What Does it Mean? An investing strategy that works like rupee cost averaging (RCA) in terms of steady monthly contributions, but differs in its approach to the amount of each monthly contribution. In value averaging, the investor sets a target growth rate or amount on his or her asset base or portfolio each month, and then adjusts the next month's contribution according to the relative gain or shortfall made on the original asset base.
For example, suppose an account has a value of Rs.2,000 and the goal is for the portfolio to increase by Rs.200 every month. If, in a month's time, the assets have grown to Rs.2,024, the investor would fund the account with Rs.176 (Rs.200 - Rs.24) worth of assets...
Monday, October 13, 2008
Good Article
Some layman explanation for what happened to Lehmann Brothers. Even though we had been hearing these terms incessantly over the last many months, didn't really have a clue what was going on. In case you happened to be in the same boat, please read the article carried by TOI (Delhi Edition) in their 'Learning With The Times' section. Explains a lot. For starters what is prime and subprime:)
US mortgage crisis: A subprimer Q: What is a sub-prime loan? A: In the US, borrowers are rated either as 'prime' - indicating that they have a good credit rating based on their track record - or as 'sub-prime', meaning their track record in repaying loans has been below par. Loans given to sub-prime borrowers, something banks would normally be reluctant to do, are categorized as sub-prime loans. Typically, it is the poor and the young who form the bulk of sub-prime borrowers.
Q: Why loans were given? A: In roughly five years leading up to 2007, many banks started giving loans to sub-prime borrowers, typically through subsidiaries. They did so because they believed that the real estate boom, which had more than doubled home prices in the US since 1997, would allow even people with dodgy credit backgrounds to repay on the loans they were taking to buy or build homes. Government also encouraged lenders to lend to sub-prime borrowers, arguing that this would help even the poor and young to buy houses.
With stock markets booming and the system flush with liquidity, many big fund investors like hedge funds and mutual funds saw sub-prime loan portfolios as attractive investment opportunities. Hence, they bought such portfolios from the original lenders. This in turn meant the lenders had fresh funds to lend. The subprime loan market thus became a fast growing segment.
Q: What was the interest rate on sub-prime loans? A: Since the risk of default on such loans was higher, the interest rate charged on sub-prime loans was typically about two percentage points higher than the interest on prime loans. This, of course, only added to the risk of sub-prime borrowers defaulting. The repayment capacity of sub-prime borrowers was in any case doubtful. The higher interest rate additionally meant substantially higher EMIs than for prime borrowers, further raising the risk of default. Further, lenders devised new instruments to reach out to more sub-prime borrowers. Being flush with funds they were willing to compromise on prudential norms. In one of the instruments they devised, they asked the borrowers to pay only the interest portion to begin with. The repayment of the principal portion was to start after two years.
Q: How did this turn into a crisis? A: The housing boom in the US started petering out in 2007. One major reason was that the boom had led to a massive increase in the supply of housing. Thus house prices started falling. This increased the default rate among subprime borrowers, many of whom were no longer able or willing to pay through their nose to buy a house that was declining in value. Since in home loans in the US, the collateral is typically the home being bought, this increased the supply of houses for sale while lowering the demand, thereby lowering prices even further and setting off a vicious cycle. That this coincided with a slowdown in the US economy only made matters worse. Estimates are that US housing prices have dropped by almost 50% from their peak in 2006 in some cases. The declining value of the collateral means that lenders are left with less than the value of their loans and hence have to book losses.
Q: How did this become a systemic crisis? A: One major reason is that the original lenders had further sold their portfolios to other players in the market. There were also complex derivatives developed based on the loan portfolios, which were also sold to other players, some of whom then sold it on further and so on.
As a result, nobody is absolutely sure what the size of the losses will be when the dust ultimately settles down. Nobody is also very sure exactly who will take how much of a hit. It is also important to realise that the crisis has not affected only reckless lenders. For instance, Freddie Mac and Fannie Mae, which owned or guaranteed more than half of the roughly $12 trillion outstanding in home mortgages in the US, were widely perceived as being more prudent than most in their lending practices. However, the housing bust meant that they too had to suffer losses - $14 billion combined in the last four quarters - because of declining prices for their collateral and increased default rates.
The forced retreat of these two mortgage giants from the market, of course, only adds to every other player's woes.
Q: What has been the impact of the crisis? A: Global banks and brokerages have had to write off an estimated $512 billion in sub-prime losses so far, with the largest hits taken by Citigroup ($55.1 bn) and Merrill Lynch ($52.2 bn). A little more than half of these losses, or $260 bn, have been suffered by US-based firms, $227 billion by European firms and a relatively modest $24 bn by Asian ones. Despite efforts by the US Federal Reserve to offer some financial assistance to the beleaguered financial sector, it has led to the collapse of Bear Sterns, one of the world's largest investment banks and securities trading firm. Bear Sterns was bought out by JP Morgan Chase with some help from the Fed.
The crisis has also seen Lehman Brothers - the fourth largest investment bank in the US - file for bankruptcy. Merrill Lynch has been bought out by Bank of America. Freddie Mac and Fannie Mae have effectively been nationalized to prevent them from going under.
Reports suggest that insurance major AIG (American Insurance Group) is also under severe pressure and has asked for a $40 bn bridge loan to tide over the crisis. If AIG also collapses, that would really test the entire financial sector.
Q: How is the rest of the world affected? A: Apart from the fact that banks based in other parts of the world also suffered losses from the subprime market, there are two major ways in which the effect is felt across the globe. First, the US is the biggest borrower in the world since most countries hold their foreign exchange reserves in dollars and invest them in US securities.
Thus, any crisis in the US has a direct bearing on other countries, particularly those with large reserves like Japan, China and - to a lesser extent - India. Also, since global equity markets are closely interlinked through institutional investors, any crisis affecting these investors sees a contagion effect throughout the world.
Financial Crises - A simplified versionSo let's go through it step-by-step, from the beginning until this weekend when the Government announced a $700 billion bailout of the financial services industry. It's our tax dollars that will be financing this bailout so I think it's important that we all understand how and why it happened.I. It all started in the housing and mortgage market:Basically, lenders were loaning money to whoever wanted to buy a home. Credit score, income and assets became irrelevant terms as brokers and local lenders rushed to issue new mortgages.It seemed like a relatively "low risk" strategy at the time to many banks. Reason being, they figured that even if people stopped paying their mortgages, the housing market was doing so well that folks could just sell the house for a profit and pay back the remainder of the mortgage.And that's really where the trouble started.II. Then the Investment Banks Got Involved:Mortgage Backed Securities (MBS) are nothing new on Wall Street. They're sort of like bonds, meaning there's a "principle amount" (the amount being loaned) and interest coupons (or payments) that would be paid monthly on the loan. However, MBS's aren't single loans.Instead, these loans were really thousands of individual mortgages all pooled together to create a single, tradable security.This is another reason why many lenders were happy to keep giving out mortgages to folks (even if they didn't qualify). Local lenders knew that they'd be able to package up all those mortgages and just sell them right to the big investment banks and not have to worry.The banks then turned around and would trade these Mortgage Backed Securities like they would a stock or a bond - trying to pocket profits in between each trade.III. BubblesThe basic assumption in this whole mess was that housing prices would continue to rise each year. In fact, that assumption turned out to be pretty accurate. According to the S&P Case-Schiller Index, home prices nearly doubled across the country from 2001 - 2006.That's because it was so easy to get a mortgage, everybody wanted to buy a home. Thus spurring demand and in turn driving up prices further. It sort of became a self fulfilling prophecy, which in turn became a full-fledged housing bubble.And just like any good bubble, it eventually had to pop!IV. The "After-Pop"So after the housing market finally started to tumble, the financial services industry went into a year-long death spiral. Here's the basic sequence of events:
1. People couldn't afford their mortgages anymore. 2. They couldn't sell their homes for more than they paid due to falling prices 3. So they defaulted on their loans - this happened to millions of people! 4. The big investment banks which now owned all the mortgages suddenly realized that these "assets" were virtually becoming worthless in a very short period of time.
5. So the banks had to take massive write-downs on these loans. The way this works is the banks were considering these baskets of mortgages as assets on their balance sheets. Once the assets went from being worth $100 to $1, the banks basically lost 99% of their value.
6. When that happened it made it very difficult for the banks to get loans themselves (imagine applying for a loan when all you have is a pack of bubble gum and the clothes on your back - it's not likely to happen).
7. When the banks couldn't get their own loans they were either going to be forced into bankruptcy (Lehman Brothers) or had to be swallowed up by healthier firms (Bear Stearns, Merrill Lynch, etc.)
V. How the Government Got InvolvedEver since Bear Stearns went under the government has played a fairly prominent role in this whole mess.But it wasn't until we almost saw the implosion of Fannie Mae and Freddie Mac that the government really made its presence felt.Fannie Mae and Freddie Mac are sort of like "buyers of last resort" in the mortgage market. They were established to maintain liquidity in these markets in the event of the large banks being unable to trade their Mortgage Backed Securities.So in the end, Freddie and Fannie were sitting on trillions of dollars in bad home loans.And while these companies were private organizations they were however government sponsored organizations. So if the government had let either one of these companies fail then it might've made it very difficult for the United States to keep selling debt to big foreign buyers, like China . Remember, it's our ability to sell our debt to other countries that has been funding our country's operations (e.g. wars, etc.) for the last several years.VI. How AIG and Insurance Fit InAIG came into the picture when it began selling "insurance" to the big banks.This technically wasn't insurance, but that was mainly due to clever wording on the part of AIG management. Because for all intents and purposes, they were basically insuring the mortgages held by the banks - this type of insurance was called a "Credit Default Swap", or a CDS.Basically, the banks would pay AIG a monthly fee and in turn AIG would promise to make the bank whole on any mortgages that defaulted (sure sounds like insurance to me).At the time I'm sure this sounded like a good idea because everybody assumed housing prices would continue to rise.Well we all know how that turned out and that's why in the end AIG was left holding the bag for billions of dollars in bad loans.VII. The BailoutSo that brings us to where we are today: On the eve of the largest government bailout of the private sector in the history of this country.The implications for these actions are vast and complex.On the one hand, the government has to do this; the alternatives are too disastrous to even comprehend. On the other hand, what type of message does this send to the banks going forward? That it's ok to engage in risky, reckless behavior and they'll always get bailed out in the end?
Article by Wayne Mulligan
US mortgage crisis: A subprimer Q: What is a sub-prime loan? A: In the US, borrowers are rated either as 'prime' - indicating that they have a good credit rating based on their track record - or as 'sub-prime', meaning their track record in repaying loans has been below par. Loans given to sub-prime borrowers, something banks would normally be reluctant to do, are categorized as sub-prime loans. Typically, it is the poor and the young who form the bulk of sub-prime borrowers.
Q: Why loans were given? A: In roughly five years leading up to 2007, many banks started giving loans to sub-prime borrowers, typically through subsidiaries. They did so because they believed that the real estate boom, which had more than doubled home prices in the US since 1997, would allow even people with dodgy credit backgrounds to repay on the loans they were taking to buy or build homes. Government also encouraged lenders to lend to sub-prime borrowers, arguing that this would help even the poor and young to buy houses.
With stock markets booming and the system flush with liquidity, many big fund investors like hedge funds and mutual funds saw sub-prime loan portfolios as attractive investment opportunities. Hence, they bought such portfolios from the original lenders. This in turn meant the lenders had fresh funds to lend. The subprime loan market thus became a fast growing segment.
Q: What was the interest rate on sub-prime loans? A: Since the risk of default on such loans was higher, the interest rate charged on sub-prime loans was typically about two percentage points higher than the interest on prime loans. This, of course, only added to the risk of sub-prime borrowers defaulting. The repayment capacity of sub-prime borrowers was in any case doubtful. The higher interest rate additionally meant substantially higher EMIs than for prime borrowers, further raising the risk of default. Further, lenders devised new instruments to reach out to more sub-prime borrowers. Being flush with funds they were willing to compromise on prudential norms. In one of the instruments they devised, they asked the borrowers to pay only the interest portion to begin with. The repayment of the principal portion was to start after two years.
Q: How did this turn into a crisis? A: The housing boom in the US started petering out in 2007. One major reason was that the boom had led to a massive increase in the supply of housing. Thus house prices started falling. This increased the default rate among subprime borrowers, many of whom were no longer able or willing to pay through their nose to buy a house that was declining in value. Since in home loans in the US, the collateral is typically the home being bought, this increased the supply of houses for sale while lowering the demand, thereby lowering prices even further and setting off a vicious cycle. That this coincided with a slowdown in the US economy only made matters worse. Estimates are that US housing prices have dropped by almost 50% from their peak in 2006 in some cases. The declining value of the collateral means that lenders are left with less than the value of their loans and hence have to book losses.
Q: How did this become a systemic crisis? A: One major reason is that the original lenders had further sold their portfolios to other players in the market. There were also complex derivatives developed based on the loan portfolios, which were also sold to other players, some of whom then sold it on further and so on.
As a result, nobody is absolutely sure what the size of the losses will be when the dust ultimately settles down. Nobody is also very sure exactly who will take how much of a hit. It is also important to realise that the crisis has not affected only reckless lenders. For instance, Freddie Mac and Fannie Mae, which owned or guaranteed more than half of the roughly $12 trillion outstanding in home mortgages in the US, were widely perceived as being more prudent than most in their lending practices. However, the housing bust meant that they too had to suffer losses - $14 billion combined in the last four quarters - because of declining prices for their collateral and increased default rates.
The forced retreat of these two mortgage giants from the market, of course, only adds to every other player's woes.
Q: What has been the impact of the crisis? A: Global banks and brokerages have had to write off an estimated $512 billion in sub-prime losses so far, with the largest hits taken by Citigroup ($55.1 bn) and Merrill Lynch ($52.2 bn). A little more than half of these losses, or $260 bn, have been suffered by US-based firms, $227 billion by European firms and a relatively modest $24 bn by Asian ones. Despite efforts by the US Federal Reserve to offer some financial assistance to the beleaguered financial sector, it has led to the collapse of Bear Sterns, one of the world's largest investment banks and securities trading firm. Bear Sterns was bought out by JP Morgan Chase with some help from the Fed.
The crisis has also seen Lehman Brothers - the fourth largest investment bank in the US - file for bankruptcy. Merrill Lynch has been bought out by Bank of America. Freddie Mac and Fannie Mae have effectively been nationalized to prevent them from going under.
Reports suggest that insurance major AIG (American Insurance Group) is also under severe pressure and has asked for a $40 bn bridge loan to tide over the crisis. If AIG also collapses, that would really test the entire financial sector.
Q: How is the rest of the world affected? A: Apart from the fact that banks based in other parts of the world also suffered losses from the subprime market, there are two major ways in which the effect is felt across the globe. First, the US is the biggest borrower in the world since most countries hold their foreign exchange reserves in dollars and invest them in US securities.
Thus, any crisis in the US has a direct bearing on other countries, particularly those with large reserves like Japan, China and - to a lesser extent - India. Also, since global equity markets are closely interlinked through institutional investors, any crisis affecting these investors sees a contagion effect throughout the world.
Financial Crises - A simplified versionSo let's go through it step-by-step, from the beginning until this weekend when the Government announced a $700 billion bailout of the financial services industry. It's our tax dollars that will be financing this bailout so I think it's important that we all understand how and why it happened.I. It all started in the housing and mortgage market:Basically, lenders were loaning money to whoever wanted to buy a home. Credit score, income and assets became irrelevant terms as brokers and local lenders rushed to issue new mortgages.It seemed like a relatively "low risk" strategy at the time to many banks. Reason being, they figured that even if people stopped paying their mortgages, the housing market was doing so well that folks could just sell the house for a profit and pay back the remainder of the mortgage.And that's really where the trouble started.II. Then the Investment Banks Got Involved:Mortgage Backed Securities (MBS) are nothing new on Wall Street. They're sort of like bonds, meaning there's a "principle amount" (the amount being loaned) and interest coupons (or payments) that would be paid monthly on the loan. However, MBS's aren't single loans.Instead, these loans were really thousands of individual mortgages all pooled together to create a single, tradable security.This is another reason why many lenders were happy to keep giving out mortgages to folks (even if they didn't qualify). Local lenders knew that they'd be able to package up all those mortgages and just sell them right to the big investment banks and not have to worry.The banks then turned around and would trade these Mortgage Backed Securities like they would a stock or a bond - trying to pocket profits in between each trade.III. BubblesThe basic assumption in this whole mess was that housing prices would continue to rise each year. In fact, that assumption turned out to be pretty accurate. According to the S&P Case-Schiller Index, home prices nearly doubled across the country from 2001 - 2006.That's because it was so easy to get a mortgage, everybody wanted to buy a home. Thus spurring demand and in turn driving up prices further. It sort of became a self fulfilling prophecy, which in turn became a full-fledged housing bubble.And just like any good bubble, it eventually had to pop!IV. The "After-Pop"So after the housing market finally started to tumble, the financial services industry went into a year-long death spiral. Here's the basic sequence of events:
1. People couldn't afford their mortgages anymore. 2. They couldn't sell their homes for more than they paid due to falling prices 3. So they defaulted on their loans - this happened to millions of people! 4. The big investment banks which now owned all the mortgages suddenly realized that these "assets" were virtually becoming worthless in a very short period of time.
5. So the banks had to take massive write-downs on these loans. The way this works is the banks were considering these baskets of mortgages as assets on their balance sheets. Once the assets went from being worth $100 to $1, the banks basically lost 99% of their value.
6. When that happened it made it very difficult for the banks to get loans themselves (imagine applying for a loan when all you have is a pack of bubble gum and the clothes on your back - it's not likely to happen).
7. When the banks couldn't get their own loans they were either going to be forced into bankruptcy (Lehman Brothers) or had to be swallowed up by healthier firms (Bear Stearns, Merrill Lynch, etc.)
V. How the Government Got InvolvedEver since Bear Stearns went under the government has played a fairly prominent role in this whole mess.But it wasn't until we almost saw the implosion of Fannie Mae and Freddie Mac that the government really made its presence felt.Fannie Mae and Freddie Mac are sort of like "buyers of last resort" in the mortgage market. They were established to maintain liquidity in these markets in the event of the large banks being unable to trade their Mortgage Backed Securities.So in the end, Freddie and Fannie were sitting on trillions of dollars in bad home loans.And while these companies were private organizations they were however government sponsored organizations. So if the government had let either one of these companies fail then it might've made it very difficult for the United States to keep selling debt to big foreign buyers, like China . Remember, it's our ability to sell our debt to other countries that has been funding our country's operations (e.g. wars, etc.) for the last several years.VI. How AIG and Insurance Fit InAIG came into the picture when it began selling "insurance" to the big banks.This technically wasn't insurance, but that was mainly due to clever wording on the part of AIG management. Because for all intents and purposes, they were basically insuring the mortgages held by the banks - this type of insurance was called a "Credit Default Swap", or a CDS.Basically, the banks would pay AIG a monthly fee and in turn AIG would promise to make the bank whole on any mortgages that defaulted (sure sounds like insurance to me).At the time I'm sure this sounded like a good idea because everybody assumed housing prices would continue to rise.Well we all know how that turned out and that's why in the end AIG was left holding the bag for billions of dollars in bad loans.VII. The BailoutSo that brings us to where we are today: On the eve of the largest government bailout of the private sector in the history of this country.The implications for these actions are vast and complex.On the one hand, the government has to do this; the alternatives are too disastrous to even comprehend. On the other hand, what type of message does this send to the banks going forward? That it's ok to engage in risky, reckless behavior and they'll always get bailed out in the end?
Article by Wayne Mulligan
RECESSION
What Does it Mean?A significant decline in activity across the economy, lasting longer than a few months. It is visible in industrial production, employment, real income and wholesale-retail trade. The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP).
Recession is a normal (albeit unpleasant) part of the business cycle; however, one-time crisis events can often trigger the onset of a recession. A recession generally lasts from six to 18 months..
Recession is a normal (albeit unpleasant) part of the business cycle; however, one-time crisis events can often trigger the onset of a recession. A recession generally lasts from six to 18 months..
Good time to begin systematic investing
Source: http://economictimes.indiatimes.com/Good_time_to_begin_systematic_investing/articleshow/msid-3583763,curpg-1.cms
Imagine a week when a couple of banks ceased to exist, a couple of nonbanking finance companies (NBFCs) became banks and some got taken over by the government. A tsunami swept across the financial scene, leaving the landscape quite changed.
While purists may complain about the US government’s action, it is not the business of governments to look at ideology — whether capitalist, communist or socialist. It is the business of the government to do what needs to be done to protect the system.
The ‘common man’ must be insulated from the excesses of a few if he is to retain faith in the system; the tax-payers’ money has to be used, because it is ultimately being used to protect the tax-payer! As an investor, it gives me great comfort to know that when it comes to the crunch, governments (whether ours or someone else’s) react predictably to preserve the system.
Let us first look broadly and in layman terms, at the crisis. The problem was most acutely felt by NBFCs that had used their large balance sheets for investment, and then, over a period of time, in an environment of easy money, leveraged to invest even more. As the mountain of debt-based investment piled up, huge profits were earned; but risk management systems failed to detect the simultaneous ballooning of the potential for losses.
Sub prime loans wrapped in securitized instruments acted as the spear that burst this bubble. As capital and borrowed money were lost, these organizations with loosely regulated capital adequacy norms found that the market for their assets had disappeared, taking with it much more than they owned in the form of capital. While banks also suffered some losses, they survived because their regulator had certain strong ‘capital adequacy’ norms: they could not pledge the family jewels to gamble on the market.
In simple terms, the solution that has been worked out tries to ensure that the capital market system does not punish the most vulnerable — the individual savers and investors.
It has effectively bought out companies that are retail facing; it has created an environment where institutions that are not retail-oriented either find their own rescuer or go under; and it has created a huge pool of money that can be used to stabilize the system. There is an engineered co-operation among the strongest banks and the government to create a fund to shore up weaker institutions, while ensuring a smooth transition of ownership and management to, hopefully, more prudent groups.
In many ways, this solution is almost Asian in its conception and design, which gives me great confidence. This does not mean that the crisis is over. It only means that the process has begun.
When the tsunami swept away whole villages in December ’04, the world swung into action with money, material and human assistance, but the process of reconstruction took time. The important issue was that help was at hand and generously given. That also happened after this financial tsunami hit Wall Street.
What does this mean for India and Asia? The most prosperous region in the world has been hit by a tsunami and naturally, the markets here cannot re
main unaffected. In the short term, markets are affected by sentiment and as western capital rushes home, it is being sorely missed by our bourses.
Yet, look at the businesses at home — they continue to do well and as their huge offshore markets disappear, the potential for intra-Asian trade has emerged on the horizon. It is clear that strong local financial systems and institutions are poised to provide liquidity to the bourses not only in the short term (after all, this is a buying opportunity — a 50% off-season discount sale), but also in the long term, for businesses that need it, including easier external commercial borrowing (ECB) norms.
At the same time, this is a great opportunity for India Inc to set aside its bloated expectations and prices, and create realistic models with realistic financial needs — real estate is a classic example. The brief ‘asset bubble’ in commodity prices is slowly subsiding, leading to expectations of inflation coming off in the next few months, as also interest rates.
As a famous person once said, “There are always tremors when a great tree falls.” It is too early to make positive predictions, but as things get back to normal slowly, the surroundings will change for the better. This is a good time to begin systematic investing. So, why not begin gradually stocking up for the festive season during this discount sale itself?
Imagine a week when a couple of banks ceased to exist, a couple of nonbanking finance companies (NBFCs) became banks and some got taken over by the government. A tsunami swept across the financial scene, leaving the landscape quite changed.
While purists may complain about the US government’s action, it is not the business of governments to look at ideology — whether capitalist, communist or socialist. It is the business of the government to do what needs to be done to protect the system.
The ‘common man’ must be insulated from the excesses of a few if he is to retain faith in the system; the tax-payers’ money has to be used, because it is ultimately being used to protect the tax-payer! As an investor, it gives me great comfort to know that when it comes to the crunch, governments (whether ours or someone else’s) react predictably to preserve the system.
Let us first look broadly and in layman terms, at the crisis. The problem was most acutely felt by NBFCs that had used their large balance sheets for investment, and then, over a period of time, in an environment of easy money, leveraged to invest even more. As the mountain of debt-based investment piled up, huge profits were earned; but risk management systems failed to detect the simultaneous ballooning of the potential for losses.
Sub prime loans wrapped in securitized instruments acted as the spear that burst this bubble. As capital and borrowed money were lost, these organizations with loosely regulated capital adequacy norms found that the market for their assets had disappeared, taking with it much more than they owned in the form of capital. While banks also suffered some losses, they survived because their regulator had certain strong ‘capital adequacy’ norms: they could not pledge the family jewels to gamble on the market.
In simple terms, the solution that has been worked out tries to ensure that the capital market system does not punish the most vulnerable — the individual savers and investors.
It has effectively bought out companies that are retail facing; it has created an environment where institutions that are not retail-oriented either find their own rescuer or go under; and it has created a huge pool of money that can be used to stabilize the system. There is an engineered co-operation among the strongest banks and the government to create a fund to shore up weaker institutions, while ensuring a smooth transition of ownership and management to, hopefully, more prudent groups.
In many ways, this solution is almost Asian in its conception and design, which gives me great confidence. This does not mean that the crisis is over. It only means that the process has begun.
When the tsunami swept away whole villages in December ’04, the world swung into action with money, material and human assistance, but the process of reconstruction took time. The important issue was that help was at hand and generously given. That also happened after this financial tsunami hit Wall Street.
What does this mean for India and Asia? The most prosperous region in the world has been hit by a tsunami and naturally, the markets here cannot re
main unaffected. In the short term, markets are affected by sentiment and as western capital rushes home, it is being sorely missed by our bourses.
Yet, look at the businesses at home — they continue to do well and as their huge offshore markets disappear, the potential for intra-Asian trade has emerged on the horizon. It is clear that strong local financial systems and institutions are poised to provide liquidity to the bourses not only in the short term (after all, this is a buying opportunity — a 50% off-season discount sale), but also in the long term, for businesses that need it, including easier external commercial borrowing (ECB) norms.
At the same time, this is a great opportunity for India Inc to set aside its bloated expectations and prices, and create realistic models with realistic financial needs — real estate is a classic example. The brief ‘asset bubble’ in commodity prices is slowly subsiding, leading to expectations of inflation coming off in the next few months, as also interest rates.
As a famous person once said, “There are always tremors when a great tree falls.” It is too early to make positive predictions, but as things get back to normal slowly, the surroundings will change for the better. This is a good time to begin systematic investing. So, why not begin gradually stocking up for the festive season during this discount sale itself?
Saturday, September 27, 2008
HDFC PENSION PLANS ARE THE BEST
Source: OUTLOOK MONEY
21 Nov 2007
HDFC Standard ULPP
This scheme could give you a bigger corpus for your retired years
SunilDhawan
Unit-linked Pension Plan (ULPP) from HDFC Standard Life Insurance Company (HDFCSLIC) is different from traditional pension plans in that the flexibility of a unit-linked plan could get you higher returns over the long term.Features. ULPP invests premiums (minimum of Rs 10,000), net of all charges, in your chosen fund till the time you want your pension to start. This is called the accumulation phase, which can be 10-40 years. The vesting age, when pension payments start, is 50-75 years. You can enter the plan between 18 and 65 years of age.This plan has no life cover and, therefore, no mortality charges. If the policyholder dies during the accumulation phase, the nominee gets the fund value and the policy ends.Options during accumulation phase. First, you have to decide the annual premium and the vesting age. Premiums go into one or more of the seven fund options, which you can change any time. Ideally, go for the growth fund option during the initial years and then move to less riskier options as you get closer to the vesting age.Options at vesting age. There is no option to get the entire accumulated fund at vesting age. The maximum you get as a lump sum is a third of the fund value, tax free. On the remaining two-thirds, the insurer starts paying you a regular pension based mainly on the then prevailing interest rates. You have the option of shifting your corpus to any life insurer which you think will give you a higher pension. Early exit. Since ULPP is a long-term plan, early exits should be avoided. If you don't want to exit, but would not like to pay regular premiums, you can stop doing so after the first three years.
Funds already invested would grow till vesting age and then pension would be payable. Ideally, this feature should be used only in case of an emergency Costs. HDFC SLIC has fewer charges than most other insurers. The front-end premium allocation charge is 25 per cent for years one and two for annual premiums up to Rs 1.99 lakh, and 1 per cent the third year onwards. Policy administration charge of Rs 20 per month is applied on the fund value all through the term of the policy. The fund management charge is the lowest among all insurers at 0.8 per cent of the fund value across all fund options. The lower FMC leaves that much more in your fund, which can become a substantial amount at vesting age.Performance. The portfolio is disclosed every month. The website has a chart analysis showing year-on-year performance of funds against a comparable market index through the 'rolling performance'. As on 30 September, the growth fund, which is actively managed, was 96.54 per cent exposed to equity. It had invested in more than 18 sectors, with about 56 per cent in capital goods, finance, transport equipment and oil (see At A Glance).What to do. This is the unit-linked pension plan with the lowest fund management charge. The clarity in the structure of charges makes it easier to understand. Over the long term, the fund has shown higher than benchmark returns. A must-consider if you are planning retirement finances.
21 Nov 2007
HDFC Standard ULPP
This scheme could give you a bigger corpus for your retired years
SunilDhawan
Unit-linked Pension Plan (ULPP) from HDFC Standard Life Insurance Company (HDFCSLIC) is different from traditional pension plans in that the flexibility of a unit-linked plan could get you higher returns over the long term.Features. ULPP invests premiums (minimum of Rs 10,000), net of all charges, in your chosen fund till the time you want your pension to start. This is called the accumulation phase, which can be 10-40 years. The vesting age, when pension payments start, is 50-75 years. You can enter the plan between 18 and 65 years of age.This plan has no life cover and, therefore, no mortality charges. If the policyholder dies during the accumulation phase, the nominee gets the fund value and the policy ends.Options during accumulation phase. First, you have to decide the annual premium and the vesting age. Premiums go into one or more of the seven fund options, which you can change any time. Ideally, go for the growth fund option during the initial years and then move to less riskier options as you get closer to the vesting age.Options at vesting age. There is no option to get the entire accumulated fund at vesting age. The maximum you get as a lump sum is a third of the fund value, tax free. On the remaining two-thirds, the insurer starts paying you a regular pension based mainly on the then prevailing interest rates. You have the option of shifting your corpus to any life insurer which you think will give you a higher pension. Early exit. Since ULPP is a long-term plan, early exits should be avoided. If you don't want to exit, but would not like to pay regular premiums, you can stop doing so after the first three years.
Funds already invested would grow till vesting age and then pension would be payable. Ideally, this feature should be used only in case of an emergency Costs. HDFC SLIC has fewer charges than most other insurers. The front-end premium allocation charge is 25 per cent for years one and two for annual premiums up to Rs 1.99 lakh, and 1 per cent the third year onwards. Policy administration charge of Rs 20 per month is applied on the fund value all through the term of the policy. The fund management charge is the lowest among all insurers at 0.8 per cent of the fund value across all fund options. The lower FMC leaves that much more in your fund, which can become a substantial amount at vesting age.Performance. The portfolio is disclosed every month. The website has a chart analysis showing year-on-year performance of funds against a comparable market index through the 'rolling performance'. As on 30 September, the growth fund, which is actively managed, was 96.54 per cent exposed to equity. It had invested in more than 18 sectors, with about 56 per cent in capital goods, finance, transport equipment and oil (see At A Glance).What to do. This is the unit-linked pension plan with the lowest fund management charge. The clarity in the structure of charges makes it easier to understand. Over the long term, the fund has shown higher than benchmark returns. A must-consider if you are planning retirement finances.
NO INSURANCE WITH MF's
In a meeting called by the Life Insurance Council, a statutory body representing all life insurers, it was decided that customers would not get insurance cover with any investment or savings product. Says S B Mathur, the council's secretary general: "It was mutually decided by all the life insurers that insurance will no longer be bundled with any investment or savings product since, in the long term it flouts guidelines prescribed by Irda."
At present, 3 mutual fun houses - Kotak Mutual Fund, Reliance Mutual Fund & Birla Sun Life Mutual Fund - have products giving insurance cover from their sister companies. "The current investors will continue with these products, but it will not be available to fresh investors," said Mathur.
At present, 3 mutual fun houses - Kotak Mutual Fund, Reliance Mutual Fund & Birla Sun Life Mutual Fund - have products giving insurance cover from their sister companies. "The current investors will continue with these products, but it will not be available to fresh investors," said Mathur.
Wednesday, March 5, 2008
Sunday, February 24, 2008
MIS - SELLING BY LIC AGENTS
LIC agents promise 200% return on '0-investment' plan
22 Feb, 2008, 1340 hrs IST,Debjoy Sengupta, TNN
Source: http://economictimes.indiatimes.com/LIC_agents_promise_200_return_on_0-investment_plan/articleshow/2805341.cms?from_et_wnd_newsltr=1
KOLKATA: Life Insurance Corporation of India (LIC) may have gone to the extent of foregoing premium income from unit linked policies to make sure customers are not lured into buying them on false promises by agents.
But despite this, a section of agents have gone to the extent of asking policyholders to take loans on their existing policy and invest in Market Plus—a unit-linked policy. What’s more, they are claiming it to be a zero-investment plan with a return of about Rs 75,000.
Agents are targeting those policyholders who are eligible to take at least a loan of Rs 50,000 on existing policies, and are sending letters in envelopes with printed address and existing policy number on which the loan is eligible.
These letters look typically like the ones sent by LIC, only that they do not have the LIC logo or LIC office address on the envelope. The letter, however, is just a printed sheet of paper with LIC’s logo, and ‘Bhartiya Jeevan Bima Nigam’ written on it. In bold is ‘0 investment plan’. A copy of the letter is available with ET. It, however, is not signed and has no name of any agent on it.
Here’s how, the zero-investment plan is supposed to work. Take a loan of Rs 50,000 on an existing policy for five years. The interest for which, according to this letter, works out to Rs 27,648 at the rate of 9% per annum. Hence, the total refund after five years needs to be Rs 77,648.
“How can people, other than agents, get hold of policy numbers on which loans of Rs 50,000 are eligible,” argued an insurance analyst. Senior LIC officials said: “Although we are discouraging such practices such cases exist.”
Now comes the twist. According to the above calculation, if one invests Rs 50,000 in Market Plus, the letter claims that total receipts after five years will be Rs 1, 52,587. Hence, according to the letter, the approximate profit would be Rs 74,939 after five years. This is arrived at by subtracting Rs 77,648 (the total amount that needs to be refunded for the loan taken) from Rs 1, 52,587 (the total returns after five years from Market Plus). However, the letter also says: “Returns may vary according to market fluctuations.”
The math is perfect, but it assumes that Rs 50,000 invested in Market Plus will treble in five years, that’s about a 200% return. This is illegal!
Insurance Regulatory & Development Authority (IRDA) has made it clear time and again that agents and insurers cannot portray more than 10% return on any type of policy in the long run. In contrast agents are assuming a 200% return here, which is against the IRDA norm.
Interestingly, IRDA chairman C S Rao disclosed to ET that he had also come across a similar handout inserted in newspapers. Although this one had some other sort of advertisement promising very high returns on unit linked policies.
Nevertheless, LIC had gone to the extent of spending money on newspaper insertions that stated returns on unit-linked polices are not guaranteed.
Further, in an effort to create awareness that returns from unit-linked policies are not guaranteed, it took a conscious decision to shift its focus from individual single premium policies (unit-linked policies) to individual non-single premium policies i.e. traditional products.
22 Feb, 2008, 1340 hrs IST,Debjoy Sengupta, TNN
Source: http://economictimes.indiatimes.com/LIC_agents_promise_200_return_on_0-investment_plan/articleshow/2805341.cms?from_et_wnd_newsltr=1
KOLKATA: Life Insurance Corporation of India (LIC) may have gone to the extent of foregoing premium income from unit linked policies to make sure customers are not lured into buying them on false promises by agents.
But despite this, a section of agents have gone to the extent of asking policyholders to take loans on their existing policy and invest in Market Plus—a unit-linked policy. What’s more, they are claiming it to be a zero-investment plan with a return of about Rs 75,000.
Agents are targeting those policyholders who are eligible to take at least a loan of Rs 50,000 on existing policies, and are sending letters in envelopes with printed address and existing policy number on which the loan is eligible.
These letters look typically like the ones sent by LIC, only that they do not have the LIC logo or LIC office address on the envelope. The letter, however, is just a printed sheet of paper with LIC’s logo, and ‘Bhartiya Jeevan Bima Nigam’ written on it. In bold is ‘0 investment plan’. A copy of the letter is available with ET. It, however, is not signed and has no name of any agent on it.
Here’s how, the zero-investment plan is supposed to work. Take a loan of Rs 50,000 on an existing policy for five years. The interest for which, according to this letter, works out to Rs 27,648 at the rate of 9% per annum. Hence, the total refund after five years needs to be Rs 77,648.
“How can people, other than agents, get hold of policy numbers on which loans of Rs 50,000 are eligible,” argued an insurance analyst. Senior LIC officials said: “Although we are discouraging such practices such cases exist.”
Now comes the twist. According to the above calculation, if one invests Rs 50,000 in Market Plus, the letter claims that total receipts after five years will be Rs 1, 52,587. Hence, according to the letter, the approximate profit would be Rs 74,939 after five years. This is arrived at by subtracting Rs 77,648 (the total amount that needs to be refunded for the loan taken) from Rs 1, 52,587 (the total returns after five years from Market Plus). However, the letter also says: “Returns may vary according to market fluctuations.”
The math is perfect, but it assumes that Rs 50,000 invested in Market Plus will treble in five years, that’s about a 200% return. This is illegal!
Insurance Regulatory & Development Authority (IRDA) has made it clear time and again that agents and insurers cannot portray more than 10% return on any type of policy in the long run. In contrast agents are assuming a 200% return here, which is against the IRDA norm.
Interestingly, IRDA chairman C S Rao disclosed to ET that he had also come across a similar handout inserted in newspapers. Although this one had some other sort of advertisement promising very high returns on unit linked policies.
Nevertheless, LIC had gone to the extent of spending money on newspaper insertions that stated returns on unit-linked polices are not guaranteed.
Further, in an effort to create awareness that returns from unit-linked policies are not guaranteed, it took a conscious decision to shift its focus from individual single premium policies (unit-linked policies) to individual non-single premium policies i.e. traditional products.
Monday, February 11, 2008
ADVANTAGE OF INVESTING IN ULIPS COMPARED TO ELSS
What are the striking features of ULIPs as compared to ELSS Mutual fund schemes?
The horizon of investment is not the same. ELSS is medium term whereas ULIP is more long term.
The tax advantages are higher in ULIPs (entry + maturity) as compared to ELSS.
Lock-in period for ELSS is three years. During this period you cannot reduce your risk.
Lock-in period for ULIPs is three years but, through switching facility, you have the flexibility to change your investment pattern.
Maturity benefit after three years in ELSS is taxable as Capital gains at 10 per cent or 20 per cent.
In ULIPs, maturity benefits are tax-free as per the current tax laws and partial withdrawal also is tax-free.
ULIPs offer protection-cum-market-related returns. Under the same product, you have a wide range of investment options.
With Ref: http://www.thehindubusinessline.com/iw/2007/11/25/stories/2007112550981300.htm
The horizon of investment is not the same. ELSS is medium term whereas ULIP is more long term.
The tax advantages are higher in ULIPs (entry + maturity) as compared to ELSS.
Lock-in period for ELSS is three years. During this period you cannot reduce your risk.
Lock-in period for ULIPs is three years but, through switching facility, you have the flexibility to change your investment pattern.
Maturity benefit after three years in ELSS is taxable as Capital gains at 10 per cent or 20 per cent.
In ULIPs, maturity benefits are tax-free as per the current tax laws and partial withdrawal also is tax-free.
ULIPs offer protection-cum-market-related returns. Under the same product, you have a wide range of investment options.
With Ref: http://www.thehindubusinessline.com/iw/2007/11/25/stories/2007112550981300.htm
KNOW IPO BETTER
What exactly is an IPO?
When a company wants to raise money, one of the ways it can do so is by selling its equity shares to the public. If it happens to be the first public offer of the company, it is known as the initial public offer (IPO). In an IPO, the promoters share in the company's equity comes down, as the number of shares issued by the company (paid-up capital) increases. After the IPO, the shares get listed on the stock exchange and shareholders can trade their shareholdings on the bourses.
How to make an IPO?
To make an IPO, a company has to file a prospectus with the Securities and Exchange Board of India (SEBI) stating the purpose of raising the money and disclosing other details of the company and its directors. Once it is approved by SEBI, the company files the prospectus with the registrar of the company to initiate the process of IPO. According to SEBI norms, a minimum of 30% of any IPO is reserved for retail investors — those who are applying for shares worth less than Rs 1,00,000. The shares are allotted on a pro-rata basis among applicants. That means, if the retail investor portion of the IPO is oversubscribed by two times, every applicant will get half of the number of shares he applied for.For large investors, whose application size is more than Rs 1,00,000 each, there is a minimum reservation of 10%. In this category too, shares are allotted on a pro-rata basis.
How is the offer price fixed?
The offer price for shares in a public offer can be fixed before the issue. It can also be discovered through gauging the demand in the market for shares at various price points. The second method is called the book-building route. In this, the issue manager fixes a price-band rather than a single price for the IPO and asks investors to bid for shares in that price range. The price band is fixed on the basis of the fundamentals of the company, the performance of share prices of other companies in the same sector on bourses and market survey conducted by issue managers.
Know more about Initial Public Offer?
An investor can bid for shares at various price levels. Normally, the demand for shares at the minimum price level is the maximum. But when the market is booming, the issue is often oversubscribed at the higher end of the band itself. In such a case, the offer price is ultimately fixed at the upper end of the band. What is a follow on-public offer?When a listed company makes a public offer to raise funds, it is called a follow-on public offer. In these cases too, the offer price can be fixed or be discovered through book-building. Normally, the offer price is at a 10-20% discount to the prevailing share price in the market.
Other ways to raise funds from market?
A company can raise funds through a rights issue. In this, the company gives shares only to existing share holders at a certain ratio to the number of shares already owned. For example, in the case of SBI, one rights share is to be given for every five SBI share owned. Normally, a rights issue has the twin purposes of rewarding the shareholders of the company and raising funds. Shares are, therefore, typically offered at a 30-50 % discount to the prevailing market price. Therefore, just before a rights issue, the share price of the company goes up.
In a rights issue, how is the entitlement of shares fixed?
In a rights issue, a cut-off date is fixed, known as the record date. Rights shares are given to those share holders who own the company’s shares on the record date. For example, in case of SBI, the record date is fixed at February 4. That means, rights shares will be given to those investors who own SBI shares on February 4. If one buys an SBI share after February 4, he will not be entitled for the rights share despite the fact that the rights share will be issued after that date. Similarly, if one sells share after February 4, he will still get the rights shares of SBI.
What is offer for sale of equity shares?
In an offer for sale, equity shares of a company are offered by large shareholders, who can be promoters also, to the public. When the Government of India divests its holdings in a public sector company, for instance, it makes an offer for sale. One famous issue of this kind was ONGC's issue of around Rs 10,000 crore, in which GoI had divested its holding in the company. In an offer for sale, the money raised goes to the seller of the stake and the company is not benefited. But, this is also treated as a public issue and follows all the rules of public offerings of shares.
When a company wants to raise money, one of the ways it can do so is by selling its equity shares to the public. If it happens to be the first public offer of the company, it is known as the initial public offer (IPO). In an IPO, the promoters share in the company's equity comes down, as the number of shares issued by the company (paid-up capital) increases. After the IPO, the shares get listed on the stock exchange and shareholders can trade their shareholdings on the bourses.
How to make an IPO?
To make an IPO, a company has to file a prospectus with the Securities and Exchange Board of India (SEBI) stating the purpose of raising the money and disclosing other details of the company and its directors. Once it is approved by SEBI, the company files the prospectus with the registrar of the company to initiate the process of IPO. According to SEBI norms, a minimum of 30% of any IPO is reserved for retail investors — those who are applying for shares worth less than Rs 1,00,000. The shares are allotted on a pro-rata basis among applicants. That means, if the retail investor portion of the IPO is oversubscribed by two times, every applicant will get half of the number of shares he applied for.For large investors, whose application size is more than Rs 1,00,000 each, there is a minimum reservation of 10%. In this category too, shares are allotted on a pro-rata basis.
How is the offer price fixed?
The offer price for shares in a public offer can be fixed before the issue. It can also be discovered through gauging the demand in the market for shares at various price points. The second method is called the book-building route. In this, the issue manager fixes a price-band rather than a single price for the IPO and asks investors to bid for shares in that price range. The price band is fixed on the basis of the fundamentals of the company, the performance of share prices of other companies in the same sector on bourses and market survey conducted by issue managers.
Know more about Initial Public Offer?
An investor can bid for shares at various price levels. Normally, the demand for shares at the minimum price level is the maximum. But when the market is booming, the issue is often oversubscribed at the higher end of the band itself. In such a case, the offer price is ultimately fixed at the upper end of the band. What is a follow on-public offer?When a listed company makes a public offer to raise funds, it is called a follow-on public offer. In these cases too, the offer price can be fixed or be discovered through book-building. Normally, the offer price is at a 10-20% discount to the prevailing share price in the market.
Other ways to raise funds from market?
A company can raise funds through a rights issue. In this, the company gives shares only to existing share holders at a certain ratio to the number of shares already owned. For example, in the case of SBI, one rights share is to be given for every five SBI share owned. Normally, a rights issue has the twin purposes of rewarding the shareholders of the company and raising funds. Shares are, therefore, typically offered at a 30-50 % discount to the prevailing market price. Therefore, just before a rights issue, the share price of the company goes up.
In a rights issue, how is the entitlement of shares fixed?
In a rights issue, a cut-off date is fixed, known as the record date. Rights shares are given to those share holders who own the company’s shares on the record date. For example, in case of SBI, the record date is fixed at February 4. That means, rights shares will be given to those investors who own SBI shares on February 4. If one buys an SBI share after February 4, he will not be entitled for the rights share despite the fact that the rights share will be issued after that date. Similarly, if one sells share after February 4, he will still get the rights shares of SBI.
What is offer for sale of equity shares?
In an offer for sale, equity shares of a company are offered by large shareholders, who can be promoters also, to the public. When the Government of India divests its holdings in a public sector company, for instance, it makes an offer for sale. One famous issue of this kind was ONGC's issue of around Rs 10,000 crore, in which GoI had divested its holding in the company. In an offer for sale, the money raised goes to the seller of the stake and the company is not benefited. But, this is also treated as a public issue and follows all the rules of public offerings of shares.
ULIP as a tax saving tool
ULIP as a tax saving tool
Unit Linked Insurance Plans (ULIP) offers an important source for saving on tax and taking an insurance cover. ULIPs aim to match the equity market return while keeping the risk cover and tax benefit. ULIPs offer high returns, risk cover and tax benefit. The premiums paid by the investor are invested in a mutual fund type of investment instrument.
Unit Linked Insurance Plans (ULIP) offers an important source for saving on tax and taking an insurance cover. ULIPs aim to match the equity market return while keeping the risk cover and tax benefit. ULIPs offer high returns, risk cover and tax benefit. The premiums paid by the investor are invested in a mutual fund type of investment instrument.
Some plans guarantee the capital invested in the form of premiums paid, reducing the risk associated usually with other forms of equity related investments. As the tenure of these plans is pretty long - upto 15 years - the risk of market fluctuations is taken care of.The cyclical variations are addressed because the investment horizon is pretty long. At the time of investment, the premium payments are converted into units at a NAV. The Fund invests in equity and debt instruments.
ULIPS are flexible and are also quite liquid in nature. ULIPs have a lock-in period of three years. Beyond this period, one can sell the units any time.
The investments are eligible for tax break under Section 80C of the Income Tax Act. The maximum eligible amount of investment under Section 80C is Rs 100,000. Under Section 10(10D) of the IT Act, the maturity proceeds are tax-free.
In a unit plan, the investor makes his contribution to the insurance company / fund. The insurance company / fund use this amount for making investments. The investments are divided into units. Whenever a contribution is made by the investor, the numbers of units to his credit are increased, depending on the market price of the units. A small part of the contribution is allocated towards the insurance cover. In case of unfortunate death of the investor, the beneficiaries of the insured are paid a lump sum benefit as the insurance cover.
On the expiry of the term of the plan, or at any time prior to that, if the investor wishes to exit, the number of units to the credit of the investor is paid off at the prevailing market rate of the units which again is governed by the NAV of the fund. Investors have the flexibility to choose the funds and to change them during the course of time, depending on his strategies and perception of the markets. The price of the units is based on the Net Asset Values (NAV) of the plan, which in turn is determined on the basis of the investment portfolio of the plan. The prices of the units tend to fluctuate over a period of time, depending on the movement in the NAV of the fund. The volatility of the unit prices during the course of the contract effect the overall returns of the investors.
The plans are quite flexible and the investor is given options of switching from one option to the other depending on his preferences - for e.g. changing the mix of debt and equity. Although they promise high returns, it is not free of risk. One needs to make cautious and informed judgment about the amount, the type of fund and tenure of investment. Also, being a hybrid product offering insurance and investment, the amount allocated toward investment is reduced not only by the amount allocated towards insurance, but also because of the other administrative charges which are loaded on the fund.
Initially UTI and LIC had launched such plans. Now other insurance players have also launched these unit plans.
Basically, unit linked insurance plans tend to offer insurance cover along with the savings and some return on the investment.The money paid towards the unit plans is partly spent on the purchase of units of the plan and the balance part is allocated towards the insurance premium. So this product acts as a dual product, in addition to the tax savings.
Thursday, February 7, 2008
Bajaj Allianz Life Insurance gets ISO certification
Bajaj Allianz LIfe Insurance Co has received the coveted security certification of ISO 27001:2005 based on its compliance with new standards for data and information security set forth by ISO. Bajaj Allianz becomes the first insurance company in India to receive this certification and recognition.
Source: ET Finance dated 7th Feb 2008
Source: ET Finance dated 7th Feb 2008
Wednesday, February 6, 2008
HDFC Bank first to get high S & P rating
Standard & Poor's (S&P) has assigned a 'BBB-' rating for the long-term and an 'A-3' short term counterparty credit rating to HDFC Bank. HDFC Bank, which is the second largest private sector bank, is the first bank in India to receive such a high credit rating. S&P has declared a stable outlook on the bank and has assigned a 'C' rating for the fundamental strength of the bank. As per a S&P release, the ratings reflect bank's strong market position in the domestic industry, good financial profile supported by strong earnings, healthy capitalisation, good loan quality and diversification, apart from bank's sound management.
Source: Economic Finance dated 18th Jan 2008
Source: Economic Finance dated 18th Jan 2008
Sunday, January 27, 2008
IRDA bans ulip products of Bajaj Allianz and Aviva
http://www.businessstandard.com/common/storypage_c.php?leftnm=10&autono=294850
Complex ULIP face Irda whip
BS Reporter / Mumbai August 17, 2007
Irda bans unit-linked insurance plans which charges are based on complex structure.
The Insurance Regulatory and Development Authority of India (Irda) has banned unit-linked insurance plans (ULIPs) in which charges are based on a complex structure, making it difficult for policyholders to comprehend.
Such products in insurance parlance are called acturial-funded products. The ban would require Aviva Life Insurance to withdraw all its 14 ULIP products, while Bajaj Allianz one of its ULIPs called Capital Unit Gain.
Bajaj Allianz has been directed to withdraw Capital Unit Gain, the deadline for which is the end of next week, while the regulator has been a little considerate with Aviva Life Insurance. Irda has not set any deadline for Aviva to withdraw its ULIP products as the company would need more time to develop new products and then seek the regulator's approval.
“Bajaj Allianz has been given a time frame of 15 days. Aviva Life will have to introduce a new set of products to replace the ones they are using right now and will, therefore, be given more time,” said C S Rao, chairman, Irda.
Insurance sources said Bajaj Allianz Life reported a profit of Rs 30 crore in the first quarter of 2007-08 and Rs 63 crore in 2006-07 mainly on account of Capital Unit Gain.
Under the other ULIP schemes, charges are deducted upfront when the premiums are paid, which could range up to 40 per cent in the first year.
In acturial funded products, the first-year premium is treated as initial premium and is put under an initial management account called acturial funding. Every year 5 per cent of the premium is deducted as initial management cost and 5 per cent as premium allocation charge.
In the second policy year, again a 5 per cent charge is deducted as premium allocation and another 5 per cent from the first year premium as initial management cost. So, for every year a customer loses 5 per cent as premium allocation and 5 per cent as initial management charges.
Assuming that the policy tenure is 20 years and the customer wants to withdraw after three years, the policyholder loses 100 per cent of premium net of charges, 75 per cent if his policy tenure is a 15-year policy and 50 per cent if it is a 10-year policy.
“Acturial-funded products mislead customers into feeling that they have more benefits. While normal ULIP products charge policyholders upfront for all administration and fund management expenses, an acturial funded product will spread it over a period of time. So, a policyholder feels that he has got a larger number of units. Such products are not in the larger interests of the policyholders,” said Rao.
“In several western countries, regulators realised that these products are misleading and have asked companies to withdraw them,” said Rao.
When asked why the Irda approved these products in the first place, Rao said, “It is only after a product is marketed that you realise all the loopholes and then you make a correction. Three weeks ago, the Irda had asked the Acturial Society of India to give its opinion on acturial funded products and it was suggested that these products are not appropriate.”
Bajaj Allianz officials were unavailable for comment. An Aviva spokesperson said: “We have had no communication from Irda on any ban of actuarial-funded products. All our products, including the ones where actuarial funding has been used, have been pre-approved by Irda and are designed on sound actuarial principles. We have been selling these products for years in the country, and these have been approved by the regulator as they follow all guidelines and regulations laid down by the Irda. None of our products is detrimental to the interest of any existing or prospective customers. One of our actuarial funded products was approved as recently as May 2007.”
THE ORDER
· The ban would require Aviva Life Insurance to withdraw all its 14 ULIP products
· Bajaj Allianz will have to withdraw one of its ULIPs called Capital Unit Gain
· Bajaj Allianz has been directed to withdraw Capital Unit Gain, the deadline for which is the end of next week
· IRDA has not set any deadline for Aviva to withdraw its ULIP products as the company would need more time to develop new products and then seek the regulator's approval
Complex ULIP face Irda whip
BS Reporter / Mumbai August 17, 2007
Irda bans unit-linked insurance plans which charges are based on complex structure.
The Insurance Regulatory and Development Authority of India (Irda) has banned unit-linked insurance plans (ULIPs) in which charges are based on a complex structure, making it difficult for policyholders to comprehend.
Such products in insurance parlance are called acturial-funded products. The ban would require Aviva Life Insurance to withdraw all its 14 ULIP products, while Bajaj Allianz one of its ULIPs called Capital Unit Gain.
Bajaj Allianz has been directed to withdraw Capital Unit Gain, the deadline for which is the end of next week, while the regulator has been a little considerate with Aviva Life Insurance. Irda has not set any deadline for Aviva to withdraw its ULIP products as the company would need more time to develop new products and then seek the regulator's approval.
“Bajaj Allianz has been given a time frame of 15 days. Aviva Life will have to introduce a new set of products to replace the ones they are using right now and will, therefore, be given more time,” said C S Rao, chairman, Irda.
Insurance sources said Bajaj Allianz Life reported a profit of Rs 30 crore in the first quarter of 2007-08 and Rs 63 crore in 2006-07 mainly on account of Capital Unit Gain.
Under the other ULIP schemes, charges are deducted upfront when the premiums are paid, which could range up to 40 per cent in the first year.
In acturial funded products, the first-year premium is treated as initial premium and is put under an initial management account called acturial funding. Every year 5 per cent of the premium is deducted as initial management cost and 5 per cent as premium allocation charge.
In the second policy year, again a 5 per cent charge is deducted as premium allocation and another 5 per cent from the first year premium as initial management cost. So, for every year a customer loses 5 per cent as premium allocation and 5 per cent as initial management charges.
Assuming that the policy tenure is 20 years and the customer wants to withdraw after three years, the policyholder loses 100 per cent of premium net of charges, 75 per cent if his policy tenure is a 15-year policy and 50 per cent if it is a 10-year policy.
“Acturial-funded products mislead customers into feeling that they have more benefits. While normal ULIP products charge policyholders upfront for all administration and fund management expenses, an acturial funded product will spread it over a period of time. So, a policyholder feels that he has got a larger number of units. Such products are not in the larger interests of the policyholders,” said Rao.
“In several western countries, regulators realised that these products are misleading and have asked companies to withdraw them,” said Rao.
When asked why the Irda approved these products in the first place, Rao said, “It is only after a product is marketed that you realise all the loopholes and then you make a correction. Three weeks ago, the Irda had asked the Acturial Society of India to give its opinion on acturial funded products and it was suggested that these products are not appropriate.”
Bajaj Allianz officials were unavailable for comment. An Aviva spokesperson said: “We have had no communication from Irda on any ban of actuarial-funded products. All our products, including the ones where actuarial funding has been used, have been pre-approved by Irda and are designed on sound actuarial principles. We have been selling these products for years in the country, and these have been approved by the regulator as they follow all guidelines and regulations laid down by the Irda. None of our products is detrimental to the interest of any existing or prospective customers. One of our actuarial funded products was approved as recently as May 2007.”
THE ORDER
· The ban would require Aviva Life Insurance to withdraw all its 14 ULIP products
· Bajaj Allianz will have to withdraw one of its ULIPs called Capital Unit Gain
· Bajaj Allianz has been directed to withdraw Capital Unit Gain, the deadline for which is the end of next week
· IRDA has not set any deadline for Aviva to withdraw its ULIP products as the company would need more time to develop new products and then seek the regulator's approval
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