Current Inadequacies• Counselling at present is mainly curative, being given after a crisis has occurred• Counselling centres perceived as debt collection wings of the banks • Lack of credence attached to the references made by these centres to banks • Inadequate credit information of borrowers • Lack of awareness among retail customers |
It’s a sad fact that when it comes to money and investments, most investors learn from mistakes— their own or someone else’s. Taking the old adage that an ounce of prevention is better than a pound of cure, the Reserve Bank of India (RBI) has released a concept paper in which it stresses on the need for financial literacy so that investors know what they are getting in to.
With a growing economy and soaring salaries, there has been a spurt in activity among investors, especially in the middle-income group, investing in mutual funds, sharetrading, borrowing loans for homes, vehicles, and so on. Financial services providers are offering products that may not be the easiest to understand, although there are also efforts, like that taken by Crisil (see page 32), to help investors better understand complex products. But this is hardly enough, and the number of gullible, and uneducated, investors is growing. The bottom line is that financial literacy is essential.
Word’s worth“There is no reason why an investor’s money should leave his bank account when share allotment is not assured.Technology will enable us to do that”— C B Bhave, chairman, Sebi “The fall is not a bullmarket correction but a serious downturn that could last 6-8 months” — Ajay Bagga, CEO, Lotus India Mutual Fund “Valuation wise, I don't see much downside from here. But the recovery will take some more time” —Manish Sonthalia, VP (equity strategy), Motilal Oswal Securities “Food prices are the kingpin of price structure. Their rise will make inflation control tougher and hurt economic stability” — Prime Minister Manmohan Singh Source: Economic Times and Business Standard |
In its paper, the RBI has reiterated the need for preventive financial literacy to help borrowers overcome defaults as well as investors to make informed choices. Pointing out that banks need to be involved in the education process, the central bank’s paper says that one of the reasons for over-indebtedness and rising NPAs is the aggressive marketing of personal loans and credit cards to vulnerable sections of borrowers.
Credit counsellors can help borrowers gradually overcome their debt burden and improve their money management skills, adds the paper. So, the next time someone defaults on loan repayments, instead of being asked to repay at the earliest, he might be asked to visit the bank’s counselling centre. The paper also suggests that banks set up financial literacy and counselling centres (FLCCs) that can help borrowers restructure payment to settle debts and also warn them if they are borrowing beyond their means. What does this mean to you?
If the bank’s recommendations are implemented, the current credit counselling initiatives by some banks like Bank of India’s Abhay, ICICI Bank’s Disha and Bank of Baroda’s Grameen Paramarsh Kendras, will get a boost. The central bank has suggested a system in which banks give due consideration to the debt management plans prepared by such FLCCs. In addition, the paper recommends that banks create trigger points so that individual cases are referred to the FLCCs before the recovery mechanism swings in. The central bank is also for expanding the role of FLCCs to handle customers from other banks. For example, in case of multiple credits availed of by individuals, FLCCs may negotiate with the banks having the largest exposure to restructure the debt and the recoveries could be shared on a pro-rata basis. Stressing on the need for independence of these centres, RBI says that serving bankers should not be included on their boards.
— Rakesh Rai
The Insurance Regulatory and Development Authority (Irda) recently issued a notification asking insurance companies to reduce the minimum sum assured (death benefit) on single premium policies based on the tenure chosen. So far, the minimum sum assured was 1.25 times the premium, irrespective of tenure. Under the new guidelines, this has been reduced to 1.1 times the single premium for policies with tenure of over 10 years. What does this mean for you? The move is likely to see an increase in the tenure of such policies. “Decreasing the sum assured for policies beyond 10 years tenure should enable the insured to gain from long-term investment,” says R Kannan, member actuary, Irda. On the flip side, it also means that your tax benefits are curtailed. Under Section 80C, if the premium is more than 20% of the sum assured, deduction will be allowed only up to this 20%. This also means that at the time of maturity, the entire amount is not tax free under Section 10 (10D).
Fund of Rechristening | |
| Old Name ING Select Stocks Fund ING ATM Fund UTI Auto Sector Fund Reliance Index Fund – Nifty | New Name ING Core Equity Fund ING Contra Fund UTI Transportation & Logistics Fund Reliance Quant Fund |
What sounds better: a fund invested in the transportation and logistics sector or an auto sector fund? Does the name matter? Fund houses seem to think so, judging by the fact that three mutual funds have rechristened several of their offerings (see table). These funds have lost some sheen over the past few quarters. The fund houses hope that a name change will help. ING Investment Management has rechristened two of its equity funds but there is no change in the investment objective or the asset allocation. UTI, on the other hand, has changed the investment objective of its auto sector fund. “Broadening the scope will increase the investment universe and reduce the volatility associated with exposure to a single sector,” says Anoop Bhaskar, head-equity, UTI AMC. Sometimes rechristening works. In 2001 when investors were shying away from the IT sector, Tata renamed its technology fund as Tata Select Equity Fund—a diversified equity fund, which has delivered 29% returns in the past one year.
— Tanvi Varma
In the past 18 months, the norms for investing abroad have been made less stringent giving more options to Indians to invest abroad. The mutual fund industry was ready to cash in on the opportunity and started tapping into global funds through partnerships and its own new fund offerings. But the current 10 funds investing abroad through various routes were faced with a collective cap of $5 billion. This cap has been relaxed by RBI and increased to $7 billion. Says Sandesh Kirkire, chief executive officer, Kotak Mahindra Mutual Fund: “The appetite for global investment is slowly increasing, and this move will only encourage fund houses to come up with more schemes to allow domestic investors greater asset allocation overseas.” The fund with the largest exposure abroad is DSP World Gold Fund, with close to Rs 1,760 crore of assets under management. The individual investment limit per fund house of $300 million will also change, encouraging fund houses to look at more funds in this category.
Fixing Fluctuations
• VIX is based on Nifty 50 Index Option prices • The volatility figure indicates the expected market volatility over the next 30 calendar days. • Investors could hedge their portfolios against volatility with an off-setting position in VIX futures or options contracts |
How does one measure risk? In the case of equity-linked products, the answer to that is relatively simple: look at volatility. Too much see-sawing means there’s a greater degree of risk. How can we measure volatility? That’s where Nifty’s new Volatility Index—VIX—comes in. The VIX is calculated using a mathematical formulation and a series of options quotes for the Nifty.
But that does not mean that you need to understand options to appreciate what VIX shows. The prices at which options trade are driven primarily by the price of the underlying (in this case, the 50 stocks that make up the Nifty) and an assumption about future volatility on that underlying. VIX takes the prices of options and the price of the underlying and then backs out the level of volatility that needs to be assumed so that the options prices make sense—this is called implied volatility. So, when you buy or sell options, you are implicitly betting on the future volatility of the underlying asset. The VIX value is a form of the implied volatility in the current options for the Nifty. Simply put, consider the VIX as a proxy for standard deviation in monthly returns. In fact, you can approximate VIX fairly well if you multiply the standard deviation in monthly return over the past 12 months by a factor of X.
The VIX can be seen as a measure of how volatile the market as a whole is; this is particularly useful when you consider portfolio allocation. At best, use the current NSE tool which indicates when the VIX is high. That’s the time to buy. When volatility jumps, and then starts to subside, stocks jump. By buying when the VIX is high, you’re gambling that the uncertainty that has gripped the market will pass. And once that uncertainty is lifted, stocks will rise.
— Sameer Bhardwaj
Telling FiguresSome figures that have immediate or long-term personal finance implications52,253 crore rupees was the amount mobilised through public equity offering in 2007-8.This is the highestever amount mobilised in a year and is 109% higher than in 2006-7 when Rs 24,994 crore was raised 10,123 crore rupees is what the Reliance Power IPO raised— the largest-ever in India Rs 269 is the final cost of a Reliance Power share for retail IPO investors following the issue of 3 bonus shares for every 5 held $64 billion was the size of India’s IT & BPO industry in 2007-8.There has been a 10-fold increase in the industry in the past 10 years |
Health insurance is now the most preferred new product from life insurers. The latest offering (at this point) is from Max New York Life, which has introduced its Lifeline series of health plans. The Lifeline plans promise comprehensive financial cover in case of death, disease, accident and disability with a fixed premium for a five-year period.
Other features include free second opinion from the best hospitals in the country on diagnosis of illness and a free telephonic medical helpline. The policy has three variants—Safety Net, Medicash, and Wellness. The scope of cover increases with each variant, from plain vanilla term plus health cover to hospital benefit with dreaded disease and critical illness covers.
Safety Net is a comprehensive term plus health protection plan offering protection from any losses arising from critical illness, accident disability and death. The Medicash variant provides the same cover with the added benefits of a fixed per day sum for hospitalisation, ICU admission, recuperation benefit and a lumpsum benefit against an unlimited number of surgeries.
The Wellness plan covers 38 critical conditions, ranging from Alzheimer’s, liver disease, deafness to permanent disability, cancer to heart ailments. Like other medical insurance schemes, this one too offers benefits under Section 80D.
Policy basics
Minimum age at entry: 18-55 years
Maximum age at entry: 65 years
Maximum number of diseases covered: 38
Hospitalisation benefit across: Over 4,000 facilities
Minimum annual premium: Rs 2,500 for the first five years
Technical analysis and chart patterns are tools used by some savvy investors. However, real-time charts were available only to a privileged few. Thanks to Reliance Money’s latest effort, real-time charts will be available to many more investors.
The company has entered into a partnership with Recognia of Canada to offer realtime charting to its existing customers. Says Sudip Bandyopadhyay, CEO, Reliance Money: “This technical analysis tool will help investors make better and more informed investment choice.” The optional tool will offer simplified, automated, sophisticated technical analysis to existing customers at less than Re 1 a day and help investors read chart patterns and price forecasting for all public traded financial instruments.
Do you know why you’ve invested and what you’re invested in? You can check your financial quotient here. More quizzes on our website.
1. Misrepresenting facts when filing an insurance claim can lead to a criminal charge against you.
YES / NO
2. Not all cheap stocks are great bargains; some of them are cheap for a reason.
YES / NO
3. In health insurance parlance, a floater plan is a single plan that will take care of the hospitalisation expenses of the family.
YES / NO
4. Phishing can be used to steal your credit card and other confidential details.
YES / NO
Rate Yourself
Give yourself 0 for every No and 1 for every Yes
0-1: Better luck next time (and do take the time to read this magazine. There’s plenty of information that could prove useful).
2-3: You’ll do—your grasp of your finances seems pretty good, though, of course, it could be better!
4: Obviously a know-it-all. Just make sure to keep reading and keeping your knowledge up-to-date.
