scorecardresearch

Futures within reach

A derivative is a security that has no independent value; its value is entirely derived from the value of one or more underlying asset—generally stocks, bonds, commodities, currencies and market indices.

Word’s Worth

“There won’t be a huge fall in premium rates.There could be a drop depending on the profile of the individual”
— CS Rao, chairman, Irda, on removing pricing controls in the insurance sector

“With the growth story intact, I foresee the Sensex touching 40,000 points over a five-year period”
— S Shahabuddin, managing director and CEO, SBI Mutual Fund

“By no stretch of imagination does [the realty sector] resemble a bubble.An unhindered growth for the next 20 years is almost sure”
— Sanjeev J Aeren, managing director, AEZ Group

“Though the rally is likely to continue in the mid- and small-cap space, one has to avoid junk stocks”
— Arun Kejriwal, director, KRIS Securities

Source:The Economic Times,The Hindu Business Line and The Hindustan Times

Puts, calls, bull spreads, bear spreads, calendar spreads, butterfly spreads, strips, straps, straddles and strangles are all part of the complex vocabulary of derivatives trading. The words alone have the power to get your eyes to glaze over. Derivatives are, by nature, not simple.

A derivative is a security that has no independent value; its value is entirely derived from the value of one or more underlying asset—generally stocks, bonds, commodities, currencies and market indices. Futures contracts, forward contracts, options and swaps are the most common types of derivatives.

Some experts think derivatives trading is not something retail investors should get into. But successful investors claim that derivatives are actually no riskier than the underlying asset from which they are derived. The value of the derivatives contract is determined by fluctuations in the underlying asset.

In fact, handled carefully, derivatives can bring in profits at minimal risk. Which is why more and more small traders and retail investors are entering this arena. Given the rising popularity of derivatives trading, Securities and Exchange Board of India (Sebi) has allowed both NSE and BSE to introduce mini derivatives contracts from 1 January 2008.

Popularly known as the mini-Nifty and the Chhota Sensex, investors are finding these mini contracts very attractive in light of the lower entry cost and relatively higher liquidity. For traders, there’s also a significant arbitrage opportunity between the mini and the normal contracts.

This also means that individual investors can hedge a smaller portfolio at lower levels of risk compared with a big-sized contract, as mini contracts are a fraction of normal derivatives contracts. On the Nifty, the contract size is now 20 compared to the earlier 50 and on the Sensex the lot size is now 5 instead of 25.

More than the lot size, the move has made entry easy by reducing the value of the lots. With one Nifty traded at about Rs 3 lakh, the mini-Nifty will be valued at about Rs 1.2 lakh, increasing the liquidity significantly. The small size of the contract would bring in more retail investors, boosting the futures markets.

The popularity of the mini contracts can be seen in the total trading turnover. On day three after its launch, the mini-Nifty recorded a turnover of Rs 190 crore and the Chhota Sensex recorded Rs 214 crore. But this does not mean that derivatives trading is for everyone.

It’s good for a disciplined and knowledgeable investor, who knows better than to over-leverage with options. Ideally, continue to identify good stocks, ignore short-term fluctuations and let others risk new forms of speculation. Before you trade, calculate how much interest your investment would earn in risk-free debt. And speculate intelligently.

Narayan Krishnamurthy

 

Ulips get clearer

A Year of New Records

For the markets, 2007 was historic. Here’s our illustrator’s view of some of the highlights and the financial records set and broken last year

Largest amount raised by IPOs

101 The number of IPOs
Rs 34,209 crore raised through IPOs
Rs 9,187.50 crore is what DLF, the biggest IPO ever, raised

Highest FII inflow

Rs 70,940 cr was the net FII inflow as on 31 December 2007, which was 140% higher than last year

Biggest change in Sensex value

6344 points was the increase in Sensex in the past one year
560% is what IFCI earned in 2007— the stock with the highest annual return

Highest investment in Mutual Funds

118% was the increase in assets under management (AUM) of mutual funds.Total AUM touched Rs 27,00,000 crore by the year end

The ubiquitous unit-linked insurance plans (Ulips) are back in the news, and it’s good news for customers. The Insurance Regulatory and Development Authority (Irda) has asked insurers to attach an illustration explaining all costs involved in each policy, which has to be signed by the agent selling it.

Beginning 1 February, insurers will have to indicate details of all the charges, clearly indicating how much of the premium is invested year-on-year for the entire tenure of the policy. This is another step towards making one of the fastest growing life insurance products more transparent.

This will reduce the chances of mis-selling of Ulips—a common allegation against this product. Says SV Mony, secretary-general, Life Insurance Council, “For a long-term product, the insured needs to know about the charges that he will have to bear through the tenure of the product.” The earlier illustrations attached by insurers only indicated the returns (ranging between 6% and 10%), avoiding costing details beyond the initial few years.

Now the consumer will not only understand his policy better, and how well it matches his needs, but know exactly what he is buying. As a first step, comparing various Ulips will be easier as insurers are to follow uniform terms in the illustration. Here’s to making more informed choices in 2008. 

 

Profit from shariah norms 

Linked-in

Finally, consumers will truly be able to enjoy the flexibility of anytime, anywhere money. You can use any ATM you want.

The Institute for Development and Research in Banking Technology has recently waived the Rs 2 switching fee of National Financial Switch (NFS) for the usage of ATM networks by member banks.

This is to encourage all banks to join the NFS network and expand the coverage of ATMs, connecting them so as to speak. Some banks are already passing the benefit on to consumers. With 16,891 ATMs that the NFS now has, it is the biggest operational switch service available.

Taking a bow

This new year will see several shake-ups in the world of finance. The following positions, in particular, are crucial for policies framed with retail investors in mind. Hopefully, those who step into these shoes will be able to maintain the momentum already set.

Position


VK Kaul, Comptroller and Auditor-General

Vinod Rai,*Secretary,  MoF

M Damodaran, Chairman, Sebi

CS Rao, Chairman, Irda 

Y.Venugopal Reddy, Governor, RBI

Vinod Dhall,  Acting chairman, Competition Commission of India 

*To take over as C AG

Retirement
date

January 2008 

December 2007 

February 2008

May 2008

September 2008

 

October 2008

 

Is mixing religion and finance a good idea? Yes it is, especially when a religion lays down specific money-related dos and don’ts. That’s why the promoters of Shariah-compliant funds are so sure they are on to a good thing. This particular form of investing, an off-shoot of socially responsible investing, should appeal to devout Muslims.

In spite of being home to the secondlargest Muslim population in the world, India lacked dedicated Shariah compliant funds or other instruments.

Now, however, a Shariah Index has been developed to track companies that comply with Shariah norms. And, subject to Sebi approval, Taurus Mutual Fund in partnership with Parsoli Corporation plans to launch the Taurus Parsoli Ethical Fund.

In India, the market cap of Shariah-compliant companies on the NSE is 61% (around 330 companies), compared with 57% in Malaysia, 51% in Pakistan and 6% in Bahrain. Hence, it’s a big opportunity for the faithful. But what exactly is Shariah-compliant investing?

Under the Islamic law or Shariah, earning from interest is forbidden; investments must carry a prorata profit actually earned. This rules out traditional fixed-return instruments like savings bank deposits, fixed deposits, debentures, bonds, etc. Although investing in real estate is permissible, there are not many options available.

Islamic scholars have defined all instruments that are Shariah compliant. Stocks in liquor and banking companies, for instance, are not Shariah compliant. “There is a misconception that investment in stocks is not permitted. As long as the stocks are acceptable in Islam, one can invest in them,” says Zafar Sareshwala, MD, Parsoli Corporation, a company that specialises in Shariah-compliant investments.

Globally, Shariah-compliant companies and funds have widespread acceptance. The Dow Jones and FTSE have already established an Islamic Index, while the S&P has crafted a BRIC Shariah Index, listing the largest and mostly liquid Shariah-compliant stocks in Brazil, Russia, India and China.

Reliance Industries, Infosys and Wipro figure in this index. It’s estimated that there are more than 100 Shariah-compliant funds managing over $5 billion (Rs 20,000 crore) globally.

INDEXNO. OF SHARIAH COMPLIANT STOCKS% OF TOTAL STOCKS IN INDEX
Sensex2273
Nifty3876
BSE Mid-cap14653
BSE Small-cap16936
BSE-50025351

Tanvi Varma

 

Expensive but extensive

Old is gold

Buying and selling used motorcycles could get easier from now. The largest two-wheeler manufacturer in the world, Hero Honda, has taken a cue from car makers to initiate Hero Honda Sure!, a branded pre-owned motorcycle venture through 40 dealerships across India.

To overcome trust issues surrounding the pre-owned tag, Sure! will evaluate a bike with a 110-check point quality assessment before reconditioning them.

Plus, the bikes are sold with a one-year warranty and limited after sales service benefit. If that does not make bikes more accessible, little else will.
Priya Kapoor

Health insurance has one purpose—to ensure that you are not in financial need should you or a family member require medical treatment.

Super Surplus, a new health plan from Star Health & Allied Insurance, ensures this. The policy covers hospitalisation expenses for sickness, illness and accidental injuries, subject to a minimum 24-hour hospitalisation.

However, the policy comes with a high Rs 3 lakh deductible. This is not a policy for first-time health insurance seekers.

The high deductible is the catch: effectively, it means that medical expenses up to Rs 3 lakh per claim will have to be borne by the policyholder or can be recovered from the person’s existing health insurance policy.

Expenses over Rs 3 lakh will be paid by this policy, so the benefits of this cover come in only after this level is reached. The policy also excludes pre- and post-hospitalisation expenses, making it very restrictive.

It’s a good cover for those who carry a high risk and anticipate hospital expenses that will go beyond Rs 3 lakh. Take this policy if you are in your 40s with an existing health condition that needs expensive care.

Vital stats:

Policy for: Those between 5 months and 65 years

Premium: Fixed irrespective of age

Options: Cover for Rs 7 lakh and Rs 10 lakh

Premium: Rs 3,000 and Rs 4,000 respectively

Narayan Krishnamurthy

 

Random Nuggets of Wisdom
Random Nuggets of Wisdom
Random Nuggets of Wisdom
Random Nuggets of Wisdom
Random Nuggets of Wisdom
Random Nuggets of Wisdom
Random Nuggets of Wisdom