| S&P BSE Sensex* |
Re/US $ |
Gold Rs/10g |
Crude ($/barrel) |
FD Rates (1-Yr) |
26,425.30 |-343.19 
-1.28% |
63.98 | 0.03 
0.05% |
26,870.00 | -180.00
-0.67% |
64.59 |1.93
3.08% |
6.75% - 8.50% |
Weekly changes as on June 11, 2015
*BSE Sensex as on June 12, 2015
Impact 
The journey for Unit Linked Insurance Plans (ULIPs) seems to have come on one full circle. Love and hate relationship of investors / policyholders with ULIPs may be puzzling, but has been an interesting one. In the initial days of their launch, ULIPs were favourites but had a rough patch later.
Let us take you through transition of ULIPs, which may help you recognise what has made investors evince interest yet again in them.
ULIPs then...
Would you accept a deal which deducts as high as Rs 50 out of every 100 you invest in first year, that too when returns are not assured, but market driven? Well, most of us may answer negatively. But yes, there were times when ULIPs heavily front loaded (in terms of charges) in the initial years and investors / policyholders accepted such deals. Lofty claims made by insurance agents lured prospective investors / policyholders buy into them, whereby agents made handsome money (through commissions) but most investors / policyholders were left dissatisfied. Mis-selling was common.
ULIPs were marketed as investment plans offering insurance. The rush for ULIPs started about a decade ago and gathered momentum during the exuberance of the Indian equity market. But during the aftermath of the U.S. sub-prime mortgage crisis, they took the brunt and investors / policyholders, lost a quite a sum of money. All investors / policyholders stood aghast when they came to terms with reality. Following that, the Insurance Regulatory and Development Authority of India (IRDA) tweaked the guidelines for structuring ULIPs in 2010 and even set guidelines for insurance agents in the endeavour to make insurance products more transparent and investor / policyholder friendly.
ULIPs now...
The IRDA has capped the percentage an insurance company can charge on a ULIP policy. For a 20-year policy, the maximum charge an insurance company can levy is 2.25% on the notional return of 10%. Similarly, for a 3-year and 4-year policy, the maximum charge can be 3% and 5% respectively. And thanks to the cut throat competition that insurance companies are charging even as low as 1.0% to 1.5%.
Moreover, there has been a 10-times increase in minimum risk cover subject to age at entry. The lock-in period too has been increased to 5 years from 3 years. To top it up surrender charges have also been capped.
Hence some of private sector insurance companies in the Financial Year (FY) 2014-15 have witnessed more than 50% growth in premium. The factors which seem to have worked in favour for increase in business from ULIPs are:
- A period of risk-on which has pushed up the risk appetite of investors looking for wealth creating market linked investment products
- Agents soliciting ULIPs during times of exuberance
- Online ULIPs have made it possible for companies to garner business (and at the same time save on the distribution costs which often gets passed on to investors / policyholders)
- Regulatory changes which have revamped ULIPs and made them more investor / policyholder centric
Should you invest in ULIPs now?
Although ULIPs have become more cost efficient in the new form, their performance will always be tested against that of mutual funds. PersonalFN believes insurance and investment needs should be dealt separately. For indemnifying risk to life, pure term insurance plans remain the best. However while taking a life insurance it is vital to optimally insure consider your Human Life Value. In the interest of your long term financial wellbeing, engage in financial planning which can help you keep sync between investments with important financial goals in life.
Do you think new ULIPs will outperform mutual funds in the long run? Share your views here.
Do Indian Banks Need A Massive Bailout Package?
Impact
Capital is lifeblood of any business organisation. Effective and prudent use of capital can result in wealth creation, while handling it imprudently can have disastrous implications. The story of a few Indian banks looks rather appalling if one happens to peep into their balance sheets.
Morgan Stanley voiced its concerns in a recently released report, which says the Indian public sector banks may need massive financial stimulus similar to that provided by the U.S. Government during times of crisis.
Health of Public Sector banks...
Let's first understand what went wrong with a few Indian banks, especially with public sector ones. Stressed assets ratio of Indian banks has jumped to 10.9% in March 2015 from 10.0% registered in March 2014. This ratio indicates how much as a percentage of gross loans issued by banks have turned non-performing or have been restructured.
As reported by the Hindu Business Line on May 6, 2015, the Indian banking system has close to Rs 7.05 lakh crore worth stressed assets. Cooling revenues, slowdown in economic growth and high interest rates have resulted in tremendous rise in stressed assets of banks.
In The Global Financial Stability Report, International Monetary Fund (IMF) suggested that, about 37% of outstanding debt of corporate sector is at risk. The Reserve Bank of India (RBI) too, has identified the troubled sectors contributing the most to stressed assets. These are infrastructure, iron and steel, textiles, mining and aviation.
Having identified the need for more capital, the Government of India has planned to infuse about Rs 8,000 crore in public sector banks in Financial Year (FY) 2015-16. However, the Government wants PSU banks to improve their governance first, before infusing fresh capital. But Morgan Stanley opined otherwise going by the report. It believes India requires immediate infusion of U.S. $8 billion to be able to raise the core capital to 10% level. It means it prescribes U.S. style bailout as against the smaller capital infusions carried out by the Government from time to time.
During the aftermath of the U.S. subprime mortgage crisis, the U.S. Government bailed out stressed assets of the financial sector. Its strategy to restructure giants in the Auto industry turned out to be successful. It is argued that massive bailout packages helped avoid domino effect and saved thousands of jobs in the U.S.
PersonalFN is of the view that, massive capital infusions at one go for PSU bank in India is unlikely at this stage. However, the Government may soon have to come up with a long term strategy for Indian banks and public sector banks in particular, to get Indian economy back on track. Growth of economy is closely linked to the performance of financial sector and the opposite also holds true.
Stock prices of banks may positively react to capital infusion; however, investors shouldn't speculate on such events. They should keep away from banking sector mutual funds as well. Instead, you may prefer to invest in opportunities oriented equity diversified funds if you want to benefit from restructuring of Indian banks, as and when it happens.
PMS Vs. Mutual Funds: Which One Should You Opt For?
Impact
When equity markets are doing well, relationship managers from brokerage houses and wealth management firms chase potential investors persuading them to subscribe for their Portfolio Management Service (PMS). They usually target High Net-Worth Individuals (HNIs) who can invest large amount of money at one go. Retail investors with decent investment potential are also on their radar. On the other hand, mutual fund houses float New Fund Offers (NFOs) inviting participation from across investor classes, retail, HNIs, companies etc.
Since it is easy to convince most of investors to put money in equities when markets are rising, marketers often make tall claims which are tough to stick to under turbulent market conditions. PersonalFN helps you compare both avenues against each other and choose the right one for your portfolio. So let's understand what they exactly have to offer.
Portfolio Management Services (PMS)
PMS is a type of wealth management service, usually offered to wealthy investors. With greater flexibility and higher customisation, PMS aim to generate superlative returns in comparison to other investment avenues focusing on the same asset class.
To read more about this news and PersonalFN's views over it, please click here.
Will Taxing Unsold Flats Helps Bring Down Property Prices?
Impact
Roti (food), Kapda (clothing) and Makaan (shelter) are primary needs of an individual. But with skyrocketing property prices, the makaan seems to have gone off the roof, especially for the common man here in India.
Despite of poor demand, property prices are holding up in many parts of the country and even ascending in some pockets. This scenario exists even as the real estate sector at present is facing multiple problems such as huge debt and high inventory. Builders have just not bothered to step down on rates and turnover their inventory, which is why it has not yet translated into a meaningful correction for the real estate market. There's ostensibly a fear that they (builders) would lose their upper hand while dealing with prospective buyers.
However, this may change soon and here's why...
To know more on our views on this, please click here.
And Other News...
There has been a 30% drop in complaints registered against mutual funds in the Financial Year (FY) 2014-15. As per data published by the Association of Mutual Funds of India (AMFI), investors lodged about 21,000 complaints against mutual funds. However, it is not worthy that most of them were related to corrections needed in investor's details such as name, nomination, no updation of change of address and errors in PAN details, among others.
PersonalFN believes, significant drop in the complaints against mutual funds suggests that, the grievance redressal mechanism of fund houses may have become more efficient. PersonalFN is of the view that, investors should also take due care while filling up the forms. As far as possible you should fill the forms by yourself instead of depending on your mutual agent / distributor / relationship manager. Investing in right fund is important but providing correct information to fund houses pertaining to your details is important too. It is vital to be responsible investor.
Financial Terms. Simplified.
Distressed Securities: "A financial instrument in a company that is near or is currently going through bankruptcy. This usually results from a company's inability to meet its financial obligations. As a result, these financial instruments have suffered a substantial reduction in value. Distressed securities can include common and preferred shares, bank debt, trade claims (goods owed) and corporate bonds."
(Source: Investopedia)
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