Prajna Capital

Insurance - Cost or cover?
Stock Open Offer and Share Buyback
Debt portfolio can yield good returns

Posted: 25 Oct 2012 04:11 AM PDT

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In the first place, your decision to buy riders should depend on your insurance needs. You should not buy them just because they are available at a low cost.

Take for instance the critical illness benefit. A policyholder who has this cover gets an amount equal to the sum assured if he is diagnosed as having one of the critical illnesses included in the policy contract. For a 40-year old healthy person having a cover of Rs5 lakh, the cost of such a rider starts from Rs3,000 and can go as high as Rs9,500. In comparison, a standalone critical illness policy (cover for Rs5 lakh for a 40-year old) starts from Rs1,500 and goes up to Rs7,500.

On the face of it, buying a rider may appear more desirable because of its lower cost. But the standalone policy covers a wider set of critical illnesses. In case of such a policy, you can also get a higher sum assured. Critical illness riders come with a lower limit on sum assured (determined by the value of the base policy). Further, their structure is rigid and there are limitations on renewal of the rider. Therefore, when you look deeper, a standalone product makes more sense despite its higher cost.

Accidental Death & Disability (AD&D) Benefit is another rider offered by many insurers. This rider pays the sum assured in case of the insured's death or total and permanent disability due to an accident. However, the rider may not provide for loss of income due to temporary disablement, which is a risk that is more common. This is a state, which in some instances is worse than death, as it deprives you of the ability to earn.

A standalone personal accident policy from a general insurer offers more comprehensive cover. Not only does this policy cover for death due to accident, partial and total disability, it also covers temporary total disability and pays out a weekly compensation of 1 per cent of the sum assured up to a maximum of 104 weeks (two years). What is more, the size of the cover in this policy is not restricted by the sum assured on the base policy. In case of a standalone policy, you have the flexibility to hike your cover depending on your income, profession and age.

The arguments that we have stated above also apply to the other popular riders such as hospital cash benefit and term rider.

Exception rules

Perhaps the only rider that has merit is the waiver of premium rider. This rider waives future premiums if the insured dies or is disabled and is unable to continue paying the premiums. If this happens, the insurance company pays the remaining premiums. This is by far the most useful rider. Parents buying insurance plans to provide for their child's financial future should certainly consider this rider.

Probability is the foundation on which insurance rests: here the risk of a few is spread over many. With the risks that one is exposed to in life on the rise, insurance is the best recourse for managing life's vagaries. An all-in-one bundled insurance plan does not necessarily offer the desired risk cover. Instead, buying a portfolio of insurance covers may be a better approach. By including a combination of term cover, personal accident cover, standard health insurance and critical illness cover, an individual can make his insurance portfolio complete.

One need not buy all these four covers at one go; scale up according to your insurance needs, age and income. For instance, one could start with a health plan, then buy a term plan (post marriage), then a personal accident plan, and later, as one grows older, add a critical illness policy. The key is to gradually acquire a set of policies that provide comprehensive protection against insurable risks.

Going alone pays

Combing a rider with your life insurance cover offers you convenience. However, this may not be what you need. The rider may not help you when you need it most. Use the standalone approach to achieve your insurance needs without compromising on the extent of cover you get.

Critical illness

Standalone critical illness policies cover a comprehensive list of critical diseases. They impose no restrictions on the extent of cover.

Rider Roulette

Do not add riders to your policy just because of their low cost. Buy them only if they satisfy your insurance needs.

Level term cover: A term insurance policy in which the life cover can be enhanced for a limited period. The sum assured offered on these riders can not exceed the value of the sum assured on the base policy.

Critical illness or surgery rider: This rider offers a lump sum benefit to the insured if he is diagnosed as having a critical illness like cancer or stroke, as specified in the contract of the policy.

Accidental death or disability benefit rider: It provides a lump sum cover to the insured for death or disability due to an accident.

Waiver of premium rider: This is an essential part of child insurance policies. This rider waives off subsequent premiums if the insured or the earning parent dies or is disabled and is unable to continue paying the premiums. If this happens, the insurance company pays the remaining premiums.

Hospital cash benefit rider: It provides a pre-specified sum of cash for each day that the insured is hospitalised. The maximum number of days of hospitalisation during the entire term for which this rider is available is specified in the policy.

Riders typically cover only a few critical illnesses such as stroke, heart attack, cancer, kidney failure, among others. Also, the policy guidelines restrict the premium payable (and hence the sum assured you can avail) on such a rider. This usually depends on the type of policy and its tenure.

Term rider

Term cover is the most cost effective and purest form of life insurance. It should ideally be bought by anyone looking for a life cover. Adding it as a rider is restrictive as you can only get a limited amount of cover.

Accidental death and disability benefit
A standalone policy of this type comes with a temporary total disablement cover, which is most useful. For instance, a fracture can prevent you from working for weeks. In such a case, this policy pays a weekly allowance that is linked to the insured's income. Many riders do not offer this.

Hospital cash benefit

This rider pays a fixed amount per day for the number of days one is hospitalised. But it comes with a number of exclusions hidden in the fine print. One may be better off creating an emergency fund that can be utilised at the time of hospitalisation.

Waiver of premium

This is perhaps the only exception where a rider offers great value. Include it with child policies. This rider scores by waiving all future premiums on the policy without compromising on the benefits

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

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Stock Open Offer and Share Buyback

Posted: 25 Oct 2012 03:35 AM PDT

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Stock Open Offer

When an entity makes an offer to shareholders of a listed company for purchasing their shares at a particular price and within a specified timeframe, it is known as open offer. The offer could be either voluntary or mandatory. An investor crossing the thresholds of 15%, 55% or 75% holding in a listed company has to come out with an open offer for at least 20% more equity, according to Sebi's 'Substantial Acquisitions and Takeover Code'.

Share Buyback

A stock buyback, also known as a 'share repurchase', is a company buying back its shares from its shareholders. The repurchased shares are cancelled, thereby bringing down the number of outstanding shares. As a result, value of each remaining share goes up, thanks to higher per share earnings. Shareholders not participating in buyback also see their stake in the company's ownership rising post buyback. A company buying back its shares is generally viewed as a positive thing.

Typically, buybacks are carried out in one of two ways:

(A) Tender offer
The company will send an offer to its shareholders to sell all or a portion of their shares within a stipulated time frame and the offer price. The company could be out to buy only a part or all of its outstanding shares and delist itself. In the case the company is planning to delist its shares under the reverse book-building method, only the floor

(B) Open market
price is given. The company can also buyback its shares from the open market, just like any other investor. It has to announce its intent of the buyback, the duration, maximum price and the total amount that it will utilise for this purpose. Such offers can remain open for a long period of time or until the amount earmarked by the company's is fully utilized.

Why is this done?

To support the share price: An overall weak market outlook can bring down the stock price substantially. In such a scenario, a management may decide to support the share price with a buyback to boost investor confidence. For example, after its three buyback programmes during FY09 and FY10

To fight the impact of equity dilution: A share buyback reduces the number of shares in circulation and hence is a great measure to fight equity dilution caused by events such as employee stock ownership plans (ESOPs) or bond conversion.

Increase promoters' stake: A buyback offer could be unveiled with a view to enable the promoter group to increase their stake in the company. Since the shares bought back are extinguished, those who are not participating in the offer will see their stake in the company's overall equity going up.

The Price Detector

When it comes to open offers, the Sebi has issued guidelines to determine the minimum price at which the open offer can be made. However, there is no upper limit. According to the Sebi rules, the highest between the average prices of the past 26 weeks and the past two weeks should be considered as the minimum price for an open offer.

Buybacks are generally voluntary on the part of the company and, hence, there is no mandate on its minimum or maximum price. However, only when the company plans to delist its shares, a 'floor price' has to be discovered in line with the Sebi's guidelines.

A reverse book-building process follows where retail shareholders can tender shares at any price higher than the floor price. The price at which maximum number of equity shares are tendered becomes the 'Discovered Price'.

However, when it comes to how high an open offer or buyback price should go, it is the acquirer's need and financial ability that play a key role.

The Action Plan

An open offer or a buyback can be an exciting but temporary opportunity to make profit for investors. However, investors need to take an informed decision based on the intentions of the acquirer, the offer price and the company's future prospects.

At the same time, keep in mind the fact that once the window of opportunity closes, the share price is likely to go back to its pre-offer levels.

It is, therefore, important for investors to carry out a fundamental research on the company to identify its current fair value and expected fair value a year down the line. If the fair value in near future is likely to cross the offer price, one should hold onto his investments. It shouldn't, therefore, come as a surprise that in four out of six open offers, which are currently on.

Another alternative for investors is to sell in the open market when the stock prices surge on news. An avid investor can actually fare much better by selling out in the market before the offer closes and covering back once the prices fall after the offer closes.

A Pitfall To Avoid

Investors must resist temptation to play the arbitrage game by buying in the open market after an open offer announcement and selling in the offer. This is risky since investors may get stuck up with a portion of their holdings, which will be worth much less in the market post-offer.

Even after an open offer is announced, the market price of the scrip tends to remain somewhat below the offer price, which one may regard as arbitrage opportunity. However, since the offer is for a limited number of shares, after the offer closes investors are likely to find themselves with a portion of their holding not accepted by the acquirer. If the market price crashes post-offer, the gains made in the offer are likely to get diluted or even negated.

Conclusion

The special opportunities offered by the 'open offers' and 'buybacks' are too attractive to miss. Investors need to do their homework, resist the temptation to trade and try to estimate how things will pan out a year later to take the best call. Often, holding onto his investment, rather than taking a quick exit, could turn out to be the best strategy for an investor.

BUYBACK

• DONE BY the company itself

• GENERALLY, the number of shares reduce after a buyback

• BUYBACK can be through open market operations or through the tender route

• BUYBACKS, are voluntary on the part of the company

• THERE is a maximum limit or ceiling up to which a company can raise its equity through buybacks during a year

OPEN OFFER

• DONE BY promoters or any other third party other than the company

• OPEN OFFERS, don't result in change in the number of outstanding shares

• OPEN OFFERS are typically through the tender route only

• IN MOST instances, open offers are mandatory rather than voluntary

• THERE is a minimum limit of 20% with no maximum limit in case of open offers

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest Mutual Funds Online

Transact Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Fund Application Forms

Best Performing Mutual Funds

Largecap Funds Invest Online

DSP BlackRock Top 100 Fund

ICICI Prudential Focused Blue Chip Fund

Birla Sun Life Front Line Equity Fund

Large and Midcap Funds Invest Online

ICICI Prudential Dynamic Plan

HDFC Top 200 Fund

UTI Dividend Yield Fund

Mid and SmallCap Funds Invest Online

Reliance Equity Opportunities Fund

DSP BlackRock Small & Midcap Fund

Sundaram Select Midcap

IDFC Premier Equity Fund

Small and MicroCap Funds Invest Online

DSP BlackRock MicroCap Fund

Sector Funds Invest Online

Reliance Banking Fund

Reliance Banking Fund

Tax Saver Mutual Funds Invest Online

ICICI Prudential Tax Plan

HDFC Taxsaver

DSP BlackRock Tax Saver Fund

Reliance Tax Saver (ELSS) Fund

Gold Mutual Funds Invest Online

Relaince Gold Savings Fund

ICICI Prudential Regular Gold Savings Fund

HDFC Gold Fund

Debt portfolio can yield good returns

Posted: 25 Oct 2012 01:43 AM PDT

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Invest Mutual Funds Online

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Call 0 94 8300 8300 (India)

It's a good time for debt allocation with both short-term and long-term options offering good returns

In the midst of a rising inflation and the resultant higher interest rate scenario, there is some good news if you are a short-term investor. Your money, even if parked for a short period of time, can get you good returns. In the last few months, the annualised returns offered by money market and liquid funds have moved upwards. The annualised returns have been in the range of over six percent.

Ironically, the returns offered by a number of sector funds have been substantially lower or negative during the same period. After more than a 1,000-point rally, index funds managed to add some green to their chart.

So, the debt market is not a bad place to be in considering that many other assets are looking not too comfortable. While equity always carries risk and its riskreward ratio changes according to timing of entry, other assets too are demanding perfect timing. Property is a perfect example which was once considered a safe haven for the long term. Commodities, because of their global linkage, are increasingly volatile and expensive too. Hence, for the risk-averse investor, there are only a few options in terms of asset classes. But the good news is that the segment as a whole is getting lot of action and with the recent budget proposals, the debt market in India, is in for major growth.

When you consider debt as an asset class, there is a growing confusion among - should they choose innovative products or simply stick to vanilla products where what you see is what you get (or earn in this context). The fear is understandable considering the fact that the 2008 financial crisis is a by-product of smart innovations in debt and derivative products.

So, in an era where debt products are giving smart returns and even closer to double digit, investors can stick to vanilla options. While debt is for the short term and for those who don't need risk, it can have some allocation if the portfolio is aiming for a 10 percent growth over the medium term. Here, investors will have to keep in mind the tax implications as 10 percent returns offered by a fixed deposit need not be tax-free returns. Since interest income is taxable, you need to keep in mind the tax-free exemption limit. While super senior citizens have the luxury of parking a large corpus because of their higher exemption limit in the coming days, it is not the case for many others.

In this context, monthly income plans of mutual funds can come in handy. While dividend is tax-free because of dividend distribution tax, it offers some added advantage in the form of lower effective tax on long-term capital gains. If you were to take into account the indexation benefit, the real returns from these products can be superior to other vanilla debt products.

Interestingly, in the last few months, investors have also had the opportunity to park long-term money in debt options with a number of issuers hitting the market with 10-year maturity papers. They are a good option in the current environment because of high interest rates. For instance, any investor would be willing to settle for a 9-10 percent interest rate option for a period of 10 years if liquidity is not an issue.

Unfortunately, very few investors fall into this category as more often than not, debt investors prefer liquidity. While a retired individual needs regular source of income, a high net worth individual may look at debt for tiding over liquidity. For such investors, a 10-year product may not fulfill the requirement unless asset allocation demands such a product for risk management. Those who can afford to allocate can make the best use of the current environment.

Happy Investing!!

We can help. Call 0 94 8300 8300 (India)

Leave your comment with mail ID and we will answer them

You can write back to us at PrajnaCapital [at] Gmail [dot] Com

---------------------------------------------

Invest Mutual Funds Online

Transact Mutual Fund Online

Download Mutual Fund Application Forms from all AMCs

Download Mutual Fund Application Forms

Best Performing Mutual Funds