Arbitrage funds are the funds floated by Mutual Funds with an aim to take advantage of arbitrage opportunities that exist between the cash and the futures market to generate a steady income for the investors. The arbitrage funds take advantage of the mis-pricing between the cash and derivatives market.
How arbitrage funds work?
For example, an arbitrage fund may buy Infosys shares @ Rs1800/share in cash market on 01 April. At the same time, it will sell Infosys shares in the futures market, which would be quoting at about Rs1815. This existing difference is called "cost of carry" in financial parlance.
Let’s say the price of Infosys on the expiry date of the futures contract (last Thursday of every month) is Rs1900. Thus, the fund will make a profit of Rs100 per share in the cash market (Rs1900- Rs1800) and loss of Rs85 in the futures market. (Rs1815 – Rs1900). Here, the important assumption is the cash and futures price remains the same on the date of expiry. The net gain per share is Rs15 after setting off the loss on the futures market.
In case the price of Infosys share drops to Rs1700 on the settlement day. The fund will make a loss of Rs100 per share in the cash market and profit of Rs115 in the futures market. Again, the net gain will be Rs15 per share. This way, the arbitrage funds makes money in all the situations.
Tax Implications for Arbitrage funds:
For tax purposes, arbitrage funds are treated like equity funds. There is no dividend distribution tax, no long term capital gains tax and the short term capital gains tax is at 11.33% compared to the applicable slab rate for debt funds.
Dividend distribution tax – NIL
Long Term Capital Gains tax – NIL
Short Term Capital Gains Tax – 11.33%
Securities Transaction Tax – 0.25%
Return expectations:
The arbitrage funds have given a return of around 9.25% p.a. in the last 6-12 months compared to 7.5% returns for floating rate funds and 7.9% for liquid plus funds. The tax treatment is also favourable compared to the debt funds. The Arbitrage funds are the only equity related funds which have given positive returns over the last 3 months or so.
Risks associated with these funds:
Of course, there is couple of them. First, it is possible that the arbitrage opportunity may not be available for the fund to take advantage off. In those cases, we understand it would act like a liquid fund. The second one is that the logic of the cash and futures price of a stock matches on the contract expiry date may not materialize. In addition there is always a possibility of fund manager not capitalizing on the opportunity and the lack of liquidity to execute arbitrage contracts.
Popular Arbitrage funds in the market:
The following are some of the popular arbitrage funds in the market:
JM Arbitrage Advantage fund, SBI Arbitrage Opportunities funds, Kotak Equity Arbitrage Fund, Standard Chartered Arbitrage Fund Plan B. Each of these funds has given a return of above 9% in the last 12 months.
Suitability of the product:
The Arbitrage funds are suitable for people who want to park funds for a short term of 12 -18 months with reasonable degree of safety and return.
Wednesday, April 30, 2008
Financial Planning for Major Events – Part II
This article looks at financial "smartness" during a function. The actual event often happens at such speed that smart decision making is difficult. While enjoying the function, from a financial viewpoint the two main factors are liquidity and safety.
Liquidity – Compute before hand the cash payments, which will need to be made during the function. If necessary, negotiate the payment mode with the vendors beforehand to make sure that you do not have to carry large amounts of cash. Do maintain a buffer for emergency expenses.
Event Insurance – Today event insurance is available from several Insurance companies. This ensures that in case the event does not happen, then insurance is available to cover the fixed expenses which have already been incurred. The amounts involved are nominal and is worth the peace of mind. Do consider the riders for theft, natural calamities etc. Typically Insurance for Rs 10 lakhs comes to around Rs 6000. Approach any general insurer for the necessary cover.
Locate the nearest ATM – Try to find out the ATM nearest to the venue where the event is being held. This is helpful, if sudden cash is required.
Find a custodian – Try to delegate the cash management to a reliable person who is not an active participant in the function. They can manage the cash without getting distracted by the events of the function.
Managing cash receipts – Giving gifts is a standard practice in our functions. Often this is in the form of cash. Decide before hand on who would manage the cash for you. Apart from keeping the gifts safely, it is also essential to maintain a record of who has made each gift. This is often difficult for cash gifts. Hence, smart and speedy record keeping is vital J Of course the physical gifts also need to be collected and stored safely.
Gifts from friends/close relations – One of the joys of receiving a gift are the surprise element. At times close friends/relations prefer to ask you what you would prefer as a gift. So do keep a list of a few handy things you would want (at different budgets). Nowadays gift cards are also in vogue. If there are no preferences then remember Cash is always king!!
Safety – Functions are a time to display the jewels, designer clothing, silver vessels and other valuable items. Make sure that individual people have responsibility for specific items. Of course at the end of the day, we would need to keep a personal eye on major items.
Recordkeeping – As always, record keeping is vital. Several big ticket expenses/receipts happen during the function and one should keep a note of the same. It will help us analyze the expenses and also compare the actual expenses against the estimates, made before hand.
Liquidity – Compute before hand the cash payments, which will need to be made during the function. If necessary, negotiate the payment mode with the vendors beforehand to make sure that you do not have to carry large amounts of cash. Do maintain a buffer for emergency expenses.
Event Insurance – Today event insurance is available from several Insurance companies. This ensures that in case the event does not happen, then insurance is available to cover the fixed expenses which have already been incurred. The amounts involved are nominal and is worth the peace of mind. Do consider the riders for theft, natural calamities etc. Typically Insurance for Rs 10 lakhs comes to around Rs 6000. Approach any general insurer for the necessary cover.
Locate the nearest ATM – Try to find out the ATM nearest to the venue where the event is being held. This is helpful, if sudden cash is required.
Find a custodian – Try to delegate the cash management to a reliable person who is not an active participant in the function. They can manage the cash without getting distracted by the events of the function.
Managing cash receipts – Giving gifts is a standard practice in our functions. Often this is in the form of cash. Decide before hand on who would manage the cash for you. Apart from keeping the gifts safely, it is also essential to maintain a record of who has made each gift. This is often difficult for cash gifts. Hence, smart and speedy record keeping is vital J Of course the physical gifts also need to be collected and stored safely.
Gifts from friends/close relations – One of the joys of receiving a gift are the surprise element. At times close friends/relations prefer to ask you what you would prefer as a gift. So do keep a list of a few handy things you would want (at different budgets). Nowadays gift cards are also in vogue. If there are no preferences then remember Cash is always king!!
Safety – Functions are a time to display the jewels, designer clothing, silver vessels and other valuable items. Make sure that individual people have responsibility for specific items. Of course at the end of the day, we would need to keep a personal eye on major items.
Recordkeeping – As always, record keeping is vital. Several big ticket expenses/receipts happen during the function and one should keep a note of the same. It will help us analyze the expenses and also compare the actual expenses against the estimates, made before hand.
Monday, April 28, 2008
Follow up on PSU Bank stake purchase by TCI Cyprus Holdings!
Further to our post on April 17 on the bulk purchases of PSU Bank shares by TCI Cyprus Holdings, we have got more information on the quantum of stake taken by TCI in various PSU Banks. Business India has reported in its latest issue, has carried a mention about the stake accumulated by TCI. TCI now holds 7.66% in Indian Overseas Bank and 9.62 % in Vijaya Bank. TCI has become the single largest shareholder after Government of India in IOB and the largest FII in Vijaya Bank. Business India has also carried some spicy information like a "big industrial group with interests in Financial Services" have also mopped up shares in Vijaya Bank in April. Incidentally, LIC has increased its stake in Vijaya Bank to 5.11% in April 2008. Lot of action in Vijaya Bank counter.
Vijaya Bank has come out with a decent set of numbers showing a growth of 9.03% in Net Profits for the year ending March 2008. This growth in profits is after providing for dimunition in value of investments to the extent of Rs272 crores in Q4, 2008. The Q4 provision for dimuntion in value of investments is due to temporary rising of bond yields during the last month of the financial year as the liquidity dried up in the market. The analysts think that the value of investments written down during Q4, 2008 would regain value as the bond yields stabilizes in the coming weeks.
Vijaya Bank has come out with a decent set of numbers showing a growth of 9.03% in Net Profits for the year ending March 2008. This growth in profits is after providing for dimunition in value of investments to the extent of Rs272 crores in Q4, 2008. The Q4 provision for dimuntion in value of investments is due to temporary rising of bond yields during the last month of the financial year as the liquidity dried up in the market. The analysts think that the value of investments written down during Q4, 2008 would regain value as the bond yields stabilizes in the coming weeks.
Watch out for action in PSU bank and in particular Vijaya Bank!!
Financial Planning for Major Events – Part I
We cherish memories of key events in our life like weddings, house warming ceremonies & birthdays. Large amounts of money are spent for the same. Proper budgeting and prudent spending can go a long way in ensuring optimal spending. In this post we address the different aspects to take into account in the lead-up to the function.
Record-keeping - The first thing is to purchase a sturdy notebook (the physical one not electronic!!)This will serve as long-term record of the event.
Budget - It is essential to prepare a budget for the event. The number of guests at a function typically determines the food and venue budgets. Hence, preparing detailed lists of likely guests is essential.
Money management – Once the budget has been finalized, decide on the best method for financing for the same. Try to have a tie-up with friends/relations to arrange for money at short notice if required. This will prevent running around at the last minute to make arrangements for money (borrowing at short notice is often very expensive)
Section Estimates - Estimates need to be made for key areas including food, travel, venue, religious expenses. Leave a generous amount (typically 20%) for miscellaneous items, price escalations. Decide on the upper limits for the key areas, keeping in mind the overall budget. It is surprising how often we go overboard, for a specific item (e.g. clothing) and find ourselves short for the remaining items.
Negotiate key expenses – As a buyer, we have the negotiating power/choice for several items like clothing, wedding contractors etc. It is worthwhile negotiating rates for these key expenses. Often, a token advance helps us secure contracts in advance for major expenses. Doing this earlier also helps us look around for different options, as we have enough time.
Bulk purchases – Purchasing items like clothing, in bulk definitely gives cost savings.
Techno-savvy – The Internet has relevant information in most areas. One can obtain information about the costs of different items; communicate with our distant friends, relations in a cost-effective manner. For e.g. maintaining online wedding albums has become a trend now. For smaller functions, consider usage of personal digital cameras, instead of hiring professional photographers.
Accounting – Note down all relevant expenses, as they occur in the build-up to the occasion. It is surprising, how often expense items get missed out/or they are not considered to be a part of wedding expenses.
Payment Options– Avoid paying cash, unless there are significant cost advantages/no other options. Also do not pay out the entire amount for any vendor. Hold back some amount till the function is completed.
Liquidity management – One needs to have sufficient cash to meet sudden, emergency expenses which come up at the last minute. Apart from that, proper planning will ensure that we do not have to make large cash payments to all vendors at the same time.
Conducting a function is a very personal event, where we decide, how we want to celebrate the event. Hence, the suggestions given above might not be applicable to everyone. Some of us would want to celebrate the event in as grand a manner as possible. Some amount of planning at the early stages saves a lot of pain during the function.
Record-keeping - The first thing is to purchase a sturdy notebook (the physical one not electronic!!)This will serve as long-term record of the event.
Budget - It is essential to prepare a budget for the event. The number of guests at a function typically determines the food and venue budgets. Hence, preparing detailed lists of likely guests is essential.
Money management – Once the budget has been finalized, decide on the best method for financing for the same. Try to have a tie-up with friends/relations to arrange for money at short notice if required. This will prevent running around at the last minute to make arrangements for money (borrowing at short notice is often very expensive)
Section Estimates - Estimates need to be made for key areas including food, travel, venue, religious expenses. Leave a generous amount (typically 20%) for miscellaneous items, price escalations. Decide on the upper limits for the key areas, keeping in mind the overall budget. It is surprising how often we go overboard, for a specific item (e.g. clothing) and find ourselves short for the remaining items.
Negotiate key expenses – As a buyer, we have the negotiating power/choice for several items like clothing, wedding contractors etc. It is worthwhile negotiating rates for these key expenses. Often, a token advance helps us secure contracts in advance for major expenses. Doing this earlier also helps us look around for different options, as we have enough time.
Bulk purchases – Purchasing items like clothing, in bulk definitely gives cost savings.
Techno-savvy – The Internet has relevant information in most areas. One can obtain information about the costs of different items; communicate with our distant friends, relations in a cost-effective manner. For e.g. maintaining online wedding albums has become a trend now. For smaller functions, consider usage of personal digital cameras, instead of hiring professional photographers.
Accounting – Note down all relevant expenses, as they occur in the build-up to the occasion. It is surprising, how often expense items get missed out/or they are not considered to be a part of wedding expenses.
Payment Options– Avoid paying cash, unless there are significant cost advantages/no other options. Also do not pay out the entire amount for any vendor. Hold back some amount till the function is completed.
Liquidity management – One needs to have sufficient cash to meet sudden, emergency expenses which come up at the last minute. Apart from that, proper planning will ensure that we do not have to make large cash payments to all vendors at the same time.
Conducting a function is a very personal event, where we decide, how we want to celebrate the event. Hence, the suggestions given above might not be applicable to everyone. Some of us would want to celebrate the event in as grand a manner as possible. Some amount of planning at the early stages saves a lot of pain during the function.
Thursday, April 17, 2008
Bulk purchases in PSU Bank stocks by TCI Hedge Fund
Over the last couple of months, one particular hedge fund, The Childrent Investment (TCI) Fund is accumulating shares of Public Sector Bank in huge quantities. TCI has been buying aggressively in the counters of Punjab National Bank, Indian Overseas Bank and Vijaya Bank . It is believed that they have invested more than Rs5000 crores in these bank stocks put together accumulating stakes ranging from 2% to 5% in each of the banks.
What is so interesting is the fact that TCI is considered to be one of the most active investor funds. They have instrumental in various corporate shake-ups over the last couple of years across the world. TCI was responsible for stopping the Deutsche Bourse's bid for London Stock Exchange resulting in the Chairman and CEO of Deutsche Bourse resigning over a period of time. Click here to read about this.
TCI has also been responsible for the sale of ABN AMRO Bank in 2007. It was one of the first funds which sent out a letter to the Managing Board of ABN Amro Bank to find out avenues to increase share holders returns by splitting the company or selling of the assets. This eventually resulted in the sale of ABN Amro Bank to Royal Bank of Scotland led consortium. Click here to read about this.
TCI is also involved in a debate with Japanese Government in trying to raise its stake to 20% from the present holding of 9% in Japan's Power Utility major, JPower. TCI wanted the dividends to shareholders to be increased by JPower but opposed by the management. Then TCI approached the Japanese government requesting for approval to raise its stake to 20% in JPower so that it can influence major board decisions. Two days back Japanese government has rejected the TCI request citing the reason that TCI looks for short term profits ahead of the common good to the public. Click here to read the story.
Now with a very noticeable history of active investing across industries and countries, TCI is upping their stake in various public sector banks in India. We guess TCI sees a possibility of using its stake in PSU banks to push forward the agenda of mergers in the Indian Banking sphere. Interesting space to watch out for!!
Saturday, April 12, 2008
The story of Orchid Chemicals & Pharmaceuticals
Shareholders in Orchid chemicals have had a roller coaster ride since the beginning of March. March started on a positive note for Orchid Chemicals with LIC picking up an additional stake of 2.3% in the company, which took the overall holding of LIC to 8%. Citibank had also come out with a positive buy report on the company. Even during the crash between Jan to March earlier in the year, Orchid had withstood the crash better than several other companies.
Then the "Bear" struck. Due to internal problems, Bear Stearns liquidated their positions in several companies in the Indian market through their unit BSMA. While they had disposed their stake in Orchid at Rs 190 level, this lead to a dramatic slide in the company prices. In a single day the price crashed from Rs 220 to Rs 130, partly due to the sale of Bear Stearn’s stake and also due to the fire sale of stock held by financiers, India Bulls Securities and Religare.
The promoter Mr.Raghavendra Rao had pledged his personal and family’s existing stake (17%) to raise funds and purchase an additional stake of 7% in the company. As the price came down, the financiers (India Bulls Securities and Religare) of Mr Raghavendra Rao & family sold the shares in the market to safeguard their investments.
Subsequently the price languished between Rs 110-140 in the later half of March. At that time, the scrip was offering tremendous value to the shareholders and was available at a forward FY09 PE of 4 times. With a gradual recovery in the market, the script price also recovered. This week, the Ranbaxy group company, Solrex Pharmaceuticals has taken a 13% stake in the company through open market purchase. There was a 40% rise in the value of the firm in two days and the price reached Rs 247 today. Initially there were talks of a hostile takeover by Ranbaxy group but with the financial institutions taking a neutral stand, the threat of hostile takeover is not there for Orchid’s Raghavendra Rao, atleast for the time being.
What are the lessons for retail investors in such a scenario?
Then the "Bear" struck. Due to internal problems, Bear Stearns liquidated their positions in several companies in the Indian market through their unit BSMA. While they had disposed their stake in Orchid at Rs 190 level, this lead to a dramatic slide in the company prices. In a single day the price crashed from Rs 220 to Rs 130, partly due to the sale of Bear Stearn’s stake and also due to the fire sale of stock held by financiers, India Bulls Securities and Religare.
The promoter Mr.Raghavendra Rao had pledged his personal and family’s existing stake (17%) to raise funds and purchase an additional stake of 7% in the company. As the price came down, the financiers (India Bulls Securities and Religare) of Mr Raghavendra Rao & family sold the shares in the market to safeguard their investments.
Subsequently the price languished between Rs 110-140 in the later half of March. At that time, the scrip was offering tremendous value to the shareholders and was available at a forward FY09 PE of 4 times. With a gradual recovery in the market, the script price also recovered. This week, the Ranbaxy group company, Solrex Pharmaceuticals has taken a 13% stake in the company through open market purchase. There was a 40% rise in the value of the firm in two days and the price reached Rs 247 today. Initially there were talks of a hostile takeover by Ranbaxy group but with the financial institutions taking a neutral stand, the threat of hostile takeover is not there for Orchid’s Raghavendra Rao, atleast for the time being.
What are the lessons for retail investors in such a scenario?
- Such rapid price fluctuations offer profit-making opportunities. If the company’s fundamentals have not changed, then abnormal fall in prices represent excellent buying opportunities. Value investors wait for these opportunities to pounce on it to grab equity at very attractive valuations.
- In bear markets, the volatility levels of fundamentally strong companies with low promoter holdings may be high as the company becomes susceptible to takeover threats from competitors.
- Financial Institutions will play a significant role in ensuring management stability. LIC and United India Insurance (which holds 2.8%) have refused to enter into the discussion on which group they would support in case of a hostile takeover.
Friday, April 11, 2008
Paid Equity Research, Is it worth it?
In the past two months, few Blogs/websites – including the prominent S P Tulsian (www.premiuminvestments.in) are no longer available for free to the common public. We had been using them over a six month period and found them quite valuable. They analyzed typical mid cap and small cap stocks from an fundamental perspective with a long-term perspective. Without complicating the analysis, they came out with concise recommendations. No longer it is available now for free public use. This raises the query whether it is worthwhile for investors to pay for fundamental research.
Typically, Investors get detailed research reports from the following sources:
- Big brokerage houses like ICICIDirect, Motilal Oswal, and Kotak Securities offer free research when one signs up for their trading services.
- Brokers like India Infoline, HDFC securities offer some research for free to the pubic
- Blogs that offer third party research from a variety of sources. They have had content ownership issues, with research firms objecting (legitimately!!) to the usage of their research. The main challenge here is their unpredictability. The frequency is not predictable and the nature of research varies. Often the blog becomes unavailable after some time.
The other category is that of paid research. Again there are a couple of categories:
- Organized players like K R Choksey, Equitymaster offer paid research. The cost varies from Rs. 5000- 15,000 per year depending on the type of research (long-term, short-term calls, derivatives etc). The research universe is mainly for large-caps and mid-caps.
- Smaller players like S P Tulsian offer research, which covers small caps and ultra-small caps. The cost is again between Rs. 5,000-10,000 per year.
The question is whether is worthwhile going in for a paid research. It depends on the nature of the usage.
- If one is a serious player with a mid-cap, small-cap focus then following the specific content makes sense. Large cap research typically does not add significant value and it might be cost-effective to buy an index Exchange Traded Funds (ETF's).
- Market prices are liquidity driven in the short run. Market and company news again drives the price. Brokers have better access to this than retail investors and might provide topical research.
- For investors who add more than 4-5 lakhs per year to their portfolio, the cost of research (assume 10k) falls to 2%. This is the average mutual fund administration charge. For smaller portfolios, the cost of research is proportionately higher.
In summary, paid research is a worthwhile investment for research for serious investors with large portfolio. For others, there is enough "free" research to keep you informed and occupied.
Thursday, April 10, 2008
OECD & IMF giving more information on sub-prime losses
Immediately a day after we wrote about the sub-prime crisis, two credible institutions have provided further information on the extent of sub-prime losses.
OECD (Organisation of Economic Cooperation and Development) works on behalf of 30 industrialized nations to study conditions in many areas of economic management and to advise on best practice, has stated the sub-prime crisis is not over. It was very critical of the supervision of the financial sector and has called the sub-prime crisis as "collective bankruptcy".
In the meantime, IMF (International Monetary Fund) has come out with a report that calculates that the total cost on account of sub-prime crisis would amount to USD945 billion for the financial sector. Click here to read the complete report.
We have seen write-downs only to the extent of USD300-350 billions so far. What is in store is another USD600 billion waiting to be written off in the coming quarters. It sounds scary, isnt?
OECD (Organisation of Economic Cooperation and Development) works on behalf of 30 industrialized nations to study conditions in many areas of economic management and to advise on best practice, has stated the sub-prime crisis is not over. It was very critical of the supervision of the financial sector and has called the sub-prime crisis as "collective bankruptcy".
In the meantime, IMF (International Monetary Fund) has come out with a report that calculates that the total cost on account of sub-prime crisis would amount to USD945 billion for the financial sector. Click here to read the complete report.
We have seen write-downs only to the extent of USD300-350 billions so far. What is in store is another USD600 billion waiting to be written off in the coming quarters. It sounds scary, isnt?
Wednesday, April 9, 2008
Mounting sub-prime losses
You would have read about the sub-prime write-downs recently by UBS AG as part of their Q1, 2008 results. They have written down more than USD19 billion worth of sub-prime investments for the first quarter of 2008. Cumulatively they have written down USD37 billion over the last 2 quarters. However big the bank may be, it is very difficult to replenish capital to the extent of USD37 billion over the last 6 months.
The total write-offs by global banks and financial institutions in respect of sub-prime investments has already crossed USD300 billion. Several other banks would be declaring their first quarter results in the next couple of weeks and one can expect loads of further write-downs.
What is in store for the future?
1. Many of the global institutions have raised fresh capital to meet these losses. However, the new capital will be required to replenish the losses, and will not result in fresh liquidity getting released in the financial markets.
2. These big banks and investment banks are big lenders to the hedge funds and other prime broking clients. There is a possibility that their credit lines may be cut forcing hedge funds to square off positions in equities/commodities markets to repay the loans.
The most scary part is the lack of clarity on the magnitude of these losses. Even now, estimates by Lehman Brothers and Goldman Sachs range from 400 billion to a trillion dollars. Hence, it is prudent to exercise caution here and one can safely assume that banks will have to make further provisions in 2008.
The total write-offs by global banks and financial institutions in respect of sub-prime investments has already crossed USD300 billion. Several other banks would be declaring their first quarter results in the next couple of weeks and one can expect loads of further write-downs.
What is in store for the future?
1. Many of the global institutions have raised fresh capital to meet these losses. However, the new capital will be required to replenish the losses, and will not result in fresh liquidity getting released in the financial markets.
2. These big banks and investment banks are big lenders to the hedge funds and other prime broking clients. There is a possibility that their credit lines may be cut forcing hedge funds to square off positions in equities/commodities markets to repay the loans.
The most scary part is the lack of clarity on the magnitude of these losses. Even now, estimates by Lehman Brothers and Goldman Sachs range from 400 billion to a trillion dollars. Hence, it is prudent to exercise caution here and one can safely assume that banks will have to make further provisions in 2008.
Sunday, April 6, 2008
Inflation and the after effects!
We have seen inflation in India going up steadily, driven by higher commodity prices. The last reported inflation is above 7.00% for the week ending April 1, compared to 2.97% in Oct 2007. That is, there is a clear increase of 4 percentage points in inflation over the last 7 months.
In response, the Indian government has freed imports of essential commodities and cut the import duty for several items. The wide-spread expectation is that RBI will hike the Cash Reserve Ratio. This will increase the cost of funds in India with an adverse impact on interest rate sectors like automobile, real-estate and above all banking.
On the other hand, US Fed is fighting real hard to delay the recession, if you believe it is not yet already there. The FED has been aggressively cutting the rates and currently it is at 2.25 %. It is believed that there would be further cuts which would force flight of capital from US to other markets with higher interest rates. If you see the interest rates raising in India, there is a possibility of capital flowing into Indian debt. Of course, there is a exchange rate risk but can't be very adverse if there is more flow of dollars into India. Rupee is going to appreciate against the dollar.
So to summarize the effects of inflation:
1. Interest rates are going to be high in India for at least the next 6-12 months.
2. Inflation is going to be high and leading to higher commodity prices.
3. Debt instruments and markets are going to be favoured compared to equity markets.
4. Rupee may appreciate further and touch Rs38 to a USD in the next 12 months.
5. Equity markets would be subdued and more stock specific.
In response, the Indian government has freed imports of essential commodities and cut the import duty for several items. The wide-spread expectation is that RBI will hike the Cash Reserve Ratio. This will increase the cost of funds in India with an adverse impact on interest rate sectors like automobile, real-estate and above all banking.
On the other hand, US Fed is fighting real hard to delay the recession, if you believe it is not yet already there. The FED has been aggressively cutting the rates and currently it is at 2.25 %. It is believed that there would be further cuts which would force flight of capital from US to other markets with higher interest rates. If you see the interest rates raising in India, there is a possibility of capital flowing into Indian debt. Of course, there is a exchange rate risk but can't be very adverse if there is more flow of dollars into India. Rupee is going to appreciate against the dollar.
So to summarize the effects of inflation:
1. Interest rates are going to be high in India for at least the next 6-12 months.
2. Inflation is going to be high and leading to higher commodity prices.
3. Debt instruments and markets are going to be favoured compared to equity markets.
4. Rupee may appreciate further and touch Rs38 to a USD in the next 12 months.
5. Equity markets would be subdued and more stock specific.
Tuesday, April 1, 2008
Health Insurance and Mediclaim – what are the differences?
There has been a slew of Health Insurance products launched by life-insurance companies over the last few months. LIC's Health Plus, ICICI's Hospital Care, Reliance Life's Health N Wealth and Max New York Life's Medicash are some of the health insurance products launched recently.
Before the launch of these health insurance products, there was only one health insurance product in the market called "Medi-claim" issued by the PSU non-life insurance companies like National Insurance, New India Assurance.
With the availability of both "health insurance" covers from Life Insurance companies and the "Mediclaim" from the non-life insurance companies, there is a possibility that we all tend to believe that both the products are one and the same. It is not the case.
This article is to provide more clarity on the differences between these products and help the customer choose the most appropriate one.
Essentially, the differences between "Health Insurance" (Life Insurance companies products) and the "Mediclaim" (non-life insurance companies products) are as follows:
1. Mediclaim policies issued by non-life insurance companies would compensate only for the expense actually incurred, whereas life-insurance companies would give you the lump-sum amount specified in the policy irrespective of your actual spend. However, the ceiling in respect of life-insurance companies' products should be kept in mind.
2. Non-life insurance policies are one-year policies, similar to your vehicle insurance, whereas life-insurance companies' schemes are long term policies. Mediclaim policies needs to be renewed on a yearly basis and it is a possibility that the insurer may not accept renewal due to adverse health condition or claim history.
3. Non-life insurance companies schemes have no provision for daily cash expenses as offered by the life-insurance companies schemes.
4. Non-life schemes cover most forms of hospitalisation, whereas lump sum benefit under the life insurance companies schemes are normally meant only for a specified list of diseases/surgeries. In case of LIC 's Health Plus, it covers a set of 50 dreaded diseases or surgeries. Outside these 50 diseases/surgeries, if somebody gets admitted for hospitalisation, LIC would be liable to cover the medical expenses . They will pay you only the Hospitalisation cash benefits.
5. Life-insurance companies schemes comes bundled with investment options (unit linked plans) whereas non-life insurance would never have investment options. The investment risk in unit linked products are to be borne by the buyer of the health insurance, as in any other ULIP product.
Which one to opt for?
The ideal solution is to have both the "Mediclaim" and "Health Insurance" policies. Since the Health Insurance policies provide for a lump sum payment if an insured is diagonised or treated for any of the listed diseases, it would act as an effective supplement to the mediclaim policy.
Before the launch of these health insurance products, there was only one health insurance product in the market called "Medi-claim" issued by the PSU non-life insurance companies like National Insurance, New India Assurance.
With the availability of both "health insurance" covers from Life Insurance companies and the "Mediclaim" from the non-life insurance companies, there is a possibility that we all tend to believe that both the products are one and the same. It is not the case.
This article is to provide more clarity on the differences between these products and help the customer choose the most appropriate one.
Essentially, the differences between "Health Insurance" (Life Insurance companies products) and the "Mediclaim" (non-life insurance companies products) are as follows:
1. Mediclaim policies issued by non-life insurance companies would compensate only for the expense actually incurred, whereas life-insurance companies would give you the lump-sum amount specified in the policy irrespective of your actual spend. However, the ceiling in respect of life-insurance companies' products should be kept in mind.
2. Non-life insurance policies are one-year policies, similar to your vehicle insurance, whereas life-insurance companies' schemes are long term policies. Mediclaim policies needs to be renewed on a yearly basis and it is a possibility that the insurer may not accept renewal due to adverse health condition or claim history.
3. Non-life insurance companies schemes have no provision for daily cash expenses as offered by the life-insurance companies schemes.
4. Non-life schemes cover most forms of hospitalisation, whereas lump sum benefit under the life insurance companies schemes are normally meant only for a specified list of diseases/surgeries. In case of LIC 's Health Plus, it covers a set of 50 dreaded diseases or surgeries. Outside these 50 diseases/surgeries, if somebody gets admitted for hospitalisation, LIC would be liable to cover the medical expenses . They will pay you only the Hospitalisation cash benefits.
5. Life-insurance companies schemes comes bundled with investment options (unit linked plans) whereas non-life insurance would never have investment options. The investment risk in unit linked products are to be borne by the buyer of the health insurance, as in any other ULIP product.
Which one to opt for?
The ideal solution is to have both the "Mediclaim" and "Health Insurance" policies. Since the Health Insurance policies provide for a lump sum payment if an insured is diagonised or treated for any of the listed diseases, it would act as an effective supplement to the mediclaim policy.
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