 2011 with an increase in an interest rate. The interest rate is expected to be cut down in coming months; the question is what would be the outlook of a bond market in such scenario?

Interest rate outlook

Recently, RBI had cleared its view to stop the further increase in an interest rate. Investors are expecting it to come down gradually in the coming months, and so they are putting a stake for the bond market in expectation of good return.

The Repo rate is expected to cut down by 50-100 basis points in next 12 months. Though rate would not fall drastically at once, but it will start coming down gradually from somewhere around April 2012. The decision on rate cut would be extremely influenced by Inflation situation in the country. The food inflation has come down slightly in last few weeks, but the manufacturing price is still a matter of concern. The increase in crude oil price and expected electricity rate hike would further push manufacturing prices to higher side. The global commodity price has already started cooling down but the depreciation in value of INR against Dollar has neutralized all the benefits due to increased import bill.

Time not right for gilts

Benchmark 10-year gilt yields had touched the peak of 9 % in November 2011, and then it fell down to 8.26 per cent recently. Still, it does not seem good time to enter the gilt market for two reasons:

The government has failed in containing the fiscal deficit, as expected in the starting of the financial year. Hence, the gilt price would further come into pressure, and yield will go up. In 2011, government had promised for strong disinvestment measures and cut down in spending. The current pictures show the failure of government's expectation as already it has increased the borrowing by close to Rs 92000 course for this fiscal, which is much beyond the budget expectation.
Two, banks are expected to cut down investment in government bonds if the credit off-take improve in coming days; Therefore, lower demand would put pressure on government bonds.

The only way through which an investor can invest in the government bonds is through gilt mutual funds. The interest return from the gilt fund has shown extreme volatility; Ten-year gilt’s return had varied from 5 percent to 9 percent in last five years. The gilt fund has given an average return of 6% in last five years. Judgment of correct time is very important while investing in the guilt fund.

The risk avoiding investors can also opt for the quasi-government upcoming tax-free bonds of HUDCO and infra bonds of REC, PFC and IDFC, etc.

Interest rates of around 8 per cent for tax-free bonds are quite impressive for a high net-worth investor.

Corporate debt better

The long term gilt funds are not looking attractive in present situation, on the other hand corporate bonds are looking very attractive for investment. The leading and top-rated corporate bond is expected to do better than the gilts for following two reasons:

The financial condition of the corporate is looking better than the government. The corporate are cutting down its expenses aggressively, whereas the government is still adding on borrowings; top Indian companies have been cutting back on their investment plans, reducing debt on their balance sheets and hoarding cash. The government lacks the smart financial planning. Any issuances by the corporate is, therefore, likely to be quickly picked up by institutional buyers.
The corporate is looking for expansion, and therefore, they are coming with bonds for financing whereas the government bond is meant to reduce the deficit burden.

Suitable duration of fund

Now we come to an agreement that corporate bond seems better for investment than gilts in the present scenario. The question now is whether an investor should buy short-term (less than three years), medium-term (three to five years) or long-term corporate bonds (more than five years)?

The investors need to invest through the mutual fund in any case. At present, the short and medium term investment is looking attractive for the investors.

Flat Return from Gilt

The interest rate is expected to come down in coming days. Though the rate may not fall as it had corrected in 2007-08, but fall is there in the card.

Gilt as well as long duration funds, which are based on more than 5 year duration instruments, earns capital gains from falling interest rates. Short duration funds gains from interest income. Hence, it is evident that little fall in an interest rate would have fewer benefit on bond and gilt mutual funds. Investors, therefore, can continue to look at short-term bond funds.

Normally, the yield on short term fund should be lower than the long term fund due to extra risk associated with the longer duration such as interest rate uncertainty.

It means that once the interest rate is reduced then yield from the shorter duration fund would come down.

Looking at the various points discussed above, the Dynamic bond funds are expected to be in demand in the year 2012 due to its flexibility to change the duration based on the existing interest rates.

Look beyond returns

It is always suggested to be cautious while investing in the corporate bonds. AAA bonds should be preferred over –AAA rated bonds. An expectation of a further slowdown in the economy cannot be eliminated as the Euro-zone crisis and global economic disturbance is still inherent in the market; hence, the funds may come under credit downgrade if the situation further degrades.

Therefore while investing, the investor should not only focus on the return but also ascertain the risk associated with it. In normal condition, the high risk portfolio can give higher return by overshadowing the risk. But when the market condition is not up to the mark and corporate are facing deep financing problem then return falls dramatically. It is suggested for all the investors to invest in highly rated bonds for good return and less associated risk.

About the author:

Amit Sethi is an MBA (Fin) graduate. He has spent 8 years in Equity research and Stock broking sector. He can be reached at amvilube@gmail.com

Tax Implications when an NRI permanently returns to India

Yogi — Wed, 18 Jan 2012 10:39:52 GMT

Taxability in India is dependent on whether an individual qualifies as an Ordinary Indian Resident (ROR), Not Ordinarily Resident (NOR) or Non-Resident (NRI). An ROR is liable to tax on his global income, while a NOR and NRI is liable to tax on the income ‘earned’ in India. NRI benefits are available to a person till the time he holds the NRI status in India; a person loses his NRI status in the same year when he returns to India or within 2-3 years from the date of arrival to India, depending...(read more)

SIP – a Smart n Intelligent Path

Yogi — Wed, 18 Jan 2012 10:08:38 GMT

Guess what…the doctor’s advice to eat more number of smaller meals rather than have 2 or 3 large meals works not only for our health but also for our finances!

An SIP – systematic investment plan is nothing but smaller and periodic investments into the equity as opposed to lump sum investments. Whether you start SIPs because you do not have lump sums to invest in one go or because you do have lump sums but are vary of the volatility in the markets, the result is the same.

An SIP allows you to invest without having to worry about the ups and downs of the markets i.e. without getting into the whole ‘time the market’ funda. You can average out the entry levels with the objective of reducing risks of lumpsum investments. When the markets are going up, and share prices are higher, then you end up with lower units for your fixed investment. When the markets are going down, and share prices are lower, you get more number of units. Ultimately the average price of the total units you have gets evened out.

Let’s look at this with an actual example.

An investment of Rs.240,000 made on 1^st January 2008, in one of the better performing large cap funds as of 30^th June 2010 is worth Rs.254,139. During this time, Sensex has fallen by 50% and is now back at the same levels. However an SIP in the same fund, totaling the same amount but over 24 months at Rs.10,000 each month is actually worth Rs.401,861!

So falling markets, volatile markets, uncertain markets, where the long term story is still good, are profitable markets to invest through SIPs.

Plus an SIP is affordable - you can start at a small amount of Rs.1000 a month and it’s easy to do since you only have to cut the first cheque and the remaining payments happen like EMIs through ECS.

On top of all this, an SIP also helps in disciplining your savings by keeping temptation away from you – no money in the bank, so none to waste.

So there you have it…SIP - a smart n intelligent path to wealth!

This 2012..Start on the intelligent path!

Author

Lovaii

NRE V/s NRO V/s FCNR Accounts: Which is a Better Option for NRI’s?

Yogi — Tue, 17 Jan 2012 06:40:35 GMT

At the beginning of the NRI Status, most of the people are in dilemma about what kind of Bank account should they hold in India? Should it be an NRO account or should it be an NRE account or a FCNR account? Each of these accounts has their own pros and cons. Understanding them in detail will help you in making better choice. Non Resident External Account (NRE) An NRE account is a Rupee denominated account. That is, funds in an NRE account are maintained in Indian Rupees...(read more)

The FCNR(B) Makeover – An attractive investment Option

Yogi — Tue, 17 Jan 2012 06:10:08 GMT

With the global slowdown and recession looming large over US and the Eurozone, coupled with the fact that the Rupee has slumped as low as 53 against the dollar, India has witnessed significant inflows of capital from the NRI community. It is a good time to convert your US dollars into Rupees and invest in rupee schemes in India. However, having said this, it is an equally good time to invest in foreign currency deposits more popularly known as FCNR (B). A little more about FCNR (B) ...(read more)

New KYC Procedure

Yogi — Mon, 16 Jan 2012 07:47:06 GMT

How many times you have filled the KYC for till now? It’s like every time you visit a financial institution for opening an account be it bank, broking house, mutual fund etc. you have to fill the KYC. The details which you fill are almost the same but the format is different. So, what is the point in filling the same details again and again? Can’t there be a central repository for storing and referring such data? Thankfully SEBI has come up with new guidelines for data handling of KYC from Jan 2012 onwards. Let’s find out what the new features are and how it’s going to be useful for investors.

What is KYC?

Know your customer (KYC) is a process where financial institutions carry out due diligence of their prospective clients so as to identify them uniquely and store relevant information pertinent to doing financial business with them.

Old KYC Process

Whenever clients approached a financial institution so as to start new relationship with them he has to fill the KYC document. If he is dealing with five different institutions, he has to fill the same information five times making the process repetitive and inefficient.

New KYC Guidelines by SEBI

As per the new guidelines by SEBI there is no need to fill the KYC data more than once. Once this data is validated and stored in a central repository any financial institution registered with the repository can access the KYC data of a particular individual. So at the beginning of new relationship with a financial institution there is no need to fill the KYC form again. The important points of the ruling are listed below:

Standard KYC form from Jan2012
Setting up of KYC regulatory body (KRA) which will be responsible for interconnectivity between different financial institutions for reference and validation of KYC data
KRA will be responsible for KYC process at the first account opening stage
Once KRA data for a client is approved it can be used as valid KYC data by different registered agencies for account opening process

Benefits of New Guidelines

The best part of new guideline is removal of duplication of effort. As the KYC will be filled only once from now onwards clients and financial institutions will both save quite a bit of processing time. Possibility of contradictory data is also ruled out as everybody will be referring to the same repository for the KYC data. By implementation of new procedure modification of existing data will also get quite easier. For example you need not inform each and every agency regarding change of your telephone number. You only need to get the modification done at the central repository and the change will be reflected in each and every financial institution. Together with this financial institutions will be in a position to reduce a lot of paperwork and storage space is order to save KYC data.

Conclusion

No doubt it’s an appreciable effort from SEBI but we will have to wait and watch how smooth and fast the whole process will be implemented. Let’s hope there will be no glitches in the setup of KRA and the process they implement for validation of KYC data.

Author

Bimlesh Singh

Loan against Property

Yogi — Mon, 16 Jan 2012 06:44:48 GMT

If you are employed and earning a handsome salary, it gets very easy to arrange funds to fulfill your needs in short term. Any bank will willingly offer you personal loan for which you need to pay interest in the range of 16% to 20%. The normal tenure of personal loan ranges from 1 to 5 years. What if your cash flow is not date dependent (every end of month) and you want a loan for longer duration so as to keep the EMI on the lower side. Also being in a position to bargain the interest rate will prove to be icing on the cake. The above two statements will get true if you own a property as there is a very interesting product called Loan against Property being offered by most of the private and public sector banks. Let’s try to explore this product in this article.

What is Loan against Property (LAP)?

LAP is pretty similar to personal loan; the only difference being you put a property owned by you as collateral against the loan. This property might be confiscated in case you default on the loan. As there is collateral against the loan, banks feel more secure in lending and hence the borrower gets some bargaining power as compared to personal loans which is unsecured.

Why you might need LAP?

You might consider going for LAP for fulfilling following requirements:

Setting up a new business
Existing business expansion
Childs marriage or education
Medical Purpose
Vacationing

Important Features of LAP

Few features related to LAP which makes this option attractive:

Lower limit starts from 2 lakh and there is no upper cap
Can opt for both floating and fixed interest rates
Longer tenure of repayment
Cheaper interest rates
Loan up to 40 to 70% of property value
Simple processing

Why you should opt for LAP?

There are three basic reasons which make this option worth consideration-

Lower Interest Rate

As it’s a secured loan, you get a bargain of 4 to 5% on the interest rate you pay as compared to personal loan. The interest rate ranges from 11 to 14%. This lower interest rate gives a clear edge to it over personal loan where you pay interest in the range of 16 to 20%.

Longer Tenure of Repayment

This feature further reduces your EMI burden as you can get LAP up to 10 to15 years. When your cash flow is not steady this feature makes the option even more attractive.

Ideal Use of Property

If you own a property and not using it, LAP gives an opportunity of optimum utilization. You do not lose the ownership and get funds at cheaper rates at your disposal.

Word of Caution

There are few negatives of LAP which one should take into consideration before applying –

Loss of Ownership of property in case of default.
Foreclosure charges may be tricky so get full clarity regarding it before applying.
As you are eligible for big amount as loan, lack of planning of repayment might create problem in future.

Author

Bimlesh Singh

HDFC Fixed Maturity Plans- New Fund Offer

Yogi — Fri, 13 Jan 2012 04:49:00 GMT

HDFC Mutual Fund is offering two New Fund Offer (NFO) in the month of Jan 2012, under its Fixed Maturity Plans- Series XIX closed-ended income scheme.

The two funds under offer are:

HDFC FMP 92D January 2012 (2), open from Jan 12 to Jan 18, with a duration of 92 days.
HDFC FMP 370D January 2012 (3), open from Jan 12 to Jan 17, with a duration of 370 days.

Brief on Fixed Maturity Plans

Fixed Maturity Plans (or FMP) are funds with a fixed maturity date and with investments in debt instruments such as Certificate of Deposits (CDs), Commercial Papers (CPs), money market instruments and corporate bonds. FMPs are closed ended schemes and fund houses generally provide an indicative rate of return on the basis of where the investments are going to be done.

Scheme Information

Both the schemes offer similar features for investors. The duration of the schemes however vary. The primary aim of the schemes is to generate regular returns by investing in debt instruments, money market and Government securities, which would be maturing on or before the maturity date of the respective plans.

Ø Options available under the scheme:

The scheme offers investors a growth as well as a dividend option. The dividend option offers a choice of dividend payouts quarterly or a normal dividend option with payout facility only.

Ø Load:

There would be no entry and exit load applicable on the scheme.

Ø Minimum application:

The minimum application amount is Rs.5, 000 and in multiples of Rs 10 thereafter.

Ø Portfolio composition:

The scheme would invest 60% to 100% in debt and money market instruments of low to medium risk and the balance in government securities on low risk.

Ø Liquidity:

There is no lock in period applicable on the scheme. Investors can further purchase or redeem units from the National Stock Exchange where they would be listed. Units however cannot be directly redeemed from the fund, until the maturity date of the plan. On maturity, units will be paid out on the basis of the applicable NAV on the date of redemption.

Ø Credit rating of the scheme:

The scheme will be benchmarked against CRISIL Short Term Bond Fund Index.

Ø Dematerialization of units:

Investors have the option to hold the units in demat form.

For Whom is the Scheme Suitable?

Fixed Maturity Plan is a low risk investment option. The dividend received from a FMP is tax free in the hands of the investor, and they offer better post tax returns in comparison to fixed deposits. They also provide indexation benefits for investors.

FMPs however do not guarantee capital protection and the returns shown by the fund house are only indicative. Thus such schemes are ideally suitable for those investors who have the capacity to take a little bit of risk for tax efficient returns.

HDFC Mutual Fund house already has more than 20 such FMP schemes of different durations. Given their past track record and reputation to consistently perform, investors could definitely be optimistic of some decent returns from the scheme.

Author

Ramya Ramachandran

NHAI Tax Free Bond

Yogi — Tue, 10 Jan 2012 04:01:40 GMT

Issue Opens 28 Dec 2011; Issue Closes on 11 Jan 2012

Another two months of 2012 is going to be very hectic for investors as its time to file tax returns. Everybody is juggling with ideas to save tax. Various companies are also coming out with different tax saving products (infrastructure bonds, tax saving bonds). Issues of IDFC and L&T infrastructure bonds just closed and if you have missed investing in them for tax saving purpose, here is another opportunity being presented to you in the form of NHAI (National Highway Authority of India) tax free bonds. Infrastructure bonds have a limit of tax exemption as interest income after initial investment of 20000 is taxable. NHAI Bond issue comes to the rescue as the income by way of interest on these bonds will be fully exempt from Income Tax having tax benefits u/s 10 (15) (iv) (h) of IT Act, 1961 and hence would not form a part of taxable income. It’s a great opportunity for risk averse investors and they should consider investing in this option. Let’s analyze all the important features of the issue.

What are Bonds?

A bond is a security offered by the government, an agency or a corporation wherein issuer essentially takes out a loan from bond buyers for a fixed period. Like all loans, the bond has a particular interest or coupon rate set and over the period of the bond's existence the interest is paid to the bond holder and at the end of bond period the issuer must pay back the principal.

Key Features of the NHAI Tax Free Bond

NHAI Tax Free Bond	Features
Issue Dates	Open 28 Dec 2011, Close 11 Jan 2012
Application Form	Available in Dmat and Paper format
Credit Rating	CRISIL ,CARE and Fitch - (AAA/stable)
Interest on Application Money if no allotment	4%
Bondholder Claim	Superior to any unsecured creditor
Face Value (1 Bond)	Rs 1000
Minimum Investment	50 Bonds (Rs 50000)
Listing On Stock Exchange	BSE
Trading	Dmat format only
Coupon/Interest Rate (per annum) and Tenure	8.2% (10 years), 8.3% (15 Years)
Interest Payment	Annually
Who can Apply	Almost everybody (individuals, companies, corporate, cooperatives, mutual fund hoses, insurance companies etc.)
Allotment Procedure	First come First serve basis

Why should you invest in NHAI Tax Free Bond?

There are five features related to security and returns which makes this issue attractive –

This issue is placed by NHAI an Autonomous authority of the Government of India under the Ministry of Road Transport and Highways whose financial performance is good and has the backing of Government of India making this pretty safe investment.
The rating which this issue has received from rating agencies certifies that NHAI is pretty secure in terms of servicing its debt obligations.
Tax benefit which is associated with this issue makes it very attractive. The whole of the interest income is tax exempt and there is no cap on it like infrastructure bonds. So, we believe that's a very attractive option. Mind it – Only interest income is tax exempt and you will have to pay full tax on the principle you invest in the issue.
The coupon rate of 8.2% is quite competitive once you take tax benefits into consideration. If you compare the interest rate with taxable bond, for a person who is in 30% marginal tax bracket, 8.2% would be equivalent to more than 11.7%.
As the issue will be traded on BSE it will be highly liquid and when somebody wants to get out prematurely he can liquidate his position easily.

How appropriate this investment option is?

As the interest income of NHAI bonds is tax exempt the effective return on this investment will be same as the coupon rate being offered on them (8.2% or 8.3%). Taking tax factor into consideration it will be on the higher side as compared to safer investment options like PPF, NSC, Fixed deposit etc. Another area where this offer clearly beats the above options is the Liquidity factor. As it will be traded in secondary market (BSE) it will be highly liquid as compared to above options.

Author

Bimlesh Singh

Buying a term plan online ?

Yogi — Fri, 06 Jan 2012 06:04:34 GMT

Here’s the checklist

With more and more number of people becoming tech-savvy, it is imperative that you would prefer buying financial products online. With an ease of getting yourself insured with the click of a mouse, you would always prefer to get that insurance policy within the confines the four walls of your house. But it is important for you to understand the delicacies of such online contracts. You should be well aware of the procedure laid out by insurance companies for filing the online application and undertaking the entire procedure online so that you do not make a mistake. Such mistakes may not be informed to you immediately but would cost your dependents the claim amount.

Take note of the procedure you should ideally follow for a seamless online buying process.

Compare the premiums first. Go to websites of insurers of your choice and find out the premiums for your age, the term and the sum assured you desire. Alternatively, you can also visit online comparison portals and feed your data. The portal will throw results for the best matches based on the data you feed.
Find out the company you are interested in. Once you have shortlisted the insurer on basis of your affordability, compare their features and choose the plan with widest cover based on minimum number of exclusion. You can get the bare minimum features from the comparison portals and then can visit the brochures of the ones which are more likely of your choice.
Once you shortlist the plan of your choice, register yourself online as a new user. Login and fill the online application very carefully. The application form will require you to fill your insurance history, your lifestyle, your personal and family history and your medical history. These questions are asked in order to seamlessly process your application and are asked for recording purposes. It is important that you provide complete information. This is in your own interest as any suppression, withholding or misrepresentation of information may lead to non-issuance of policy or rejection of your claim. To keep your dependents away from any worries that may arise later down the road, it is advised that you should disclose your habits and lifestyle correctly. In case of your adverse lifestyle and habits, you may be asked to pay extra premiums for the ‘extra’ risk that the insurer takes.
After you have filled all your details in the application form, you will be asked to make payment for the required premium. Check for the security of the platforms before making the payment. The address bar starts with ‘https’ for secured payment platforms instead of normal ‘http’. Another indication of secured platforms is that you will see a yellow colored lock on the right bottom of the page. This shows secured access. Once you have made the payment, an acknowledgement receipt will be generated. The soft copy of the policy will also be generated for your reference. Make sure to save it for yourself on your desktop and also take a printout of it for your reference in case of procedural anomalies.
Once your payment receipt is generated, you will be asked to book a slot for yourself for your medical examination, if required. You will be given an option to choose the time slot most convenient to you. Make sure to choose the early morning slot since you have to be on a 12 hour fasting before giving the blood and urine samples. Once you register a slot, you will get a confirmation call from the insurer of the designated diagnosis center. The samples will be picked up from your home. In case you require to give a treadmill examination as well, which is required if you belong to the not-so-young category, you will be asked to visit the designated diagnostics laboratory closest to you residence.
After you are done with your health check-up, the next thing you would have to do is to scan all your supporting documents and upload them or mail them to the insurer at the email ID provided by them at the time of your completion of payment. Make sure to save the page where the depiction of uploaded documents has been done. Some insurers also provide you the flexibility of asking a sales agent to pick the documents from your home. You will have to ask the insurer whether the facility is available or not.
You will get the hardcopy of your policy called the ‘policy pack’ within 10 to 15 days of completing the online formalities. Your free-look period starts from the day you get the hard copy. Free-look period is a 15 day period which is granted to you by the insurer and you are free to return your policy in case you find out that it does not suit you. You will be returned the premium-the only deduction that are made would be for health-checkup, stamp duty and the cost of risk taken for the interim period starting from the time you policy is accepted up to when your application of return is accepted.

Process snapshot

The procedure for buying an insurance policy online is often termed as ‘tricky’ since you have to undertake the entire process yourself and there would be none other than the customer care executives to guide you, who in most instances are not very well aware of the process themselves. Thus, the responsibility of correct disclosure of all material information in the desired format lies completely on your shoulders.Take due care to save pages, acknowledgements, transaction IDs and other important numbers and text that throw up during the process of transaction.

Choosing the Right Insurance Rider

Yogi — Wed, 04 Jan 2012 07:12:23 GMT

Riders along with insurance policies are additional benefits that could be opted for over and above the base policy. Available at an extra premium, they enhance and customize your insurance policy to meet your specific needs. Insurance companies offer a host of insurance riders to choose from. From critical illness to disability, these riders are surely a great way to give yourself and your family the much needed extra protection from unforeseen calamities. Here is a brief evaluation of what these riders are actually about and which one of them could be most appropriate for you.

Why opt for riders?

The single big reason to opt for a rider is that it gives you an additional level of financial protection. Apart from this, riders also offer you the following.

Tax advantage- Riders give you a tax benefit under Section 80C on the premiums paid, up to a sum of Rs 1 lakh. Health and critical illness riders offer a tax benefit up to a maximum of Rs. 10,000 under Section 80D.
Protection without having to take a second policy- Riders save you the trouble of having to take a second policy, in case of a specific requirement.
Choice of two or more riders- You could opt for two more riders, to customize your policy to meet present as well as future financial requirements.
Could be attached to any type of policy- Riders could be attached to almost all types of policies. So you could customize any type of policy - term, endowment, money back, whole life and ULIP.

Riders are affordable

The premium on riders is much lower than the premiums on the base policy, owing to the fact that the rider premiums go entirely towards the risk covered and not towards any savings component. There really isn’t any limit on the number of riders you could opt for. Multiple riders though could substantially increase the cost of your insurance policy. Moreover, as per IRDA regulations the premiums of all riders put together, in a single policy should not exceed 30% of the premium of the base policy.

Making the choice

Insurance companies give you the option either to opt for a rider at policy inception or any time during the course of the policy. It is nevertheless recommended to opt for it at the beginning of the policy itself, as the costs tend to get higher as the policy rolls on, depending on your health and age.

Here are some of the typical insurance riders offered by insurance companies.

Ø Accidental Death Benefit Rider

Provides additional cover in the event of accidental death of the insured, generally around 100% of the base policy’s cover amount.
Accidental death in this case means death caused by violent, accidental, external and visible means and independent of any physical or mental illness.
Recommended at all stages of life.

Ø Waiver of Premium Rider

Waives all future premiums of the base policy as well as the rider, in case of total and permanent disability due to an accident.

Ø Permanent Disability Benefit

Provides an additional cover in case of permanent disability due to an accident.
Permanent disability here means permanent and immediate inability to work or permanent loss of use of two limbs or total and permanent loss of sight.

Ø Critical Illness Rider

Provides an additional cover in the event of major medical illness such as Heart Attack, Cancer, Stroke, Kidney failure, organ transplants, Aorta and Heart Valve surgery.
Recommended along with pension plans

Ø Income Benefit Rider

In case of death of the life assured, around 10% of the rider sum assured is paid every year to the beneficiary on the policy anniversary, ensuring financial independence to dependents.

Riders and Insurance Needs

The decision to buy an insurance rider should be solely based on your individual insurance needs, and not because you have been persuaded by your insurance agent to buy one. Before you decide to buy a rider, you need to do a comprehensive evaluation of the nature of your job, and your family commitments. Say, for example, your job involves you to be on a construction site on a daily basis, disability insurance may make more sense for you. For those, whose job involves frequent road travelling, an accident insurance could well be suitable. To narrow down on the most appropriate insurance rider, it is vital to do a critical evaluation of your financial needs. Also, do not forget to go through the terms and conditions and exclusions of the rider. Rider terms and conditions are generally independent of what would be mentioned on your base policy.

Author

Ramya Ramachandran

Save Extra By Paying Insurance Premium Smartly

Yogi — Wed, 04 Jan 2012 07:00:29 GMT

The moment one gets settled into his life or get married, the first thing comes into his mind is savings and the most common way of savings for every starter is life insurance as it gives a return as well as insure the Life also.

Introduction

A Life Insurance Policy is a very common part of every investor’s portfolio. These policies are known to give a moderate return due to life cover attached with it. Policies are taken basically to cover the risks attached to the life of the insured. In case of any casualty, this policy insures the future of dependents. However, comparing from other investment instruments, one would get least return from a life insurance policy. If one is concerned with safety, security and investment gain, then the life insurance is undoubtedly best instrument for all investors.

How to Save Extra?

It has been seen that the premiums of life insurance are not paid regularly by many investors, and their cases of policy lapses or surrenders in such a situation. As per IRDA records, almost 10-15 % of the life insurance Policies taken during the year lapses or surrenders due to non timely payment. The reason is a heavy premium to be paid annually. This problem can easily be handled by paying premium in a smart way. One can deposit the amount equivalent to the amount of monthly premiums in a Bank Recurring Deposit (RD) for one year. After the maturity, one can withdraw the amount and pay his premium annually. Using this strategy, an investor can save some extra money by interest received in RD. The amount of insurance premiums paid monthly or quarterly is always greater than the annual payment. The RD gives the interest return at the rate of Fixed Deposit (FD), hence before paying the annual premium, an extra interest can be earned on the same. This can be illustrated with an example.

Example

Suppose an Investor, aged 28 has taken a life insurance Policy for 21 years and a sum assured of Rs. Six Lac. The amount of premiums he has to pay quarterly is Rs.8048 and the amount he has to pay annually is Rs. 31224. This means he has to pay (8048X4) Rs.32198- Rs.31224= Rs.974. more. If he pays Rs.2520 monthly in a recurring deposit of a Bank, he would get the maturity of around Rs.31240 which is equal to his annual premium. In the RD, he has to pay Rs.30240 to get the maturity of Rs.31240 (taking interest @6% P.A). Here, he would earn Rs.1000. So, by paying the premium under this model an Investor may save Rs.1000+Rs.974= Rs.1974 extra which is 6.3% of the amount of premium. The past bonus rates declared by LIC of India under its different plans is around 4-5 %. This means one can save more through this investment strategy if he chooses to pay his premium annually through RD. If we take the rate of return at 5% P.A, then a policy of Rs.6. Lac for 21 years will give around Rs.12 Lac on maturity. However, paying the premium annually under our RD strategy will provide Rs.1. Lac extra at the end of the maturity if the saved amount is fixed deposited @8% P.A regularly every year.

So, one should think over it and save extra money out of his Insurance investments. This type of premium paying habits keeps one out of the pressure at year ends, and he can smoothly save the amounts on a monthly basis without any worries.

This is an example only in life insurance policy case. One can easily use the same pattern in his other saving plans also where he has to pay the amount annually. These small differences can collectively make a huge difference to our saving plans. A difference of even one rupee can change the opinion of an investor while comparing different investment plans. Normally, one would bargain for a smaller amount without going through the quality and return of a plan then why shouldn’t he customize his plans in such a way that he can get the best return out of it.

Conclusion

Amount of premium: Check whether the amount of premiums to be paid is within your limits. This will minimize the chances of policy lapse due to non -payment of premium.
Duration of policy: Duration for which the policy has to be taken should be looked at. This depends on your future requirements, e.g. children’s education, marriage, etc.
Frequency of premium: The interval in which you want to pay your premium should be decided properly i.e. whether it should be monthly, quarterly or annually.
Type of plan: The future needs can help investors decide the plan which he should opt to fulfill those needs. This should be chosen with own discretion and not on the suggestion of others.

Thus, one can earn the best return from his investments if he pays little attention at the initial stages of investment.

About the author

Amit Sethi is an MBA (Fin) graduate. He has spent 8 years in Equity research and Stock broking sector. He can be reached at amvilube@gmail.com

The Upcoming Market Triggers (JAN 2012)

Yogi — Sun, 01 Jan 2012 18:43:10 GMT

Current Scenario

The year’s ended, but I don’t see any respite from troubles in equity market and the world economy. Though inflation has shown some signs of slowing down but simultaneously, the industrial growth is also moving towards negative. In last few days, stock market of world’s major economies were trading with a cautious note. The recent Euro Zone meeting, concluded to rescue it from a drastic economic collapse, had resulted in a Luke warm response from the financial world. The action taken during Euro Zone meeting was not decisive enough to overcome the debt crisis. The Indian market has also taken several blows in its attempts to fight the economic crisis. Recently GDP growth has been revised down from 9% to 7.25-7.75%, the IIP data has drastically come down to -5% in second week of December and the rupee has crashed down against dollar to around Rs 52. The tax collection in India is expected to slow down due to weak industrial activity. Since most of the troubled economies are China’s main business market, China’s growth is also under deep pressure to cope with the low demand. The property market in China has shown some slowing down signal, and it could further escalate the problem.

Expected Scenario and Important Events

Inflation to cool down

The Inflation in India and other emerging economy is expected to cool down consistently. The weak IIP data suggests low industrial demand, and the prices of agri based commodities are also expected to ease in coming days. Already, the food inflation in the 2nd week of December has come down to 4.5%. With the drop in crude price and industrial slowdown, it is expected that inflation will fall further in the coming months.

(IMPACT OF INDIAN STOCK MARKET: POSITIVE)

Crude and Energy Price Expectation

Energy has a major role in influencing the economic conditions. So far the world has seen crude prices jumping towards a new high despite European slow-down along with a great global economic concern; the crude price is not expected to cool down in coming months. The recent escalation in tension between Iran and US is expected to further push prices in upward direction. In a situation of any restriction/ban on Iran's oil export, the price of energy product is expected to show a sharp increase in coming months. This would have an adverse effect on the equity market. The impact of energy price escalation would have a severe effect on the inflation and Indian government’s intention to control current account deficit in short term.

(IMPACT OF INDIAN STOCK MARKET: Negative)

The Value of Indian Rupee

For last two months, the depreciation of Indian rupee against dollar had been the biggest concern for the government and the RBI. Though in credit policy review of December 2011, the RBI has decided to keep the key rates unchanged but still the depreciation of Rupee is expected to continue until Rs 56-57/$. Amid lots of speculations about RBI decreasing the CRR rate, a curb on FOREX trading has been ordered by it to check manipulative speculation. Further, if the world economic condition worsens, then RBI is expected to sell some of the Gold that is holding. The FII inflow/Outflow is also important to watch, as any negative rumor can make them pull out money in coming days causing Rupee to decline against the dollar.

(IMPACT OF INDIAN STOCK MARKET: NEGATIVE)

Elections in Five State

The elections for five states assembly have been announced by the election commission during Feb 2012. Its result would have a great impact on the central government’s stability as well as the stock market. Due to elections, the budget session is also expected to be postponed to second week of March 2012 i.e. after the result of assembly election. The market seems to be very volatile due to increased frequency of rumor based information flow in coming months.

(IMPACT OF INDIAN STOCK MARKET: NEGATIVE)

What should an investor do?

When the market is standing on the edges, it's better to take advantage of every opportunity because in such a situation the stock's moment decouples itself from the valuation and fundamentals; the only thing that drives the market in such a situation is “Rumors ". Any negative news in this situation would push the market downwards more then expectation. The investor should just focus on shares with good fundamentals and invest while the prices are at a rock bottom level compared to the actual valuation. For example, the capital good sector seems unattractive at present due to fall of Rupee value against dollar, but I would suggest taking a contrary view. The inflation is slowing down, and Rupee too is expected to stop depreciating after some time. As soon as the RBI decides on rate cut, the investment in the infrastructure sector would take a pace, and capital good's sector would be on the front to take the advantage. Similarly, there are other selective sectors from which investors can reap precious advantage for investment in coming days.

(Investment suggestion: Diversified value picking on sharp corrections with a long-term view. Daily Traders please keep away)

About the author:

Amit Sethi is an MBA (Fin) graduate. He has spent 8 years in Equity research and Stock broking sector. He can be reached at amvilube@gmail.com

Sovereign Rating - How ratings are assigned to National Government

Yogi — Wed, 28 Dec 2011 18:43:00 GMT

Few months back, S&P downgraded US rating creating havoc in financial markets. Financial market tanked in the range of 10% throughout the world. Not much time has passed since the market digested that unprecedented downgrade and we are standing on the verge of another collapse. This time, S&P is ready with news which can have even bigger implication on the health of financial markets. It’s threatening to downgrade the whole Euro zone, if there are only words and no actions from the European leaders towards solving the debt crisis. How exactly S&P or any other rating agency decides the sovereign rating? Is it such an easy task or a lot of pain involved in this revelation? Let’s try to find out the answer.

What is this Sovereign Rating?

A sovereign credit rating is the credit rating of a country or a national government. It’s basically evaluation of the capacity of a national government to pay its debt obligations. It also indicates the level of risk an investor is exposed to, while investing in that particular country.

Parameters used for Sovereign Rating

Rating agencies takes into account the economic risk and the political risk involved while assigning a sovereign rating. A careful analysis is done and based on the outcome a rating downgrade or upgrade is recommended.

The Economic Risk: This is risk which is the measure of a nation’s capacity to pay its debt obligations is short term and long term. While measuring the economic risk rating agencies take into account economic growth prospects, living standard, inflation rate, liquidity, income level, strength of currency and public debt burden (Pensions to be paid, Heath services cost). Together with these factors high weight age is given to the monetary and fiscal flexibility applied by the country.

The Political Risk: As economic risk measures ability and capacity to repay debt, political risk is the measure of government’s willingness to repay its debt obligation. This all depends on the stability of the government and acceptance of economic policy goals. This risk is quite evident on global trade platform and is indicated by the trust shown in national financial system. Unlikely events like War and crisis enhances this risk. The unavailability of any legal alternative in case of default by a nation makes it even more important to analyze the political risk.

Conclusion

It’s not an easy task to downgrade a nation’s credit rating as a lot is at stake for both the parties. If the rating agencies assessment is correct, the whole financial market tailspins and if the assessment is not so correct, the future of the rating agency gets darker. But in any case as a smart investor, we should raise the red flag once such news flows into the market. It’s time to be cash rich and keep away from risky investment instruments like stocks and commodities. Wait for the storm to subside and you will get a chance to purchase these assets at better prices.

Author

The author Bimlesh Singh is a financial consultant and is the lead partner at Vertical Grass. He can be reached at bimlesh@verticalgrass.com.

Company Fixed Deposits - An alternative of Bank Fixed Deposits

Yogi — Tue, 27 Dec 2011 18:16:00 GMT

Investing in risky assets is not a wise proposition if you don’t have time and mental bent for research. Normally investors who invest in risky assets like stocks and derivatives have very high return expectations. In real sense sometimes these expectations are highly unrealistic which leads to the fall of a larger percentage of risk loving investors. If stock market has given a historical return of 15 to 20% expecting 40% return out of it on continuous basis should be categorized as highly unrealistic. So if you are risk averse and don’t have enough knowledge and time and you want return in the range of 8 to 15% (15% return is quite competitive with respect to stock market returns), what are the options available with you? If you are willing to roll your sleeves up and do a little bit of analysis, Company Fixed Deposits can prove good alternative for you.

What are Company Fixed Deposits?

Company fixed deposits are similar to the famous bank deposits, but in this case, deposits are managed by a corporate firm which is not a bank. It can be a NBFC, listed public limited company or private firm. The main difference between Bank’s Fixed Deposit and Company Fixed Deposit is the loan guarantee of up to Rs 1 lakh given by RBI against Bank Fixed Deposits. Company Fixed Deposits are not secured by RBI and hence they are risky as compared to Bank Deposits.

Pros and Cons of Company Fixed Deposits

The Good

The Bad

· Higher Interest rate (9% to 16%) as compared to Bank Deposits (9 to 10%)

· These are short term deposits (Ranging from 6 months to 1 year)

· Income tax is not deducted at source if the interest income is less than 5000

· Deposit can be spread in more than one company so as to keep the interest income lower than 5000 from each of them to avoid tax deduction at source

· Company Deposits are not Secured by RBI as done for Bank Deposits

· Procedure of foreclosure is complex and not smooth. Guidelines may vary from company to company

· Possibility of default of payment by company is high as compared to Bank Deposit

· Proper research needs to be done before choosing a company for investment

Risk Analysis

Company Fixed Deposits are exposed to default risk as, at maturity, the company might not be in a position to repay the accrued amount. There might be various reasons like bankruptcy, fraud, cash crunch due to loss etc. These loans are not secured by RBI as done for Bank Deposits so investors do not have insurance of even Rs 1 Lakh.

Who Should Invest

As there is a default risk involved and these deposits sound risky, before you plan to invest you need to take out some time for research. It’s not that you reject this option as a whole but do some analysis to find out the good option as the effort is worth it (you will get superior returns 11 to 14%). Please find below some of the checks which you should apply before choosing a company fixed deposit:

Company deposit rating by rating agency like ICRA, CRISIL and such.
Financial health of the company – Profit, Debt, EPS and such parameters should be in good shape.
Dividend Payout history of the company – It should have a healthy history of dividend payments.
Promoters History.
Companies Management capability.
Overpromising rates – people should avoid deposits which are offering return above 15%.

Conclusion

If you are comfortable with doing a little bit of research, Company Deposits can be promising investment options. Basic rule is to go with renowned names with proven track record. It’s not advisable to be invested in long term deposits as default risk increases with tenure. Enjoy the new armor in your kitty.

Author

The author Bimlesh Singh is a financial consultant and is the lead partner at Vertical Grass, a company with the mission of providing personalized financial services. He can be reached at bimlesh@verticalgrass.com.

Top 10 Personal Finance News 2011

Yogi — Mon, 26 Dec 2011 22:53:00 GMT

As we say good-bye to 2011, let us summarize the top events in the area of personal finance that affect your money directly. Here’s a look at top 10 news items from InvestmentYogi (in no particular order):

1) European Debt Crisis - We all are an eye witness to the financial market volatility, both stocks and bonds, in the recent past. This is going to continue till a potent solution is not devised for this situation. Together with stock market volatility, the financial institutions that are exposed to this debt will have to write off their debt in worst case scenario, hitting their bottom line. Borrowing will get costlier and interest rate will remain quite high for some time, creating extra pressure on the economy. And as borrowing will be costlier, spending will be less resulting in prolonged recession.

2) RBI’s Monetary Policy Fails To Contain Inflation - In spite of multiple increases in repo and reverse repo rates, in the current financial year the WPI indicated rate of inflation has been 9.6%, which is abnormally high. Why it is that inflation has not been contained despite so many rate hikes.

3) Rupee Depreciates To A New Low - The rupee fell to a new low of 53.52 a dollar on Tuesday before ending the day at 53.23, with the euro’s weakness against the US unit adding to the woes of India’s currency. The euro’s fall has prompted safe haven-buying of the US currency globally and this weakened the rupee, which has already been under pressure from weak economic numbers and nervous investor sentiment.

4) New Income Tax Slabs - In 2011 annual budget, the government has brought about relief for the common man by widening the tax slabs further, along with reducing qualifying age of senior citizens from 65 years to 60 years, and introducing a high new tax slab for senior citizens of over 80 years in age (Super Seniors) who will not be required to pay taxes for income upto Rs 5 lakhs per annum.

5) Saving Account Interest Rate Deregulated - Till recently the interest on savings account deposits was governed and regulated by the Reserve Bank of India (RBI). Banks had no control whatsoever and a meagre 3.5% on the lowest amount available in the account from the 10th to the end of month was paid out. With the RBI’s recent move to deregulate this interest rate, banks now have a free hand in deciding what they wish to pay to their depositors. Here is a quick snapshot on what this deregulation is and how the move could impact you.

6) Revision in Post Office Savings Schemes - The Central Government has made some key changes to the Post office Small Savings Schemes. The revision in the Schemes and interest rates was in response to Reserve Bank of India (RBI’s) announcement on complete deregulation of savings banks deposit rates. Here are the key changes.

7) No need to file Tax Return for income upto Rs 5 lakhs (Conditions apply!) - No income-tax returns would be required for salaried persons earning up to Rs 5 lakh per annum. However, under the scheme, the salaried person wants exemption from filing IT return, has to disclose about the incomes like dividend and interest to his employer for tax deduction. Other conditions also apply. Read on.

8) Hurray! Indians can Invest in Global Markets - This year SEBI’s move to allow the Indian investors to trade in almost 24 major global indices including that of US, Europe and Asia, sitting in their comfortable homes, strengthens the proposition that everything is local now. As SEBI has opened the gates partially (You can only trade in derivatives of global indices for the time being) let’s try to figure out how exactly this arrangement works and how an individual investor can gain from this opportunity.

9) IRDA Issues Customer Centric Guidelines For Online Insurance Marketing - Insurance regulator IRDA issued guidelines on distance marketing of products to protect the interest of individuals who buy policies over phone or Internet. Insurance companies are mandated to implement the guidelines from October 1, 2011. The Compliance Officer of each insurer shall submit to IRDA, at the end of each Financial Year, a certificate confirming that the insurer has complied with all the provisions of these guidelines during the year.

10) The Rise And Fall of Gold - Global prices of gold have been steadily going upwards since last decade. In September this year, Gold prices saw a correction of around 6% from the peak and have fallen sharply along with Equity. In the short-term, experts say there will be a slow rally in gold prices; in the long-term however, gold prices will be largely determined by currency prices and inflation rate. Lower the reserve currency (presently, US Dollar) and higher the inflation rates, the higher the price of gold and vice versa.

European Debt Crisis

Yogi — Mon, 26 Dec 2011 06:36:28 GMT

One fine morning you come to know that you can get personal loan at 3% interest. What will be your next move if you were contemplating taking a personal loan at the rate of 16% the previous morning? Persons who do not require a loan will also start thinking about going for a loan. Suddenly, there is a long queue of loan seekers. Economy is doing great. So, banks sanctioned the loans without much ado. But, as the fate has pre decided it, at the time of repayment, there was deep recession. So, the whole debtor lot who spent mindlessly at the time of low interest rate did not have enough earning to pay the debt and are on the verge of default throwing the whole economy on the path of even deeper recession. None of the characters and events in the above story is figment of imagination, but it’s the true story of European debt crisis.

What is this crisis all about ?

Unification of Europe as one economic zone resulted in birth of currency Euro. Countries comprising European Union were of varying size and economic strength. Some countries like Greece and Portugal whose economy was not so strong are the part of union too. As Euro was the single currency throughout European Union, there was no fear of local inflation and banks were happily lending to economically weak and strong without any discrimination. World economy was in good shape and hence the direct correlation of economic strength and repayment strength was not evident. This miscalculation raised its head with vengeance when the world economy slipped into recession. Although, there were some universal rules for lending, there was an absence of well-defined guidelines regarding spending. Weaker economies of the union took advantage of this loophole and overspent using borrowed money. This is the current situation in Europe and if Greece defaults on repayment, we will slip into even deeper recession.

What is being done to avoid the crisis ?

Stronger economies of the Union like Germany are pushing hard for stringent spending guidelines so as to avoid such crisis in future. Under new environment, countries spending will be made directly proportional to their economic strength to pay. This proposition is not going to solve the current crisis and is hailed as precautionary step by various analysts. One of the proposed immediate actions to fix the crisis as being discussed is issuance of Euro bonds which will be backed by whole European Union. There are many other propositions being discussed but each has its own groups of pro and anti-based on economic implications.

How you will be affected ?

We all are an eye witness to the financial market volatility, both stocks and bonds, in the recent past. This is going to continue till a potent solution is not devised for this situation. Together with stock market volatility, the financial institutions that are exposed to this debt will have to write off their debt in worst case scenario, hitting their bottom line. Borrowing will get costlier and interest rate will remain quite high for some time, creating extra pressure on the economy. And as borrowing will be costlier, spending will be less resulting in prolonged recession.

Conclusion

It’s recommended not to go for fresh investments in financial market till some clarity appears in the whole scenario.

Author

The author Bimlesh Singh is a financial consultant and is the lead partner at Vertical Grass. He can be reached at bimlesh@verticalgrass.com.