Wednesday, November 30, 2011

Prajna Capital

Prajna Capital

Take SIP route of Investment during this volatile stock market

Posted: 30 Nov 2011 02:43 AM PST

 

THE usefulness of a systematic investment plan (SIP) is clearly visible at regular time intervals. Often, it is during tough times, when one is able to appreciate the benefits that an SIP provides and how this can be effectively utilised by the investor to build a strong financial position.

Here is a look at some of the conditions when this route would be useful for making investments.

Large amount to invest: One situation that the individual has to encounter is where they have a large amount to invest but they actually are not very confident about investing the amount. This happens due to the fact the investor wants to ensure that there is a low initial risk present on their investment. There is a large risk in making a one-time investment, as a sudden change in the situation from the time the amount is invested, could result in a large loss that is unaffordable.

So, if a person has Rs 25 lakh to invest and they want to invest into equities, then they would not like to come to a situation, where, in a week, after they invested the amount, there is a loss of 10 per cent and they find that they have lost a sum of Rs 2.5 lakh. Instead, they would want to ensure that the amount is invested in such a manner that this kind of initial risk is minimised, which is where the usefulness of the SIP comes in.

Regular investment: The other thing that a lot of people want to ensure is that there is a regular investment over a period of time so that they are able to ensure that the financial planning process is successfully carried on.

When the regular investment is required, then they would want that there is some way by which they need not make calculations every month and direct the investment in a specific manner.

This will mean following the SIP process, where, for example, they are able to, say, that out of the savings of Rs 15,000 per month, Rs 8,000 a month will be invested into two equity-oriented funds. This will ensure that there is ease of completion of process, without having to undertake any tension once they have set up the entire investment structure.

Uncertainty about equity markets: The manner in which the individual selects the investments for the SIP is important, but there is also a situation where the individual faces an uncertain equity market. There will be occasions when the individual will not be clear about the manner in which the equity markets will move, and hence, they will be confused whether they should complete their investments immediately or wait for a better opportunity to emerge. In such a situation, when the manner of the movement of the markets is not clear, the individual would be better off in selecting an SIP route for the investment.

This could mean that there are a lot of times when the SIP would be the best route that would be present for the investment. The individual can save a lot of trouble by just going in for the SIP and leaving out the investment worries to the fund manager, rather than trying to understand very short-term movements in the equity markets and then finding out that they have been wrong in these predictions. It is nearly impossible to time the markets, and hence, investors would realise that they are better off using the simple SIP route and save a lot of worries.
 
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What you need to know about Health Insurance Portability ?

Posted: 30 Nov 2011 02:11 AM PST

What does 'Health Insurance Portability' mean?
Health Insurance policy holders, who are not satisfied with the services of the present provider, will be able to switch/change their service provider without losing the basic coverage of health insurance.
As per IRDA portability rules, consumers will get credit for the time already spent for covering the pre-existing disease along with bonus accrued to him from his past insurer.

What all benefits you can shift under 'Health Insurance Portability'?
Health Insurance Portability allows you to shift from one health insurance provider to another, without having to lose any of the benefits that your current health insurer provides. It includes -
1. The credit from the waiting period already completed can be carried forward to the new insurer.
2. Any bonus accrued to him (insured) from his past insurer.
3. The new insurer will provide some cover, at least up to the cumulated sum assured in the old insurance policy.

What happens if the customer applies to the new insurer does not have a similar policy?
If the new insurer does not have a similar policy, the policyholder will have to purchase one with a higher sum assured. Suppose a person with insurer A has a sum insured of Rs 3 lakh. When he shifts to insurer B. However, if insurer B has no product offering Rs 3 lakh as sum insured, he will have to offer the nearest higher slab of, say, Rs 4 lakh. While the premium will be charged on Rs 4 lakh, the portability benefits will be limited to Rs 3 lakh.

What happens if the customer applies for an increased sum insured in the new ported policy?
If the customer has a policy of sum insured of Rs. 4 Lakhs, and now he/she wants to port the policy to another insurance company with a higher sum insured of Rs. 10 Lakhs. The portability relief in waiting periods in the new policy would only be to the extent of Rs. 4 Lakhs sum insured. The waiting periods for the additional sum insured of Rs. 6 Lakhs would similar to a fresh policy.

What happens if the customer has holding an old policy for two years (which has waiting period for pre-existing conditions for 4 years)?
The policyholder will be able to carry over the waiting period with respect to pre-existing ailments. The waiting period for most pre-existing conditions is four years. So, say, the person wants to shift after a year itself. His waiting period for the pre-existing ailment will be three years with the new insurer.

I have bought a policy of sum insured of 2 lakh, a few years back and have cumulative bonus of Rs. 50,000; what would be the new sum insured after porting the policy to new insurer – 2 lakh or 2.5 lakh?
It would be 2.5 Lakh. For example - A person with insurer 'X' has a sum insured of Rs 2 lakh and cumulative bonus of Rs 50,000. When he shifts to insurer 'Y' his sum insured will automatically beRs 2.5 lakh. However, if insurer 'Y' has no product offering Rs 2.5 lakh as sum insured, it will have to offer the nearest higher slab of, say, Rs 3 lakh. While the premium will be charged on Rs 3 lakh, the portability benefits will be limited to Rs 2.5 lakh.

I have a health insurance policy from life insurer e.g. LIC; can I switch my policy under 'Health Insurance Portability'?
Currently, Health insurance portability will be limited ONLY to non-life insurers .

I am currently covered under Group Health Insurance Policy of my company; can I switch my policy under 'Health Insurance Portability'?
Currently portability will be allowed ONLY to individual health policies, which also includes family floater policies. For policyholders covered under Group Health Insurance policy first have to shift to individual health insurance to same insurer (from where they are covered under group policy) then in future they can port their policy to new insurer.

What things one need to watch out for?
The following are some of the conditions for which you should watch out, while switching your health insurance policy –
1. Maximum renewable age - Certain policies do not let you renew them after you reach a certain age.
2. Exclusions - Not all policies are same; certain exclusions are there in each policy. Check each one of them before you should switch.
3. Moving job - If you are moving jobs, then you can take advantage of portability.
4. Not all benefits continue - Not all policies are same; so check that all benefits that you are looking for are there in new policy.
 
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Bond prices are up because of Insurance buying

Posted: 30 Nov 2011 12:33 AM PST

 

BOND prices rose slightly as insurers made their purchases taking advantage of the high long-term yields.

Traders say among the insurers that made the purchases include LIC.

LIC's purchases are mostly made through switches.

Such switches imply that short-term bonds are sold and long tenure bonds are bought. Besides, some banks and funds also remained buyers on the back low credit demand and swelling deposits.

The purchases pushed up the price of the 10-year benchmark bond, the 8.79 per cent coupon security falling due in 2021, to Rs 99.71 (face value Rs 100) translating to a yield of 8.84 per cent last weekend. Previous weekend the security had ended at 8.96 per cent. Long-term yields for maturities above 10year, were above 9 per cent. The 29-year security, the 8.4 per cent coupon, falling due in 2040 was

priced at Rs 91 that translated into a yield of 9.2 per cent. This was a particular favourite for insurers like LIC, who have long term liabilities.

Quantum's Mutual Funds head of fixed income Arvind Chari said, "The increased limit for foreign institutional investors helped bonds. But the rise in bond prices is still far short of a rally.

Bonds could fall back gain." Last weekend, the overnment had enhanced he limit for FII investment into government se urities by another $5 bilion (Rs 25,000 crore), tak ing the overall limit to $20 billion.

But a fall back in yields is expected beginning next month onwards, in view of the tight liquidity conditions in the financial mar kets. The tight cash condition was evident from bank borrowings from the Reserve bank of India. At the weekend liquidity adjustment facility auctions, where banks borrow overnight cash from the RBI, borrowings amounted to Rs 1.06 lakh crore. In fact, most of last week, borrowing stayed above Rs 1 lakh crore. Borrowings, from RBI, or the Repurchase window is done against collateral of government securities.

Risk aversion remained a dominant element in financial markets. The mounting risk aversion, stemming from the worsening soveriegn debt crisis in Europe, triggered a flow into U S government securities. The ten-year US treasury yield has dropped 33 basis points from the beginning of November.

Besides, European yields are also becoming attractive to institutional investors at this point of

time. The yield on the 10year Italian government bond yield is presently 7.25 per cent (source: Italy, department of Treasury). As a result, traders said, interest from foreign investors in Indian government bonds was unlikely to be significant.

The shortage of dollar supplies in the foreign exchange markets and low capital account flows also sparked a dollar shortage.

The shortage reflected in high short term forward and low long term forward premiums. But there was likely to little reprieve. In the non-deliverable forward markets (off shore trading in Rupees and settlement is done in u s dollars) the dollar was priced at a record Rs 51.71. On the onshore market one month forward was priced Rs 50.61 indicating another round of outflows or another tumultuous week.

ELSS will lose appeal once DTC is effective

Posted: 29 Nov 2011 10:34 PM PST

 

THE coming few months will see the relevance of a category of mutual funds coming to an end. This category is the equity linked savings scheme, also known as ELSS, because the introduction of the Direct Tax Code (DTC) will leave no room for its existence as a tax-savings instrument.

The question that investors have to deal with is what they should do with their existing investments and how they will be affected if they put money into these ELSSs over the next few months. Let's take a look at the overall situation.

ELSS is a category of funds that provides a tax deduction for the investments that are made in the fund.

Under Section 80C of the Income Tax Act, there is a deduction of up to Rs 1,00,000 that is available for investments in various instruments and ELSS is one instrument that is included in the list.

The reason why several investors find this an attractive route to invest is that there is a tax deduction, and, at the same time, there is also the possibility of high returns from the investment. At present, this is the only route that provides a pure equity exposure to the investor in the tax deduction area. Now, with the introduction of DTC, which would be effective from the financial year 2012-13, there will not be any tax deduction benefit available for investments in such funds because the eligible instruments list does not include ELSS.


There is nothing very distinctive about ELSS due to the fact that they are exactly similar to diversified equity funds that are available in the market. The funds invest across a range of sectors and in several companies that stretch across market capitalisation, so they have the features of a diversified equity fund.

The only difference is that there is a tax benefit here and this separates the fund from the other schemes that are usually launched by mutual fund houses. Thus, when the tax benefit goes away, it will be difficult for the funds to actually get investments because there is nothing much in terms of its features that distinguishes them from the others.
Lock-in period: One of the main things that will actually protect investors in these funds is the three year lock-in period. Normally, when a fund loses flavour, the main way by which existing investors react is by pulling out the investments in the fund.

However, due to the fact that there is a three-year lock-in, this will not be easy as far as ELSSs are concerned because only those investors who have completed this time period will be able to take their money back. This will lower outflow and protect existing investors.


What will happen once the funds lose their tax benefit is that they will continue to run like before as there will be existing investors who will continue with the fund due to the lock-in provision. There cannot be a sudden windup of the fund because investors will have to continue with this fund at least till the time the lock-in period prevails.

After that, there can be different things that could happen, including winding up of the fund, but, what is important is the fact that investors should not worry about the fact as to what will happen about the continuation of the fund at least for the next three years.

 

 
 
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