MFs, insurance play different roles

Buying a market-linked insurance plan could turn out to be much cheaper than investing in a mutual fund, if an investor is willing to wait for over 10 years.
Most Indian investors however, do not understand that higher ULIP charges stem from the higher distribution costs involved vis-à-vis mutual funds, said Rajesh Sud, CEO of Max New York Life Insurance. Speaking at the Sunday ET CEO Rountable on Personal Finance, Mr Sud said price was the main differentiator in the Indian market and that investors failed to realize insurance and mutual funds played different roles in their portfolios.
For investors who felt cheated as a result of the high charges or price differentials within the insurance space, Mr Sud admitted that standardization of prices went against the grain of the industry. However, he indicated that there was a move towards setting a cap on the overall charges that insurance companies could levy on their customers (excluding mortality charges).
He added that accusations of hidden charges in market-linked insurance products were unfounded and that insurance companies were highly transparent in comparison to other financial products, especially as they were forced to make disclosures by the regulator.
According to Mr Sud, the fundamental issue in India was that individuals did not really know their needs or what they were buying. Hence, they approached companies with demands for insurance cover of Rs 50 lakh even when they didn’t have enough money to back it up.
Instead they could rely on thumb rules to assess their insurance needs based on annual income, number of working years left or even monthly expenditure. An investor could, for instance, consider necessary insurance cover as being worth five to ten times his annual income.
Mr Sud also said that while the fundamental needs of investors had not changed in the last 18 months, it was critical for them to understand the importance of upfront planning for the downside scenario. Investors needed to take responsibility for their wealth and to create an investment plan which would provide direction for their actions.
Instead of blaming others for their problems, they needed to be careful of who they were betting on, be it an institution or an adviser. He encouraged investors to refrain from following the herd mentality vis-à-vis entering or exiting the markets and to follow the old-time maxim of conservatism regarding what they did not understand or what risks they were not sure they were willing to take.

Source: http://economictimes.indiatimes.com/Personal-Finance/MFs-insurance-play-different-roles/articleshow/4767711.cms

Bidding norms blocking road project investment

Bidding norms are blocking investment of at least Rs10,000 crore in roads and highways, according to representatives of some infrastructure firms.

The guidelines, issued in June, said that an application would be disqualified if an investor or its associates holds at least 5% in another company which is applying for the same project, directly or indirectly.

Earlier, this conflict of interest could have arisen if the stake was at least 1%.

“In the last few months, various institutions have set aside close to Rs10,000 crore for investments in roads and highways. This capital cannot be invested as the companies that intend to bid for road projects have investors who hold more than 5% in them,” said M.K. Sinha, president and chief executive officer of IDFC Project Equity Co. Ltd, which has put on hold plans to invest at least Rs1,000 crore in road projects because of this requirement.

Road and highway developers are scheduled to meet minister for road transport and highways Kamal Nath this week to seek relaxation in a number of regulations that they claim have been preventing deployment of funds.

“Due to stringent norms, funds could not be deployed for roads, and many projects have not taken off over the last few years. This time, the ministry is reasonably liberal and we hope that the investment norms will be relaxed to attract more private capital,” said Gokul Chaudhry, partner at BMR Advisors, who also estimated the quantum of money raised by funds for roads and highways to be Rs10,000 crore.

Though the ministry’s move to increase the shareholding limit to 5% was aimed at encouraging investments in road projects, financial institutions and developers say even this is not enough because there are a number of consortiums that have common investors with at least 5% equity share.

“To facilitate road sector investments and improve the bidding process, we feel that the stakeholding limit could either be removed or be raised to at least 26%. A 26% stake will also allow us to get veto powers over the management of the companies where we have invested,” added Sinha.

Other industry executives also said a relaxation of the stakeholding limit was imperative for such projects.

“The clause of conflict of interest should be made liberal. At least 26% shareholding could be set as the cap for investors in companies bidding for road projects. Even the tax and company laws recognize 26% as the limit to consider two companies as related parties,” said Chaudhry.

Agrees Arvind Mahajan, executive director at KPMG Advisory Services Pvt. Ltd. “The test should be not just equity holding but ability to control management.”

Private equity (PE) funds can invest indirectly in the road sector by buying stock in firms that bid for road projects. Infrastructure mutual funds can allocate capital in roads and highways projects by investing in special purpose vehicles (SPVs) created by road construction companies.

“Many financial institutions have raised infrastructure funds with a portion to be invested in road projects, but if such clauses are not relaxed to absorb the capital, they will eventually be deployed to other infrastructure projects,” cautioned Chaudhry.

Currently, Macquarie-SBI Infrastructure Fund (MSIF) and IDFC Project Equity Fund have about $1 billion (Rs4,870 crore) each dedicated to infrastructure projects in India, while 3i India Infrastructure Fund has at least $1.2 billion.

Some of the world’s biggest banks and PE funds have announced infrastructure funds with India as a priority. US-based Morgan Stanley in May 2008 closed its global Morgan Stanley Infrastructure Partners fund at $4 billion, and JPMorgan Chase and Co. has said it would invest at least $2 billion.

The government has announced plans to invest about $500 billion in improving the country’s infrastructure over the next five years, with one-third of the funding coming from the private sector.

Various mutual funds have been raising capital under infrastructure schemes that can invest in SPVs and equities of companies in the infrastructure industry. Reliance Mutual Fund recently raised Rs2,300 crore under its Reliance Infrastructure Fund. SBI Infrastructure Fund, UTI Infrastructure Fund, Tata Infrastructure Fund and ICICI Prudential Infrastructure Fund have their own infrastructure schemes.

“We can invest in SPVs if there is an opportunity. There are prospects of more money from mutual funds coming in for infrastructure projects. These will, however, be subject to regulatory approvals,” said Sundeep Sikka, chief executive officer of Reliance Capital Asset Management Ltd, a unit of Reliance Capital Ltd, which is promoted by the Reliance-Anil Dhirubhai Ambani Group.

“I agree that this norm needs to be relaxed. The industry is hopeful that the new ministry will look at this aspect favourably,” said Mahajan of KPMG Advisory Services. “Relaxation of this clause will move in the positive direction with regard to road projects. However, they are necessary but not sufficient. The ministry needs to do more on policy and even more so on execution to enable these projects to happen.”

Nath last week said the government plans to raise at least Rs1 trillion for construction of 12,000km of highways in the current financial year. Half of that, he said, would preferably be from foreign investors. The ministry has recently raised its target of constructing 2km a day to 20km.

Source: http://www.livemint.com/2009/07/12211006/Bidding-norms-blocking-road-pr.html?h=B

MFs line up feeder funds to raise asset base of global schemes

Despite severe losses and rapid shrinkage to net assets of existing schemes, mutual fund houses are hoping to get investors to their newly-launched international funds that invest in overseas equity and debt. Holding on to the old ‘risk diversifier’ theory, fund houses are launching more overseas investment schemes, with many acting as feeder funds that will increase the asset base of the main fund.
Undeterred by low performance, fund houses like DSP Blackrock, ICICI Pru, IDFC, Mirae Asset, Reliance and JPMorgan are launching newer schemes that are mandated to invest in stocks of foreign companies. While DSP Blackrock has received approvals for launching two feeder funds (World Mining Fund and World Energy Fund), JPMorgan is currently in the NFO phase to raise money for its Greater China Equity Off-shore Fund.
“Feeder funds are usually launched to replenish or expand the asset base of a principal fund. While it will be difficult for fund marketers to collect large sums of money from one market, they launch feeder funds in different markets and pool in the required money,” said the channel head of a bank-promoted fund house.
IDFC and ICICI Pru MF have approached Sebi for approvals to launch a World Gold Fund and Global Basics Fund, respectively, while Mirae Asset and Reliance MF have sought approvals for a China Advantage Fund and International Equity Fund.
“We’re just keeping approvals (to launch an international equity fund) in place so that whenever there is investors’ appetite, the fund can be launched,” said Reliance MF CEO Sundeep Sikka, adding, “this product caters to a defined set of investors. It enables investors to have portfolio allocation on the basis of regions. Mutual fund is a long-term game, and down the line, people will look for diversification into other markets,” he added.
While the diversification theory sounds good to ears, it has not done well to investors who had invested into international funds previously. While net asset values (NAVs) of most funds in this category fell around 50% from their peak levels, assets under management of a few schemes shrunk 60-70% as a result of the market meltdown.
According to online MF tracker Valueresearch.com, Birla Sun Life International Equity; DWS Global Thematic; HSBC Emerging Equity; ING Global Real Estate; Principal Global Opportunities and Sundaram BNP Paribas Global Advantage are logging negative returns in the range of 20-27%. Only Franklin Asia Equity scheme is in the positive zone with annual returns over 1%.
“It’ll be unfair to assess international funds against the backdrop of the current economic downturn. All markets have been impacted by it. In a normal case, different markets perform differently; they have their own time of growth and degrowth. That is when international funds yield good results,” Mr Sikka added.

Source: http://economictimes.indiatimes.com/Personal-Finance/MFs-line-up-feeder-funds/articleshow/4770373.cms

New pension scheme is up for challenge

The benefits of New Pension Scheme (NPS) are no longer confined to government employees. An individual from the unorganised sector can also avail of the benefits with the government opening it to all citizens from May 1, 2009. It was announced in the Budget that NPS will not attract any securities transaction tax (STT) and dividend distribution tax (DDT), which will improve the performance of the scheme further. SundayET brings experts’ view on NPS — whether one should go for NPS or opt for other instruments as a part of retirement planning? But before that let’s understand the nitty-gritty. NPS is more or less like other pension plans where you invest throughout your working career and reap the benefit when you retire by withdrawing the amount. Currently, only tier-1 of the NPS is available, where there is a lock-in period. Investors can invest a minimum Rs 500 per month (i.e Rs 6,000 a year). The age ranges from 18 to 55 years to buy NPS and one cannot exit before the age of 60 years. Also, while exiting one has to buy an annuity. Funds collected by NPS would be invested in three asset classes — equity, government securities and credit risk bearing fixed income instruments. Also, within the equity class, a fund manager will only invest in the index funds and not more than 50% of anyone’s portfolio will be allocated to equity. Investors also have the choice to choose the auto choice option. Under the auto option, if the age of investor is up to 35 years, 50% of his wealth will be invested in equity. Rest of the amount will be allocated to government securities and credit risk bearing fixed income instruments in the ratio of 20:30. However, once, the investor’s age crosses 35 years, participation towards equity and credit risk bearing fixed income instruments will start coming down annually. Finally, at the age of 55 year, the ratio of equity, government securities and credit risk bearing fixed income instruments will be 10:80:10. The major advantage of NPS is that it is much cheaper than a mutual fund or a ULIP. The total cost is merely 0.0009% for NPS. Also, it is easy to invest in and operate. In case, you choose the auto option, your portfolio gets automatically rebalanced depending upon your age. But the major drawback is that NPS is taxable on withdrawal, which means any gain that you make while exiting will attract tax. Sanjay Sachdev, country manager at Shinsei Bank, says, “The NPS is a great product but since it is taxable on maturity, it loses the charm.” Agrees Dhruv Agarwala, co-founder of iTrust Financial Advisors. He says, “NPS has not come at par with other instruments in the same category such as PPF, where the gains on maturity are tax free. Also, the other disadvantage is lack of a distribution channel.” There are other two instruments — mutual funds and ULIPs, which compete with NPS. A part of the money invested in ULIPs gets reinvested in equity and fixed income securities, while rest is used to provide insurance to the investor. Here investors can choose the contribution that they want to make towards equity and fixed income securities. According to Veer Sardesai, MD of Sardesai Finance, the major advantage of ULIP is that on maturity the entire amount is tax-free and the down side is that it has high commission structure and in fact, the cost is the highest in the first couple of years. This expense makes a significant dent in your post maturity amount. Mutual funds, on the other hand, have much lower expense in comparison to ULIPs. According to Sardesai, the first two years of a ULIP can have expenses of 30% per annum or higher, which means that for every Rs 100,000 you contribute only Rs 70,000 gets invested in your name. In comparison mutual funds may charge only 2.25% for their equity products. Mutual funds also enjoy tax benefits akin to ULIPs if one chooses an equity-based scheme. Also, in equity mutual funds the maturity amount is tax free if the investment is made for more than one year. However, generally in the debt mutual funds one has to pay capital gain tax. Ideally, there should be a product where both equity and debt components do not attract any tax. This is where PPF comes in. PPF offers 8% tax-free return and the capital is guaranteed to be protected by the government. In case one has to avail 80C benefit, one can go for a combination of PPF and equity-linked savings schemes. According to Mr Sardesai, the ideal pension fund would be a combination of PPF and index fund, the redemption from both are tax-free on maturity. An index fund has very low cost and replicates the index such as the BSE Sensex or the NSE Nifty.

Source: http://economictimes.indiatimes.com/Features/The-Sunday-ET/Money-You/New-pension-scheme-is-up-for-challenge-/articleshow/4767790.cms

India can sustain 8 to 9 per cent growth rate

Prime Minister Dr. Manmohan Singh has said India should be able to sustain with little bit difficulty growth rate of 8 to 9 per cent notwithstanding difficulties on the international front.
Addressing a press conference onboard after attending the G8-G5 summit at L’Aquila in Italy, Dr. Singh said, “India’s saving is 35 per cent with normal capital output 4:1. I am confident that India will come out of this crisis stronger, but it will be a difficult road to travel.”
“Our exports have suffered, capital flows from abroad have declined, and international bank lending to the developing countries have declined. Therefore, challenge for us is to sustain and revive the growth which we have built up in last five years notwithstanding the deterioration,” he added.
The Prime Minister further said: “All available indicators of 2009 points to weakening of US and European economies and therefore one can say that the global environment for development of the countries of third world has undergone on sharp deterioration.”
Earlier, Dr. Singh expressed confidence that the country can achieve eight to nine per cent growth rate in the coming two to three years and the government will be working to achieve it.
The Prime Minister emphasized that though the fiscal deficit is high, there is a need to rapidly expand economy, create jobs and resources for spending on flagship programmes on education, health, rural development and scope for expansion in infrastructure development.

Source: http://blog.taragana.com/n/india-can-sustain-8-to-9-per-cent-growth-rate-106483/