How much is enough?

  By Basavaraj Tonagatti |
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We all invest in the hope of getting good returns. But is their any yardstick to judge how much is enough? No…because each person have different expectation from his investments.

We all know that return is directly proportional to risk. But still we all hope to get good returns. Even when we are looking for safer investments like Bank FDs we have tendency to look for best interest rate available in market. So it is natural including me to look for good returns. But sometimes it may bring some bad experience too. Below I will share two real life experiences which I faced few days back. One is from investor who is looking for high returns and another is insurance company who is luring investors by showing false claims.

1) Investor who expects high return-During my last travel to my hometown, I met one Marwari family. Few hours silence turned into discussion and to serious discussion when that Marwari family come to know that I am Financial Planner by profession. So discussion now turned into serious and he started to ask questions about equity investments, real estate investments and other avenues of investments. Obviously I asked him what will be his waiting period and expectations. Answer is so mild from him but shocking to me !!! his waiting period is 3-4 years and his expectation is just 10% to 12% more than current bank interests :)

I cautioned him about the risk reward ratio. But he is adamant and shared his experience that few months back one PMS firm offered him service to manage his money. But what he asked for is, he is ready to share his profit with that PMS firm but not ready to share the loss. Reason he shared is a wonderful business tactic. He simply reluctant to share loss because, while in profit PMS fund manager’s knowledge and his money both are participating. So he is ready to share profit. But for loss, no fault of his money but only fault of fund manager :)  Wonderful to hear. But in reality is it a case of over expectation?

2) Insurance company’s high return offer-Few days back my friend called and shared information about offering by one insurance company who are luring my friend to invest by false claim on return of around 19%. Scheme (I say scheme instead insurance, because of it’s marketing tactic and forgetting the real need of insurance) is, you need to invest Rs.50,000 yearly for 5 years and on 6th year investors will receive back around Rs.4,00,000. Pure return of around 19% in such a short span of around 6 years. Also they offer is Rs.2,50,000 of free insurance for life long. Wow what a gimmick :)

When I directly interacted with that concerned person of Insurance company, I found that it is traditional plan where current bonus rate is around 6.5% but that agent advising me to consider this rate of bonus as half yearly for compounding. After long discussion and advised him to meet me personally and if I satisfied then I guaranteed them that I am going to give them around 10 proposals within a week, I have neither received their call nor no one met met till now :)

So expecting more is wrong?

No not at all, it is your right to expect good returns. But over expectation is what is wrong. When you are looking at safe heaven for your investment and at the same time expecting more returns than equity or real estate may make yourself in wrong position. So you need to balance your needs according to your risk appetite and time horizon.

RBI’s Inflation Indexed Bonds-Will they work for you?

  By Basavaraj Tonagatti |
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As was proposed in current year Budget, RBI will release first tranche of Inflation Indexed Bonds on June 4th 2013. It is claimed that it will protect retail, especially poor and middle class investors against inflation risk. But before going ahead let us first understand how these bonds work.

Bonds are fixed return instruments where you invest lumpsum at one shot and you will receive coupon (return on your investment) either yearly, half yearly or at the end of period based on the feature of bond. After completion of period you will receive what you invested. Few terminologies which you need to understand while investing in bond market are as below.

Coupon-This is the return or you may say as interest which you receive on your investment and will be payable to you as specified in bond feature.

Coupon rate-It is the rate of return which you receive on your bond.

Par Value, Principal or Face Value-As the name suggest it is the amount which you will invest. For example Rs.1,000 face value bond means you will invest Rs.1,000. But remember that market value of bond may be higher or lower based on the valuation of bond.

Callable Bonds-Bonds which are re-purchased by issued after specified period.

Putable Bonds-Bonds which are eligible to sell to issuer after specified period.

Issuer-Issuer is the entity which that issues bonds.

Issuer Price-Price which will be available for purchase during the time of issue. Usually other than zero coupon bonds issue price will be same as that of face value. But in case of zero coupon bonds, where you will not receive any coupon during bond period, issue price will be lesser than face value or maturity value. Difference between these two prices will be your return.

Above terminologies will be for the basic understanding of usual bonds. But in case of inflation indexed bonds slight changes will be their. In Inflation Indexed Bonds (IIB) your coupon will be constant (especially in up coming RBI’s IIB bond) and variation will be in principal which will automatically get adjusted to the inflation index.  To give you a clear picture, let us take one example.

Suppose you invested Rs.100 in IIB bond which is of 10 years period and coupon rate will be 5% annually. Now if next year inflation will be 6% then your principal will be raised to Rs.106 and coupon will be fixed 5% on Rs.106 but not on your invested Rs.100. So you receive Rs.5.30 but not Rs.5.  That is why such bonds are also called real return bonds as your returns are adjusted to inflation.

Now let us come to the feature of Inflation Indexed Bonds which RBI is issuing.

1) Coupon rate will be fixed but as of now rate will not be available. But hope it will be lesser than normal rates.

2) Index ratio (IR) will be calculated as below.

IR=Ref. Inflation Index (on set date)/Ref Inflation Index (On issue date).

For example let us say inflation index during the period of start was 10% and inflation was raised to 12% on the set date (means date on which coupon need to be payable). Then Index ratio will be 1.2 (12%/10%). This will be multiplied by your principal Rs.100 and resulting principal for calculation of coupon will be Rs.120. Now on this Rs.120 coupon will be calculated to pay you.

Coupon I considered is 5%, Principal you invested Rs.100. Now what you receive as a coupon after one year will be is,

Rs.6=5% (coupon rate)*Rs.100 (principal)*[12%(Ref.Inflation Index on set date)/10% (Ref.Inflation Index on issue date)]

3) Reference inflation index will be Wholesale Price Index (WPI) which makes it less attractive as the real inflation which we all face is retail inflation is not possible for this bond. Also their is always a difference between Wholesale Price Index and Consumer Price Index (CPI). So you can’t say that this bond is fully inflation hedge. In wider sense if CPI was the reference then we may say that it is a real hedge against inflation.

4) Retail participation increased from 5% to 20% which I hope will make more participation. But lagging is the investor education about bond market.

5) Bond maturity period will of 10 yrs.

6) Issue date will be on June 4th 2013.

7) On maturity you will receive adjusted principal value or face value whichever is higher.

Advantages of IIB-

1) A best hedge against inflation, especially for retired and investors who looking for safer options.

2) Less volatility than normal bonds.

3) Lowest co-relation with other asset classes.

4) Diversification of your portfolio.

5) You can expect fixed long term real return which may not be possible through stock, commodity or real estate.

Disadvantages of IIBs-

1) Few expert suggest that calculation of WPI itself contains flaw. Hence believing this instrument as a real inflation hedge will be a costly affair.

2) As of now taxation is not known. So we need to think about the post tax returns too.

3) We may expect some mutual funds specifically designed for IIBs which I think will be of tax effective. But let us see how it unfold in future.

4) In case of deflation value of bond will go down and your return too. Which is not the case with other type of bonds.

5) It was actually floated to curb the Gold investment. But in my view only financial literates feel that Indian investors are investing in gold as hedge against inflation. But in reality gold investment in India is purely for ornament purpose which even god can’t stop them :)

6) Coupon on such bonds will be lower hence may be less attractive than other.

7) Investment process is not that much easy. I hope RBI will streamline it as soon as possible.

8) As I mentioned above reference of inflation will be WPI which makes it less attractive. Also India is the only country which have reference of WPI, but rest of all countries refer CPI as their reference index.

9) Currently inflation is easing and in such scenario investing in such bonds may not be an attractive option.

10)  Until and unless Govt create awareness about bond market and liquidity issue, I hope retail investors will stay away for IIBs.

 

 

 

 

EPF-Now with enhanced Life Insurance !!!

  By Basavaraj Tonagatti |
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Lot of salaried may not know that contribution to EPF is also attached with free insurance coverage called Employee’s Deposit Linked Insurance (EDLI). You may not know because of the low cover it offers. But now your EPF cover opt you minimum Rs.1,32,000 of insurance coverage. Let us see what new changes are done to this.

Below is the table which shows how FPF contribution by you and your employer will be distributed.

EPF

Note-Salary for this purpose Basic+DA. This above calculation is considered where employee’s salary is Rs.6,500 or less. But for employees who’s basic salary is more than Rs.6,500, their are different way of calculation. Like few companies contribute equal to employee’s contribution, some maximum of Rs.6,500 whatever employee contribution and in some cases they restriction employee and employer contribution to Rs.6,500 only. So I am not going deep into that.

What is Employees’ Deposit Linked Insurance (EDLI)?

Under this scheme insurance cover is provided to the members of EPF. Cost to this scheme will be borne out by employers but not by employees. As of now the coverage under this scheme is Rs.60,000. Hence lot of employers used to opt out of this scheme due to the less coverage.

But now EPFO allowed Edelweiss Tokio Life-Group Life Protection which covers almost double the existing EDLI covers. Sum Assured covered under this plan is minimum of Rs.1,32,000. But maximum benefit is not mentioned in EPFO circular. All the members of EPFO are eligible to this scheme. Advantage of this scheme is, suppose employer failed to contribute the premium in due period and member dies then employer made responsible. So members need not worry about claim settlement.

Suppose your employer opted for this scheme then they may opt out of EDLI as the benefits under this scheme is higher that the existing EDLI. Hope lot of employers will opt this as an additional benefit to their employees.

 

ICICI Direct Secure SIP with Secure Mind-Review

  By Basavaraj Tonagatti |
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Recently ICICI Direct launched insurance protection for it’s mutual fund investors which is called as “Secure SIP with Secure Mind”. Let us look at it’s features and was it good to take.

First thing about this product is, it is combination of critical illness+Accidental Insurance. So for natural death you will not get any amount from this policy. Hence bear in mind that this is not the life insurance but a general insurance which offers bundle of features. This is the product which will be available for the ICICI Direct customers only but not ICICI Mutual Fund. Hence you need to have account with ICICI Direct to avail this facility. Below are the offerings from this policy.

  • Lump sum benefit on diagnosis of 9 named major critical illness diseases, surgeries and procedures (Cancer, end stage renal failure, multiple sclerosis, major organ transplant, heart valve replacement, coronary artery bypass graft, stroke, paralysis and myocardial infarction).
  • Accidental death/Permanent Total Disability  due to accident.
  • 2% of Sum Assured per month (max for 3 months) in the event of Loss of Employment in case of salaried.

Now the biggest question is, is it free?? I think no..because from the FAQ of the this plan, it is clearly written that while buying mutual fund you need to select it and buy it. But I don’t know how much they will charge. Because I neither have ICICI Direct Account nor that information was not available on it’s home page. Also bear in mind that in case of natural death your nominee will not get anything. Because it is general insurance not life insurance.  So lot of drawbacks with this scheme and thought to point them below.

  • This is not free. Premium will be based on your age, SIP amount and SIP period.
  • This is only available for ICICI Direct customer, hence don’t think that this will be scheme offered by ICICI Mutual Fund.
  • No benefit in case of natural death.
  • Minimum age at entry is 20 yrs and maximum is 50 yrs.
  • Minimum Sum Assured available is Rs.60,000 and maximum is Rs.15,00,000. I don’t think maximum limit will satisfy anyone.
  • Insurance coverage will be 10 times of your SIP. So to have Rs.15,00,000 SA (which is maximum available SA in this), you have to invest monthly Rs.12,500.
  • Maximum availability will be 5 yrs which will hinder for long term investors. Because if they not get the same policy cover after 5 years then they need to look for other alternatives.
  • If you cancel your SIP or defaulted then this insurance cover will be automatically stopped. Even for modification of SIP amount too this policy get cancelled :)
  • If you are existing customer of ICICI Direct then you will not be eligible for this plan. To avail this you need to invest fresh.
  • But premium you will to avail this plan will be available for tax benefit under Sec 80D.
  • If you cancel this plan then you will not receive any premium back.

When mutual funds are available directly then this plan seems to me costlier. Because you need to pay SIP charges of Rs.30 or 1.5% of your investment (whichever is lower) more than that you need to pay for this plan also. In my view premium will also be costlier when you purchase same featured plans from other insurers. Because this plan will be provided by ICICI Lombard whose premiums are always costlier than their competitors.

So finally my review is, go directly or invest through sites like FundsIndia if you are online savvy (which offers free account and no charges for SIP) and opt for insurance coverage separately.

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