Prajna Capital

Canara Robeco Schemes are Available on NSE
Surrender of life insurance policy and Its Impact
Understanding Floating Rate Funds – A Debt Mutual Fund

Canara Robeco Schemes are Available on NSE

Posted: 09 Oct 2012 03:28 AM PDT

Download Tax Saving Mutual Fund Application Forms

Call 0 94 8300 8300 (India)

Canara Robeco Mutual fund has announced that all schemes excluding Canara Robeco Liquid, Canara Robeco Gold, Canara Robeco Gilt PGS , Canara Robeco Gilt Advantage, Canara Robeco Dynamic Bond, Canara Robeco Expo, Canara Robeco Floating Rate Short Term can be transacted through Mutual Fund Service System (MFSS) platform of NSE with effect from August 7, 2012.

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

Gold Mutual Funds Invest Online

Relaince Gold Savings Fund

ICICI Prudential Regular Gold Savings Fund

HDFC Gold Fund

Surrender of life insurance policy and Its Impact

Posted: 09 Oct 2012 01:43 AM PDT

Invest Mutual Funds Online

Download Mutual Fund Application Forms

LIFE insurance, like marriage, is a long-term relationship. You have an exit option, but it can be messy and expensive.

The scrutiny of the game is similar to the way financial experts' advice on exiting an insurance policy. Some flatly recommend immediate termination, some suggest to wait for five years, and some also go that far to suggest the policy attains the paid-up status. In reality, the mumbo-jumbo does not state the fact that one looses if they exit a policy before its stated tenure.

Policyholders should be aware that unlike other savings instruments, life insurance policies are long-term tools and it is difficult to get out of them without taking a financial blow.

Compared with other financial instruments such as mutual funds or even a bank deposit, insurance is for the long term and, hence, has a substantial loss if one exits early. Short term needs vary and are flexible, however, long-term needs are rigid. For instance, there is no compromise in the year you will need money for your child's education or marriage, compared with a vacation or buying a car, two years from now. It is for this very reason that we always advocate that life insurance should be bought for the right reasons and the needs to be matched to the policy benefits.

Therefore, while making a long-term financial decision, one should be aware and create the necessary cash flow to continue the plan. However, despite such provisions, one may buy the policy wrongly, in which case insurers provide a 15-day free-look period for the policyholder to exit the policy with minimal loss. Such an exit feature is available only with life insurance plans and no other financial instrument. At every instance, policyholders should be aware that exiting an insurance policy should be done without compromising on their insurance needs.

In most circumstances, exiting a life insurance policy is a bad idea. The three factors to consider when exiting a life insurance policy are – the policy type, the number of years the policy has been in force for, and the reason one wishes to exit the plan. If one wishes to exit a plan because they can no more afford to pay future premiums, depending on the type of the plan, they can seek assistance from insurers who can rework on the policy tenure or the insurance cover or a combination of the two.

If the policy is pure risk protection, exiting is simple. Just stop paying the premium. But, do remember if you were to buy a term plan again in the future, the cost will only go up.

In case of hybrid plans that mix protection and investment, the policyholder does incur losses in the form of charges on account of premature exit. The tenure of the policy comes into play in such instances because when a life insurance policy is in force for at least five years, it acquires a surrender value.

Policyholders who wait for the policy to build surrender value before exiting, miss out on the opportunity gain that the cash value can build up to maturity of the policy.

Policyholders who terminate plans before the paid up value, completely lose out on the premiums paid.

This move can work favourable for very long-term plans because instead of staying invested for very long, the policyholder can cut their losses and instead look for better opportunities.

The same analogy should be applied if one is considering exiting such policies before they attain the paid-up value.

One should analyse the benefits of cutting costs on future payments before exiting and the prospects of benefiting from alternate investments. In extreme instances when one does surrender a policy by lapsing it, there is room to revive the policy ones things get better within limited time frames.

This is again an option which needs to be resorted to only in dire straits.

The exit complexity also takes tax treatment into account. It is akin to a rain-hit match where the 'Duckworth Lewis' method comes into play to decide the course of the match. The surrender value is tax free, provided the insurance component of the policy is five times the premium. On surrendering a policy after claiming tax deductions under Section 80C, the rules of the game change. According to the income tax rules, tax savings are reversed if the policyholder does not keep a single premium policy in force for two years after the date of commencement of the policy or regular premium policy premiums are not paid for two years.

Unlike a regular cricket match where the chance of a team winning is equal, surrendering an insurance plan before its complete term has a higher probability of actual loss to the policyholder.

Happy Investing!!

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

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

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:

DSP BlackRock Top 100 Fund

ICICI Prudential Focused Blue Chip Fund

Birla Sun Life Front Line Equity Fund

Large and Midcap Funds

ICICI Prudential Dynamic Plan

HDFC Top 200 Fund

UTI Dividend Yield Fund

Mid and SmallCap Funds

Reliance Equity Opportunities Fund

DSP BlackRock Small & Midcap Fund

Sundaram Select Midcap

IDFC Premier Equity Fund

Small and MicroCap Funds

DSP BlackRock MicroCap Fund

Sector Funds

Reliance Banking Fund

Reliance Banking Fund

Gold Mutual Funds

Relaince Gold Savings Fund

ICICI Prudential Regular Gold Savings Fund

HDFC Gold Fund

Understanding Floating Rate Funds – A Debt Mutual Fund

Posted: 08 Oct 2012 11:33 PM PDT

Buy Gold Mutual Funds

Invest Mutual Funds Online

Download Mutual Fund Application Forms

The interest rate
The interest rate yo-yo has impacted most of us. Interest rates have been volatile in the past few years. Riding this Interest rate roller-coaster can be a nerve-racking experience. At times enjoyable and at times distressing. In times when interest rates were going down, one benefited from cheaper loans but lost out on lower returns on investments. Conversely when interest rates stiffened, one benefited from higher rates on fixed rate investments but lost out on dearer loans.

Understanding Fixed Rate Loans and Floating Rate Loans
Before actually trying to unravel Floating Rate Instruments, let us get a grip on a situation we are familiar with - Floating rate and Fixed rate loans.

A fixed interest rate loan has the advantage of clearly defining the total loan obligation, but in case of a fall in interest rates, a fixed rate loan may result in a higher debt service obligation. On the other hand, a floating rate loan allows you to take advantage of interest rate movements. The interest rate in such loans is linked to a benchmark generally the internal prime- lending rate. This is adjusted periodically in relation to market movements.

Thus a floating rate loan denies you the knowledge of the total loan obligation but ensures that you reap benefits in case of fall in interest rates. So quite clearly floating rate loans work best to your advantage at time when interest rates are falling.

Quite similarly a Floating Rate instrument is a debt instrument whose interest rate (coupon) is not fixed and is linked to a benchmark rate and is adjusted periodically.

What is a benchmark rate?
A benchmark or a reference rate is a rate that is an accurate measure of the market price. In the fixed income market, it is an interest rate that the market respects and closely watches. A benchmark rate should be from an unbiased source, be representative of the market, transparent, reliable and continuously available and most importantly be widely acceptable to the market as the benchmark rate

Such benchmark rates issued by unbiased sources are the Treasury Bill T-Bill) rate issued by the Government of India, the bank rate as decided by the Reserve Bank of India, the Mumbai Interbank Offering Rate (MIBOR) released by the National Stock Exchange of India and GOI Securities.

A company issues debentures at 1 year GOI Security yield +100 basis points (simply 1%) with a tenor of 5 years, periodically reset every six months. If the1 year GOI security is currently ruling at 5.75%, the interest rate that is fixed for the first six months is 5.75% +1%=6.75%.

What are Floating Rate funds?
A floating rate fund is a fund that by its investments in floating rate instruments seeks to provide stable returns with low level of interest rate risk and volatility. For example the UBS Floating Rate Fund invests primarily in

Floating rate debentures and bonds

Short tenor fixed rate instruments

Long tenor fixed rate instrument swapped to floating rate (Interest Rate Swaps)

Why Floating Rate Funds?
Floating Rate funds are protective funds and shield your investments from interest rate fluctuations.
In a declining interest rate scenario older securities issued at higher coupon rates (interest paid on the face value of a debt instrument) appear much more attractive than the ones that are currently issued. Consequently older higher interest bearing securities would go at a premium. Thus long term income funds by virtue of their investments in longer maturing securities would see a rise in their Net Asset Values.

However, when interest rates are on the rise newer securities appear more attractive than the ones that were issued earlier, as they offer higher coupons than their predecessors. The lesser paying older securities therefore will be sold at a discount. So the same income fund with a majority of investment in longer maturing securities, now start earning you lesser as newer securities continue to earn higher returns than the ones in the portfolio.

This bearish scenario lasts as long as interest rates continue to show an upward trend. It is during these times that floating rate funds offer the best utility.

In a rising interest rate scenario, the interest rate on a Floating Rate instrument is periodically reset to a higher level due to the fact that accompanying benchmark rate is anyway at a higher level. On account of this periodic reset the difference in returns between a floating rate fund and a security that is issued currently is marginal. So the price difference is marginal leading to a marginal impact on the NAV.

Interest Rate Swaps
Most floating rate funds also invest in something referred to as 'Long tenor fixed rate instrument' swapped to floating rates. These kinds of instruments are commonly referred to as an Interest Rate Swaps. By definition an interest rate swap is a contractual agreement entered into between two counter parties under which each agrees to make periodic payment to the other for an agreed period of time based upon a notional amount of principal. The principal amount is notional because there is no need to exchange actual amounts of principal.

A fixed for floating interest rate swap is an exchange of a series of fixed interest payments for a series of floating interest payments, fluctuating with the benchmark.

Example
Fund A and Bank B enter into an IRS agreement where in Fund A pays Bank B a fixed rate of 7.25%p.a. for three months and receives NSE MIBOR (benchmark floating rate) from Bank A for the next 3 months on a notional principal of Rs. 10 Cr.

Scenario I
After 3 months let us assume the average MIBOR compounded daily turns to be 7.05% p.a.

Fund A would pay = 10,00,00,000 x (7.25/100) x (90/365) = 17,87,671
Bank B would pay = 10,00,00,000 x (7.05/100) x (90/365) = 17,38,356

Net Pay from Fund A to Bank B = Rs. 49,315

At the end of 3 months SCMF would pay Bank A Rs. 49,315. Please note that the notional principal is not exchanged.

Scenario II
After 3 months let us assume the average MIBOR compounded daily turns to be 7.45% p.a.

Fund A would pay = 10,00,00,000 x (7.25/100) x (90/365) = 17,87,671
Bank B would pay = 10,00,00,000 x (7.45/100) x (90/365) = 18,36,986

Net Pay from Fund A to Bank B = Rs. 49,315

After 3 months had the MIBOR compounded daily turned out to be 7.45% then Bank B would have to pay Rs.49,315.

Fund A thus benefits if interest rates rise. Bank B benefits if interest rates fall