Wednesday, May 26, 2010

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.

Posted via email from Ranjan's posterous

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.

Posted via email from Ranjan's posterous

Friday, May 21, 2010

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.


Posted via email from Ranjan's posterous

Wednesday, May 19, 2010

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."

Posted via email from Ranjan's posterous

Friday, May 14, 2010

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

Posted via email from Ranjan's posterous

Monday, May 10, 2010

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.

Posted via email from Ranjan's posterous

Saturday, May 8, 2010

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.

Posted via email from Ranjan's posterous

Thursday, May 6, 2010

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.

Posted via email from Ranjan's posterous

New Index Mutual Fund From IDBI

The latest entrant in the country’s mutual fund business IDBI Asset Management Company on Wednesday said it targets to break-even by 2013-14.

The fund house launched its first new fund offer (NFO) - IDBI Nifty Index Fund - on May 3, which would close on May 31.

“For the time being we plan to launch only index funds at least for next few years. We are targeting a break-even within three years,” said Mr Krishnamurthy Vijayan, MD and CEO, IDBI AMC. The scheme re-opens for continuous sale and repurchase from June 3 0. The face value of the new issue will be Rs 10 per unit.

“For the time being we will concentrate on equity products benchmarked against index. We will be launching short term, liquid and all kind of debt products. Debt products are in the planning stage,” said Mr Vijayan.

When asked if the fund house is looking for acquisitions, he said: “If the right opportunity comes then surely we would be ready to buy something. As of now we are planning to grow organically.”

The fund would be investing all stocks comprising the S&P CNX Nifty Index with the objective. “We will focus on Nifty companies so that we do not take investment decision on our own, we will leave it to the performance of the market,” Mr Vijayan added.

The minimum investment will be Rs 5,000 and in multiples of Rs 100 thereafter. Under the Systematic Investment Plan (SIP) investors can pay Rs 500 per month for a minimum period of 12 months.


Posted via email from Ranjan's posterous