Friday, October 28, 2011

Prajna Capital

Prajna Capital

Tata Motors DVR: Steep discounts

Posted: 28 Oct 2011 04:24 AM PDT

TATA Motors' differential voting rights (DVR) shares are currently quoting at a steep 45.5 per cent discount to the ordinary shares of the company. In other words, at `181, the ordinary shares are trading at a premium of `82 a share, compared to the DVR shares. Typically, DVR shares trade at lower prices as these have limited voting rights but enjoy higher dividends visa-vis ordinary shares. In the case of Tata Motors' DVR, the holders have a tenth of voting rights but enjoy an additional five per cent dividend, compared to holders of ordinary shares.

While there are no benchmarks, at what price should they trade? In the case of Tata Motors DVR, since its listing in December 2008, the discount on an average has been 34 per cent. However, in the last three years the discount has never breached the 46 per cent level, which is where its DVRs are now trading. If this historical trend holds, either Tata Motors' share price will fall, or the DVR share price will rise from current levels to narrow the gap. It has happened in seven to eight occasions in the past, and every time the discount has touched 46 per cent, the DVR share price has recovered. Even if the gap has to reduce to its historical average of 34 per cent, the DVR share price should move up by at least `21 per share from the current `98.80. In terms of valuations as well, analysts believe that there is enough room for the DVRs to appreciate, and the risk-reward equation is favourable currently. "Considering the fundamentals and the current valuations, there is not much downside for the Tata Motors' share price," says Deven Choksey, managing director of K R Choksey.

Moreover, at the current levels the DVR is offering good dividend yield. In FY12, analysts are expecting a dividend of `4.40 per share for the ordinary share; the company paid a dividend of `4per share (adjusted for stock split) for FY11.

Considering the five per cent additional dividend, DVR holders should get `4.5 per share, which translates into a dividend yield of almost 4.55 per cent as against the dividend yield of 2.43 per cent, in case of ordinary shares.

In terms of price to earnings, DVRs (at four times of the estimated earnings for FY13) are available at half the valuation of ordinary shares. For those considering Tata Motors as an investment, DVRs could be a good option. Even for those holding ordinary shares, switching to DVRs should prove rewarding. In both cases, it becomes risky if the discount widens beyond the 46 per cent level.

Infrastructure companies line up tax-free bond issuances

Posted: 28 Oct 2011 03:35 AM PDT

AFTER getting the approval of raising up to `30,000 crore through issuance of taxfree bonds this financial year, infrastructure finance companies, Housing and Urban Development Corporation (HUDCO) and Power Finance Corporation (PFC), have thrown open their subscriptions under the private placement route. However, collections may not be that high keeping current market conditions in mind, say market participants.

While PFC aims to raise `150 crore through the issue, HUDCO has come up with a base issue size of `100 crore for the first tranche. Both issuances have open greenshoe options and companies can retain the oversubscription. "The initial response has not been that good because of current market conditions and tight liquidity. Lesser profitability will mean lower investment appetite," said senior official of a Mumbai-based brokerage firm. The Central Board of Direct Taxes has given HUDCO and PFC the permission to raise `5,000 crore each this financial year. Bonds can be placed publicly as well as privately. The coupon rate on these bonds is not taxable and should not be less than 100 basis points lower than the yield on government securities of the same residual maturity, as reported by Fixed Income Money Market and Derivatives Association (FIMMDA) on the last working day of the month preceding the month of issue.

PFC and HUDCO are offering coupon rates of 7.51 per cent for 10-year and 7.75 per cent for 15-year bond. Subscription for PFC bonds closes on October 7, while HUDCO closes on October 12. Both these issues had opened last week.

The yields on the 10-year benchmark government bond have hardened by 12 basis points over the last month. "The response for these bonds has been lukewarm, as rates are moving up and investors are waiting for better coupon rates next month," said a bond arranger from a domestic brokerage firm.
 

New Ulips from ICICI Prudential Life - Elite Life and Elite Wealth

Posted: 28 Oct 2011 02:21 AM PDT



ICICI Prudential Life Insurance has launched two unit-linked insurance plans (Ulips) – Elite Life and Elite Wealth – aimed at the high net worth individuals. The features of both the plans are similar, save the premium. The minimum premium for Elite Life is . 2 lakh, while it goes up to . 5 lakh for Elite Wealth. The premiums can be paid either in one go or over a period of five years.


Under the one-pay option, the life cover for those aged till seven years and over 60 years is limited to 1.25% of the premium. Those between eight and 60 years can opt for a minimum sum assured of 1.25 times the premium, with the upper limit being five times the premium amount. If the premium is paid over five years, then policyholders aged between 8 and 45 can secure a sum assured that is either 10 times the annual premium or an amount equal to the policy term multiplied by half of the annual premium, whichever is higher. For those over 45, the sum assured will be seven times the annual premium or an amount equal to the policy term multiplied by one-fourth of the annual premium, whichever is higher.

If policyholders chooses a life cover of 1.25 times the premium, the deduction available under 80c of the I-T Act will be limited to only 20% of the total premium and not the entire premium amount. What's more, the returns generated by the product will be taxable, too.

FUND OPTIONS, MATURITY PROCEEDS:

The products offer eight fund options, and also the option to invest systematically through the automatic transfer strategy. In case of the insured's death during the policy term, the amount payable will be the sum assured reduced by the partial withdrawal, if any, or the fund value, whichever is higher. Partial withdrawals are allowed after five years of the policy, subject to limits.

CHARGE STRUCTURE:

Premium allocation charges amount to 3% of a single premium and 2% under the five-pay option. Policy administration charges are . 60 per month for one-pay and . 500 per month under the five-pay option. Any alterations in the policy, besides switching funds, will cost . 250 per transaction. The initial charges are lower compared with other Ulips, but they still cannot beat mutual funds which don't have an entry load.

UPSIDE:

Long-term insurance cover with a limited premium payment term. Also, the policyholder can choose between eight funds options and switching between them is free.

DOWNSIDE:

Like all Ulips, financial planners feel the charges are higher vis-à-vis other comparable financial products like mutual funds.

 

 

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NAV guaranteed Ulips Head into a Uncertain Future

Posted: 28 Oct 2011 01:43 AM PDT

   Unit linked insurance plans (Ulips) with guaranteed NAVs (net asset values) are back in focus. The preferred insurance product of many cautious individuals is under the scanner of the Insurance Regulatory and Development Authority (Irda).

At a recent insurance conference in Mumbai, the Irda chief J Hari Narayan said, "We are examining it because my concern is that the highest NAV guaranteed product may lead to miscommunication. We want to understand the entire issue before taking a call."

A lack of clarity on this category of products is the sticky point. As uncertainty surrounds the fate of these products, it is worthwhile to spend some time to understand how they work in their current form.

FLAWED COMMUNICATION?

Most leading life insurers offer at least one NAV-guaranteed Ulip as part of their product suite. And much of the concern stems from the products guaranteeing the highest NAV. According to critics, some people looking to buy these products may get the impression that the returns would mimic the stock market when it is at its peak and suffer minimal damage even if the indices nosedive. In other words, many individuals could assume that they can make the most of an equity boom, with the downside remaining capped in adverse situations. "They could be seen as pure equity products, but they come with a strong debt component. They are not exactly aligned with stock market movements. They may capture a larger percentage of the upside when markets are consistently moving upwards in a secular manner, but when they turn volatile, these products could start replicating fixed income performance," says Raghvendra Nath, managing director, Ladderup Wealth Management.

TYPES OF GUARANTEES

The NAV can be guaranteed in two ways. The most common is calculating the fund value at maturity on the basis of the highest NAV registered by the fund during the tenure specified by the life insurers. Or, they could carry a pre-defined NAV of a fixed amount, say, . 20. In both cases, the investment mix could be skewed towards debt products that are chosen by keeping the product's maturity in mind. For instance, in case of 10-year prefixed NAV guaranteed Ulips, a major chunk of the premium will be directed to a G-sec or corporate bond maturing after 10 years. The highest NAV product could see the premiums being invested in equities initially and the composition leaning towards fixed income instruments as the maturity date approaches.

The thing to remember is that such products have to rely on debt to ensure that they deliver on the returns that are promised. Also, a lot depends on the market view and skills of the fund manager and the actuary, who monitor the asset allocation on a daily basis and take calls on switching in and out of equities and fixed income products depending on the prevailing market situation.

KNOW THE NITTY-GRITTY

You need to be aware of certain intricacies regarding asset allocation in such Ulips. First of all, the guarantee is applicable only if you remain invested in the policy throughout its term. Most guaranteed Ulips carry a fixed tenure of 10 years and limited premium payment term of 5-7 years. In the event of the insured's death, the fund value or the sum assured, whichever is higher, is handed over to the nominees. Unlike regular Ulips, these products do not offer multiple fund choices — from only equity to only debt — and, by extension, an option to switch between them. The products, instead, are linked to the capital- or returnguarantee fund that the company offers for such Ulips. Moreover, you will have to shell out a fee in return for securing the guarantee, which could be in the region of 0.25-0.75%. Remember, this does not fall within the ceiling on charges Irda had imposed on Ulips in September 2010.

LIMITATIONS IN CURRENT FORM

NAV-guaranteed Ulips will attract the regular Ulip charges, too, which financial planners believe continue to remain above reasonable levels despite Irda's actions. More importantly, the complex nature of the products leaves them vulnerable to misinterpretation – by the sellers as well as buyers, unintentionally or otherwise. Those who go for these products assuming that they will get the best of equity markets – when they are on a roll – and yet can stay protected when the markets start tumbling, could be in for a disappointment. "Many think they can fetch fabulous returns, which may be a little difficult. What is assured is the highest NAV attained by the fund and not the highest index level," says Raghvendra Nath.

This is a complex product and, hence, difficult for investors to comprehend that in one or two situations, it can provide sub-optimal returns. It also does not provide flexibility on debt-equity allocation to the investor.

MERITS OF GUARANTEED ULIPS

But, the fact is that these products have become popular in a short span of time, which can be attributed to the lure of 'assured' returns and, of course, due to hard-selling by distributors. They appeal to those who are risk-averse and yet do not want to ignore the value of equity in wealth creation.

 
We had launched a guaranteed fund to provide options to individuals who may be keen on equity participation, but at the same time, wish to protect their corpus during swinging market fortunes," says Rituraj Bhattacharya, head, product development, Bajaj Allianz Life Insurance, which discontinued this fund option on March 31 after its tenure expired. They provide balanced fund-like returns since most capital-protection methodologies require a combination of debt and equity. This could be better than pure debt options. In short, while guaranteed Ulips have their share of pros and cons like other products, it is best to evaluate them in terms of their suitability. Before buying NAV guaranteed Ulips or any other financial instrument, ascertain how well they fit into your risk profile and also whether they can help you fulfil your long-term goals. Finally, factor in the element of uncertainty surrounding them today, given the concerns expressed by the Irda publicly.
 

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Invest in IDFC Mutual Funds Online

 

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L&T General Insurance enters health insurance

Posted: 28 Oct 2011 12:09 AM PDT

 

ONE-YEAR-OLD L&T General Insurance Company has forayed into the health insurance business. On Wednesday, it unveiled its first health insurance product -my:health Medisure Prime Insurance. The policy has a maximum entry age of 65 years but can be renewed for a lifetime. The company would be settling claims inhouse and not through a third-party administrator.

The policy's unique selling proposition would be its response time, where L&T General would decide if cashless hospitalisation can be given to a policyholder within six hours and would settle reimbursement claims within six working days. In case, the insurer fails to honour the commitments, it would pay a compensation of Rs 1,000 to the policyholder.

The policy provides free pre-policy check-up at the comfort of a customer's home and comes with no sub-limits on room rent, medicines and surgery. In addition, the sum insured also automatically doubles on diagnosis of a critical illness. The policy gives Rs 10,000 as lumpsum recovery benefit if the hospitalisation exceeds 10 continuous days.

YM Deosthalee, L&T General Insurance's chairman of the board, said the company would get a capital infusion of Rs 500 crore over the next three-four years.

Joydeep Roy, CEO and wholetime director, L&T General Insurance, said, "Since healthcare costs are different in different cities, the premium for a small city is different from that of a metro city."
 

DSP BlackRock Mutual Fund Launches 2 FMPs - New Funds

Posted: 27 Oct 2011 08:53 PM PDT

DSP BlackRock Mutual Fund has launched two fixed term plans.
 
1) DSPBR FTP - Series 1 - 24M will be open for subscription from 1-Nov-11 to 14-Nov-11.
2) DSPBR FMP - Series 18 - 12M will be open for subscription between 2-Nov-11 to 03-Nov-11.

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Invest in DSP BlackRock Mutual Funds Online

 

Invest in Reliance Mutual Funds Online

 

Invest in HDFC Mutual Funds Online

 

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Invest in Birla Sunlife Mutual Funds Online

 

Invest in IDFC Mutual Funds Online

 

Invest in UTI Mutual Funds Online

  

Invest in SBI Mutual Funds Online

 

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IDBI Gold ETF

Posted: 27 Oct 2011 07:26 PM PDT

 

With the price of gold up by around 30 per cent this year, investments in gold through mutual funds has become a silent trend. It has become simple and easy for investors to get exposure to gold through fund SIPs.

 

There are many gold funds available already, with IDBI Mutual Fund joining in now. IDBI has become the 12th AMC to launch a Gold ETF – an open-ended gold exchange traded scheme.

 

Investment Strategy

It will invest in physical gold with the objective of replicating the performance of gold in domestic prices. The ETF will adopt a passive investment strategy and try to minimize the tracking error between the fund and the underlying asset. Besides these investments in physical gold, the scheme may invest up to 5 per cent in debt and money market instruments. The physical gold will have the purity of 99.5 per cent.

 

Charges

The fund's annual charges will be 1.5 per cent and it will include fund management fees and other charges.

 

The transaction charges (fees to distributor/agent) will be Rs.150 for first time investors and Rs.100 for existing investors. However, there will be no transaction charge for investors who choose to invest directly with the fund house.

 

Fund Manager

Mr. Gautam Kaul will manage this fund. He is an MBA with over 10 years experience in debt markets including 6 years in the mutual fund industry. He has worked as a dealer & fixed income fund manager in Religare Mutual Fund, dealer - fixed Income in Sahara Mutual Fund and government securities & corporate bond desk dealer in Mata Securities Pvt. Ltd. He also manages IDBI Nifty Index Fund, Liquid Fund, Ultra Short-Term Fund, Nifty Junior Index Fund, Short-Term Bond Fund, FMP and MIP.

 

Fund House

IDBI Mutual Fund launched its first scheme in May 2010 and now manages 7 funds, including this one. Its assets under management (AUM), as on September 30, 2011, stand at Rs 4926 crores.
 

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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 IDFC Mutual Funds Online

 

Invest in UTI Mutual Funds Online

  

Invest in SBI Mutual Funds Online

 

Invest in L&T Mutual Funds Online

 

Invest in Edelweiss Mutual Funds Online

 

 

How a chit fund works?

Posted: 27 Oct 2011 07:34 AM PDT

A chit scheme generally has a pre-determined value and duration. Each scheme admits a particular number of members (generally equal to the duration of the scheme), who contribute a certain sum of money every month (or everyday) to the 'pot'. The 'pot' is then auctioned out every month. The person bidding the lowest sum gets the bid amount.


The working mode is simple. Businessman 'A' joins a . 50,000-worth chit fund, with a monthly subscription fees of . 1,000 for 50 months. There are 50 members contributing to the 'pot'. In the first month itself, when all the 50 members contribute . 1,000, the the 'pot' becomes worth . 50,000. As per chit laws, 'A' has the right to bid for the 'pot' (which collects a monthly subscription of . 50,000 every month). In most cases, 'A' can bid almost the full value of the pot. When there are multiple bidders, the person bidding the lowest amount (than the 'pot' value) gets the money. Even if 'A' has bid money from the 'pot' at a discount (say . 49000), he has to continue paying his subscription fees of . 1,000 till tenure.
If one takes the simplest of calculations, 'A' pays in . 50,000 at the end of 50 months, but he gets only . 49,000. However, 'A' benefits from the timely receipt of funds; he also gets dividends (which will reduce his . 1,000 shortfall to pot) if other members have borrowed from the 'pot' in subsequent months. The . 1,000 that 'A' pays in divided among other members of the chit fund, which is their profit or dividend. Members who have not borrowed from the 'pot' generally make 10-12% returns on their investments.


Even if the member bids in the early life-period of the chit fund – say 2-3 months into the first subscription, the cost of money borrowed (the difference between pot and money bid by the member) will be around 12- 14%, much lower than 19%-plus rates charged by banks on unsecured loans.

 

 

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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 IDFC Mutual Funds Online

 

Invest in UTI Mutual Funds Online

  

Invest in SBI Mutual Funds Online

 

Invest in L&T Mutual Funds Online

 

Invest in Edelweiss Mutual Funds Online

 

 
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