Popular Investment Myths Debunked

Making an investment is the best way to save the money an also to grow it securely. But most of the people do not invest their money due to some myths o they try to postpone it.  Here are some of the popular myths for investments which should be exposed now.

1.      Investing in fixed deposits

Are you among those people who think that fixed deposits are among the safest and best investment options. Well, you are right but only partially. Fixed deposits give you fixed return but that is not the best investment option. You actually lose the purchasing power of the money during inflation term.

2.      Only experts can handle investments

Well, if you are among those who believe that only experts can handle the investments properly, you are wrong. It is your money and you know how to handle it. Just invest carefully and keep a track on your money, rest everything will be fine.

3.      Too early to plan retirement

When a youngster gets a job and he starts earning, he plans to spend the money for his needs and sometimes for some luxuries. Very few youngsters plan to save money right from the initial days of their job. And from these few youngsters, there would be hardly any who would plan to invest it. Most of them think that it is good to deposit the money in the bank and save it for any need but rarely anyone would plan to grow it. If someone asks you to invest your money for your retirement, you would wonder as there is a lot of time for your retirement. But if you think practically and wisely, you would realize that this is the right time when you should start investing for your retirement so that you may have enough money to fulfill your and your family’s need after your retirement.

4.      Stock markets are the best place to invest

You can only earn through stocks if you are patient and calm. This is a long term procedure and you need to invest your money for a long period. Also it is important to keep an eye on the stock market.

5.      Working only with timing

Most of the people think that they should purchase stock when the market is low and should sell tem when it is high to gain profits. Reality is that this is not the only factor which affects the price of the stock and so you should be careful.

6.      Diversification of funds

Diversification of funds is important while investing in mutual funds and stocks. But if you are investing in more than required, then you are losing your money as you are actually investing on average  stocks which will not give you good returns.

7.      Investing in the latest option

It is advised not to follow the crowd for investments. Pick your investment plan carefully after doing appropriate research on various plans so that you may not lose your money.

8.      Investment made for saving tax

If your only objective for making investment is to save tax, you are certainly doing a wrong thing. Plan your investment carefully without considering if you would get any rebate or not on that investment.

Author Bio:

The author holds a sound knowledge on investment in mutual funds. You can go through his articles which are written to guide you with the best possible way.

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Planning For Ups And Downs In Your Monthly Income

Source: Business Standard , Sept. 7, 2010

 

Professionals with erratic incomes need to make lump sum decisions in terms of buying insurance and investing. Two years ago, Suneer Chowdhary gave up his job as an analyst at Accenture to pursue his passion for cricket. Now, he freelances as a sports writer for websites.

 

For event photographer Veena Gokhale, the busiest time of the year is during the marriage and festive season. Actors, photographers and writers may belong to different fields but share a lot in terms of uncertain working hours and incomes.

There is a constant pressure of not receiving pay cheques at the end of each month. Says Chowdhary, “Somewhere at the back of your mind, the thought persists...what if I don’t get enough assignments next month?”

Such uncertainty calls for a lot of financial maneuvering if short- and long-term goals are to be met. Financial planner Suresh Sadagopan, says, “People with irregular incomes need to start at the very outset.”

Fact 1: A drop in income for no apparent reason
Planning for such a situation should be an integral part of your back-up plan. Television actor Vibhuti Thakur learned this the hard way. “Several times I have shot but not been paid as one get payments for only the telecast episodes. This taught me to spend only after cash is deposited in my bank account.”

Using those erratic income streams is key.

Buy medical insurance: It must be at least Rs 5 lakh for an adult and Rs 3 lakh for a child.

Buy life insurance: Opt for pure term plans. A one-time premium option can be a good idea when you have enough cash.

Have an emergency kitty: Keep aside cash equivalent to at least six-nine months expenses. This serves as a cushion for an extended lean period.

Fact 2: Lower savings, as meeting the requirements at hand takes priority over saving for the future
For instance, most of Gokhale’s income is spent on buying latest photographic equipment and on her teenage son’s growing demands. Financial planners advise investing and saving in instruments or funds that can be accessed quickly in times of need.

Fixed deposits and debt funds: Both can be accessed at a short notice. Even the sweep-in option offered by banks for a savings bank account can earn you an interest. This facility puts money from your account into a short-term fixed deposit and puts the money back into your account if there is a deficit when you have issued a cheque.

Opt for a systematic transfer plan (STP): Invest lump sums in liquid or liquid-plus schemes, and move the money over time, say six or 12 months. Investing in lump sum will ensure that the money in your hands does not get spent.

Fact 3: Fear about the future of your dependents and building a retirement corpus
Gokhale knows buying a new house will mean working for many more years. “Though I am not the only earning member of my family, I may have to keep working till my son grows up and starts earning”, she says. Planners suggest retiring current liabilities before building a corpus for the future.

Opt for foreclosures: When you get paid for an assignment, ensure you settle your existing loans, even if they are expensive. For instance, despite the fee of 1.5-2 per cent, it is advisable to retire home, car and personal loans as soon as possible.

Public Provident Fund: It is a good investment option to build a corpus for the future. It gives eight per cent after-tax returns, and investment options stretch from a maximum of Rs 70,000 to a minimum of Rs 500 a year, per individual.

Pension schemes: Besides insurance and mutual funds offering pension plans, the New Pension Scheme can also be looked at to collect a corpus for the golden years

Ranjan Varma
Blog; Website; Software

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Do you want to Live Longer? Buy a Retirement Plan

Steven Levitt and Stephen Dubner, in their book SuperFreakonomics (Page 82) write

 

"… People who buy annuities, it turns out, live longer than people who don't and not because the people who buy annuities are healthier to start with. The evidence suggests that an annuity's steady payout provides a little extra incentive to keep chugging along."

While this is written in the context of California pensioners, even in India, the people who buy annuities belong to that part of the population which has access to good medical and other facilities and will live longer than the general population.

Ranjan Varma
Blog; Website; Software

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Last 5 Days to File Your Taxes

There are 5 days to go for you to file your IT Returns! Avoid the rush and stress of filing on the last day i.e. July 31st, 2010 - and also avoid the potential mistakes that can be made when you file in a hurry. And if you want to tackle your return yourself, you have an online option too. The advantage of online filing is that it's convenient and user friendly exercise where you get to learn a bit about your finances too.

TaxYogi is offering a special 20% discount for my readers. Start Now to get the benefit.

Other than TaxYogi, there are a few offers from others as well.

Elagaan, rated # 1 in India by numerous TV Channels, Newspapers and other medias. They are offering a 15% discount to the readers of this blog and their friends. Please use Coupon code: RANJANTAX to avail the benefit.

 

TaxMunshi, which is an authorized E-Intermediary (means you don't have to upload the xml file yourself, and it's a complete filing!). TaxMunshi's offer is 20% discount and you need to use code: RanjanVarma to get the discount.

TaxMunshi Link

Trust you have already filed your taxes. If not, File IT Today!
Ranjan Varma
Blog; Website; Software

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Luck By Choice Not Chance

This is an intersting email forward that I got today.

 

There once lived a great mathematician in a village. He was often called by the local king to advice on matters related to the economy. His reputation had spread in all directions. So it hurt him very much when the village headman told him, "You may be a great mathematician who advises the king on economic matter but your son does not know the value of gold or silver”.

 

The mathematician called his son and asked, "What is more valuable - gold or silver?"      "Gold," said the son. "That is correct. Why is it then that the village headman makes fun of you, claims you do not know the value of gold or silver? He teases me every day. He mocks me before other village elders as a father who neglects his son. This hurts me. I feel everyone in the village is laughing behind my back because you do not know what is more valuable, gold or silver. Explain this to me, son."

So the son of the mathematician told his father the reason why the village headman carried this impression. "Every day on my way to school, the village headman calls me to his house. There, in front of all village elders, he holds out a silver coin in one hand and a gold coin in other. He asks me to pick up the more valuable coin. I pick the silver coin. He laughs, the elders jeer, and everyone makes fun of me. And then I go to school. This happens every day. That is why they tell you I do not know the value of gold or silver.”

 

The father was confused. His son knew the value of gold and silver, and yet when asked to choose between a gold coin and silver coin always picked the silver coin. "Why don't you pick up the gold coin?" he asked. In response, the son took the father to his room and showed him a box. In the box were at least a hundred silver coins.

 

Turning to his father, the mathematician's son said, "The day I pick up the gold coin the game will stop. They will stop having fun and I will stop making money.”

 

Sometimes in life, we have to play the fool because, people around us like it. That does not mean we lose in the game of life. It just means allowing others to win in one arena of the game, while we win in the other arena of the game. We have to choose which arena matters to us and which arenas do not.

Life is a sum of all your choices

Ranjan Varma
Blog; Website; Software

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Swatantra: Road(show) To Financial Freedom

UTI Mutual Fund (UTI MF) launches the largest Investor Education Initiative called “Swatantra” for creating awareness about the concepts of financial planning and benefits of investing in mutual funds. As a part of this initiative three UTI Knowledge Caravans will travel through the length and breadth of the country for spreading financial literacy. UIT MF’s Investor Education Initiative called “Swatantra” was dedicated to the nation today in Mumbai by Shri Pranab Mukherjee, Hon’ble Finance Minister.

UTI Knowledge Caravans will travel from Porbandar, Jammu and Guwahati covering all the major towns and cities in India and will complete their journey at Kanyakumari. During the journey Investors Meets will be held in various centres for spreading financial awareness.

The Investor Education Initiative is in Partnership with Ministry of Corporate Affairs, Government of India.

Shri U K Sinha, Chairman and Managing Director, UTI Asset Management Company Ltd. said, “ ‘Swatantra’ is India’s Journey to financial freedom and is the largest investor campaign in the country which will cover over 300 cities in 100 days through 100 investor meets. Financial Education is very crucial for the growth of India’s capital market and India will progress at a faster pace if there is higher retail participation in the capital markets. This Campaign will target inculcating financial literacy to potential investors which will help them to take informed decisions.”

Shri Jaideep Bhattacharya, Chief Marketing Officer, UTI AMC said,” UTI Knowledge Caravans will travel throughout the country and will cover a total distance of over 9500 kms. The Investor Education Initiative will be conducted in 10 languages. Penetration of Mutual Funds in India is still very low. This Initiative will help in increasing investor awareness, wealth creation and will also help in creating Financial Advisors across the country.”

On the occasion, UTI Mutual Fund also entered into a tripartite agreement with Bharat Petroleum Corporation Ltd (BPCL) and Corporation Bank for providing Micro Pension initiative through UTI-Retirement Benefit Pension Fund to the Short Distance Commercial Vehicles (SDCV) Community Members of BPCL Dealers Network. The tripartite agreement was signed by Shri U K Sinha, Chairman and Managing Director, UTI AMC, Shri Ashok Sinha, Chairman and Managing Director, BPCL and Shri J M Garg, Chairman and Managing Director, Corporation Bank in the presence of the Hon’ble Finance Minister.

Members of the SDCV associated with BPCL & Corporation Bank, will contribute an amount as low as Rs.200/- every month towards UTI-Retirement Benefit Pension Fund. This initiative aims to provide the much needed social security cover for the low income group during their old age.

Hon’ble Finance Minister also presented mementos to organizations like SEWA (Ahmedabad), COMFED (Patna) and Mann Desi (Satara, Maharashtra) where the Micro Pension concept has been successfully implemented.

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New Pension Scheme Revisited

THE New Pension Scheme (NPS) is likely to get a makeover if the revised Direct Tax Code is implemented. However, the government is doing its bit to lure investors to take a close look at the NPS. Recently, the government announced the ‘Swavalamban’ scheme through which it would add Rs 1,000 co-contribution every year for the next three years for everyone who joins the New Pension Scheme in this financial year. Any NPS subscriber who invests Rs 1,000-12,000 per annum between April 1, 2010 and March 31, 2011, will get Rs 3,000 free from the government.

THE LIKELY DTC IMPACT

The revised DTC, if implemented without any changes, will keep the NPS out of the tax net. This new change will make the NPS an attractive investment opportunity. The government has proposed EEE (exempt-exempt-exempt) method of taxation for NPS, which implies the NPS will be exempt from taxes at all the three stages of deposit, appreciation and withdrawal. Earlier, the NPS proceeds were taxable at maturity.

ADVANTAGES

One of the major advantages is also the lowest fund management charge, which is Rs 99 per lakh (0.0009%) compared to charges of a pension plan offered by an insurance company, which is around 0.75-1.75% per year. This low-cost structure makes it more attractive than most annuity/pension plans offered by insurance companies, financial advisors say. The custodian charges are in the range of 0.0075% to 0.05%. Despite all charges, the cost of investment is cheaper than charges of mutual find and ULIPs.

HOW DOES IT WORK?

Investors have an option to choose their investment mix among three categories. The first one (E) refers to high investment exposure in equity, which targets investors with a high risk appetite. Equity investment, however, is capped at 50%, which mainly comprises index funds. The second option (C) is high exposure in fixed income instruments, which targets investors of a moderate risk profile. These instruments include liquid funds, corporate debt instruments, fixed deposits and infrastructure bonds. The last option is pure fixed investment products (G) which offer low returns. Ideally, you should start investing for your retirement in your early thirties. If you have the advantage of longer investment horizon (20 years plus), equity is the best option to start with. But in the case of the NPS, you have to buy a life annuity offered by life insurance companies. The NPS requires the investor to use the retirement corpus to buy annuities to avoid taxation. As per the existing stipulations, you have to invest 40% of the corpus in annuities.

OTHER ALTERNATIVES

Annuity plans which don’t return the purchase price offer 8-9% and the ones that return the purchase price offer 50% a year are other options. Any bank deposits over five years, which offered 10% a couple years ago, offer around 8-8.5% today because of a decline in interest rates. There are other assured monthly income options like the Senior Citizens’ Savings Scheme (SCSS) which offer 9%, PPF at 15% and the post office monthly income scheme at 8%.

WHY GO FOR IT:

If you are planning to invest in the NPS, invest now to make the most of the compounding effect of Rs 3,000 (the government contribution)

WHY NOT:

You have to buy annuities at maturity, which offer a return of 5-6.5% Source: EconomicTimes

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File Your Taxes Online With TaxYogi

The last date of filing your Income Tax Returns is coming closer - July 31, 2010. A gentle reminder so that You should not be left stranded the eleventh hour to file your returns, trying to find someone who would prepare and file the tax return for you.

A very friendly and upcoming option is e-filing. Now there are very intuitive tax applications which offer you live chats and help/tutorials in helping you to file your taxes online. It also gives you an opportunity to learn a bit of your finances yourself. I mean by doing it by yourself, you learn a lot about your finances and how you can improve upon it.

I am happy to inform that InvestmentYogi's tax application TaxYogi has been specially white labeled for my blog/website readers. Take a look.

You can experience an intuitive and step by step process for preparing and e-filing your return. The tax filing online also gives you tips for tax planning for the future.

Bindisha Sarang, LiveMint has reviewed all the tax filing applications in India and she rates the Taxyogi application "Excellent". Check out Bindisha's review here

All you have to do is:
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Crossposted here

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Designing Learning Programs

A post on how to design a financial literacy program

Gautam Ghosh on Organizations 2.0: The Indian Way of Learning?

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I edit Personal Finance Online Resources, nurture Financial Literacy Foundation, deliver Financial Awareness Workshops and have built a desktop RupeeManager.

Invite me for a talk. Email me on ranjan@ranjanvarma.com or Call me on +919867755615

Become A Member Of AIM

Are you interested in:
1. Getting unbiased, independent financial advice from a panel of experts
2. Pay no commission or get huge savings in distribution costs of the product.
3. Contribute to the financial well being of the underprivileged fellow Indians

Is it possible to have all three? Sounds interesting? Take a moment to read on.

We invite you to be a member of an Association of Indian MoneyManagers (AIM), an investor group where you get the best financial advice and do not pay any commission. The group will negotiate with Financial Services Company for commission free financial products that will entail huge cost savings for you. You also get to invest in financial products chosen by a panel of financial experts.

The Background: WHY
All financial products come with a distribution cost attached. The distribution cost includes financial advice and the logistics. The logistics include document handling, travelling expenses and office expenses of the advisor.

For example, a term insurance of Rs 10 lacs for a 30 year old, the annual premium for a 20 year term policy from LIC costs Rs 3821/-. However a group term insurance will cost approx. Rs 1500 only! This translates into a saving of approx. Rs 2000+

This group insurance cost will depend on the size as well as the age & income profile of the group. The best part is that depending on the profile of the group, the price quote can be negotiated with an Insurance company.

Other than group insurance, there are group schemes available for retirement planning too. For example a Group Superannuation scheme, a unit linked scheme, charges only 0.5% as premium allocation charges compared to 15-40% in other ULIPs.

Further, as the group grows, it can negotiate with a Fund House/AMC for discounts on the trailing commissions or the expense ratio of the fund that the group decides to invest.

Benefits:
Cost Savings: Being a part of the group saves you a lot of money. As we saw that in a group term insurance, the cost savings are to the tune of around 50-67%. For the superannuation fund, the saving is more than 15% on your investment for the first year. If the group can negotiate a lower expense ratio by 2% in a fund, the saving in terms of costs is over Rs 2 lacs over a 20 year period for a monthly investment of Rs 10000/-

Informed Advice: The investor group will be mentored by a panel of informed and independent financial experts. The panel of financial experts will decide on the financial products that the group will put their money on. Therefore, the group will be benefitted with independent as well as expert advice.

Workshops: The members will get the benefit of the Financial Health Check & Planning workshops on a discounted price.

It’s Not For Everyone: Eligibility:
Membership to the group is open to earning individuals and those who are in the age group of 25 to 35. All members have to agree to set up an automatic ECS for their investments. This ensures convenience for both the members as well as the administration of the group.
The eligibility criteria can be reviewed from time to time by the trustees of the foundation.

Caution:
It is important that the membership is closely monitored so as to not let in rogue elements. A few rotten apples can make the entire basket rotten. So we have to be cautious not to let in members who may want to make false claims.

How to become a member:
If you want to become a member of the AIM (Association of Indian MoneyManagers) Group under the aegis of Financial Literacy Foundation (FLF), take the following steps:

1. Download the application form

2. Send the completed form to FLF along with a deposit of Rs 1000/- only. This deposit will be considered a donation if there is no claim for refunds. This deposit is to indicate your commitment to the group and will help the FLF defray costs of administering the group. The cheque is to be issued favouring "Financial Literacy Foundation" and to be sent to Financial Literacy Foundation, 10-B, Mahagun Mansion, Vaibhav Khand, Indirapuram, Ghaziabad - 201010.

You may also deposit the amount in cash/cheque to the Foundation's Current Account No. 60046469290, Bank of Maharashtra, Indirapuram, Ghaziabad.

Most Important:
The bigger the group, the bigger will be the benefits. We request you to spread the word and ask your friends to become a part of the group.

TimeLines:
The last date for filling up the membership form is 31st July, 2010.

We are in talks with various financial service providers and the first product that we buy together will be before 30th September, 2010.

So, join in and spread the word!

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Planning for your Child's Education

The expenses of children’s education are getting higher everyday, and the earlier you start planning for your children’s educational funding, the more alternatives you will have for their future.

Even if the kids are grown-up it’s never overdue to take some steps to guarantee that your child’s educational expenditures are covered for the future. If you are having life insurance policies, see that it also takes your kid’s education into account. According to financial specialists, next to purchasing a house, children’s schooling is the biggest expense you’ll ever face. Thus, it is better to plan things as early as possible.

Before planning for your child’s education, you should have an excellent idea of the various costs that may have to face. The key thing is to not underrate what stuffs will cost, because a funding shortfall in the future could give you problems.

Giving your child private education, is clearly a huge financial obligation and one that needs a lot of financial planning. Your kid may have to take an Education Student Loan in the future. And the overall expenditure of a complete private school learning that is followed by college could be expensive. School boarding may even cost more. The expenses depend on the school so it is a fine idea to research on prices in your locality if this is a choice you want. It is also a good idea to consider how the prices have climbed each year; this will help you to make economic projections.

Even if you don’t like to give private education for your kid, still there are costs related to state schooling. Also, it is better to plan for these expenses now rather than wait for a later time, thereby evading a large part of your profits being gulped up when the time arrives. Costs will comprise of uniforms, excursions field trips, and maybe holiday childcare.

The costs of higher education has now hit an all time high. Finance packages are available to assist learners fund their college education. Nevertheless, a lot of parents are anxious about their kids falling in financial obligation at a youthful age and would rather put aside savings in advance. Campuses can charge heavy amounts in coaching fees. Apart from this you have maintenance and accommodation costs as well.

After you get a picture of the kind of educational opportunity you would like your kid to have, you can begin studying the best savings tactics. There are various alternatives; the one you pick should be based on factors like the time you have, your income, and the amount you like to save.

It is advisable to spend some time for exploring all the alternatives at this juncture. You can also get advice and help from a financial consultant. Once your financial plan is ready, you will have peace of mind about your kid’s education.

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Retirement Planning Options

Launching a retirement plan is not as tough as people assume it to be. Besides, there are various retirement plans that offer tax benefits to both employees and employers. Some guys even invest online for their retirement period. Nevertheless here are some retirement plans that you can go for.

Payroll-Deduction IRA

If a company doesn’t want to go for retirement plans, still it can allow its workers to donate to IRA using payroll deductions, offering a straight and simple method for qualified workers to save.

SARSEP (Salary Reduction Simplified Employee Pension)

A SEP setup before 1997, a SARSEP is that which comprises of a salary cutback deal. As this plan is a basic one, the managerial expenses should be lesser than what would be for more intricate plans. Here, as an alternative to setting up a new retirement plan, companies contribute to IRAs of workers and their own IRA, subject to some percentages of dollar limits and pay.

SEP (Simplified Employee Pension)

Simplified Employee Pensions offers a simplified way for workers to contribute for a retirement plan. Instead of setting up a money purchase or profit sharing plan with a trust, companies can use a SEP agreement & contribute straight to a personal retirement account or a personal retirement annuity set up for every entitled worker.

Simple IRA Plan

These are Tax favored plans that some small companies can arrange for their workers, a Simple IRA plan is a written salary decrease accord between worker and company that permits the worker, if qualified, to decide on having the company to pay salary reductions to a SIMPLE IRA on behalf of the workers.

401(k) Plan

This is a type of defined contribution plan, which allows worker salary deferrals and/or company contributions.

Simple 401(k) Plan

This one is a type of defined contribution plan for small business owners having 100 or lesser workers. In this plan, a worker can elect to put off some of the compensation. Contrasting to a standard 401(k) plan, here the company must either make: (1) a corresponding payment up to 3% of every worker’s salary, or (2) a 2% non elective contribution of every eligible worker's salary.

If you have a bad credit mortgage, you should consider that as well and adjust your retirement plans accordingly.

403(b) Tax Sheltered Annuity Plan

This is an annuity plan for certain colleges, public schools, universities, public hospitals, churches, and charitable bodies that are exempt from tax under the IRC section 501(c)(3).

Defined Benefit Plan

This is a type that is financed primarily by the company and whose expense is verified actuarially.

Money Purchase Plan

This one is a type of defined contribution plan in which employer contributions are fixed.

Profit Sharing Plan

This is a defined contribution plan that permits optional yearly company contributions.

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How To Budget?

Proper budgeting can help you save a lot of problems in the future. Here are some tips for doing your budget right.

You'll possibly find it useful to track your current expenditures first. You can review latest bank statements of yours, and then keep track of every dime that you pay out for the subsequent few days. The budget that you prepare will depend on various factors, together with what place you are living in. You can use professional help for this, but you should beware of various rip-offs including credit report scam.

Maybe the 60% Solution is the easiest way to budget. The idea here is that every essential spending, like food, clothing, shelter, etc, arrives out of the opening 60% of your whole, pretax income. All the remaining, in 10% amounts, is dedicated to short-range savings, retirement savings, amusement money, and the like.

There are various ways to keep debts from causing mayhem on your financial plan. To start with, think about consolidating your loan to lock in low rates. Also you can talk to your lender about other alternatives. If you are facing crisis, you can request for a deferral, however keep in mind that your interest will keep accumulating. That’s why it is better to shell out something every month.

However, that is not the case with credit card debt. You constantly want to pay more than the bare minimum. Or else, the interest charges keep piling up. If you can't pay the minimums, think about contacting Consumer Credit Consultants in your neighborhood.

Congratulations if everything goes fine. The budget you made will help avoid potential debts in the future.

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Screenshot of RupeeManager on Twitpic

Screenshot of RupeeManager on Twitpic

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My Other Blog

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All About Portfolio Management Services (PMS)

From the DNA

 

A few days back, I was consulted by a friend on two portfolio management services (PMS) products. One was what is termed a quant-based PMS, while the other had no definite asset allocation, though it claimed to be an equity PMS. As I studied the products, I realised a few home truths about the category:

l PMS is supposed to be meant for high net-worth individuals (HNIs). By definition, this is supposed to imply that from an asset allocation perspective, only that portion of investible surplus allocated to high-risk categories needs be invested in this. However, the minimum investment amount permitted by Sebi is Rs 5 lakh (which, according to many, is too low and will not restrict it to HNIs)

l PMS is meant to provide a lot more freedom to both investors as well as fund managers with wider objectives. This is in sharp contrast to more conservative approaches adopted by mutual-fund managers

l Sebi does not regulate PMS as tightly as mutual funds with regard to disclosures and other standard requirements

l Sebi also does not specify charges that can be levied by PMS providers. It expects customers to exercise their discretion in entering into agreements with service providers

Thus, it is quite apparent that the entire spirit of the PMS is one of freedom for both the investor and the portfolio manager and that it pre-supposes a high degree of financial knowledge on the part of the investor. It is not a product for the risk averse, nor is it for those who cannot strike a good bargain with the service providers. Knowledge of the market and access to information will be very useful for an investor to make the most of a PMS.

However, the PMS is not being pitched as a product to those who have the extra cash. It is now being sold as a product similar to a mutual fund.

The product seems to have become the toast of financial advisers and distributors. It isn't hard to see why — at a time when selling mutual fund schemes has become less lucrative, the lure of the higher upfront commissions on PMS products seems too tough to resist.

In August 2008, Sebi came out with PMS regulations with the intention that portfolio managers should manage PMS activities in a manner which does not partake the character of a mutual fund. Whether this is indeed the case, is a matter of debate.
So if you have decided that PMS is for you, find below a primer to help you make a good decision:

 
l Check the past performance of the fund manager against the stated benchmark. (Unfortunately, I could not find any performance details on websites of service providers). This should be available on request. Demand the same from your distributor

l The service is likely to have upfront fees along with annual management fees with or without a profit-sharing arrangement. Compare this and understand the net yield in various return scenarios

l Expenses in PMS are bound to be higher than those in mutual funds, as Sebi does not permit pooling and the portfolio churn rate is high. Compare this with expenses of equity mutual funds (1.75-2.5% pa for diversified funds and 0.75-1.5% pa for index funds)

l PMS is also likely to have an incidence of higher taxes since short term capital gains will apply for sale of shares by portfolio managers despite the investor staying invested. Hence there could also be a lot of paperwork involved

l A PMS can be either discretionary or non-discretionary in nature. Under non-discretionary PMS, the portfolio manager makes recommendations to the client and investment decisions are at the client's discretion while under the discretionary service, the portfolio manager has a greater degree of freedom and can take investment decisions without explicit approval from the client.

 

Choose what suits your knowledge and on how much you wish to control the portfolio

If you are ready to step into this world, please do so carefully and as they say in Catholic wedding services, "It is therefore, not to be entered into unadvisedly, but reverently, discreetly and in the fear of God".

 

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Investing Guidelines From The Experts

Nilesh Shah, Deputy Managing Director, ICICI Prudential Asset Management Company, “Investors need to be prepared to burn their fingers in the market. This is the only method by which they can build a good sum in the longterm. Consider this, there are at least 50 plus mutual fund schemes which have given 20% plus return compounded for last 10 years. How many of us have invested in those schemes and generated 20% return on our portfolios? I can bet not even a single person in this group.” He added, “Somewhere investors have developed that apathy of generating better return, of pursuing right process. It is almost like when you go to a doctor, you do not take the guarantee that he will cure you perfectly and then only you will accept his treatment, but when you go to investment, whether it is experience of bank deposits or otherwise, you always want a guarantee that it will be successful.”

An important point retail investors forget and don’t feel the need to realise is: clarity on financial goals. The biggest problem that most investors face is that they do not really spend enough time on writing down what their financial goals are and at what point of time in their life cycle they need money for what kind of purposes. Said Amitabh Chaudhry, Managing Director and CEO at HDFC Standard Life Insurance, “Take for instance insurance, you know, there is a research on the fact that your insurance amount should be to the extent of ten to twelve times your annual income, and that is you know a kind of yardstick a lot of people use and I am sure if we ask ourselves that question, you will realise that maybe we are at best, three to four times on our annual income. Hence, we need to realise why, what and when of the invested money.”

Another point investors need to bear in mind while investing is clarity on returns on investment and its horizon. There are many investors who hardly know or begin with the right notion of achieving returns. Just as greed knows no limits, investors when market go up, need to keep this in mind and keep a sort of range beyond which they would exit even when market would be moving up. If the investor pursues this strategy in the long-term he would be better-off than a trader or a shortterm gainer. Advises Sudhir Kapadia, Tax Markets Leader at Ernst & Young, India “I think if an investor has targeted returns in mind, then the problem is solved. And in this it is important that retail investors should invest for longterm period in order to reap handsome returns on their investment. The reason being this our tax policy which favours long-term investment. Hence investors should prefer equities and mutual funds, which give handsome returns over a longer-term and also because investing in traditional investment avenues like fixed deposits offer negligible post-tax returns.”

Much of the slim participation of retail investors can be attributed to the traditional mindset of investors where one would take minimum risks and secure guaranteed decent returns. Hence, fixed deposits have attracted a huge amount of investment. It is however seen that equity, mutual funds have provided investors far better returns than this traditional investment avenue. The only impending block retail investor faces is willingness to make time to check their investment status and growth. Stressed Manasije Mishra, Managing Director and CEO at HSBC InvestDirect, “Those investors who invest in far better lucrative investments such as equities and mutual funds need to keep a tab on their portfolio. At least 15 to 20 minutes must be dedicated to do a check whether the money invested is generating commensurate returns or not.” He added that for those who cannot do this on a frequent basis should invest in mutual funds where fund manager’s investment acumen would help them get rid of hassle of constantly checking their investment progress.

Mutual funds offer diverse options to retail investors to reduce the risk of losing on the principal capital. Options such as balanced (a combination of debt and equity), pure equity and pure debt funds. Balanced funds suit those investors who intend to diversify well and don’t want to lose their hard earned money. Dhirendra Kumar, CEO, Value Research said, “I think broad diversification can be achieved with one single investment which is a nice balance fund. You get diversification at different levels. With one single balance fund, I can tell you that you get asset allocation in equity and debt. You get a diversified equity portfolio, you get a diversified bond portfolio and you get automatic re-balancing, you get full tax efficiencies, being over 65% invested in.” Besides balanced funds, there are exchange-traded funds, which mirror the benchmark index. Investors who intend to play on pure market movement must invest in these funds. Not always when the index moves, stocks of companies you have invested move and hence investing exchange traded would help to gain from exchange-traded funds. In fact, a combination of a balanced mutual fund and exchange-traded funds must play a crucial role in asset allocation strategy.

With such wide array of investment options it is observed that investors despite following targeted returns still remain discontented. This is because many investors forget the rule of the thumb: are you playing the role of an investor or a trader. It is observed that it is the investor who benefits in the long-term not the trader. A supreme example of this is celebrated investor Warren Buffet, who has advocated investor’s approach to markets. Hence, you would be better-off in the long-term if you play the role of an investor.

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Invest Your Retirement Corpus in MIPs & Senior Citizen Schemes

Question: I am 61, retired and have paid all loans. I need Rs 40,000 as monthly expenses. I never invested in mutual funds but want to do so now. I have saved Rs 8 lakh. Please suggest some good funds I can invest in. My risk appetite is very low and I want regular returns. - Suvidha Your target seems unachievable. Even if you invest your entire savings in equity diversified funds (risky) that provide high returns against debt instruments, you will fall short of the target. Conservatively assuming equity yields 10-12 per cent yearly, you get only Rs 6700-8000 a month.

Answer: You may invest in monthly income plans (MIPs) - Reliance MIP, DBS Chola MIP - that give income by investing in debt schemes (80 per cent) and rest in equity. They are risky and the returns can be irregular. But, they can return more than debt. In the last 1-, 3-and 5-year, the category average gave 12.19, 8.43, and 9.18 per cent, respectively (as on April 30). Alternatively, you may invest in Senior Citizen Savings Scheme (SCSS) that give an assured annual return of 9 per cent.

Also, you could split your corpus between SCSS and MIP in a ratio of 50:50, or 60:40.

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Tricks of Selling An Endowment Insurance Policy

From the DNA

 

In an endowment policy, the policyholder is insured for a certain amount, referred to as the sum assured. A portion of the premium goes towards this insurance cover. Another portion helps meet the administrative expenses of the insurer. And a third portion is invested by the insurance company on behalf of the policyholder. The return the insurance company makes on the invested portion is distributed to policyholders as an annual bonus. The annual bonus is declared as a proportion of the sum assured. So if sum assured is Rs 10 lakh and a bonus of Rs 5 per Rs 100 sum assured or 5% is declared, the insurer is effectively declaring a bonus of Rs 50,000 (5% of Rs 10 lakh). The bonuses rarely go beyond 5-6% primarily because the investments are made in relatively safe debt securities. Since the risk taken is low, the return generated is also low.

How agents mis-sell it?

Let us consider an endowment policy of 25 years, with a sum assured of Rs 10 lakh, taken by 30-year-old individual. The annual premium on such a policy will work out to around Rs 40,000. So if an insurance company declares a bonus of 5% on the sum assured, it would mean a bonus of Rs 50,000. Now, Rs 50,000 is greater than the annual premium of Rs 40,000. And if a company continues to pay a bonus of greater than Rs 40,000 every year, the bonus being paid will be greater than the annual premium. This feature of the endowment plan it what the agents turn into a marketing gimmick. A typical agent is likely to tell you, "Sir, the insurance company always declares a bonus of more than 4% (Rs 40,000) every year. So the bonus you get every year will be more than the annual premium you pay to the company. Isn't that marvellous?"

Here's what the agent does not tell you

The agent works for the insurance company and not you. Hence, he does not tell you the real thing. What you, as policyholder, do not know is that the bonus, unlike a dividend, is not paid out every year. The bonus accumulates and the policyholder gets it along with the sum assured at the maturity of the insurance policy. So let's extend the example above. Assuming the policy declares a bonus of 5% every year, over 25 years, you will get a bonus of Rs 50,000 every year. So at the end of 25 years, you will get Rs 12.5 lakh as bonus (Rs 50,000 x 25). You will also get the Rs 10 lakh sum assured as well, for a total of Rs 22.5 lakh (Rs 12.5 lakh + Rs 10 lakh).

So what is the problem?
The biggest problem with the bonus is that it does not compound, and is merely an accounting entry that accumulates. What this means is that in the above example, the bonus of Rs 50,000 would stay at Rs 50,000 till the 25th year, when the policy matures. This would be true of all bonuses declared during the term of the policy (if they are declared). So if you survive the policy period, the insurance company would give you Rs 22.5 lakh in total.

What are the returns you can expect?

A payout of Rs 22.5 lakh at the end of 25 years, would imply a return of 5.78% per year, which isn't great shakes by any stretch of imagination. Even if we were to assume an average bonus of 6% every year, the total amount paid at maturity would amount to Rs 25 lakh (Rs 10 lakh as sum assured + Rs 15 lakh as bonus) with a return of 6.48% per year.
Is there a better way to go about it?

The moral of the story is that the point about bonus paid out during a given year being greater than the premium paid, isn't really relevant. It is just a mis-selling trick.

A better way to go about would be to take a term insurance policy of Rs 10 lakh and invest the remain-ing money (i.e. the difference between the premium being paid in case of the endowment policy and the premium paid on the term policy) into the Public Provident Fund (PPF), which guarantees an interest of 8% per annum. A term insurance cover of Rs 10 lakh in this case will cost around Rs 3,200. If the remaining Rs 36,800 is invested in the PPF account earn-ing 8% every year, at the end of 25 years, a corpus of Rs 27 lakh will accumulate. This is Rs 4.5 lakh or 20.5% more than Rs 22.5 lakh.

Of course, the advantage of taking on term insurance is that by paying a little more money you can also increase the amount of life cover. By paying around Rs 4,600 per year, the policyholder can get a term insurance with a cover of Rs 15 lakh. This is Rs 1,400 more than the premium for a cover of Rs 10 lakh. An endowment insurance plan will require a premium of Rs 15,000-20,000 more over and above, the annual premium of Rs 40,000.

 

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IRDA Cracking The Whip

There is a clear upside to the fight between regulators Securities and Exchange Board of India (Sebi) and the Insurance Regulatory and Development Author­ity (Irda) to regulate Unit Linked Insurance Plan (Ulip) —a life insur­ance product that invests money in stocks and debt instruments. What will prove to be a game-changer for the industry, a fort­night ago Irda tightened the screws on the norms for Ulips and pension plans, while increasing the risk cover they offer. A slew of measures have been introduced to make these products more investor-friendly.

The timing of the move is significant as it came when Irda is fighting Sebi to retain its independent jurisdiction over Ulips. For a period of six months now, the two regu­lators have been involved in a tussle over the control of Ulips. Sebi has termed Ulips as investment schemes like mutual funds, and thus wanted to control them. The spat surfaced in January this year, when Sebi is­sued a notice to 14 insurance companies seeking an explanation as to why Ulips were launched without its approval and why appropriate action should not be tak­en against them.

It went on to become a full-blown war when on April 9 2010, Sebi banned 14 in­surance companies from selling Lllips. The matter has since gone to the Supreme Court which would decide who will control Ulips after heating the case from July 2010. But that has not stopped Irda from making some major changes in the rules that gov­ern Ulips.

 

Look at the changes brought in by the regulator that will kick in from July 1. In the case of Ulips, investors now cannot surrender a policy before the completion of five years. In addition, partial withdrawal on all Ulips, except pension plans, can be made only after the fifth year, which was earlier permitted after three years.

Longer commitment
The industry has welcomed this move as it is expected to prove beneficial to investors due to the nature of the product. Ulips are front-loaded products, that is, a large por­tion of the premium goes into meeting var­ious charges initially, leaving very little to be invested. So they begin to give returns only after four to five years, faking tliis into ac­count, this move of a lock-in period of five years is expected be a pro-investor move by the regulator.

Apart from this, the move is expected to give Ulips a long-term character and to curb mis-selling. As the front-loaded struc­ture implies high commissions initially. customers were often encouraged by agents to churn their products either by surrendering or making partial with­drawals. In fact, with numerous complaints coming in, Irda had recently asked insur­ance companies to disclose the commission paid to the agents.

Retirement benefits
Another change the regulator has called for is diat now, a part of the top-up premi­um (additional premium) should be used for the purchase of risk cover. Earlier, any top-up invesnnents up to 25 per cent of the annual premium were not required to have any insurance component. This is also seen to be a good move as top-ups now will have a component of insurance which will en­hance the life cover of the investor which was not the case earlier.

 

As Life Insurance Council (a body rep­resenting life insurance compamies in In­dia) Secretary General SB Matlutr said, "This move will bring in discipline which will help people to save for their retire­ment." In addition to this, if an investor surrenders the policy before maturity, he will get only one-third of the surrender value as lumpsum payment; with the re­maining he would have to buy an annuity, or a pension product.

While the advantage of this is that it helps policyholders build a large corpus, what has to be taken into account is that withdrawal will not be allowed even in the case of an emergency or exringency. Another big change brought in by Irda is the mandator,' insurance cover for pen­sion plans. 

More expensive
The flip side to this is that now the pension plans will become costlier, as there is a compulsory mortality charge which will be deducted from the premium amount, reducing the investible money. (Mortality charges for a 50 year old person will be around Rs 400 for a cover of Rs 1 lakh.) This means there will be less money left for pension.

 

These changes seem to be brought in both to address the complaints against the product (Ulips), and as an attempt to si­lence Irda's ctitics. If more such issues are addressed, the tussle between Irda and Sebi may lead to a much-improved prod­uct.

As Mathur summarised it, "Irda has said that while savings cannot he de-linked from insurance, certain products where the investment component was higher like cer­tain pension products and top-up portion of Ulips, have been tine-tuned."

Ranjan Varma
http://ranjanvarma.com
http://personalfinance201.com
http://rupeemanager.com

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Stocks Give The Best Returns

The Indian stock markets have given the highest returns compared to any other asset class over the past decade, according to a new study.

According to a recent study, the Indian stock markets have given the highest returns compared to any other asset class over the past decade, provided you adopted a long term approach.

The research conducted, by value-based investment firm, FAMS analyzed long term investments in real estate, stock markets, commodities, Mutual Funds, art and ULIPS over the past decade.

According to the findings stock markets outperformed other assets classes on an average by 60%. The outperformance in certain cases was as high as 3000%. For instance an investment in Bank of India's FD (Fixed Deposit) would have given you a return of around 8% per year, while on the other hand investing in Bank of India's stock would have given you a return of around 3300% from 2001 to 2007. The stock rose from Rs. 12 to Rs. 410 in that period.

The study further added that the high returns and transparency due to electronic systems have attracted several new investors both local and international; over two lakh new Demat accounts are opened every month. There is a potential for this number to easily double or even triple in coming years.

Speaking about the research, Yogesh Chabria, investor and bestselling author said, "The irony is that even though stock markets as a long term asset class have given the highest returns, short term trading in futures and options has also caused the maximum losses. Our study showed that the maximum numbers of bankruptcies were caused during to the stock market crash in 2008-2009 amongst high risk speculative traders."

Indians continue to be underinvested and less than 3% of the Indian population directly invests in stocks. The main reasons for this is a lack of knowledge, awareness as well as unethical practices by a small minority of participants who encourage regular churning based on tips and rumours.

"The study proves that investing in the stock market can be profitable if you have knowledge, experience and above all patience on your side," Chabria added.

Ranjan Varma
http://ranjanvarma.com
http://personalfinance201.com
http://rupeemanager.com

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NPS Updates

Pension Fund Regulatory & Development Authority (PFRDA), the pension fund regulatory body, is planning a massive marketing campaign to revive the New Pension System (NPS) for the unorganisedsector.TheCentre had recently announced the appointment of Yo gesh AgarwalasPFRDAchairman.

A committee has already finalised the details of the Rs 10 crore marketing campaign and it would be launched after the new chairman approves it, PFRDA sources said. A PFRDA team is also meeting private corporates to facilitate their pension funds to be channelised through the PFRDA selected pension fund managers.

While the NPS was supposed to tap massive 80% of the unorganised working population, who don't have the access to any kind of pensions,six fund managers-SBI Pension Funds,UTI Retirement Solutions,I CICI Prudential Pension Funds Management Company, Kotak Mahindra Pension Fund, IDFC Pension Fund Management Company, Reliance Capital Pension Fund---have mobilised just Rs 10 crore from 5,000 accountsinlastoneyear.

UTI Retirement Solutions CEO Balram Bhagat said, "With the response in the last one year, we can certainly say that the NPS has not taken off rightly .

There has been no investor awareness to promote the NPS whichisalsoonereasonthatthe scheme is way below the expectations."Headded,thereshould beaseparatecommittee formed to look into the failure of the scheme.Alsofinancialintermediaries should be roped in to sell NPS. The way the NPS system is works currently only Central Recordkeeping Agency (CRA) owned by National Securities Depository Ltd (NSDL) is benefitingasitreceivesRs500-600per accounttomaintainthem.

"The government and the pension regulator will have to spend generously to popularise and raise awareness about pension schemes,'' said LIC PensionFundsCEOHSadhak.

It was expected that low fund management charges,Rs 9 for Rs 10 lakh each, would make more money available for investments and will be an incentive for the NPS investors,butithasnotproduced thedesiredeffects.

Rather the 21 life insurers, which have pension products on both unit linked and traditional platforms and were expecting competition from new pension fundmanagers,havebeenableto mobilise substantial amount of premium by selling these products in 2009-10. The state-owned Life Insurance Corporation (LIC) has mopped up around Rs 7,500 crore from one of its pension product Market Plus.

 

Even the three pension fund managers—SBI Pension Funds Private ,UTI Retirement Solutions, LIC Pension Fund—which are currently managing the Rs 4000 crore of pension funds of government of India are finding tough to manage their expenses as the fund management charges are low. “Going by the existing system of operations,it would be long way to reach profitability in this way where our current income is much less thantheexpenses,”saidSadhak.

Fund managers feel that marketing, portability (investors can change fund manager at no cost), a wide choice available in selecting where the money is invested and transparency should help in the product finding favour in due course.According to a Ficci-KPMG study, the reform of the pension system in India wouldhelpincreasethemarket size to Rs 4,06,400 crore by 2025 from Rs 56,100 crore estimated in 2002. Tthe overall economic gains would be substantial as the mobilisation of assets would lead to effective investments in the stock, bond and mortgage markets,t hereby supplying capital to finance corporate growth and government,saidthereport.

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Retirement Planning Options

Life cover to be bundled with pension plan from July. Unit-linked pension plans may not be the best option for your post-retirement needs, as the Insurance Regulatory & Development Authority (Irda) has made life cover mandatory with these products from July.

Compared to retirement products offered by mutual funds and New Pension Scheme (NPS), unit-linked pension plans have become more expensive.

For instance, the fund management charge on pension products offered by insurance companies is 1.35 per cent of the difference between the gross and the net yield, while on NPS, it is 0.09 basis points per annum. This charge is 2 per cent on pension plans offered by mutual funds.

“NPS is the cheapest pension plan in the market. Mutual funds come next, followed by unit-linked pension plans. In case of NPS, there is no track record, while UTI and Templeton have been around for some time,” said Amar Pandit, a certified financial planner with My Financial Planner.

Other fee, such as administrative and allocation charges, are as high as 30-35 per cent in the first year for unit-linked insurance plans. Similarly, in case of NPS, the cost comes to Rs 300 for every Rs 2,000 invested. This includes the cost of opening an account, which is Rs 50, the annual maintenance charge of Rs 350 and a per transaction charge of Rs 10.

“We prefer pension products of mutual funds and NPS over those offered by insurance companies,” said certified financial planner Gaurav Mashruwala.

Another drawback of unit-linked pension plans is that partial withdrawal is not allowed during the policy term. Though a person cannot withdraw even from NPS, he can do so in case of critical illness, for buying a house and for some other purposes. The maturity proceed in pension plans are divided into two parts. One-third is withdrawn as lumpsum and the rest is used to buy annuity. The latter part is taxed. The policy term is chosen by policy holders for products offered by life insurers, while under NPS, it is fixed at 60 years.

Under NPS, after the term gets over (60 years), a person can only withdraw 60 per cent of the corpus as cash, while the rest can be used to buy an annuity. Like pension products of insurance companies, one can withdraw funds in two tranches.

While no partial withdrawal is allowed during the term of the policy in case of unit-linked pension plans, if a person withdraws before 60 years in NPS, he needs to immediately buy an annuity with 80 per cent of the money accumulated. There are only two retirement plans available from mutual funds — UTI Retirement Benefit Plan and Templeton India Pension Plan. Funds can be withdrawn at 55 and 58 years, respectively.

Both NPS and pension plans of insurance companies offer a choice of investment plans and are managed by professional fund managers. NPS, though regulated by the pension regulator, does not have any government guarantee or security. A person can invest 50 per cent of the total invested amount in equity under NPS and 40 per cent in case of a mutual fund pension plans, while there is no limit in case of insurance-linked pension plans.

With new norms kicking in from July, returns on pension plans offered by insurers are likely to come down by up to two per cent. For instance, if a 35-year-old person now pays Rs 10,000 premium for a pension plan, the entire sum goes for investment. From July, Rs 70-100 will be used for covering his life and the rest will be invested. Apart from t his, a part of it will be used for health check-ups.

“There is a cost for the insurance cover. If the premium on pension plans is used to provide the insurance cover, returns will definitely come down,” said Aegon Religare Life Insurance Appointed Actuary KS Gopalakrishnan.

“Mortality charges are not very high, so the returns may not see any significant impact. The death benefit will be an added advantage for pension plans,” said Bharti Axa Life Insurance Vice-President (Products & Customer Management) Rishi Mathur.

Industry experts believe pension may not be as attractive as earlier because of the insurance element attached to it. “Worldwide, pension is an investment product and not a life cover. Clubbing the two is not the right thing to do. It will lose its charm,” said an insurer.

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Challenges in Preventing Economic Miseries to the Common Man

The government, the Pension Fund Regulatory and Development Authority, and civil society have to work in tandem to protect the common man from economic misery post his working life, says G N Bajpai

INDIA is a young nation. Over 65% of its population is below 35 years of age, yet the rank (number) of senior citizens is growing exponentially because we are a nation of 1.2 billion people. Steadily growing longevity of life is also adding to the surge.

Indian society until a few decades ago had the inherent protection against old age under the shadow of the institution of joint/extended family. Urbanisation, growing standards of living, and changing social system have led to disintegration of country’s age-old social system into nuclear families — double income no kids and single income no kids.

The current social security system of the nation (both private and public sector) covers only a small proportion of the population engaged in organised employment. The self-employed and unorganised workers, including agricultural labour, have no economic security worth the name for their old age. The financial capacity of the Union and state governments is inadequate to accommodate any meaningful security against old age.

 
Even in the case of government employees — central, state and local bodies — with the change-over to funded ‘defined contribution’ (DC) from unfunded ‘defined benefit’ (DB) from October 1, 2002, the management of pension is becoming an area of concern. With ‘pay as you go’ DB schemes and decelerating population, even rich nations are finding it difficult to fund the social security system. The ‘hazard of living too long’ for India as a nation is looming large. The social disquiet, stemming out of economic deprivation, is today manifest in our younger generation but could envelope the entire society, if the misery caused by the longevity of life becomes more painful. Encouraging and facilitating voluntary effort seems to be the only remedy.

The Union government has been trying to promote self-contributed pension scheme (NPS) and has, pending approval of legislation by Parliament, set up a Pension Fund Regulatory and Development Authority (PFRDA), which has been functioning as an administrative body for over five years. However, it has not been able to make any headway with the existing panoply of challenges and the corpus under its management is a niggardly Rs 4,000 crore. It is said that over 98% of even this small fund belongs to DC schemes of the government employees. Penetration into the unorganised segment, for which this major initiative has been taken by the government, is almost negligible.

It would not be appropriate to blame PFRDA. There are challenges on the ground and have to be met with some innovative approaches. First, the challenge is to convince those who need insurance against the ‘hazard of living too long’. They have to be persuaded to sacrifice some part of current needs for a secured living tomorrow. Deficit domestic budgets of individuals make the shift daunting.

Financial literacy in India is abysmally low. The product to be marketed by PFRDA is a service and can only be experienced at a distant date, say some 20-40 years hence. Rampant financial illiteracy makes the business of selling financial instruments particularly, insurance and pensions, a ‘push business.’ It has to be marketed assiduously, which warrants persistent efforts. Any push product invariably has ingrained in it an amount of intermediation fees payable to the ‘pushers’ commensurate with efforts required. And the task cannot be organised on probono or voluntary basis. Even Union government’s announcement in the Budget for year 2010-11 to credit Rs1,000 to the new accounts opened after 1 April, 2010 has not generated enough encouragement to queue up. The nature of the pension scheme proposition itself leaves little room for PFRDA to compensate intermediaries for pushing the product.

CONVERSION of push product into ‘pull product’ requires visible demonstration of benefits. Such a demonstration emanates from the economic benefits; in this case the rate of returns, which are attractive enough to induce a prospective investor into joining the National Pension Scheme (NPS). However, this is something like a chicken and an egg story. Unless there is a demonstration of return, which is enabled by corpus (sizeable) managed well over a period of time, how can there be demonstration? And, unless the scheme gets going, how can a corpus be created? Some innovative approach of guaranteeing a return and/or other form of financial incentive has to be devised.

The prospects — target group to be covered under NPS — is not only large but is dispersed across the entire Indian geography. This requires creation of a network, which facilitates not only the approach — outreach — but a constant communication. This is another redoubtable challenge, which even some of the private sector organisations in the asset management industry (MF), with all the necessary enablers (including technology), are finding it difficult to manage successfully.

Yet another challenge (fundamental) is building of regulatory foundations, which will withstand the test of time with heterogeneous constituents — customers, depositories, intermediaries, and fund managers. Designing such a framework is an awesome task. Replication of framework from any of the jurisdictions from across continents may have to be customised so much that it may lose its original shape, because our society is complex — socially, economically, politically — and comprises rich and deprived, educated and illiterate, and riddled with traditions and complexities of family relationships.

The intermediaries — fund managers, depositories and distribution links — will be experimenting and innovating. The PFRDA may only be able to draw inspiration from the framework of other jurisdictions and will have to keep the blueprint on the drawing board continuously to refine the regulatory framework on an ongoing basis. The PFRDA will have to run, and not walk, on the learning curve as the challenge of providing cover against ‘hazard of living too long’ is not only mammoth and serious, but direly urgent.

The list of challenges is long and formidability is apparent. This makes the task of putting in place an acceptable, marketable and manageable scheme tough. The PFRDA, government and civil society have to work in tandem to prevent the economic miseries faced by the common man, post his working life.

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