Recently Bajaj Allianz Life Insurnace company has introduced a Insurance Linked Index Investment Plan called "Capital Shield". This product is being aggressively pushed by one of their Bancassurance partners, Standard Chartered Bank.
The salient features of the plan are as follows:
1. 5 times the initial amount as life cover, i.e., Rs5 lakhs for the next five years.
2. Investment allocation of 98% of the investment after deduction of the mortality charges.
The product works like this. You make the initial investment and after 5 years of the policy term, Bajaj Allianz guarantees that they would be able to return the money what you invest today. The minimum investment amount is Rs50,000/-. That is, they guarantee to return back the capital after the policy term. In this period of fast depreciating investmnets, the idea is to entice the investors with a capital protection guarantee. So what is the big thing about this product? The important thing is that portion of your investment is channeled towards buying NIFTY Call Options and the returns you would get is linked to the NIFTY returns over the next 5 years. The plan also guarantees a 15% return on investment at the end of 5 years subject to certain conditions.
Does it sound interesting to you? I have a capital protection and also at the same time I have an exposure to equity markets through NIFTY Index options. On this premise only this product is being aggressively sold. I think there are lot of questions which needs to be answered before you can invest in these structured products.
First one is the Participation ratio: This is the percentage of your investment which goes into NIFTY Index Linked Call Options in this product. Technically, this is the percentage which has been left after allocating investment towards the fixed income portion of your investment which guarantees your capital at the end of 5 years term. It is not clear from the product brochure the percentage of your investment which will go into Index options.
Unable to time the entry based on NIFTY Index Levels: In this Capital Shield Product, the entry point for you would be the average of the first 3 months from the time you invested. Actually, this is a double edged sword. You may decide to invest today just because that the NIFTY has been hammered a lot and hovering around 2700 levels. But Bajaj Allianz would not take the investment at today's NIFTY Index Level but wait for the next 2 months level to decide on the average. In case, the NIFTY goes up in the next 2 months, your entry price is averaged out upwards. Though this averaging out helps to smoothen the volatility, it defeats the very concept of trying to time the market.
Poor guaranteed returns: The plan brochure talks about guaranteed 15% return on investment over the next 5 years if the NIFTY Index moves up by 100% over the next 5 years. On plain reading this return percentage looks attractive but the fact is the return of 15% is simple return after 5 years. That is, you invest Rs1 lakh today and the NIFTY level is at 2750 and at any point of time during the next 5 years it moves to 5550, then you are guaranteed 15% on Rs1 lakh after 5 years. It works out to a measly 3% simple interest.
What happens if the NIFTY fails to double within 5 years?: There is a possibility that NIFTY never manages to double from todays level over the next 5 years. Then Bajaj Allianz is not even compelled to pay this 3% simple interest per annum. In that worst case scenario, they would pay Rs1 lakh back to you with a big thank you. They would have used your investment for 5 years and return the capital only. The product doesnt have a feature of roll over the maturity period to take care of the prevailing market conditions.
Overall, investment in Bajaj Allianz's Capital Shield product should be avoided as there are better investment opportunities in the fixed income domain itself. Our suggestion would be go for plain vanilla products compared to these structured products where fixed income and equity index futures are combined. It neither has the stability of the fixed income instruments nor gives the multi-fold returns of Equity products.
Friday, February 6, 2009
Tuesday, January 13, 2009
Encashing the ESOP - another stark reminder from the recent Satyam episode.
We all know about the Satyam scandal and the various efforts made by the Government in salvaging whatever possible for the various stakeholders from this unprecedented fiasco. At this juncture, we have to remember the employee millionaires of Satyam who had made tremendous wealth (of course on paper) through ESOP's. The employees who were holding ESOP's were one of the worst affected of the lot due to steep correction in share values of Satyam. We cautioned in one of our earlier articles when Bear Stearns went down in March 2008 about the need to systematically encash ESOP's to avoid situations like this. You can read that article here.
The Satyam episode once again reinforces the need for encashing the ESOP's on a periodic basis. One of the most commonly faced phenomenon with regard to employee shareholders of the company is that they continue to hold on to their ESOP's thinking that their company is strong and nothing would happen to their company. We have past examples of Bear Stearns, Lehman Brothers, I2 Technologies from USA where employee shareholders held sizeable portion of the equity and finally they were the one who were left in the lurch. Bear Stearns shares were exchanged by JP Morgan at USD2 per share. Lehman Brothers is currently engaged in Bankruptcy proceedings and we dont know the fate of the share price. I2 Technologies had fabulous prices during the early years of 2000 and now quoting nowhere near its all time high prices.
None of the employee of Satyam would have imagined prior to 07 Jan 2009 that their top management is doing all sorts of corporate frauds. Leave alone the employees, the stock analysts who were following the Satyam stock for number of years had any clue on what is happening in the company. So how we can blame the novice employee shareholders. They in most cases neither have the time nor the skills to evaluate their own company financials and exit at the right price. But that should not mean that they should continue to hold all their ESOP's without doing anything.
What the employees can do to mitigate the "Black Swan" events?
They would have never thought that their share prices would plumment more than 80% of the value in the next 3 days or so.
The employees should practice systematic encashment of ESOP and convert them into different classes of assets. Instead of holding shares of their own company, they can spread the risk by investing in Fixed deposits, real estate or even shares of their competitors or in equity of other companies. This would help them to tide over this unexpected black swan events better rather than just lament about their loss of wealth.
We once again advise all employee shareholders who hold massive amounts of ESOP shares to convert at least partially into other asset classes or move into equities of other companies other than their own company. Lets be better prepared to meet these corporate events rather than react to them.
The Satyam episode once again reinforces the need for encashing the ESOP's on a periodic basis. One of the most commonly faced phenomenon with regard to employee shareholders of the company is that they continue to hold on to their ESOP's thinking that their company is strong and nothing would happen to their company. We have past examples of Bear Stearns, Lehman Brothers, I2 Technologies from USA where employee shareholders held sizeable portion of the equity and finally they were the one who were left in the lurch. Bear Stearns shares were exchanged by JP Morgan at USD2 per share. Lehman Brothers is currently engaged in Bankruptcy proceedings and we dont know the fate of the share price. I2 Technologies had fabulous prices during the early years of 2000 and now quoting nowhere near its all time high prices.
None of the employee of Satyam would have imagined prior to 07 Jan 2009 that their top management is doing all sorts of corporate frauds. Leave alone the employees, the stock analysts who were following the Satyam stock for number of years had any clue on what is happening in the company. So how we can blame the novice employee shareholders. They in most cases neither have the time nor the skills to evaluate their own company financials and exit at the right price. But that should not mean that they should continue to hold all their ESOP's without doing anything.
What the employees can do to mitigate the "Black Swan" events?
They would have never thought that their share prices would plumment more than 80% of the value in the next 3 days or so.
The employees should practice systematic encashment of ESOP and convert them into different classes of assets. Instead of holding shares of their own company, they can spread the risk by investing in Fixed deposits, real estate or even shares of their competitors or in equity of other companies. This would help them to tide over this unexpected black swan events better rather than just lament about their loss of wealth.
We once again advise all employee shareholders who hold massive amounts of ESOP shares to convert at least partially into other asset classes or move into equities of other companies other than their own company. Lets be better prepared to meet these corporate events rather than react to them.
Monday, December 29, 2008
Highest Bank Fixed Deposit rates for different time periods
The interest rates are peaking across different maturities and here is quick review of the highest interest rates across different time frames offered by various banks.
Time Period Bank(s) Interest rate
15 - 29 days Barclays Bank 6.75%
30 - 45 days Barclays Bank,
DBS Bank 7.25%
46-60 days Oriental Bank of
Commerce 8.25%
61 - 90 days Oriental Bank of
Commerce 8.25%
91 - 179 days ING Vysya Bank 10.00%
180 - 364 days State Bank of
Hyderabad 10.25%
1 yr - 2 yrs DBS Bank 11.25%
2 yrs - 3 yrs CUB, KVB, LVB 11.00%
3 yrs - 5 yrs Karnataka Bank 11.00%
In addition to the above, there are "Special Deposit Rates" offered by banks which are as follows:
Bank Rate Term (Days)
ICICI Bank 10.50% 890
City Union Bank 11.30% 1000
Federal Bank 10.00% 365
Standard Chartered 10.00% 401
ING Vysya Bank 10.50% 365
Tamilnad Mercantile
Bank 11.00% 1095
Please note that these special deposit rates are applicable only if you choose the specified term mentioned above.
Make best use of this opportunity to lock in your fixed deposits componenet of your asset allocation.
Sunday, December 28, 2008
Real Estate gets little relief in Andhra Pradesh
The Andhra Pradesh Government has recently announced the following concessions to prop up the ailing real estate industry in the state:
The concessions offered are:
* Stamp duty on new houses of area up to 1200 sq.ft would be exempt from January 1, 2009 to December 31, 2010.
* Building approval and permit fee has also been exempted.
* City level infrastructure is also allowed to be paid in four-six monthly instanlements during th period of construction.
We believe this would start the process of exempting stamp duty and offering other benefits to real estate developers in various other states as well. The concessions should be time bound and withdrawn once the overall market recovers in the next 2-3 years. Else, this would become a matter of right for the consumers and it would lead to large scale protests when these concessions are withdrawn. The Government would be forced to keep extending the benefit just like what is happening with STPI benefits for IT/ITES companies.
Coupled with the recent reduction in loan interest rates on housing and the proposed exemption of stamp duty, the buyers gets real bargains while buying the house.
Friday, December 5, 2008
Time to lock into Fixed Deposits - Part III
After completing the first two parts on the attractive fixed deposit interest rates currently prevalent in the banking sector, we have been contacted by various people if they could committ into fixed deposits for 3 years for the entire corpus/savings they have.
We have also come across advertisements from banks over the last week or so where the interest have still gone up from the 10.50 - 11.00% bracket to above 11%. This is particularly very evident in the case of private sector banks and makes it all the more enticing.
The rates looks very tempting for lay investors. But at the same time, it is very important to note that the time-frame of the deposit should be decided by the funds requirements of the individuals. Just because a bank offers higher interest rates, the deposits should not be contracted for a longer time-frame. It should be aligned with the individual's funds requirement before the tenure of the fixed deposit is committed. In case you have surplus money which you may not require for a longer tenure, then it makes sense to lock into deposits at higher rates, but at the same time maintain your assset allocation matrix.
One should also remember that Fixed Deposits are only a portion of your investment portfolio and higher interest rates alone should not influence you to have a very high proportion of your investments in fixed deposits. When we take into account the inflation rate of around 8%, and the deposit rate of 11%, technically it means that you are able to get a real effective interest rate of only 3% or so pre-tax. Post-tax, the return would be much lower. Therefore, in order to grow your investments and build the corpus for meeting your future financial goals or retirement, you need to ensure that investments are also channeled to other investment avenues like equity, gold etc.,
The other point to remember is to spread your deposits across different banks with a maximum limit of Rs100,000/- to take advantage of the Deposit Insurance scheme. Though it involves more running between the banks, it may be prudent to do so.
Just for information purposes, few attractive interest rate options which has come up from private sector banks are:
We have also come across advertisements from banks over the last week or so where the interest have still gone up from the 10.50 - 11.00% bracket to above 11%. This is particularly very evident in the case of private sector banks and makes it all the more enticing.
The rates looks very tempting for lay investors. But at the same time, it is very important to note that the time-frame of the deposit should be decided by the funds requirements of the individuals. Just because a bank offers higher interest rates, the deposits should not be contracted for a longer time-frame. It should be aligned with the individual's funds requirement before the tenure of the fixed deposit is committed. In case you have surplus money which you may not require for a longer tenure, then it makes sense to lock into deposits at higher rates, but at the same time maintain your assset allocation matrix.
One should also remember that Fixed Deposits are only a portion of your investment portfolio and higher interest rates alone should not influence you to have a very high proportion of your investments in fixed deposits. When we take into account the inflation rate of around 8%, and the deposit rate of 11%, technically it means that you are able to get a real effective interest rate of only 3% or so pre-tax. Post-tax, the return would be much lower. Therefore, in order to grow your investments and build the corpus for meeting your future financial goals or retirement, you need to ensure that investments are also channeled to other investment avenues like equity, gold etc.,
The other point to remember is to spread your deposits across different banks with a maximum limit of Rs100,000/- to take advantage of the Deposit Insurance scheme. Though it involves more running between the banks, it may be prudent to do so.
Just for information purposes, few attractive interest rate options which has come up from private sector banks are:
- City Union Bank is offering 11.30% on 1000 day deposit. Karur Vysya Bank is offering 11% on a 3 year deposit.
- Standard Chartered Bank is offering 11.00% on 90 days short term deposit.
- In Chennai, REPCO Bank Ltd., is offering 11.50% on 40 months deposit. But please note that REPCO Bank deposits doesnt come under Deposit Insurance Guarantee scheme.
Thursday, November 20, 2008
Time to lock into fixed deposits? - Part II
India also started feeling the heat of global slow-down. Inflation ruling well above 12% has now slipped into single digits and it has been reported below 9% for the last week. The rupee continues to trade volatile against the USD and again slipping below the Rs49 mark yesterday. The Prime Minister is making statements to the effect that more pain is in the offing for India. Exports have gone down to a great extent both in manufacturing and service sector (IT) resulting in lesser inflow of foreign currency. FII sales in the stock markets are continuing and the demand for the greenback remains constant.
Coming back to the main question of interest rates in the econcomy, the auto manufacturers and real-estate developers are crying hoarse about the high interest rates which is affecting the demand for their products. Of course, the interest rates alone cant prop up an industry, but it is a definitely a critical factor. With the increasing cost of money, Indian industries have started delaying or jettisoning capacity expansion plans. Many projects could not achieve financial closure due to lack of funds in the market. Now the Government started stepping in through RBI by giving out signals of low interest rate regime. Now there is no threat of demand led inflation, Government is keen on reducing the interest rates in the economy. RBI, under a new head, D Subbarao, started using the monetary tools to bring down the rates to banks and financial institutions. It has aggressively cut the CRR rates by 3.5% over the last 2 months. It has reduced the reverse repo rates and opened up the window for lending to banks and mutual funds.
With the signals becoming clear that Government favouring a lower interest rate regime, the banks has started reducing the lending rates. Of course, the PSU Banks have taken the lead in this instance as they are more amenable to the Government's intervention in the interest rates. The measures taken by the RBI is expected to pump in more than 200,000 crores of Rupees into the system and it should relieve the current pressure on the credit. The interest rates may also start coming down over the next couple of months. Though term deposits are not as tax efficient as FMP's, it is still better to have a good percentage of your fixed income investments in the form of term deposits, as it gives the needed liquidity and the redemption terms are much more easier compared to FMP's. Therefore, I think it is one of the best times to committ funds to Fixed Deposits with banks to take advantage of the high interest rates offered by them.
State Bank of India offers 10.50% for 1000 days deposit and other private banks like Karur Vysya Bank, City Union Bank, Lakshmi Vilas Bank are offering 11.00% on term deposits for 400 days or more. State Bank's deposit scheme was very popular that it garnered more than Rs1000 crores on a daily basis during the first few days of this campaign. Remember, the deposits in the name of Senior Citizens fetches 0.50% more than the normal rates.
Enjoy this small window of high interest rates and commit your term deposits at attractive rates. Make hay while the sun shines!!!
Coming back to the main question of interest rates in the econcomy, the auto manufacturers and real-estate developers are crying hoarse about the high interest rates which is affecting the demand for their products. Of course, the interest rates alone cant prop up an industry, but it is a definitely a critical factor. With the increasing cost of money, Indian industries have started delaying or jettisoning capacity expansion plans. Many projects could not achieve financial closure due to lack of funds in the market. Now the Government started stepping in through RBI by giving out signals of low interest rate regime. Now there is no threat of demand led inflation, Government is keen on reducing the interest rates in the economy. RBI, under a new head, D Subbarao, started using the monetary tools to bring down the rates to banks and financial institutions. It has aggressively cut the CRR rates by 3.5% over the last 2 months. It has reduced the reverse repo rates and opened up the window for lending to banks and mutual funds.
With the signals becoming clear that Government favouring a lower interest rate regime, the banks has started reducing the lending rates. Of course, the PSU Banks have taken the lead in this instance as they are more amenable to the Government's intervention in the interest rates. The measures taken by the RBI is expected to pump in more than 200,000 crores of Rupees into the system and it should relieve the current pressure on the credit. The interest rates may also start coming down over the next couple of months. Though term deposits are not as tax efficient as FMP's, it is still better to have a good percentage of your fixed income investments in the form of term deposits, as it gives the needed liquidity and the redemption terms are much more easier compared to FMP's. Therefore, I think it is one of the best times to committ funds to Fixed Deposits with banks to take advantage of the high interest rates offered by them.
State Bank of India offers 10.50% for 1000 days deposit and other private banks like Karur Vysya Bank, City Union Bank, Lakshmi Vilas Bank are offering 11.00% on term deposits for 400 days or more. State Bank's deposit scheme was very popular that it garnered more than Rs1000 crores on a daily basis during the first few days of this campaign. Remember, the deposits in the name of Senior Citizens fetches 0.50% more than the normal rates.
Enjoy this small window of high interest rates and commit your term deposits at attractive rates. Make hay while the sun shines!!!
Wednesday, November 19, 2008
Time to lock into fixed deposits? - Part I
Fixed deposits or time deposits were a long last financial instrument hardly used over the last 3-4 years thanks to continuous bull run in the stock markets. Persons who wants to keep money in Fixed deposits were looked down upon as risk-averse, conservative and naive investors. Low interest regime and inefficient tax structure also added to the woes of the investors in fixed deposits. Fixed deposits, as the preferred asset class, vanished from the investors radar.
Coupled with the recent turmoil in the global financial markets and erosion in value of stocks across the board and the high fixed deposit interest rates, fixed or term deposits have slowly gaining prominence again. Currently banks are offering attractive interest rates of 10.50% to 11.50% (for senior citizens) on retail fixed deposits.
If you analyse the reasons behind the high interest rates, you will understand that it is due to the tightening of the domestic money supply by RBI through various monetary policy measures like hiking the CRR rates and repo rates making it costly for banks to borrow and lend. RBI followed the dear money policy till couple of months ago due to the run-away demand led inflation. Suddenly in September, the global financial markets went through a very bad patch where many of the global investment banks disappeared from the scene and it led to sudden realisation of counter-party default risk among the financial community. Banks started hoarding cash instead of lending to customers and financial institutions thereby creating scarcity of deposits.
In that scenario, Indian banks and financial institutions which have lent money to various sectors like real-estate and others started facing defaults or delayed payments. The stock markets worldwide tumbled as the FII's started selling across the board and more particularly in emerging markets. FII's selling the stocks and taking the money out of the country resulted in heavy demand for the US Dollar. The Indian rupee depreciated sharply against the dollar breaching the Rs50 mark against the dollar before recovering to Rs48 against the dollar. The industrial production, exports and consumer demand started to slow-down across the world. Today many countries have seen negative growth in their economy. US, Japan and Europe have slipped into recession. What a change compared what was 6-9 months back. The reaction were swift and painful for most of the market particpants.
Part II of the article would be published tomorrow.
Coupled with the recent turmoil in the global financial markets and erosion in value of stocks across the board and the high fixed deposit interest rates, fixed or term deposits have slowly gaining prominence again. Currently banks are offering attractive interest rates of 10.50% to 11.50% (for senior citizens) on retail fixed deposits.
If you analyse the reasons behind the high interest rates, you will understand that it is due to the tightening of the domestic money supply by RBI through various monetary policy measures like hiking the CRR rates and repo rates making it costly for banks to borrow and lend. RBI followed the dear money policy till couple of months ago due to the run-away demand led inflation. Suddenly in September, the global financial markets went through a very bad patch where many of the global investment banks disappeared from the scene and it led to sudden realisation of counter-party default risk among the financial community. Banks started hoarding cash instead of lending to customers and financial institutions thereby creating scarcity of deposits.
In that scenario, Indian banks and financial institutions which have lent money to various sectors like real-estate and others started facing defaults or delayed payments. The stock markets worldwide tumbled as the FII's started selling across the board and more particularly in emerging markets. FII's selling the stocks and taking the money out of the country resulted in heavy demand for the US Dollar. The Indian rupee depreciated sharply against the dollar breaching the Rs50 mark against the dollar before recovering to Rs48 against the dollar. The industrial production, exports and consumer demand started to slow-down across the world. Today many countries have seen negative growth in their economy. US, Japan and Europe have slipped into recession. What a change compared what was 6-9 months back. The reaction were swift and painful for most of the market particpants.
Part II of the article would be published tomorrow.
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