Prajna Capital

Pension plans: Undefined Returns and No Guarantee
How to buy Property in India by NRIs
Bank FD – Special Schemes
SEBI cancels Aegon Mutual Fund licence

Pension plans: Undefined Returns and No Guarantee

Posted: 28 Aug 2011 07:33 AM PDT

With Irda revoking assurance, pension plans may not offer as much as other long-term products

The Insurance Regulatory and Development Authority (Irda) has given in to the demands of the industry and done away with the 4.5 per cent guaranteed return on unitlinked pension plans. While the exposure draft issued by Irda on August 1 gives more flexibility to insurance companies, it also tries its best to address the need of the policyholders.

"A pension product (deferred annuity contract) shall have an assured benefit disclosed at the time of sale, where the assured benefit means an amount in absolute terms that becomes payable on the vesting date (time when the pension starts)," said the Irda circular.

The circular goes on to explain: "An assured benefit shall mean any guarantee such as providing:

i) a minimum return (non-zero positive return) on the premiums paid during the contract period;

ii) A guaranteed maturity benefit (in absolute amount) payable at the vesting date;

iii) A guaranteed annuity from the date of vesting." If these norms come into effect, life insurance companies will have to give either of the above mentioned guarantees —to be conveyed to the policyholder at the time of buying of the product. None of the products will give all the three guarantee options — one pension plan would carry only one of the guarantees.

For instance, if you want a minimum return on premium, the insurer will assure you a part of the premium you have paid over the policy term. It will be a percentage of the premium paid to the insurer. And, this return will be revised every year in line with the prevailing market condition and the interest rate scenario.

In fact, the return will differ from one insurer to another. And since the insurance regulator has not defined the return, the policyholder will have to shop for the best possible return being offered in the market.

The method of calculating this return is yet to be decided. The good news is, given the present higher interest rate regime, these returns can be in tandem, at least in the short term. And, insurers will have to compete with the best rates available in the market to be able to sell pension products, as no one will buy a product if less than six per cent is on offer.

At present, State Bank of India has been offering 9.25 per cent on fixed deposits of five to ten years. Long-term products like Employee Provident Fund (EPF) and Public Provident Fund (PPF) give 9.5 and 8 per cent, respectively, National Saving Certificate (NSC) also offers 8 per cent (compounded half-yearly). Even traditional insurance products return around six per cent.

Those looking at buying pension policies with guaranteed maturity benefit would be assured capital protection. For example, if you buy a pension product for 10 years and are paying a premium of `1lakh annually.

If you are supposed to get `15 lakh on maturity, this option would make sure you get at least `10 lakh or your capital.

Besides, those looking at guaranteed annuity would be assured a fixed annuity or pension of the money invested. Say, if you agree to pay `10,000 annually for 10 years, the insurer would guarantee paying `5,000 from the date of vesting.

However, policyholders will be better off buying annuity at maturity at the prevailing market rate. Reason: A guaranteed annuity at the time of buying the contract may not be in line with the likely market conditions at the time of maturity. Guaranteed annuity schemes have had a bad experience in other countries. At many places, if the scheme had assured five per cent annuity, the interest rates had gone up to as high as 12 per cent and policyholders had to suffer huge losses.

Is the new norm beneficial for policyholders? The 4.5 per cent guarantee was more comforting from policyholders' perspective, as it gave this return over and above the capital. Just assuring the capital does not help a retiree. And, most traditional products already have the capital guarantee feature. Some give the sum assured and the bonus accumulated in the year.

By not defining the payable return, Irda has given the insurers an option to invest a portion of the corpus in equity markets. Given that insurers have to give a guarantee on the product, they will have to invest most of the corpus in debt funds. But, a small portion, say 30 to 40 per cent, can be put in equities.

Another disadvantage is that annuity is taxable. Only the one-third withdrawn on maturity is tax-free. This may change after Direct Taxes Code comes into effect in 2012.

Return on premium: This option may not be able to offer more than 2-3%

Guaranteed maturity benefit: Will guarantee only the capital invested

Guaranteed annuity: May not pay in line with the likely market conditions at the time of maturity

Put aside a fixed amount in equity-linked funds, which can pay 10-12% annually in the long run (at present, equity diversified funds' one-year returns = 1.76 per cent)

Other options are long-term products like EPF, PPF

Financial planners say pension product can be just a small part of your retirement kitty

If these norms come into effect, policyholders will have to scout for the best deal being offered across insurers

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Also, know how to buy mutual funds online:

1) DSP BlackRock Mutual Funds:

http://prajnacapital.blogspot.com/2011/05/buying-dsp-blackrock-mutual-funds.html

2) Reliance Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-reliance-mutual-funds-online.html

3) Reliance Mutual Funds:

http://prajnacapital.blogspot.com/2011/07/buying-hdfc-mutual-funds-online.html

4) Sundaram Mutual Funds:

http://prajnacapital.blogspot.com/2011/07/buying-sundaram-mutual-funds-online.html

5) Birla Sunlife Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-birla-sunlife-mutual-funds.html

6) UTI Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-uti-mutual-funds-online.html

7) SBI Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-sbi-mutual-funds-online.html

8) Edelweiss Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-edelweiss-mutual-funds-online.html

9) IDFC Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-idfc-mutual-funds-online.html

How to buy Property in India by NRIs

Posted: 27 Aug 2011 10:50 PM PDT

Real estate is popular as an investment avenue not just with resident Indians but also with Indians posted offshore or on secondments to international destinations. If you are already servicing a home loan while going on a posting abroad, nothing much changes. Your EMIs continue as per the existing PDC (postdated cheque) or ECS (electronic clearing service) mandate. But bankers advise that you should inform your home loan lender about change in address and your status. Be it an NRI or a resident Indian, the terms and conditions of home loan are largely the same for both sections of borrowers. But, it is advisable to inform the bank about change of address or relocation to another country. This way the customer will not miss any crucial letter or detail from the bank, which may impact his loan.

But if you are a new borrower who is posted abroad, you are treated like an NRI customer. Hence, you have to repay the loan through your NRE/NRO (non-resident external/non-resident ordinary) account even if you have a fully functional account in India. As per the Foreign Exchange Regulation Act, 1973, NRIs are Indian citizens staying abroad for employment or for business or vocation outside India. He/she should hold an Indian passport. Working professionals on second ment to another country, government servants posted abroad with Indian missions, and government professionals deputed on assignments with foreign governments or regional/international agencies like the World Bank, IMF, etc, fall under this category.

RBI GUIDELINES

Any NRI holding an Indian passport is eligible to buy a house in the country. But the money for the property should be routed through legitimate normal banking channels by way of inward remittance from any place outside India. Alternatively, you can also use your non-resident accounts to make the payments.

The RBI's guidelines for granting loans to NRIs state:

a) The loan amount should not exceed 85% of the cost of the property.
b) The individual's self-contribution should be from direct remittances from abroad through normal banking channels such as the non-resident (external) [NR(E)] account and/or non-resident (ordinary) [NR(O)] account in India. c) Even the repayment of the loan, comprising the principal and interest, should be remitted to the home lender form these accounts.

NEED FOR POWER OF ATTORNEY

An NRI applicant has to provide the power of attorney (POA) to a local relative before the loan is approved. It is helpful for the bank to have some local touchpoint.

If you are already servicing a loan, a bank may not insist on a POA. But you can avoid procedural hassles by giving a POA to a trustworthy relative in India. When an NRI buys a property, it may be under construction. Later, the property will need registration. It will not be possible for the customer to physically be present for all the formalities. Hence, the authorised individual with the POA can carry out important decisions on behalf of the customer.

TAX IMPLICATIONS

NRIs usually put money in real estate in India as an investment. Like resident Indians, NRIs, too, get tax benefits on housing loan's interest payments, say tax experts. Of course, the assumption is that the NRI has rental or interest income in India. But the bigger tax implication for NRIs kicks in when the house is ready for occupation. The tax implications depend upon the end use of the house and the host country in which the NRI resides.

IF THE HOUSE IS RENTED OUT

NRIs residing in the US have to pay income-taxes on their worldwide taxable income. Therefore, rental income from the house in India is taxable in the US. However, a deduction can be claimed on the interest payable on the loan taken for purchasing the house. In addition, the expenses on renting the property, such as maintenance charges, brokerage paid to the agent, property insurance, fees paid for registration of the rental agreement, depreciation, etc, can be deducted from the rental income.

In the UK, however, the taxability of the rental income from property situated outside the UK depends on the residential status, domicile, remittance, etc. In case, the rental income from the Indian house is taxable, then one can claim deduction on the interest on the loan taken for the purchase of the property. One can also claim deduction on the maintenance charges, brokerage paid to the agent, property insurance, fees paid for the registration of the rental agreement, etc.

If you are a tax resident in Australia, you are liable to pay income-tax in Australia on your worldwide income, which would include the rental income from the property in India. In such a case, you can deduct the interest payable on the loan taken for purchasing the house. You can also claim deduction on expenses, such as maintenance charges, brokerage paid to the agent, property insurance, fees paid for registration of the rental agreement, etc.

There is no personal income tax payable in the Gulf countries. In addition, all the countries offer credit of Indian income-tax paid on the rental income as per the Double Tax Avoidance Treaty.

If the house is occupied by family members, the income-tax implications again depend on the borrower's host country (country of residence). For example, in the US, a deduction is allowed on the home mortgage interest even if the property is situated abroad.

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Also, know how to buy mutual funds online:

1) DSP BlackRock Mutual Funds:

http://prajnacapital.blogspot.com/2011/05/buying-dsp-blackrock-mutual-funds.html

2) Reliance Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-reliance-mutual-funds-online.html

3) Reliance Mutual Funds:

http://prajnacapital.blogspot.com/2011/07/buying-hdfc-mutual-funds-online.html

4) Sundaram Mutual Funds:

http://prajnacapital.blogspot.com/2011/07/buying-sundaram-mutual-funds-online.html

5) Birla Sunlife Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-birla-sunlife-mutual-funds.html

6) UTI Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-uti-mutual-funds-online.html

7) SBI Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-sbi-mutual-funds-online.html

8) Edelweiss Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-edelweiss-mutual-funds-online.html

9) IDFC Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-idfc-mutual-funds-online.html

Bank FD – Special Schemes

Posted: 27 Aug 2011 10:21 PM PDT

The special deposit schemes that were a rage till recently are being phased out by banks. Meanwhile, thanks to the interest rate rises, the rates being offered by regular fixed deposits are slowly inching up to those being offered by the special schemes, signalling an end to the latter's earlier advantages.

Most banks had launched the special deposit schemes (maturing in 390 days, 555 days, 1,000 days) late last year, when rates were rising and banks started pushing these aggressively. For instance, Punjab National Bank is offering 9.05 per cent on a 555-day deposit and nine per cent for those maturing between one and three years. Bank of India is offering nine per cent for a 1,111-day deposit and the same rate between one and two years.

The difference is much wider between regular tenure deposits and the special schemes in the case of private banks. ICICI Bank is paying 9.25 per cent on 390-, 590- and 990day deposits and 7.50 per cent, 8.25 per cent and 8.50 per cent on one-, two- and three-year deposits, respectively.

As bankers explain, the rate of interest a bank offers on fixed deposits signals asset-liability mismatch (ALM). They will offer higher rate on tenures for which they need more funds, as these schemes help bridge ALM in a hardening interest rate regime for a long tenure. This means public sector banks have a neutral ALM, while private banks have a higher ALM and need more funds on certain maturities. So, State Bank of India, earlier offering 9.25 per cent only on its 555 and 1,000-day deposit schemes is now offering the same rate for longer tenures of one to 10 years.

Last year, bankers were advising to get in to special schemes for shorter tenures as rates were rising. And, you could reinvest once you completed the maturity or even withdraw mid-way. But, going by broad expectations, tomorrow's monetary policy review may see a final rate rise of 25 basis points and then the end of the tightening cycle. Bankers now suggest opting for schemes that give a higher rate, irrespective of whether they are special or regular ones. In fact, the longer the tenure, the better.

Interest rates have peaked. Therefore, opt for the higher rate even if you have to lock-in for a longer tenure, as these rates will not be offered in a long time. IndusInd Bank is giving 9.5 per cent on a 400day deposit and nine per cent between one and two years.

MD Mallya, chairman, Bank of Baroda, says there is still a difference in rates being offered on special and other schemes. Not all banks are giving the same rates across the board. His bank is offering 9.35 per cent on a 444-day scheme and only nine 9 per cent on regular tenure ones. So, inspite of rate rises, special deposit schemes are offering more value.

Most Banks Had Launched the special deposit schemes late last year, when rates were rising and banks started pushing these aggressively

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Also, know how to buy mutual funds online:

1) DSP BlackRock Mutual Funds:

http://prajnacapital.blogspot.com/2011/05/buying-dsp-blackrock-mutual-funds.html

2) Reliance Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-reliance-mutual-funds-online.html

3) Reliance Mutual Funds:

http://prajnacapital.blogspot.com/2011/07/buying-hdfc-mutual-funds-online.html

4) Sundaram Mutual Funds:

http://prajnacapital.blogspot.com/2011/07/buying-sundaram-mutual-funds-online.html

5) Birla Sunlife Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-birla-sunlife-mutual-funds.html

6) UTI Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-uti-mutual-funds-online.html

7) SBI Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-sbi-mutual-funds-online.html

8) Edelweiss Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-edelweiss-mutual-funds-online.html

9) IDFC Mutual Funds:

http://prajnacapital.blogspot.com/2011/06/buying-idfc-mutual-funds-online.html

SEBI cancels Aegon Mutual Fund licence

Posted: 27 Aug 2011 08:41 PM PDT

With immediate effect, Aegon MF, Aegon Trustee Company and Aegon AMC cannot carry out any activity, says Sebi

THE Securities and Exchange Board of India (Sebi) on Thursday cancelled the registration of Aegon Mutual Fund and withdrew the approval granted to Aegon Asset Management Company to act as the asset management company (AMC), acting on a request filed by the company.

Aegon Mutual Fund set shop in India in September 2008 after receiving Sebi approvals but hadn't started operations so far. Aegon Mutual Fund officials couldn't be contacted for their comments.

Aegon Mutual Fund, promoted by Dutch financial services major Aegon, had earlier made a request to Sebi to cancel its licence, Sebi said in a release issued on August 18.

"Consequently, with immediate effect, Aegon Mutual Fund, Aegon Trustee Company and Aegon Asset Management Company cannot carry out any activity as a mutual fund, trustee company and asset manage ment company, respectively," the regulator said.

For Aegon, the going was not good from the very beginning, as a month after getting Sebi's nod to launch mutual fund business, Aegon's 50:50 joint venture partner Religare Enterprises, decided to part ways. Religare set up its own mutual fund operations by acquiring Lotus India Mutual Fund.

Aegon then became lone promoters of erstwhile Religare Aegon Mutual Fund but remained inactive for almost three years.

Although, the two partners, decided to end their relationship in the mutual fund venture, there are still together in the life insurance business as partners of Aegon Religare Life Insurance.

After Aegon's exit, there are 44 mutual funds now operating in India.

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Also, know how to buy mutual funds online:

Invest in DSP BlackRock Mutual Funds Online

Invest in Reliance Mutual Funds Online

Invest in HDFC Mutual Funds Online

Invest in Sundaram Mutual Funds Online

Invest in Birla Sunlife Mutual Funds Online

Invest in UTI Mutual Funds Online

Invest in SBI Mutual Funds Online

Invest in Edelweiss Mutual Funds Online

Invest in IDFC Mutual Funds Online