Call from Bank for Insurance.....................

You maintain a decent Bank Balance! Great.......

Very soon you will get a call from your Bank pitching you an Insurance product or you may be pitched an Insurance product the moment you enter your Bank for some work.

This is also Great! You get the benefit of buying all kinds of Financial Products under one roof. That's what the Bank's are aiming at. Becoming a Financial Powerhouse.

Insurance is never bad. Personally I feel Insurance is a great product and covers your Liabilities. The concept dates hundreds of years back and started as a cover for Merchants sending their goods via Ships. Now Insurance is a vast field and covers are available for a lot of activities and products in our life. Whenever I am advising somebody I always tell him to get Insured first to cover his Liabilities and then look for other investments.

Hence whenever you are pitched by your Banker for Insurance donot run away or buy without understanding. I never advise anybody to avoid understanding the Product in Bank as you never know when you come across something good.

Ask for the following Insurance products from your Banker to make it a part of your Portfiolio and help you cover your Liabilities.

Term Insurance: Whenever you are pitched for an Insurance by your Banker ask for a Term Insurance. The Banker may approach you for a Traditional Plan or and Endowment. But Term Insurance is far better than both. It is a Pure risk cover and not an Investment option hence at low cost you get a fairly high coverage securing your liability in case of an unfortunate event. Child Plans, Retirement Plans or any other similar plan may not be beneficial as they can be structured through a combination of Term Insurance, Mutual Funds, FD's etc.

Health Insurance: As Life expectancy has gone up so has the cost of medical facilities. A Health Insurance is a perfect Tool to secure your medical liabilities. Healthy people usually avoid this saying that we have never taken a claim so why should we pay for Health Insurance. Insurance company is just making money out of it. My take: Do it like a charity for yourself. Illness never informs before happening. You may want to set aside some corpus for Health and do away with Health Insurance. Well not a bad idea till you have a heavy corpus dedicated to your medical expenses. This is possible iis you are extremely rich or in later part of life when you have accumulated sufficient corpus for the same and Health Insurance coverage is insignificant compared to that corpus. Till that time always keep a Health Insurance and buy it early right from the time you start working.

Criticall Illness: Important coverage to cover some extremely critical illnesses. It covers 8 to 10 illnesses depending on the company and pays the insured on detection of any of these problems subject to certain conditions.

 Home Insurance: It covers your home and items in your house against burglary, fire and act of god perils. Most people ignore this but I suggest we take one to cover against  a negligible probability of mishap.

Vehicle Insurance: If your Cars or Two wheeler are not insured. No need to explain why we need them. Mandatory insurance for every vehicle owner.

So next time you are being pitched for Insurance from your Banker donot run away or donot buy the product blindly. Ask for the products mentioned above as per your requirements and cover your liabilities. Never buy Insurance for Investment purposes. This will curtail your coverage and will let you fall into a false sense of satisfaction that you are Insured which probably wont suffice at the time of actual need. There are Mutual Funds, FD's  and other investment products to suit your Investment requirements. Insurance is just a risk coverage and should be taken for that purpose only. 

Very Basics of Financial Planning

Many people ignore Financial Planning and start thinking very late about the same. Many a times despite of thinking about planning our finances we are not able to get the time to structure them. Or at times we take it lightly and ignore the same. Here are some basics which one should do if somebody is not able to structure a financial plan for himself.

Start investing early and Invest only after you are through with your monthly expenses and have an investible surplus.

Always start with Insurance so that you cover your Liabilities. Get a Health Insurance and Take a Life Insurance Cover once you are married. For enhanced Liability coverage depending on your investment limits you may take Critical Illness and Personal Accident coverage. These covers are also available as riders along with your Life Insurance. For Life cover just take a Term Insurance to get a maximum coverage. Online Term Insurance are available with high coverage and at low cost and should be considered. However just make sure that you get the medical tests done and do all require disclosures. This ensures smooth claim settlements to your family in the event of any mishaps.  Don’t go for any ULIP / Endowment / Traditional Plans. They are not an effective combination (However they are sold the maximum by distributors due to high commissions).

Take Health Insurance:  Take a Health Insurance to cover your unforeseen medical exigencies. Taking Health Insurance in early age is beneficial as it is highly cost efficient.

Now Plan your Investments: Decide your goals / the timeframe / your budget and investible surplus and then your Asset Allocation. Simple rule: Diversify between Equity and Debt depending on your time frame and age. 

 Suggested Investments according to horizons:

1.)    1 to 30 days – Liquid Funds

2.)    30 to 365 Days – Ultra Short Term Debt Funds and Short Term Debt Funds

3.)    366 days to 5 years – FMP’s, Dynamic Bond Funds, Income Funds, MIP’s, FD’s. Decision should be made depending on the interest rate scenario. Just keep in mind that FMP’s and   Debt Mutual Funds are tax efficient is investment is held for more than 1 year (10% without Indexation and 20% with Indexation whichever is less). However this is best only if an investor falls within 30% Tax slab as he gets a min 20% arbitrage over FD’s. For anybody falling in 10% slab FD’s. Anybody in 20% Tax slab can divide his investments between Debt Funds and FD’s. This is because an investor falling in 20% tax slab might enjoy a tax arbitrage if Indexation is taken into consideration (Effective taxation rate after applying indexation might go down below 10% considering the current indexation rates.).

4.)    Above 5 years : Equity is the best as long term returns out of Equity are the best. In case you are not able to invest a Lumpsum amount invest through SIP (Systematic Investment Plans) with as low as Rs. 1000 per month. SIP’s are the best investment options for a Salaried investor to generate good returns over a long term. Remember Investment is Equity Mutual Fund is highly tax efficient as investor doesn’t incur any Tax if investment is held for more than 1 year from the date of Investment (Long Term Capital Gain is Tax Free). Never fear Volatility of Equity. Ups and downs in Equity are common but if a discipline and patience is maintained for the requisite horizon one does get a decent return beating inflation and fulfilling the required goals.

5.)    Allocation to PPF: Always allocate some amount to PPF as it is an old and well proven investment option from the last many years offering a consistent return of 8%. Only restriction: It has a minimum lock in of 15 years. But withdrawal after 15 years is Tax Free.

This article just emphasizes on basics. I have not included the nitty gritties of Financial Planning and Products in this article.  

Financial Planning a Two Way Process

I keep on meeting many people who often quote me “I know a lot or everything about Mutual Funds and markets. I have been doing this for so many years. In the end it’s a loss making investment and I have lost a lot of money in this”. Then I get to know a lot of explanations about why they only want to stick to the traditional FD’s, PPF and NSC’s.  At the end of this conversation I always wonder that if somebody knows so much about Investment Products / Markets then how come did he lose money.  The chances of a learned or properly guided investor to lose money in a long run are negligible. As a person who has planned his investments will have his goals and time frame in mind and shall select the product accordingly. 

I am not against any product whether it is traditional, market linked or exotic structured product. Traditional investment products like PPF, NSC’s, PF etc are designed keeping all sections of the society in mind and are still a favourite choice of investment. Whether downturn or boom they have consistently given decent returns.  However they may not serve all investor goals depending on their inherent structure. On the other hand Property Investment requires liquidity in Hand, Equity Investment requires a long horizon, Gold (Favourite Investment for Indian’s) is more of a hedge etc etc.... Investment in every asset calls requires a reason. Hence Financial Planning is required with a proper asset allocation depending upon the timeframe or investor goals.

Financial Planning is a two way exercise. Banks/Asset Management Companies/Insurance companies are doing a lot to educate the investors. Awareness Programmes are organized by various organizations. Lot of information is published in newspapers by organizations. Educational Mails are a regular phenomenon. Steps are also taken by regulators to educate the customers. Various campaigns are being rolled out via print and electronic media. In short there is no dearth of information on Investment products.

Now it is the advisors job and responsibility to guide the investor!! Agreed and also this advisory has to be done from a long term view and not from a short term revenue perspective. Right advisory without miss selling means a happy investor. This might lead to lower revenues in short term but over a long term it helps in building a trust, reputation, more no of customers and eventually shall translate into higher revenues for the advisor.

With all this in place it is also the investor’s responsibility to become proactive in planning his investments. Most of the time we go by word of mouth in deciding our investments without even evaluating the options.  We avoid investing in products which could be the best investment options without any valid reason. This is where we tend to miss the bus.  Many investors do not understand the nitty gritty of the products because of which they form their opinions (mostly negative especially about Equity and Equity MF’s) and further spread the same via word of mouth. Hence choosing a right advisor becomes very important. At the same time it is also the investor’s responsibility to at least have a look at where he is investing and clarify all doubts.  

Financial Planning being a two way exercise hence Trust and Information Exchange has to be done from both the ends.

 

Reform Storm........meaningless without implementation

Recently the mood of our Equity Markets and the overall economic enviroment has changed. From a lull which was present from the last couple of years the Government suddenly announced a bouquet of reform into sectors ranging from Pension, Insurance, Mutual Funds, Retail, Aviation, Infrastructure etc etc etc.....To be precise some of them are:

- 49% FDI in Insurance and Pension Sector
- 49% FDI in Aviation
- 51% FDI in Retail
- Reforms in Mutual Fund Industry
- etc etc ......

After years of inaction and lull the announcement of reforms was so quick that it appeared like a storm. The entire economic environment suddenly became upbeat. Our rangebound Equity markets which were trading between 16,000 - 17,000 suddenly touched the 19,000 mark. Expectations are rife that the markets will shortly cross 20,000 mark.

It is noteworthy that UPA Government was under serious pressure from the opposition and its allies the Trinamool Congress not to announce these reforms especially retail, insurance and pension. Despite this pressure the government went ahead with this announcement sensing the Domestic and International outlook for growth of Indian economy. UPA had to lose the support of the ever noisy Trinamool Congress as the Mamata Banerjee led party pulled back its support from UPA. Just when it looked that the UPA government will fall Samajwadi party turned out to be the friend in deed for UPA supporting it from outside.

On Papers these reforms look fabulous. It looks as if we shall take leaps on the development front. However the not so clear side is yet to be seen. It should be kept in mind that these are just announcements. Although any announcement from the Government means big for the nation and its economy,  they need to be approved in Parliament session to become a law. The most difficult part is yet to come when these reforms shall be put in next parliament session for approval. It will be an acid test for the UPA government to convince the opposition parties to get their support on these reform bills. Till the time this happens these reforms will just remain on papers.
Mr Chidambaram's actions to get things together and announce the bold reforms in such a short span of time are really commendable. Still my view is that these reforms are meaningless till the time they have a direct positive impact on the growth of our economy. Even after announcement of the reforms Global players are moving slowly and steadily on their India strategy as India faces a high degree of risk on the political uncertainity front. The road to an end to end implementation both for Government and gobal players is tough. But once the implementation is in place these reforms may prove to be a milestone in India's growth.
I strongly feel that markets have taken these announcements over enthusiastically and have moved faster than the pace of reforms. A small negative news on the domestic front can cause a bigger market fall compared to any global negative news as this bull phase is strongly dominated by local sentiments. My view is that markets have factored in these reform announcements and further upside lies on two factors:

- More reform announcements by Government as the speculation is rife. 
- Implementation of the existing set of reform. 

For Equity Investors Systematic Investment Plan remains the best mode in this volatile scenario. Lump sum investors need to have a 4 - 5 year timeframe to see a good growth at this market level.

At last the hopes are alive that these reforms shall translate into Law paving the growth path for our countr's economy.

Soon to be published..........

- Views on the Current Reforms in India
- Views about Pension and NPS reforms

Is it a party time after rate cuts by RBI??

After 13 continuous spells of rate hikes and two consecutive CRR cuts RBI finally did a cut in Repo and reverse repo rate by 50 basis points. Current Repo rate stands at 8% and Reverse repo rate at 7%. RBI started hiking rates from March 2010 to control inflation which has been hurting the Indian economy like a monster. In simple economic terms rate hike was supposed to make availability of loans difficult thereby curtailing liquidity and dampening the growth which in turn would reduce the demand leading to reduction in prices followed by a lower inflation. The strategy was to control inflation by taking a hit on growth which had slowed down drastically to 6.1%. The IIP for January 2012 dropped to an all time low of 1.1%. The massive liquidity crunch led to a rally in the CD rates (1 and 3 months) which crossed 10.5% mark. Heavy borrowing by Government to finance the burgeoning fiscal deficit added to the problem. Yields of 10 yr G-sec’s soared to 8.75% and speculations were rife that the soaring liquidity crunch would take the 10 yr G-sec’s to 9%. RBI did two CRR cuts to infuse immediate liquidity in the system and bring some respite. But the crunch was to such an extent that the money infused in the system got used with just a blink of an eye. The RBI Governor finally took the most awaited step of cutting down the rate.
However this rate cut doesn’t seem to bring cheers to the slowing Indian Economy. Some reasons which could spoil the party: 

- Banks do not seem to be cutting down rates immediately. Banking sector as such is reeling under heavy NPA pressure. Any lowering in rates means taking a hit on NIM’s. Also the deposit rates would be required to cut which might have an adverse affect as Banks are finding it hard to mobilize the deposits. Hence most of the Banks maintained a status quo in their base rate with some banks doing a nominal base rate cut.

- Inflation (WPI) although came down to 6.89% levels before RBI cutting the rates, the pressure still continues to be on as Food prices still do not seem to moderate. Supply chain problem remains a critical problem which continues to go unaddressed by the government.

- High level of Crude price is keeping the inflation pressure on. Also demand by Oil companies to the Government for enhancing Oil Prices could play the spoilsport. Oil marketing companies are already reeling under heavy under recoveries and are consistently demanding the permission to hike oil prices from the government. Deregulation of diesel also continues to be a mooted topic. Any negative step at this end will have severe impact down the line on inflation and growth. Crude prices are currently hovering at $120 per barrel mark whereas the growth calculations in the Fiscal Budget 2012-12 have been done assuming the crude price level of $115 per barrel.

- High fiscal deficit remains another major issue. This will lead to heavier Govt Borrowing thus keeping pressure on liquidity and yields. 10 Year G-sec Yields which went down to 8.30% after announcement of rate cut by RBI has again bounced back to 8.6 levels.

- Rupee continues to slide against the dollar keeping pressure on trade finance activities and growth. Any fall in rates will discourage the foreign investors who are already shying away from India. NRE deposit rates are at all time high of 9%+ levels to encourage dollar flow and stabilize the value of rupee.

- Slow reforms by the Govt have raised concerns about the growth of Indian Economy among the investor fraternity. Insurance, Retail FDI, Aviation, etc bills are still in limbo and no reform signals available at governments end.

RBI will have to balance between growth and inflation and take a call on its further course of action. High growth leads to high inflation whereas low growth has its own set of problems. Time will tell whether it will be cheers or tears for Economy and the common man.

What hinders retail investment in Equity Funds?

Investment in Equity Mutual Funds in volatile or falling markets is considered as taboo by most of the investors. The general perception among investors is that recession is going to lead to further falls hence eroding the value of their money. Moreover the fear psychosis becomes so huge that investors go ahead with redeeming their equity investments at losses and parking their remaining money in low risk fixed return instruments. Recent example is the case of Indian Mutual Fund Industry where more than 1 million folios were closed in the last one year.


Time and again we keep on reading articles explaining the under mentioned benefits of Equity Mutual Funds:

- Equity is a long term investment option.

- Equity Mutual Fund investment shouldn’t be done from a speculation point of view.

- Equity is beneficial from Tax point of view as it doesn’t incur long term capital gain tax after 1 year of investment.

- Long term returns from Equity are always more than inflation.

Despite of all these benefits published and explained time and again retail participation in Equity is still meagre. Three major factors affecting the growth of retail participation in Equity:

1.) Stringent SEBI regulations for Mutual Fund Industry: It started with banning the entry loads on Mutual Funds in year 2009. This led to a sudden decline in revenues for AMC’s and thereby reduction in the distributor commissions. Many of the small distributors shut shops as they couldn’t make for their expenses. Many financial advisors refrained from aggressive distribution of MF’s and promoted Insurance and Real estate solutions where margins were higher. Most of the distributors found it very difficult to service their customers given sudden cut down in their commissions. This led to a sharp decline in flow of money in MF’s.

2.) Lack of right advisory: Very few distributors have really worked on the advisory model. The investors were never really advised on their investments based on their needs. Funds were pushed citing their benefits and not as per the investors requirements. The good schemes gave smiles to the investors and the bad ones left them clueless with no option but to redeem their funds by booking losses. Also they were never advised rightly during panic redemptions at the time of economic slowdowns as a result booking losses on their investment.

3.) Investors Panic: Panic comes hand in hand with a meltdown. Any bad news or any market meltdown sends shockwave among the investors. Investors need to understand that Equity is a long term product and euity investment needs to be disciplined. Discipline needs to be similar to what is maintained when somebody invests in a PPF or NSC etc and forgets about the money till the maturity. The underlying basis of investment in Indian Equity market is the India growth story. Though India has been facing a slowdown from some time the consumption story still remains intact. A disciplined investment shall pay in the long run and a meltdown shouldn’t be always taken with a panic. It is important to note that since year 2004 the 5 to 7 year rolling returns of BSE Sensex have always been positive. SEBI’s ban on Entry Loads has been an investor friendly step and Mutual Funds as of now are the cheapest and most tax efficient products in the market from a long term investment perspective.