First steps in reforming your pension

First steps in reforming your pension

For too long now, the pension sector has been a woefully neglected stepchild for everyone—government, regulators and investors. Now, hopefully, the first step towards pension reforms has been taken.

Word’s worth

Y V Reddy
“Barring any further shocks, inflation will be at the current levels till the first half of third quarter. By fourth, we can bring it to 7%”
— Y V Reddy, RBI Governor

“So far, real estate prices have not fallen as the rise in steel and cement prices have added to the cost. But we are expecting a 10-15% fall”
—Renu Sud Karnad, Joint MD, HDFC Bank

“The shift to FMPs and liquid funds from income funds is obvious given the uncertainty over long-term interest rates”
—Ramanathan K, Head, Equities, ING Vyasya Mutual Fund

“Commodities have a strong correlation with inflation and are also good for portfolio diversification”
—Vineet K Vohra, MD and CEO, ING Investment Management India

Source: Business Line and The Economic Times

For too long now, the pension sector has been a woefully neglected stepchild for everyone—government, regulators and investors. Now, hopefully, the first step towards pension reforms has been taken. The government has decided to allow three private fund managers to compete with the State Bank of India (SBI) in handling the funds of the Employees’ Provident Fund Organisation (EPFO). The asset management companies of HSBC, ICICI Prudential and Reliance Capital will come in to manage the Rs 1,50,000 crore in the EPFO kitty, that had so far been managed only by the public-sector SBI. The economic and political ramifications can be argued in other forums; what’s important is its implications for you.

The most obvious impact is likely to be felt by the EPFO itself and not by the 15 million investors. The organisation will save Rs 2 crore every year in investment management fees. Reliance and SBI will get an investment management fee of 0.01% (that’s 10 paisa for every Rs 1,000 managed), while ICICI and HSBC will get 7.5 paisa and 6.3 paisa, respectively, for every Rs 1,000 managed by them. The fund houses are more than happy to get this fee for a chance to manage Rs 27,000-30,000 crore, estimated to be EPFO’s annual incremental assets. In fact, when bids were invited from asset management companies, two indicated their willingness to manage the fund without a fee.

Given that the four asset management companies will be vying for the same business, it’s a given that they will deploy the money efficiently and get better realisations. In simple terms, it means better returns. While the returns might not see a significant growth immediately, the fund managers could pave the way for the EPFO money to be invested in the equity market. This will bring more stability to the stock markets as the EPFO money stays for the long term and there is a regular annual inflow.

Increased transparency of operations and a greater degree of accountability are other positives. But does all this also mean a significant improvement in service for the small investor? Given that the service is deplorable at the moment, even a minor improvement will be welcome. However, better service standards can only be set when the private fund managers are allowed to deal with account-holders. Under the present guidelines, this is not possible. Experts hope that this will happen once the pension bill, pending in Parliament, goes through. For the present, it is enough that the first baby steps towards reforms have been taken. If all goes well and the pension sector finally gets due recognition, millions of employees in the country stand to benefit.

—Narayan Krishnamurthy

Free terror cover

Telling figures

Numbers speak louder than words. Money Today highlights some figures that have immediate or long-term personal finance implications

6.7% is the real rate of return in equities since 1990 and is about the same as India’s real GDP growth rate

440.5 million dollars is the money remitted by NRIs in 2007-8, according to RBI

5,149 crore rupees is the net investment by mutual funds in debt in July this year, a 50% rise over June

10 lakh is the number of e-returns filed by 29 July this year.The figure was expected to cross the 13 lakh mark by 31 July, compared with 1.6 lakh e-returns filed in the same period last year

With the number of terror strikes going up across the country, an insurance policy offering cover against such acts has become imperative—and the insurance sector is finally waking up to its potential.

While a structured product is still awaited, a beginning has been made. The Optima Insurance Brokers has launched a life insurance policy offering terrorism coverage. The policy comes free of cost and provides Rs 1 lakh to the policyholder’s family in the event of his death in a domestic terrorist attack. However, the policy is only available for the first 1 lakh applicants, and it excludes the residents of Jammu and Kashmir and the North-east. The procedure of getting the policy is simple: log on to the company’s portal, and fill in some personal details.

Once the company processes the information, the policy will be dispatched. It’s valid only for a year, but the company is in talks with the existing insurer, The New India Assurance, for a renewal option. Says Rahul Aggarwal, CEO, Optima Insurance Brokers: “Most often the compensation doled out by the government to the victim’s family is inadequate. Though the insurance amount provided by this policy will not take care of all financial needs of a family, it will help them to a certain extent.”

— Priya Kapoor

The lesser evil

Best FD interest rates
BankInterest rateTenure
ABN Amro Bank10.25%400 days
Tamil Mercantile Bank10%400 days
Kotak Bank9.75%
>1 yr but less than 2 yrs
Senior citizens will get an additional 0.25%; list is illustrative

After its July 29 credit policy announcement, RBI seems to be the villain out to drain your money. In fact, after the announcement, the BSE Sensex fell by more than 500 points, and the banking index lost over 5%. Despite these negatives, the central bank is working to your benefit. By increasing the repo rate and the CRR by 0.5 and 0.25 percentage points, respectively, it hopes to control the single biggest threat to personal finances—inflation. Through these measures, RBI aims to bring down inflation to 7% by March 2009. That is not to say that you won’t feel the pinch in the immediate future. Stocks from more rate-sensitive sectors such as real estate, banks and capital goods, which had posted a tentative recovery in the run-up to the credit policy announcement, may face a setback. “With capital becoming dearer, we also expect it to impact corporate profitability as a whole because most sectors and companies have embarked on huge capacity expansion plans,” says Hitesh Agrawal, head of research, Angel Broking.

Worse, many analysts believe the investors should be prepared for another round of hikes in deposit and lending rates considering the higher borrowing costs for banks and the pressure on liquidity. Also, RBI may have to further tighten the screws in the near future. A lot will depend on crude oil prices, which have thankfully begun to fall. The bad news is that its spill-over advantages may be negated if government expenditure goes up sharply, as it is wont to in election season. But if the government can curtail expenditure and inflation is back in the 5-7% range, RBI will be able to relax its vigil and interest rates will come down.

— Tanvi Varma


Site seeing

Your verdict

Most Money Today pages are devoted to bringing the best expert advice on personal finance. But our readers too come up with profound pearls of wisdom. Starting this issue, we bring you the results of Money Today online poll on select and current investing issues.

Our Question

The Sensex has been anything but promising this year. Would you sell your stocks or buy more while the prices are low?

80% buy
14% sell
6% can't say

An overwhelming majority of readers feels that bearish markets are not to run away from, but are meant to buy more stocks. No wonder there is no panic on Dalal Street

Conducted between July 15 and July 29. Total responses: 346

Poll question for you

With interest rates rising, is it time to shift from equities to debt investments?

• Yes, but for the short term
• No, it's time to buy more equities
• Not sure

There are enough and more travel portals to find the best hotel deals. Savvy travellers also surf individual hotel Websites as they often quote lower rates than the facilitator sites. How about a portal that does all the searching on your behalf?, the latest kid on the block, claims to trawl through 30 travel sites, from biggies like to Asia-specific sites like, to cover 9 lakh properties across 195 countries.

Little wonder that it can throw up results for 142 destinations in India alone, including little known places like Alsisar and Kanatal. Its global representation gives it an edge over, the only other major travel aggregator covering hotels. However, Trip-Bazaar is only an infomediary, not an intermediary. So you can’t make a booking on the site directly, but it will take you to the relevant site, where you can make an instant reservation.

— Sushmita Choudhury

Triple gain

It is an overdraft facility that comes with the added convenience of a credit card and a personal loan. The Standard Chartered Bank’s latest product offering, Smart Credit Gold Overdraft, allows a customer to overdraw on his or her current account by swiping the card attached to the account at an ATM. Alternatively, you can use it at any merchant establishment just like a credit card. The repayment terms are easy too—you can pay an amount as low as 5% of the overdraft amount every month and the total amount can be repaid as per your convenience. Also, you only have to pay interest on the amount that is over- drawn, which gives it an edge over a personal loan. Says R. L. Prasad, general manag- er, credit card and personal loans, Standard Chartered Bank: “We have designed this overdraft facility with the aim of giving our customers the unique experience of using many products rolled into one. It’s handy if you need cash and can repay it in the short term.” The key benefits of this product are higher credit limits, convenient access to an open credit line, reward points on spends and a fuel surcharge waiver. The facility will carry an annual fee of Rs 1,499 and will initially be launched in Mumbai, Delhi, Kolkata, Chennai, Bengaluru and Ahmedabad.

— Sushmita Choudhury

M-Pay on hold

Have you seen the Airtel advertisement featuring actors Vidya Balan and Madhavan, where the latter pays the mobile bill via an SMS? RBI has seen it too and is not very happy because the Airtel service is offered in partnership with several leading banks. The central bank, which is in the process of finalising the operative guidelines for mobile payments, has recently issued an edict, asking banks to stop the offering and advertising till the guidelines are issued. RBI states that it has no objection to the use of the mobile channel to provide basic informational services—be it mobile alerts for credit or debit entry, balance enquiry or stop-payment instructions for cheques. But it feels that due care needs to be taken before customers are allowed to initiate m-payment instructions as this is a new technology and there is no set framework for banks to adhere to. The guidelines are expected to be released before August 15—but till then you cannot transfer money through an SMS.

— Sushmita Choudhury

Home service

Types of calculators

ACC ( Construction cost calculator to estimate how much you can build on your budget; a stamp duty calculator and another to compute the permissible area for construction as per law

Lafarge ( Estimate whether you want to rent or buy and the home price you can afford with the EMI calculator

Asian Paints ( calculator that estimates the cost for your painting requirements

Most of us know exactly what our dream house should look like. But building it can be a nightmare when money matters come into play. Now, a new tool can help you do all your calculations., a construction and home improvement Website, has launched a free online estimator to help you calculate the material and cost for each stage of construction. “For years, people have struggled with the problem of money running out before the construction is complete. If we employ proper planning and construction estimation techniques, we can save time and money, and improve the quality of projects,” says Rajnish Utraja, CEO, The interface is so simple that even a non-techie can use it. For instance, if you feed in the built-in area, the system will calculate how much material you need for the foundation or flooring. You can fine-tune the estimate by choosing the type of flooring or paint. In five minutes, you get a near accurate picture of the overall monetary implications. It will also help you approach the banks for a loan with a lot more clarity. While this is the first such composite estimator in the country, the concept has been around for a while.

— Sushmita Choudhury

Chart topper

Nuggets of wisdom
Nuggets of wisdom
The bull run in the equity markets in the past five years has made mutual funds a much sought-after investment option in recent times. According to the latest Nielsen Mutual Fund Brand Health Monitor, which gauges consumer attitudes towards mutual funds, 90% of the investors surveyed put their bets on mutual funds last year, raising their share in the overall portfolios to 40% from 34% in 2006. Interestingly, the profile of investors in mutual funds is also changing: Men in their mid-30s are investing more compared with those in their 40s. The profile of prospective investors is similar to that of the existing MF investors—they are averse to risk and invest in traditional avenues like life insurance, bank deposits and PPF, which means the scope of expanding the market for funds is good.

—Rakesh Rai