How difficult is it to buy a term insurance plan?

We all know that term insurance is the cheapest and the easiest form of insurance. But look at the travails of Business Standard reporter when he tried to buy a term insurance product from various life insurance agents in Mumbai.

Click here to read the story.

This is not an isolated case. We have also had instances of meeting the Insurance Advisors who go on talking about the various ULIP's and other products but never talk about the simple of insurance. We have seen rampant mis-selling of ULIP's by the advisors where the long duration products are sold to people who are in the age bracket of 55 and above.

We once had an opportunity to meet the Sales Development Manager of one of the India's largest private insurance company and the talk went towards what kind of products being sold pre-dominantly. He said he pushes only Unit linked products and when we quizzed him about the term policies he was not even clear about the products and it premium rates. That is the kind of environment we are in.

There is some good news from the biggest of the lot, Life Insurance Corproation (LIC). LIC has indicated that it would sell more of traditional products in the Financial Year 2008-09 and hopes to bring down the percentage of ULIP's to 70% of the total new policies sold.

It is a market where the buyers are to be aware. Caveat Emptor!!

Review of existing Insurance policies

We all own life insurance policies that have been acquired over the last several years due to reasons, which are not really towards, risk mitigation. We would have bought life insurance policies because the "agent" is our relative or a person who is known to us. We start servicing the policy acquired without ever realizing if these policies are cost-effective, matches our risk profile and provides adequate security. Therefore, it becomes imperative that we do a review of our existing life insurance policies and do a cost benefit analysis with regard to the premiums paid and the risk cover provided.

We came across a person of 32 years with the following insurance covers.

1. An Endowment policy for Rs100, 000 with double death benefit and a annual premium of Rs4100/-. The policy was taken 8 years ago for a term of 25 years.

2. A term policy for Rs300, 000 with return of premium after the policy term of 25 years. Annual premium is Rs3085/-.

Now considering his present financial position and his age, it becomes important that he has a higher life cover than the coverage of Rs500, 000 (from both the policies). For the premium of Rs7185/- per annum, it is possible that he could get a cover of close to Rs20, 00,000 for a term of 25 years. Therefore, it makes sense to discontinue the existing policies and go for pure term insurance policies with a much higher life cover. We need to keep remembering that Insurance is for meeting any exigency and never be construed as an investment.

Now the other important question that comes up is what we would do with the existing policy and how to salvage the premium amounts already paid. Here you don't have many options but to accept the surrender value of the policy. There will be definitely loss of premiums paid when you pre-close a policy, but you should also understand that there is still 17 more years left in the policy. Will it make sense to discontinue now or to go on for another 17 years with low risk cover?

Normally for policies, which have completed 5 years of service, the Insurance Company allows the policy to continue for 6 to 12 months from the due date of premium without allowing the policy to lapse. Therefore, it is prudent in this case to stop paying the premium for 2008 onwards and look out for alternative life covers. You will be able to enjoy the life cover for another 6 months from the due date and then approach the insurance company to surrender the policy and recover the surrender value.

To summarize:

1. Review the existing life insurance policies held by you periodically to find out if it is providing you with optimum cover.

2. If you are planning to re-engineer your existing life insurance policies, it makes sense to do it as early as possible. Preferably, it should be done before somebody attains 35 years of age to take advantage of the lower premiums till 35 years.

3. Go for pure term policies and not for term policies with return of premium unless you for some strange reason want the premium you have paid back at the end of the policy term. It does not make economic sense.

4. Make best use of the policy terms to ensure that the policy continues to be in force until you choose the new policy.

5. Surrender value in respect of policies can be used to plan your cash flows, as at times it is sizeable. In the above example, for the first policy the surrender value is close to Rs28, 000/-.

6. Last but not the least; Insurance should never be looked at from an investment perspective.

Arbitrage funds – a good place to park money for short term

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.

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.

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.

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.

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!!