Salars' blog

Facebook IPO - Some lessons for the average investor

2012-06-10T19:33:00.000+05:30

Originally written for India Finance Brief

If a business does well, the stock eventually follows - Warren Buffett

As we type this article, the much hyped IPO of Facebook, the world’s largest and most popular social networking sites’ IPO has been officially declared a dud at the markets by most participants. With more than 30% fall from the issue price, it’s been widely seen as a much hyped, craze driven offering which rode on market sentiments and exaggerated claims of social media dominance being the next big thing on the street

Though its universally accepted that FB changed the way the world looks at networking, it probably miscalculated market reaction that is driven by individual judgments than actual company fundamentals. With mad frenzy owing to mass-selling and accusations of unfair trading against the founders, the whole has affair is getting murkier and ugly by the day

Facebook IPO and its free fall offers the following lessons to investors, future entrepreneurs and common observers

Invest in the founder, not on hype

Given that FB commands a user base of 1/6^th of human race, the mad rush to buy shares was seen right through the buildup of the IPO. People thought it’s a prestigious thing to own a pie of the worlds largest repository of human thoughts, likes and attitudes more than anything else. The herd mentality ensured that people subscribed in hordes conveniently forgetting the fact that the scrip price was close to 88 times 12 month trailing income! The founders vision matters the most in any IPO and Mark’s dubious distinction of being a hawkish capitalist who aimed a $100bn valuation should have ringed a bell or two in investor minds. Sadly enough, it didn’t.

Hype is temporary

By now, investors who burnt their fingers would have realized the fact that market is always driven by craze and hype to begin with and settles down in a while when correction happens. Hype is typically created by the investment bankers in collusion with the founder to jack up the price and generate wealth for the elite few

Earnings potential is the key

Facebook, in its obsession with increasing the user base conveniently forgot the fact that as a soon-to-be public enterprise, should focus on revenue generation. Given the high valuations, FB should grow exponentially till 2020 and reach a market cap of $950 bn to justify high costs.

Business model matters

In comparison to LinkedIn, FB bets purely on user behavior and ad revenue. Its pretty common with internet based businesses that provide non-commercial offerings to begin with and slowly monetize them through premium offerings. This has worked for LinkedIn as it’s seen as a value add for working professionals who don’t mind paying a premium in exchange for value. FB may not have this luxury as many times, the transition from non-commercial to commercial haven’t worked for web-based businesses

Valuation is sacrosanct

At the end of the day, all it matters is how much on invested and how much did the investment return as monetary value to the investor. The explosive and near exponential growth plans that FB charted out may not pan out as expected as online world is highly fickle and boredom is a major threat. Surviving in a business like Social media for 10 long years has not happened before and it’s a major challenge to justify high IPO pricing

Safe to test waters

People who are planning to buy FB stock at $20 are actually wise in assessing the scrip accurately. Given that bankers and founders may have vested interest in the IPO, its safer to see from the sidelines, wait for the market to settle down and invest in tranches

Technology sector as such thrives on continuous innovation and short shelf life in general. A model that combines strong technology tools and the science of human behavior sounds like a winnable combination on paper but would take time to prove that it’s a horse for the long run

India GDP numbers - When the going gets tough

2012-06-07T10:06:00.001+05:30

Written for India Finance Brief, India's largest finance newsletter

Our measures help in checking inflationary expectations and inspire confidence for improved capital flows as well as recovery in domestic investment growth.

– Pranab Mukherjee

This quote by our honorable finance minister is an evergreen and a readymade answer for any query thrown at him. Only the questions vary, the response has been typically tex tbook like and highly armchair economics inspired.

India, facing its worst economic crisis since 1991 has seen growth falling to 5.3%, the slowest ever growth in the last 7 years. With corruption allegations and record levels of distrust and frustration among fellow Indians, governance and fiscal management have been shallow and myopic, to say the least

Back in 1991, when India faced an acute crisis that sent it scurrying to IMF for a bailout, many economists thought that the Indian elephant was merely trying to prolong longevity and try something desperate that would revive its fortunes. Its quite a miracle that the move worked well for the nation and with a flurry in foreign investments, India embarked on a journey that promised growth, prosperity and an opportunity for India to stand side by side with global superpowers.

Fast forward to 2012. Corruption, scams, scandals, governance issues, black money, nepotism, incompetency define India today. Fiscal deficits are soaring high, rupee at all time low, trade sentiments bleak and reforms are stalled due to lack of willpower from the government and lack of interest from investors like. It seems to us that India has trapped itself in a quicksand that in many ways, its policies help create

Inflation, which acts as a barometer for consumption and price rise, has been stubbornly at 7%+ levels for more than a year now. Continuous rate hikes haven’t done their bit as RBI has been busy trying to curb demand when the real problem was with supply side inefficiencies. The armchair style functioning of the central bank has sent interest rates soaring to double digits while inflation is still high and growth, sluggish!

Given our huge, talented and cheap manpower, its no surprise that services hog the limelight when it comes to GDP contribution. They have been growing in double digits since 2000 and have played a major role in our ambition to be a global player. Services growth today stands at a dismal 8%. Farm produce, the backbone of our economy grew at 2%.

So what is really going wrong?. Is it because the rest of the world is reeling under economic distress?, Global economy, intertwined than ever before has made us susceptible and vulnerable to global changes. Fairly enough, this argument holds good to an extent. Even during the great economic crisis of ’08, India grew at 5.8%. Situation today is far better and still we don’t have a clear reason as to why things have gone terribly wrong in many levels!

Should RBI get into the vicious cycle of tweaking interest rates, make good costlier and stoke inflation northwards?. Empirical data suggests that rate hikes have ONLY help increase interest rates, make it difficult for companies to borrow, dampen bottom line, stall expansion plans and lead to a slowdown ultimately. In an attempt to contain inflation, we are essentially putting a brake on our ambitions to be a developed nation. The reason for inflation lies elsewhere and RBI conveniently chooses to ignore the real reason and punish the common man for no fault of his

As per Mr,Bimal Jalan, theoretically India is well off. It has the surplus to pay off oil imports, exports are good owing to a weak rupee, tax collections are fairly good too!. What is wrecking havoc is a deep structural and systemic problem, he insists.

The recent fuel price hike hasn’t gone down well with the common man. Though it helps bridge deficit, it would again stoke inflation thereby triggering the vicious cycle of rate hikes, high borrowing costs and further inflation. Our budget deficit now stands at 5.1% and expected to hit 5.8% next FY.

Some also argue that domestic unrest and dampened sentiments among market players has also contributed to the freefalling GDP numbers. A deadly cocktail of incoherent/populist/politically driven policies, fall in global risk appetite and a government in a perennial state of coma has tightened the noose and strangulating the country

What we are going through it’s a situation never seen before and as they say ‘ drastic situations need drastic steps’. But does out government, already mired under the cloud of corruption and incompetence have the teeth to take drastic measures to set things right?. The last thing an aam aadmi would need is the government choosing to do nothing to make things work, if not make anything better!

Facebook IPO - A trendsetter of sorts or a bubble?

2012-06-05T23:40:00.000+05:30

Originally written for India Finance Brief

“Social Media puts the “public” into PR and the “market” into marketing.” - Chris Brogan

Traditionally, businesses with a proven model of operations and revenue generation have been successful in generating good returns for their stakeholders. They typically sell a product or a service that has tangibility attached to it and such businesses are scalable and dynamic. They catered to specific demands of the public and strived to carve a niche among other competitors to capture the mind share of the customer.

But in the early 2000s, a new form of business evolved which rode on the biggest invention of mankind since the wheel – the internet. Dot com companies boomed in the beginning of the decade offering web based solutions free of cost to their clients. The revenue generation was slated to happen once the requisite ‘mind share’ has been captured. Difficulties in valuation owing to the novel nature of such businesses and general media hype ensured that the IPOs were fully subscribed and stock prices reached dizzying heights before they came down crashing in 2000. The basic flaw with most companies that failed during the boom was that they had strikingly similar business models and thought that they would attain market leadership through offering freebies and cash in on the initial buzz. Except for companies like Google and Amazon, which had robust business models and chose to stand apart by not following the herd survived the bloodbath and turned profitable in a few years time. The entire crash is estimated to have wiped off $5 trillion from the market

Very recently, Facebook.com, world’s largest social network with over 900 million users went public. Given that 2011 was a dud for social media IPOs, investors and bankers alike were skeptical about the outcome of the IPO at a time where privacy policies of FB were under question and Facebook was already fighting an internal battle against abuse among its vast user base. In 2011, only LinkedIn was able to survive the wind that blew most social media IPOs to dust. LinkedIn was seen as a stable and long term bet as professional networking grew manifold and companies gave preference to hiring through professional networks like LinkedIn.

So what did the Facebook IPO really bet on? Is it the power of user generated content?. Is it the mere gut feel that a social media company can survive long without boredom creeping in?.

Lets compare Facebook business model with LinkedIn IPO that happened in 2011. LinkedIn is currently trading at over double its issue price. Zynga and groupon have been doing fairly well too. LinkedIn, on paper seems to be a better business model with revenues coming from users (which include job seekers) and companies that choose to opt for premium services. It’s a proven fact that headhunting today happens with tremendous input from a candidate’s social media footprint. This indigenous method of revenue generation means that as long as the value proposition of ‘better professional visibility’ appeals to the user, LinkedIn would continue to make merry.

Facebook has a clear business model where users aren’t charged to use the service but brands/companies who seek visibility and acceptance among its 900 mn user base. Revenue generation is passive and is boosted purely by the innovativeness of the brand and level of involvement by the average user. Given that an average user on FB has about 130 friends, likes 80 pages and spends at least 20 minutes every visit, it’s a must for brands to be present and present themselves in good light.

Though the IPO is under immense scrutiny for its over valuation and accusation that sensitive data pertaining to revenue guidelines were leaked to big investors, appetite in the market was fairly good during the IPO. Price has since fallen by over 18% and investors are a bit too wary about future prospects of the company viz revenue generation through mobile users, combating abuse and user fatigue. Its estimated that FB should be $950 bn company by 2020 to justify the high premium most investors paid to buy the stock

Facebook is truly a trend setter of sorts when it comes to trumpeting the arrival of social media. Though google and Amazon must be worried about FB eating into their pie, only a clear vision from the founders would tell if a social media firm with no real ‘paying’ users could survive and change the game in the long run.

Islamic banking in India – A primer

2012-06-01T00:06:00.001+05:30

Originally written for India Finance brief - the largest finance newsletter portal in India

"I welcome Islamic fiinance in India, Islamic finance has proven successful in poverty alleviation and promoting sustainable growth, and it is very relevant in our country where millions of people are starving,"

Justice V. R. Krishna Iyer- Former judge, SC of India

Economic activity in the ancient times happened through the conceptualization of physical things as money. Commodities such as grain, agri products and metals such as gold were used as mode of exchange. Values were determined by the dynamics of demand and supply of different commodities. Later, the need for standardization arose with the maturity of economic system and the modern banking system was born.

Like any other banking system, Islamic banking works on the principle of taking money from one party and lending to another, thereby making revenue for itself in the process. The essence of Islamic banking lies in the principle of Sharia that has laid down principles of banking based on tenets of early Islam. Islam prohibits any form of ‘interest’, a component that traditional banking system invented and relies mostly for its survival. Sharia code for financial system also prohibits investments in businesses linked to alcohol, nicotine, usury and gambling to name a few

The basic difference between traditional interest based and Islamic banking system is the level of participation of stakeholders. In the traditional system, the depositor places the money with the bank and earns a basic interest rate linked to interest rates in the country. He has no clue of ‘utility’ of the money that lies with the bank. The bank, on the other hand chooses to lend the money it pooled into from different depositors to a few borrowers. There is a clear wall between the depositor and the borrower as far as utility of money is concerned. Islamic banking however emphasizes on increased involvement of both parties lending accountability to businesses that make use of the banks’ money

Why is Islamic banking a relevant concept now?. Would IB require drastic changes in the existing system to accommodate interest free banking?. The answer lies in the fact that the west got into elaborate traps it help lay during the years leading up to 08’. Interest was widely seen as many, not without reason a major contributor or ‘virtual’ money that has wrecked nations and eroded most of their wealth. In a well connected economic system, IB supporters argue that all parties should bear equal risk in any financial transaction. Traditional banking puts the onus on the borrowers to successfully generate returns high enough to pay the ‘cost’ of borrowing whereas the depositor would get a ‘fixed interest’ no matter how good or bad the banks’ decision works out. The reward for the depositor goes up if the system perceives the business to be risky. The bank would then lend to such ‘risky’ businesses attracting money from investors by paying them more interest. Debt markets around the world thrive on this concept. When things turn ugly with borrowers defaulting, the system slowly crumbles and all stakeholders begin to lose

Is interest free collaborative banking really possible?. How would RBI squeeze the concept if IB that replaces ‘bank’ style of functioning with a ‘venture capital’ mode? Would it take a revolution to change the ‘risk free returns’ mindset that most Indians are used to over the years?. Given that wealthy banks in the middle east were fairly insulated from ’08 and are still cash rich and that India would need at least $500 bn in the next 10 years for infrastructure development, it would be wise if the think-tank comes up with a strategy to encourage Islamic style banking in India. Though cynics may feel that modeling a banking system based on religion might be a bad move, the truth is that IB is more based on cultural and moral values of a society than a religion. If a banking system based on a particular set of moral/social values can do good to us, why not tailor it and introduce the concept on a pilot mode in India?. Recently, Kerala had mooted an IB based model and has succeeded in attracting money from the middle east for infrastructure projects.

Though RBI has categorically ruled out IB in near future, Dr.Subbarao had commented that “With the present set Banking Regulation Act, Islamic banking just cannot take place as many of the banking principles in place are based on interest payments. However, Islamic banking is possible through a separate legislation

It would be quite interesting to see how our government handles a delicate yet controversial topic of mixing a religious belief with an existing financial system. Though establishing an IB based system has a long way to go, necessary awareness need to created among our citizens to educate them of its benefits. Though IB cant survive in tandem with the traditional system, it could be a game changer for a section of investors who shun interest and would want to experiment Islamic way of banking & finance

India Infrastructure debt fund – Some thoughts

2012-05-28T21:01:00.000+05:30

Originally written for India Finance brief

"We see India as a huge market for our business. We are strong in transport, shipping, aircraft, energy, logistics and infrastructure financing. And these are areas where there is strong demand in India."

Dr Hannes Rehm
Chairman
Norddeutsche Landesbank

Infrastructure is widely considered by many, not without reason as the backbone of any nations economic might and success. Countries like the U.S that invested heavily in this sector are enjoying the fruits of its success today. That effective and efficient infrastructure mechanisms bring prosperity to developed nations is a well known secret. Apart from aiding employment generation, infrastructure as a sector boosts economic output and helps in smooth transport of goods, thereby acting as the well oiled machine on which the nation functions

Back in India, bureaucracy, lack of investments and long cycles have resulted in low yields from the infrastructure sector. During the budget speech in Mar’12, our honorable finance minister had emphasized that the government would be giving the much needed push by mobilizing funds from the common public, FIIs and retirement funds. He has outlaid an ambitious funding plan of Rs.60,000 Cr for infra related projects in the country. This is double of what was raised in 2011-12. As per government estimates, the infra sector would need a whopping $1 trillion in the next 5 years.

According to Overseas development institute, lack of infrastructure is seen as the biggest impediment to developing nations on achieving their MDGs(Millennium development goals). ODI also argues that 50% of development and growth can be attributed to infrastructure investments in any developing country

Globally, pension funds are major players in the infrastructure sector. For example, US pension fund industry has invested close to 40% of its AUM in this sector. The long term nature of pension funds with long term liability and the long cash flow cycles of infrastructure projects resulting in long term asset creation have made it a wonderful combination resulting in a win-win for both the sides.

As far as policy measures are concerned, the following have been the initiatives from the government of India in the last few years to boost infrastructure investments

Raising FII limits in infrastructure sector. Though FIIs have a limit of $25 billions in infrastructure bonds, only $110 millions have been mopped up by FII investors so far
Four financial institutions viz ICICI bank, Bank of Baroda, LIC and Citi financial have come up with India’s first IDF(India infrastructure fund) with an initial corpus of $2 billion.
There is also a proposal from the Ministry of finance to EPFO(controlled and heavily regulated by ministry of Labour) to invest a part of the PF corpus into such infrastructure debt funds or direct infrastructure bonds issued by PFIs
The huge requirement of $1 trillion cant be met with the government merely contributing to the kitty. Its estimated that atleast 50% of the funds should come from private sector too. PPP models are being developed and joint venture companies are being formed for infrastructure projects that enable active private participation and the much needed infusion of funds
Attractive tax incentives for the common man to be a part of the India growth story by investing in infrastructure sector
By opening the inflow of funds from EPFO, the sector would get long term funds with long term liability that match its vision of long term asset creation. Also, the retirement funds would earn a slightly higher return given the huge opportunity this sector bring forth!

Though it sounds nice on paper, it remains to be seen how effective are the funds utilized to boost the infrastructure of the nation. Bureaucracy still rules the roost when it comes to putting the money to work. And of course, corruption has crippled the nation for too long and it would spread its wings to infrastructure sector as well. It would be interesting to see how our political think tank goes beyond political and regional issues and vigorously pursues infrastructure as the next revolution in India. Without proper vision and funding options for infrastructure, the nation would go a few steps back in its relentless vigor to be a global superpower

Outsourcing long term care to India – Is it the next big thing?

2012-04-24T10:27:00.000+05:30

Originally written for India finance brief portal here - http://www.indiafinancebrief.com/from-the-editors-desk/166448-outsourcing-long-term-care-to-india--is-it-the-next-big-thing

“Old age is - a lot of crossed off names in an address book” – Ronald Blythe

For the past 10 years, India has been considered by many as the hub for outsourcing. Initially technology firms in the U.S outsourced their less critical support operations to India to optimize costs and improve process efficiency. Slowly, riding on the back of talented manpower and innovation, the Indian I.T/BPO industry was able to outsource high end critical processes and has proven its capabilities

Retirement is probably the last of the few things that haven’t been outsourced to India so far. The U.S, facing turbulence in economic growth is facing the demographic challenge of providing its baby boomers a safe and healthy retired life. The long term care industry in the U.S that caters to care giving for the elderly works in the following way

One buys a ‘long term care’ insurance product by paying a premium which is calculated based on his age of entry, past ailments and other mortality assumptions
The insured pays premium from the time he/she purchases the policy till the time he/she reaches an age mentioned by the policy document or reaches a stage where he is unable to perform a set of Activities of daily living(ADL). The policy would decide when the insured would be eligible for benefits by prescribing a minimum number of ADLs that he is unable to perform
The insured stops paying the premium and starts claiming benefits from the insurer. The benefit amount is decided at the time of entering the policy
Also, the insured has an option of selecting the number of days he/she gets to spend in a long term care centre(day care) that has skilled nurses who tend to the insured
The tenure of stay, quality of services and care centre are agreed mutually between the insured and the insurer. The insured may also choose to pay a higher premium if he wants specific riders with the policy

As per AARP(American Association of Retired Persons), the average payout for the insured in the U.S is about $3000 per month. This would be payable as a social security benefit to the insured.

The challenges arise when the elderly face health problems that need specific care and attention. Globally, the U.S has the highest per capita medical cost. This would translate to lower savings in the hands of the insured and increased financial stress on part of the family.

The concept of long term care insurance, though well tested in the U.S has not found much ground in India. The only form of social security we have is our family system. New India insurance had recently created a product called Bhavishya Arogya aiming to cater the needs of today’s youth who would age in the next 20 years. For some reasons it was scrapped and there exists no such policy that caters to ‘caring’ rather than curing

India, given its skilled manpower provides a great opportunity for westerners to spend their retirement here by utilizing their long term care payouts. There are few such centers specially designed for U.S citizens in cities like Goa, Pondicherry and American citizens have been flocking such destinations. A typical care center in India with high end facilities would cost around $1500 per month for an inmate. This would be considered dirt cheap compared to high cost of care in the U.S which may run to as high as $300 per day. Though such high end centers maybe out of reach for most Indians, they can think of tying up with insurance firms in the U.S. This would also benefit the insurer as he would face low payouts, translating to lower premium for the insured.

Potential challenges for this proposal could be driven by VISA regulations, physical and sexual elder abuse, emotional disconnect and cultural differences. Though higher costs back home is a major factor for someone to outsource his retired life, factors relating to cultural sensitivity could act as a dampener.

Though major hospital chains in India aggressively pursue medical tourism as a line of business, the focus of any such measure would be to cure an ailment. Also, such trips are short in nature. Retirement life would need ‘care’ for a longer tenure and hospitals, insurance service providers and foreign policy makers should arrive at a consensus to promote the idea of India as a retirement hub. This would provide employment to various segments of the society and breed a new generation of care givers who would be flag bearers of a professional care giving industry

SWF- Sovereign wealth fund. Is India ready to create one?

2012-04-16T21:33:00.000+05:30

Originally written for India Finance brief - http://www.indiafinancebrief.com/opinion/postlist/166101

“Wealth is in applications of mind to nature; and the art of getting rich consists not in industry, much less in saving, but in a better order, in timeliness, in being at the right spot”

Ralph Waldo Emerson

Generating wealth for self, family and society at large is seen as the corner stone of anybodys’ economic activity. For a nation, it boils down to effective use of money to give a good standard of living to its citizens.

Nations like Saudi Arabia have come out of utter backwardness to have become economic superpowers through effective use of surplus funds accrued out of domestic economic activity. Such surplus wealth of nations is pooled in to form a fund called ‘Sovereign Wealth Fund’.

Wikipedia defines SWF as ‘state owned investment fund composed of financial assets that are invested globally on a long term basis’. They are different from forex reserves that are primarily used as short term instruments with safety and liquidity as prime concerns

SWFs are a result of nations having fiscal surplus and little debt abroad. Earliest SWFs were run from proceeds of oil exploring and export. Globally, SWFs have access to close to $20 trillion in assets. SWFs are considered by many as a steady source of funding, especially for infrastructure in developing nations.

The idea of SWF for India was mooted by a GoM sometime in 2011. They argued that India is woefully constrained when it comes to long term sustainable energy supply. It was proposed that India create an SWF with an intention of investing in energy companies abroad in the wake of rising oil prices and demand for energy domestically

How relevant would be for a nation like India, with a huge fiscal deficit to run an SWF?. Lets try and answer this question by analyzing some facts

Most countries that have a sovereign fund are either in surplus or have a steady supply of funds from natural resources or public money(which includes pension funds). India, sadly doesn’t have both
India is still in a deficit mode and creating a sovereign fund could actually widen the deficit and send interest rates northwards.
The idea of SWF for India is flawed in its basic premise that it would be mainly meant for oil companies to bridge their deficit and stay profitable. Companies like ONGC have ambitions of taking equity stakes in energy companies abroad. But a $10 billion fund would fade in comparision to other SWFs that run into hundreds of billions
Where would funds come from?. It not a wise idea to dip into our foreign exchange reserves and form this fund. FOREX reserves are maintained by central banks and are mainly short term in nature. There would be a major disconnect between the 2 parties on fund utilization. Also the RBI is strongly against utilizing forex money for SWF
Since most global SWFs invest in the long run, would it be a wise idea to pool in retirement funds from EPFO?. No. EPFO has objections investing in Indian equity markets. One cannot expect them to agree investing in risky assets abroad
Uncertainty of returns – Investment calls made by several energy related companies worldwide have bombed due to political unrest and domestic and environmental issues. It would nothing less that stupidity to borrow funds from the public and flush them down the drain abroad!
Many SWFs abroad have been accused to using the fund to further their political and strategic ambitions abroad. Russia has been accused of manipulating supplies to Europe
Compared to global trend, the proposed SWF is only about $10 billion(about 3% of forex reserves) compared to China which has a SWF that’s valued at $400 bn.

Considering all these factors, the following would be the way forward for an SWF(if at all it materializes)

An also-ran SWF would not make sense at all as $10 bn is barely sufficient to solve our energy woes. India would hardly be a force to reckon with and would be highly incompetent to compete globally
Ideally, a sovereign fund should be 30% of the nation’s forex reserves. Its up to the RBI and GoM to discuss how best these reserves can be used. Also, forex reserves act as a great buffer during economic slowdown. Using it to invest in risky assets abroad during a very bleak global scenario would be suicidal
Retirement funds – With asset sizes close to around $8 billion, these funds can contribute to a sovereign fund. But clear directives have to be given with accountability to workers and a minimum guaranteed returns. Am sure EPFO and GoM would never look eye-eye on this too

With so many domestic issues plaguing the nation, it would be wise to focus on narrowing our fiscal deficit, manage under recoveries by investing in domestic energy assets and moot studies to look for alternative energy sources.

The super ambitious plan of setting up a sovereign fund may end up as a damp squib or a sign of resilience depending purely on how the government plans and executes it

Investing PF money in equity markets – A quick look

2012-04-02T20:33:00.000+05:30

Originally written for India Finance brief. You can read the article here -> http://bit.ly/H9XIVf

Follow the discussion on LinkedIn here --> http://linkd.in/HGPBAR

“If you don’t follow the stock market, you are missing some amazing drama.”
Mark Cuban

Globally, retirement funds AUM amounts close to $30 trillion, making pension funds as the biggest institutional investor well ahead of insurance companies, mutual funds and sovereign wealth funds. Only private wealth, with AUM of close $32 trillion is bigger. This financial might of pension funds have given them a distinct edge over other market players due to the long term nature of the asset, large subscriber base and shareholding strength in various major corporations. Pension funds are a dominant force in the developed world with the U.S accounting for 60% of global pension fund corpus, followed by U.K, Japan and Netherlands. Systems like U.K pension system as assets equivalent to 113% of its GDP. Top 13 pension markets in the world amount to 76% of their respective economies

There is an interesting analogy between pension fund size and formal social security arrangements in developed nations. For eg, Japans pension fund, GPIF manages close to $1.3 trillion in assets, which is almost as big as India’s GDP. Almost all of the developed nations have a formal social security arrangement that is backed by such well managed pension funds that take advantage of opportunities in the rest of the world to provide a safe retirement to its citizens. Global pension funds play an active role in international markets from investing in upcoming economies to bailing out entire organizations. During the crisis of ’08, pension funds led the front providing much needed equity to stressed organizations thereby reviving them. With a long investment horizon and friendly policies by respective governments and central banks, these funds have succeeded in generating long term wealth for their retirees and provide a safe and sound retired life

Back in India, Social security measures, if any, are shallow and plagued by bureaucracy and lack of will from the government. The apex body that manages the provident fund money of a crore subscribers, the EPFO manages assets close to Rs.2 lakh crores. The entire money gets into safe instruments like sovereign and corporate debt with little exposure to debt of private organizations. How can a system, given its corruption and shallow investment policies help an average Indian take beyond the meager returns that hardly beat inflation?

Policy making in India has been historically dictated by vote bank politics and managing sovereign debt. Instead of enabling retirees to take advantage of India’s booming equity markets, the think tank is very busy trying to figure out how best could PF money be used to fund its deficit. Also, the so called ‘navratna’ PSUs borrow extensively with the blessings of the government and PF money is mandated to be invested into it, whether the subscribers prefer it or not!

Of late, there have been initiatives from the ministry of finance to introduce PF (provident fund) monies into equity markets. But they have been stuck down furiously by the labour ministry which is ultra conservative when it comes to safety of the common workers’ money. Though its justified to be genuinely bothered about the hard earned money of the labour force, the ministry should also ponder over the fact that every year, more Indians go below the poverty line than come out of it. With inflation soaring to new heights and eating away the meager returns, it has become a challenge to pull our poor out of poverty. Given that financial literacy levels and risk taking ability of Indians is very low, it makes a lot of sense to get at least their retirement money into equity and take advantage of the long term advantages equity of brings with it.

The Indian equity market on its part is dominated by FIIs, foreign pension funds, domestic corporates and HNIs. Retail participation is hardly around 20%. A rough calculation tells us that close to Rs.3500 cr of fresh PF money flows into debt markets every month. Out of this, even a token investment of 20% would provide the much needed push to the returns a retiree would get. Also, getting retirement money can ensure stability in the markets as it can help offset fluctuations due to FII flows. A market that is severely volatile due to global crises needs a domestic backing to stay stable and generate consistent returns. What could be better than letter our own citizens take advantage of the same and fatten their retirement kitty in a legitimate way. When foreign pension funds can play at will in Indian markets and boost returns for their nationals, I see absolutely no wrong in finance ministry pushing for reforms to boost equity exposure of retirement funds in the domestic markets. Focus of the government should move from solely financing its deficit to finding safe ways to ensure a safe retirement for its subjects.

Possible issues of investing PF money in equity are

No guarantee of returns – We are now trying to move towards a market linked economy rather than guaranteeing returns and burn our fingers later trying to bridge the deficit
Professional management – Though NPS has seen fair success among some autonomous bodies, managing funds to the tune of 10s of thousands in PF would be a challenge. Also, accounting the returns annually could be taxing for the fund manager
Risk aversion – Indians would always prefer to have a guaranteed return that hardly beats inflation. A series of consumer education initiatives should be undertaken
Bureaucracy – Ministry of labour and finance normally don’t see eye to eye on issues pertaining to retirement money and its seen as an infringement of a workers basic right. Though counseling could help clear such doubts, the change should come from within. That security of workers on a long term is more important that keeping them in the dark and paying them peanuts through a complex system called EPFO

India has a lot to learn from the first world when it comes to utilizing the markets to ensure a safe living for its old. Since our workforce is relatively young and accumulations over a longer period would fetch good returns, policy initiatives should be undertaken to implement the same and make this dream of mine a reality

Popularizing the NPS (New Pension Scheme)- The way forward

2012-03-30T21:14:00.000+05:30

Originally written for India Finance brief portal. Please follow the discussion on this topic in LinkedIn here - http://linkd.in/H3KJDS

“Chase your passion, not your pension” – Denis Waitley

Historically, India has been a nation that laid emphasis on a hierarchical social framework that provided the much needed cover for its elderly. Being a developing nation, our elders were primarily dependent on some sort of ‘defined benefit’ plan where the government would pay them a fixed amount per month irrespective of age and longevity. With widening fiscal deficits and mounting debt, the government has been reeling under the pressure of paying its retirees and managing to keep its deficit intact

It took not less than 50 years for the government to realize that it cannot run a ponzi show by paying pensions by running huge debts. After years of deliberation, NPS(New Pension Scheme) was introduced in 2004 for central government employees was launched and subsequently open to retail subscription in 2009. Despite the fact that NPS was modeled after successful pension schemes around the world, it has hardly picked up due to several reasons. Let’s dissect NPS and try answering the following questions

What is it?
How does it work?
What went wrong?
How do we fix it?

What is it?

A precursor to NPS, project OASIS was commissioned in 1998 to examine issues related to old age security in India. As per the project findings, it was recommended that the government introduce a scheme that may have a mix of equity, debt and cash component modeled on western systems. Thus NPS was conceived as a scheme that would have a maximum exposure of 50% in equity and rest in debt

NPS is purely a defined contribution scheme that pools in money from both employee and the employer and invests as per agreed investment norms. These norms differ based on age and risk appetite of the subscriber. Money is maintained in tier-I account that cannot be withdrawn until retirement. The idea would be to generate a fair amount of wealth that would beat inflation and act as a shield during retirement. The scheme is also flexible given that subscribers may move between options/fund managers based on risk and performance.

How does it work?

A typical NPS architecture has the following components

POPs – Points of presence. Places where the investor may walk in and transact his/her account. Includes post offices/banks
PFM- Fund managers. Professional fund managers who manages the corpus. The investor is free to select the PFM based on performance/trust
CRA –this is the record keeping agency. Very much like the ones mutual funds have
PFRDA- The super boss who regulates the whole system and takes care of the regulatory aspects

What went wrong?

NPS, a well conceived and executed plan was seen as the holy grail of social security officials who found the burden of following defined-benefit too taxing. NPS provides the average Indian an opportunity to get into equity markets where retail participation is sub-25% and generate long term wealth. The following are the reasons why NPS failed to pick up

Lack of awareness – No marketing campaign undertaken to popularize the scheme
Weak distribution – distribution is the backbone of any popular scheme and NPS seems to have lost the plot here. While its obsession with low cost model aside, lack of incentive to push the product lead to intermediaries shunning the product and pushing ULIPS more aggressively
Tax clarity – There isn’t much clarity if NPS would fall under EEE (exempt- exempt- exempt) model of taxation. Only DTC can shed light on this
Flawed cost structure – As per an E&Y survey, most respondents felt that NPS has high fixed costs and less transparency. This would surely be an issue given that faith of the common man in government institutions is at an all time low

How do we fix it?

The arrangement of having a CRA & POP as advisers should be revisited. Better incentivizing of distribution network would ensure that the POPs are better equipped in giving fair advice to investors.

As with many pension products, consumer education is the key. Educating people on the benefits of investing in NPS should be undertaken. POPs can conduct awareness camps to educate people and enable them to take an informed decision. Effective use of print and visual media should be explored by the government to send the message across to the common Indian on the street

Transactional delays because of a large hierarchical structure of NPS can be a dampener too. It takes as much as 20 days for the money to reach the PFM and gets invested. Making the process simpler by reducing the role of intermediaries and automating the process would also go a long way in popularizing NPS.

Though NPS as a social security measure looks ambitious on paper, it requires changes in hierarchy, role definition of intermediaries, incentive schemes that improve transparency, accountability and gives the common man the much needed shelter during retirement. Though we are late when compared to western nations in utilizing equity for pensions, its time India wakes up to this challenge of pension burdens and enables its citizens to make best use of equity and build a safe boat to tide over retirement

Formal Social Security in India – dream or reality?

2012-02-16T21:34:00.001+05:30

Originally written for India Finance Brief. Link can be found here

“A market that's as open as possible is the precondition for a successful economy, and a successful economy is the precondition to being able to pay for social security” - Gerhard Schroder

This quote by Schroder reaffirms common perceptions people have about social security and the role the nations’ economic might plays in it. Though it seems practical that only developed nations with streamlined policies, efficient tax collection and social security distribution network would fit this description, developing nations like India are also flirting with the idea of having formal social security processes with the help of technology and innovative schemes to reach the poorest of poor

Statistics tell us that more than 30% of the worlds’ poor live in India. At least 90% of the workforce in India is not covered under any forms of social security measures. Apart from government servants and corporate employees, others are left to fend for themselves when it comes to protecting their retirement nest. Most of our poor live under conditions that are inaccessible to their own governments and throws challenges on reaching out to them and implement measures to alleviate poverty. While social security in the west emphasizes on protecting the lifestyle of retirees, countries like India should view it as a tool to protect the poor from drastic economic, climate and policy shocks. The question here would be would the government be well equipped to implement a nationwide policy given the various loopholes in distribution and lack of will from the ruling party.

Defining objectives

Its crucial that a developing nation cannot afford to embark upon ambitious schemes that target the poor and aid ‘poverty alleviation’. The aim should be to ensure that the divide between the rich and poor doesn’t widen and that the poor don’t slip into the vicious cycle of deprivation, extreme poverty and erosion of human capital. The two pronged approach of keeping them afloat and help them move out of poverty should be addressed through policies like free access to healthcare, rural insurance, grameen banks, primary schools etc. that protect human capital.

No social security measure would succeed without help from macroeconomic policies of the government. The central bank, as an accountable entity should frame its policy to protect the poor from Inflation that pushes people below the poverty line due to erosion of wealth. Also, supply side dynamics should ensure that price fluctuations don’t affect the common man. Shocks due to mismanagement on the part of the government might paralyze the social security measures and bring the process back to square one!

Who deserves formal social security?

The line has to be drawn between the ones who are financially sound and can contribute to the social security kitty and the ones that don’t. Its typically the ‘needy’ that need to be covered first. Though this view may sound too populist, ground reality is that the nations’ development is not just dependent on the rich becoming richer but the poor not being let to become poorer. A recent report by ILO (International Labor organization) points out that India has fared very poorly when it comes to protecting the vulnerable. It also comments that schemes like NREGA have only drained the system and aimed at retaining vote banks and not at alleviating poverty. In a nation were only 20% of elderly receive some form of pension, its wise that the government starts taking measures to prevent a scenario when the country ages and its burdened with humongous pension bills!

Social security in the west – What do we learn?

The west is light years ahead of us when it comes to designing social security measures and implementing them across demographics. Data suggests that pension funds in the U.S are the biggest in terms of asset size at $13 trillion and has played a crucial role in bailing out companies during the recession of ’08. Though it may be argued that U.S today faces a huge unfunded liability owing to an aging population, they are still better placed than most of other developed nations. Most of these nations started ‘early’. Their social security systems were designed after WWII when economies were booming and productivity was improving.

Potential benefits of having a formal social security measure in India

Protection of the poor from socio economic shocks and enhance productivity through employment opportunities
Strengthen human capital as alleviation of poverty has a direct correlation with productivity hike
Social stability through generation of jobs

Possible pitfalls

Argument that social security measures may have vested interests from the ruling government and maybe a mere eyewash to retain vote bank
Encouraging more people to be lazy and dependent on government for their daily bread.
Strong skepticism among public on implementation of such schemes and political lobbying for or against certain schemes

Though its true that expenditure on social security and its ROI wont be calculable, the ugly truth is that we are still a poor nation and drastic measures are needed to raise the well being of public. Social security may not be ‘the’ best way of stoking economic growth but it can a first step towards building a stronger, productive and sustainable growth in the long run

The joke called rating agencies! - Do euro zone ratings make sense?

2012-02-09T22:48:00.001+05:30

"Junk bonds prove there's nothing magical in a AAA bond rating" - Merton Miller

Rating agencies are traditionally known to be neutral players in the market who, in the interests of buyers of debt rate the issuer based on fundamentals, financial strength, repaying capacity and stability of future cash flows. They play a crucial role in pricing of sovereign debt (bonds that countries issue) which would directly impact domestic interest rates, cost of borrowing and general sentiment in the market. Developed nations have a robust system of ratings where the agency takes an independent view of the situation at hand and rate the issuer. All is hunky dory when the economy is booming and nations pile on debt in anticipation of further growth and increased appetite in global markets until that day in Sep’08 unfolded in front of our eyes

The death knell was delivered in 2008 when the institutions which were considered ‘too big to fail’ came down crashing dragging the global economy along. The recession as we popularly know it changed the global view on rating agencies and questioned their credibility on rating instruments that were soon waiting to become toxic. Since the hawks in Wall Street were oblivious of the devastating impact such a faulty rating system would bring along, things came crumbling down before they could say ‘abracadabra’

After the meltdown, it was widely expected that nations would learn the lesson and get financial discipline in order; a looming crisis in the euro zone threatens to disrupt the road to recovery and drag the world to 2008 levels. If ’08 was caused by corporate greed with the approval of rating agencies, the euro crisis of more of fiscal mismanagement and short sightedness by central banks of euro zone nations

Many experts are of the opinion that rating exercise is merely an eye-wash aimed at saving the face of central bankers and erring governments who reel in perpetual debt. Given that rating determines to a fair extent, the borrowing cost of a country and domestic interest rate movements, its imperative that central bankers keep the rating agencies 'happy' and achieve their twin objective of cheaper bonds and financial stability(at least on paper). Though this strategy seems to work in the short run, its very harmful in the long run and is currently manifesting in the form of euro debt crisis. Though people may argue that the crisis is not a direct fallout of questionable rating methods, rating agencies have come under the scanner post Lehman'08.

The following infographic (from reuters - http://www.economicsinpictures.com/2011/12/credit-ratings-of-european-countries.html) would give us a good idea of how countries have been rated by various agencies and more importantly, why their significance is of mere academic interest!.

Some key observations from the ratings given to nations

A country like India, which has far better control systems in place in banking and general business regulations by RBI and SEBI has a rating of just above investment grade (BBB) and nations that have a debt/GDP of over 120% have AA and above!. Ironically, if any of the nations default, developing nations like India would face the brunt as the global economy is more intertwined than ever!
England, which as per reports is flirting with borderline recession has been given a AAA while France, which has better budget deficit than England was awarded a rate cut(AA+)s
Austerity as a measure is generally expected to reduce government costs and reduce budget deficits by way of savings. This would, in the short run help pay short term loans. But rating agencies seem to think otherwise. They are of the opinion that austerity diminishes economic growth as it impedes investments and makes the nation go on the ‘defensive’
A case in point in Portugal and Greece. The rating cuts were steeper when these nations seriously considered austerity measures to stay solvent

Shifting the blame solely on Greece is something that other nations have managed to do without realizing that they are on the same boat. Such actions coupled by hypocrisy from the ECB in terms of cornering a few nations despite knowing the fact that nations like France, Germany and U.K aren’t in good financial shape has only put more pressure of a bunch of small nations to come out clean on debt. How the global economy would be in case of a sovereign default is a matter of how united are countries in the euro zone in saving the common currency and make sure that their house is in order. Meanwhile the role of rating agencies need to be revisited and disproportionate power and clout should not be handed over to them to maintain some sanity in the zone!

Rating cuts should move on from being a ‘reactive’ measure to an active measure that doesn’t take markets by surprise. If one notices, rating downgrades have been handed over in bulk to nations and has caused tremendous volatility in global markets. Its in the best interests of the entire global business climate that the role of rating agencies is revisited and stringent accountability norms are in place to improve transparency and unbiased reporting. Euro zone is slowly drowning in the grave it dug through years of shallow fiscal practices, flawed financial system and sovereign bankruptcy needs a radical rethink of core issues if it wishes to avoid long periods of stagnation and economic turmoil

Pension crises across nations. Where do we stand?

2011-07-13T15:45:00.000+05:30

My third write-up in India finance brief under Social security in India. The original link is here http://www.indiafinancebrief.com/opinion/157-from-the-editors-desk/114784-pension-crises-across-nations-where-do-we-stand

I'm retired - goodbye tension, hello pension! ~Author Unknown

Pension – The very phrase politicians and policy makers alike try to shun and consider it as the ‘holy cow’ whose reforms would weaken their political sustenance. Voices calling for its reforms are silenced and nations live in denial when it comes to facing the reality. The lack of such proactive action is now manifesting itself and threatens to erode hard earned wealth of tax payers

As we speak, nations are far fetched when it comes to planning for future pension liabilities. Many governments around the world have advocated Pay as you go (PAYG) model for social security. Though it works well for paying present liabilities, such models essentially push nations into perpetual debt. Factor the U.S.A s’ pension’s model- As per a Bloomberg estimate, the U.S government faced a planned pension liability of $3 trillions in late 2009 and was short by almost $1 trillion owing to the financial crisis that engulfed the nation during that time and eroded asset value. Apart from this, the windfall issuances of ‘Pension bonds’ by institutions after 1997 resulted in a major crunch when redemption of such bonds were due. According to Mr. David Zion of Credit Suisse Holdings U.S.A “If the returns of such stressed assets don’t exceed the cost of raising the bond, the taxpayers ultimately suffer”

So, who is to be blamed for ruining the poor taxpayer?. The government? The fund managers? The financial markets? Though it’s fashionable to blame the government, it should also be remembered that faulty accounting practices that tend to normalize losses over a longer period of time sugarcoats the bad news and delays the inevitable. Funds that have been reporting expected revenues of 8% are now returning only 2-3%. Accounting standards of such funds are questionable and need monitoring

In a trend not seen in Asian nations, the U.S pension funds invest up to 60% in equity and rest into bonds, real estate and less riskier assets. For a country that grows at an annual rate of 3%, it’s indeed miraculous for a pension fund to return 8%. But these funds still return 8%. How? The answer lies in ‘Pension obligation bonds’, bonds that are risk free and are backed by taxpayers’ money whose very social security is the reason these funds are meant for. Sounds like whirlpool of debt doesn’t it? Warren buffet, the billionaire investor from the U.S warned that over-promising and under performing funds would only lengthen the fuse of the time bomb and problems would show up in the longer run.

Now let’s compare and see how other countries fared compared to the U.S model of pensions. Such speculative practices followed by the U.S were aped by Puerto rico, a small U.S commonwealth chose to under-fund their pension liabilities. The nation arbitrarily increased pension payout to 75% of salary from 40%. This resulted in the nation declaring a liability of $12 billions while having assets worth only $2.3 billions.

Coming closer home, South Asian countries tend to fare better in terms of risk taking and stability of pension numbers. China, for instance has the highest ‘Pension wealth’ – an indicator of the asset value with a household that covers future pension requirements. Following China closely are India, Vietnam, Taiwan, Pakistan, Thailand and Srilanka. This trend may be attributed to the fact that such nations have a strong culture of household savings. This can also be contributed to the fact that India. Philippines, Pakistan and China lead in ‘replacement rate’- the effectiveness with which a pension system matches up to the last earnings of the individual. With an average value of 75%, such nations are safer when compared to the west.

Most of the OECD nations fare very badly under the same indicators. Most of them have replacement rate of <50% and ‘Pension wealth’ far less than Asian nations. Could be attributed to the non-prevalence of a savings culture in those nations and a fully developed institutionalized social security model

Developing nations are also trying their desperate best to contain pensions by increasing retirement age and downplaying mortality numbers. The full effect of demographic overlap is yet to drag the growth story downwards.

Though there may be reasons to rejoice for countries like India, one has to understand that we are still a fast developing nation with never ending needs. It remains to be seen how long are we able to sustain our savings rate and stay afloat. Our culture of saving for a rainy day may have helped us tide such a huge crisis so far but only proactive long term calibrated planning would help avoid a situation many developed nations are facing.

It’s good to dream of becoming a developed nation. This dream should not shortchange our future generation by jeopardizing their tax wealth and compromise their retirement life for the sake of providing a better today.

Pension reforms in India – Is PFRDA bill the answer?

2011-07-04T16:33:00.000+05:30

My second write-up in India finance brief under Social security in India. The original link is here http://www.indiafinancebrief.com/component/simplestforum/postlist/7/19

Comedy writer Gene Perret once quipped “Retirement- It's nice to get out of the rat race, but you have to learn to get along with less cheese”.

Sad yet true! The end of ones productive years ushers in a dark period of uncertainty and insecurity. Most of the retirees don’t accumulate a corpus big enough to ride through the last few years, and as Gene mentions “learn to move on with less cheese”. Deterioration of health and lack of institutionalized social security only makes things worse for the retired. Once an average Indian lives up to 60 years, he/she is expected to live for 17 more years. The social security nest that he builds over his lifetime has to accommodate his needs in the remaining years. Going by current levels of inflation and hike in healthcare costs, one shudders to think about consequences of an ill managed retirement

In a fast paced economy like ours, a young and ever growing labour force is our competitive advantage. This generation is expected to accumulate good amount of wealth for the nations in terms of savings and investments which in turn would propel the economy to dizzying heights. An estimated 920 million Indians would be in the job market by 2025. The older generation would pave way for the young to take the nation forward. With labour mobility and emergence of flexible working styles on the rise, this ambitious generation would change the traditional Indian attitude of working ‘life-long’ to retiring early and enjoying the fruits of labour.

Historically, India never had a comprehensive social security system. Formal retirement plans cover only about 12% of our labour force. The rest are let to fend for themselves or rely on private pension plans. There are a few mandatory schemes for state and central government employees under the EPS umbrella. States in India have followed ad-hoc procedures with questionable rationale in fixing pension liabilities and never really bothered to enforce fiscal discipline. This led to introduction of FRBMA in 2003. Even then only few of our states today show signs of improved fiscal behavior. Need for Fiscal stability of such schemes has propelled to the shift happening to ‘defined contribution’ which is more predictable and augurs well for long term sustainability of such reforms.

A direct link to retirement corpus of an individual can be linked to savings rate. As per a WSJ release, India has one of the highest gross domestic savings rates in the world at 35% only behind China and Malaysia. This includes savings in cash and physical household savings (gold and property). A significant chunk of our population lives in tier-II cities and tends to save more owing to lower costs of living. Such developments act as valuable inputs for an institutionalized social security system that strives to cover all its citizens. Its like a huge pie that the government must judiciously use to protect its citizens and maintain social cohesion at the same time so that any particular segment of the society doesn’t feel compromised or taken for granted.

With the introduction of NPS (New Pension Scheme), the government think-tank is paving way for a contribution based, effectively managed delivery model for pensions in India. It faced stiff opposition from labour groups that have pressed for ‘defined benefit’ model of pension payments without understanding the huge fiscal ramifications that can be disastrous. If one remembers, the left parties defeated our PM’s ambitious plans to pass the PFRDA bill in 2005. NPS aims at bringing in professional management, transparency, accountability and portability to managing the monies of the largest labor force in the world. It’s the world’s lowest-cost model for retirement benefits and seen as the panacea for all the problems that have clogged the social security juggernaut. Yet, NPS has failed to take off since its launch to non government staff. Poor marketing, skeptics questioning equity returns and lack of past performance have not helped matters either.

The PFRDA bill, after an aborted attempt in 2005, has been reintroduced in the parliament last month. Surprisingly enough, the opposition has also given thumbs up to the bill this time. The bill strives to give PFRDA full powers to manage and develop the industry. Also FDI cap of 26% is also proposed for this industry in line with Insurance. Though ‘All izz well’ when it comes to introducing such reforms, it remains to be seen how effectively it’s implemented and how extensive is the reach of such reforms.

Some key points and observations about this bill, if implemented

The good –

Proposal for FDI to be capped at 26%. Many FDI’s(including AVIVA, AIG, AXA) who have exhausted their cap in Insurance firms in India may look at entering the attractive pensions market
Swavalamban scheme that aims to incentivize members who contribute a maximum of Rs.12000 per year. This should encourage the unorganized sector to pool in savings
An opportunity for the average Indian worker to take advantage of the booming markets and build a corpus faster enough for a rainy day
Effective channelization of funds to much needed sectors like infrastructure, green energy etc. This would result in a symbiotic relationship and such sectors would get ready equity from pension funds, thereby reducing cost of operations and enhanced profitability that would be eventually passed on to the investor over a longer period of time
Take the burden of pensions from state and central government and help them rein in fiscal deficits as pensions payment is the largest component of state expenditure.
Judicious allocation of assets into equity/debt and liquid funds resulting in optimized returns. Would also meet the demand in the bond markets as pension funds look to invest for longer periods
Act as a boost for private insurance firms as a part of the retirement corpus would be utilized to purchase an annuity.
Pensions would now be free from politics and linked more to economy.
Last but not least, empowering the investor to decide his own strategy of investing(Active/passive)

The not so good

Tax treatment of such pension funds is still unclear. As of now, premature withdrawals are treated as income and are taxed. Hope DTC implementation in 2012 answers this
The private annuity market in India as of now is underdeveloped. The stupendous performance of a pension fund may be crippled with non-availability of suitable annuity plans at maturity
Distributors of NPS need to be incentivized more to reach the weakest sections of the society. Penetration levels for NPS have been far from satisfactory
Poor financial literacy and risk averseness of the average Indian acts as a major hurdle to such funds

In totality, if India wishes to tide over the huge demographic mismatch that would happen in the next 30 years, it has to implement pension reforms at the earliest and make sure that while the government carries on with it’s core job of maintaining fiscal stability, its citizens must also be adequately covered to have a safe and hassle free retirement

Changing demographics and lifestyle - An impending crisis in India

2011-06-29T11:35:00.000+05:30

I wrote this opinion piece for India finance brief in March'11. This entry was judged the best article in Tradebriefs''Industry opinion contest". The original link is here --> http://www.indiafinancebrief.com/opinion/157-from-the-editors-desk/114134- . You can also follow the discussion on LinkedIn here --> http://www.linkedin.com/groups/Changing-demographics-lifestyle-impending-crisis-3825162.S.46746265

Do read and let me know your comments!! :)

Over the last 63 years after independence, India has been making giant strides in almost every field that was considered a monopoly of the west. Be it textiles, agriculture, manufacturing and of late, IT and ITES, India is pitching hard as a worthy contender for international recognition and status of a superpower. The economic reforms spearheaded by the government in 1992 accelerated this growth to newer pastures like bio tech, renewable energy, medical research and eco tourism. These achievements were possible because of our biggest asset – man power. With a 1.18 billion strong population and no dearth of opportunities in a flat global village, we are poised to achieve greater heights and glory. In contrary to the Malthusian view that population growth would put pressure on scarce resources and impede growth, many south Asian counties, including India have accelerated growth by judicious and effective use of human capital as an engine for growth in the last 30 years.

Gone are those days when India was stricken with poverty and malnourishment. Children died in large scale famines and life expectancy numbers were abysmally low. In 1920s, India had an astonishingly equal birth and death rates – 48 per thousand. The raging WW-II didn’t make things any better for India. Since then, our population has virtually exploded to touch 1 billion in 2001. Fast forward to the 2009 – Due to improvement of living standards and advancements in medical field the same figures stand at 22.22 births and 6.4 deaths per 1000. Average life expectancy is a tad less than 70 years now.

Amidst all the brouhaha that a country that has 65% of its population below 35 years

of age would take the entire world by sheer numbers, there is an uncomfortable demographic shift that’s happening in

India

and most of us are oblivious about it. We are facing a huge “age-quake” that threatens to erode hard earned wealth of nations

The U.S.A, given the boom it post WWII is now facing challenges to provide social security for its aged and disabled. Statistics tell us that “baby boomers” (born between 1945 and 1962) are retiring now and is eating a huge chunk of U.S spending on social security. A concept called “Spending wave” suggests that once a generation of people age and move into their unproductive years, they tend to burden the economy and increase costs for the state to maintain them. AARP (American Association of Retired Persons) has been frantically lobbying for higher spending for retirees. As we speak, the nation is today facing a huge pension crisis with an estimated shortfall of $1.5 trillions.

Take Japans case- Japan had a boom in population in 1930-1940s when 37% of population was under 14 years of age. When this generation eventually retired en-masse in 1990s, Japan faced a huge deficit in allocation for the aged and disabled.

How does all this affect us? Or rather why are such things being discussed when things back in

India

are hunky dory? If one watches closely, India is also facing a similar “demographic time bomb” waiting to explode and take down the economy with it. The massive economic growth that’s been talked about in India comes with a price tag -The price we pay for medical care when this booming generation retires. If one notices, the following has happened to our society in the last 20 years

1. Emergence of nuclear families

2. Lifestyle disorders arising due to an unhealthy lifestyle

3. Ever widening gap between haves and have nots

4. An intent to break away from shackles and social taboos

In a way, parallels can be drawn between the baby boomers of the U.S and the current Indians who were born between 1975 and 1990. This generation was the first to taste the fruits of economic reforms and grabbed opportunities that came their way. This cohort considers itself different from all the previous ones. They also carry a distinct cultural identity that emphasizes on individuality and freedom.

This is the generation that would retire in the next 40 years. The number of elders (>60 years) would increase from current levels of 7% to about 25% by 2050. Also, by 2050, it is estimated that the number of people below 15 years of age would be same as that of those above 60. This is really alarming for the following reasons

1. A nuclear family structure means that the elderly would have to fend for themselves or depend on caretakers

2. A flat world with opportunities means that the younger lot may feel its burdening and emotionally taxing for them to take care of elders

India, traditionally never had an institutionalized social security in place. The current public health insurance and old age pension schemes in India are woefully inadequate. However, all these years, the joint family system has been of immense support as far as elderly care is concerned.

Are we prepared to face this eventuality?

Many demography experts are of the opinion that the elderly, once out of their productive years may start draining resources of the family. This might eat away hard earned wealth of the nation thereby applying the brakes on growth. Thus, average productivity of the Indian work would fall substantially as the worker ages and also takes the burden of elderly care. Estimates suggest that dependency ratio (the ratio of elderly dependent on the young) would zoom to 23% by 2050

The current social security system in

India

is woefully under prepared to face such a calamity. Given that 80% of these elders would dwell in villages and a major proportion of them being widows/widowers, it shudders to think how the government would come up with a system that gives them a right to dignified living.

Also, Insurance companies are reluctant to cover people beyond 60 years as they carry huge risk of falling sick and needing emergency care. Given that India doesn’t have a history of affordable geriatric care, things don’t seem positive in the long run.

The need of the hour

If we wish to tackle this demographic shift, a four prong strategy is required that ropes in Insurance companies, tertiary care centers, Geriatric specialists and Pension regulators and forges a partnership between them.

Hybrid products that can tie up with tertiary care centers would definitely augur well for the elderly.
Also, pension regulators need to popularize NPS (New pension scheme) and set aside a corpus every year that would pay them a defined amount apart from the actual pension drawn by the elderly.
The role of geriatrics would move from curing the elderly to caring for them to enable a dignified living. As of now, geriatricians are a rare breed in India. Government must allot subsidy for doctors who wish to take up geriatrics.
Budget allocation on health (which stand woefully at 1-1.5%), along with tertiary care centers in villages would help alleviate this problem.
NHRM (National rural health mission) lists about 15 programmes. Would be great if they can include elderly care too

Hope India wakes up to this challenge posed by demographic change and tackles it with vigor, determination and a sense of compassion for our elderly!!

Union budget 2011-12- A quick look

2011-02-28T14:26:00.000+05:30

So, the much awaited yearly exercise is here. All eyes glued to the TV and internet to see what our honorable FM has got for us up his sleeve. Lets have a look at the buildup to this budget

2010-2011 - The year that was

Courtesy - Deccan herald

A huge fiscal deficit of 4.8% fueled by a strong currency crunch and slow recovery of global economy after the recession. The unexpected inflow of 3G auctions money helped reduce this deficit. The overall borrowing of the govt was pegged at 3.54 Lac crores
GDP growth was at 8.6%. After seeing a dip in 2009-10, there was a good rebound in 2010-11
Average inflation has been hovering around 9% for most part of the year owing to high commodity prices in the international market. Political turmoils in the middle east and north africa hasnt made things any better for the commodities space.
Current tensions in Libya have seen oil hitting the 100$ barrier after a long time and poised to go even further north
The SENSEX has been relatively flat throughout the year with cautious optimism in the market keeping it in a relatively narrow band.

The monetary stance of the government changed from "Excess liquidity" to "tight liquidity" since March 2010. All the excess money was mopped up by hiking interest rates every now and then. March 2010 was the last time the system was in excess cash. Repo and reverse repo were hiked by 200 and 150 basis points respectively this year. As we speak, the system is in systemic liquidity deficit and borrows close to 70k crore per day through RBI's repo window. Also inflation remained stubbornly high for most part of the year owing to supply side constraints to start with. This was further fueled by inefficient storage systems and bureaucratic hassles. But later on, the inflation became more broad based and factored demand side pressures too. The average Indian today earns more and is willing to consume, This has also led to hike in inflation.

Mutual funds, that saw a bloodbath in 2009-10 owing to excess redemptions, saw decent returns in last financial year. Particularly ELSS has outdone other MF categories owing to the long tenure and less redemption pressure.

Budget 2011-12 - Highlights

FII's can invest directly in Mutual funds - This gains importance as MF industry has been battling volatility and cash crunch.
The disinvestment target of Rs.40,000 cr is as expected. The previous highest disinvestment done by the govt was Rs.23,550 cr in 2008-09. Doesnt surprise me much because given the response CIL got last year, the companies that are lined up this year are IOC, MMTC and Rashtriya ISPAT ltd might also get positive response from the market. But FM has assured that the 51% govt holding in all the PSUs would stay. Sudden and full disinvestment would only result in
GST has been a long pending reform from a taxation perspective and would bring states to a consensus on taxation. FM has indicated that the April 2011 deadline would be met. If the I.T infrastructure is in place, it would roll out by April 2011
Service tax retained at 10% - Good news for corporates. Expecting the market to give a thumbs up to this
Not much of an emphasis on FDI in retail - FM should have given FDI more room as retail is expected to boom in the years to come. Maybe the FM thinks time is not ripe yet!
Fiscal deficit pegged at 4.6% - Borrowing numbers stand at Rs.3.43 crores(almost same as 2010-11)On expected lines. But what remains to be seen is how this gap would be filled up and where would the revenue generation happen? Good signs for banks as they see hike in borrowing. See more action in corporate bonds this year. Also the expected fiscal deficit for 2012013 has been pegged at 3.5%- not a mean task to achieve.
Expenditure estimated to be Rs.4.4 lac crores, up 18.3%. This would be tough for the market to digest because one wonders where govt would raise so much to spend?. How long would it take to implement such expenditures?
Storage capacities for grains to be increased - This could have be a double edged sword. Though the govt wishes to curb inflation by reducing wastage, this measure could increase the MSP(Minimum support price) which is a direct input to Inflation.
There is not much of clarity in FII investments in infra sector bonds. Given that the current limit itself is not fully utilized, how much of an impact this would make?. A better measure would be to hike the limits for salaried employees to make these bonds an attractive option.
Easier service tax refunds for SEZ - Well, a good sign but remains to be seen how its implemented!
So far, no strong words on Inflation - Signs that FM would pass the buck to RBI. Not a good sign as its the govt stance and RBI core committee that devises monetary policy. In his words

"But it (inflation) clearly remains a concern... But I expect the policy taken by RBI to further moderate inflation in coming months... Average inflation to be lower next year. Difference between retail and wholesale prices is unacceptable" finance minister Pranab Mukherjee said while presenting the Budget for 2011-12

Fertilizer sector gets infrastructure status - Good news. Would make it easier for them to pitch for financing through the issue of bonds under infra category
The oil sector has nothing much to cheer for as there arent any tax sops for them. Seems status quo would prevail
Some good news for salaried individuals. Exemption limits for salaried class has been hiked from 1.6 Lacs to 1.8 Lacs. Would result in a loss of Rs.12,000 cr. But its not as good as it sounds because inflation is anyway eating away this nominal exemption hike.
There is a proposal to hike service tax on air travel and posh restaurants - This must be bad news for airlines that are already battling losses.In lines with the popular trend of taxing the wealthy and rich
Credit flows to farmers hiked to Rs.4.75 lac crores. Good news for the agricultural sector. Also import of agriculture machinery wold be taxed at 4.5%. This is a sharp decline from 5% last year. But this may benefit only the large farmers who enjoy the subsidies and evade taxes. Would not make much of a difference to the small and marginal farmers(who incidentally comprise 75% of farming population)
Defence sector has been getting a huge share in budgets every year. This year too, defence gets a cool 1.64L crores. FM has also indicated he may loosen the strings more if needed
Some good news for senior citizens. The age to qualify for tax exemption has been brought down to 60%. Also a new category of senior citizens above 80 years has been formed. They would get exemption till Rs.5 Lac per year
Tax free bonds to the tune of Rs.30,000 crores announced. Given that infrastructure has long gestation periods and grappling regulatory issues(skirmish between environment & mining ministry, for eg) one wonders how the govt plans to generate revenues to justify this huge spending
Overall growth projection stand as under

GDP -8.6%
Agriculture - 5.4%
Industry - 8.1%
Services - 9.1%
Projected GDP growth is at 9%

100% hike for anganwadi workers - A populist move
MAT(Minimum alternate tax) to be hiked from 18% to 18.5% - Am of the opinion that the govt wants to be on the safer side in taxation to avoid tax evasion on book profits by companies
Iron ore export duty raised to 20%
Setting up of public debt management office is proposed. This would streamline debt borrowing program and reduce the burden of RBI. Public debt bill to be introduced soon
There is lot of emphasis on rural infrastructure and agriculture spending but all seem very far fetched given the sorry state of affairs in the respective ministries. They have not done enough to secure food for the BPL families and farmer suicides continue unabated.
Some encouraging news on PPP(public private partnership). The policy framework is in initial phase. Would love to see how the govt makes best use of this model in agriculture sector
No changes in DTC implementation. The deadline of April 2012 would be adhered to

Overall, the budget seems to give an impression that the govt is planning big for the future without looking much into the present.Huge investments without any concrete time-frame for returns may come back to haunt us in the coming years. It has tall plans in almost all the sectors but little plans and no tenable road-map to realize those dreams. There has been good thrust on agriculture(30% increase in credit flows to farmers)but given the inefficiencies and rot in the system, am afraid if any of them would reach the intended recipient. As i said earlier, it would be pocketed by the big farmers. The LPG and kerosene subsidies seldom reach the BPL families. A direct transfer, if implemented properly would serve the purpose. Any ambitious plan has to be backed up by a suitable revenue model. This seems to be missing. The budget is also mum on tax exemptions as everyone seems to be waiting for DTC regime to take over. For the common man, this budget gives nothing much to cheer for. All the schemes announced would only succeed if efficient governance is in place. This budget could have focused on I.T infrastructure for governance as its public knowledge that an I.T system goes a long way in reducing corruption. Any budget would be a success only if it manages to reach the right person. Seems only baby steps are being taken in this direction. The salaried class feels utterly left out.

Budget - 2011-12 - Large dreams, no clear vision and not practical enough.

SBI Lower tier II Retail bonds issue - An overview

2011-02-19T17:28:00.001+05:30

Inflation, Interest rates, Economic uncertainty, Turbulence in markets - Do such words dazzle you when you are about to decide on your investment vehicle? Do you wish to steer clear of all these market risk factors and expect a decent return out of your investments?. To be on the safer side of risk-taking, one should look at bonds that tend to give better returns(interest) in a rising interest rate scenario. As we speak, our economy is witnessing a spree of interest rate hikes by the RBI in the last one year. Though supply side constraints are cited, there is a huge upward pressure on Inflation as the average Indian is consuming more and is willing to spend more despite supply side pressures.

If we sample the Indian debt markets, the g-sec has moved close to 70 basis points in the last 8 months(7.57% in June 2010 to 8.18% now). Short term interest hover around 9.85%-10.05%. Banks, pressurized to keep their deposits in line with lending growth are offering high rates for short term deposits. RBI has sternly warned banks to beef up their deposits as the divide between deposit and credit growth is widening.

One such measure adopted by banks is to issue bonds that pay a fixed coupon(interest) income every year. One such recent issue was the 9.50% SBI bonds a few months back. The issue saw a phenomenal response and was over subscribed 20 times. SBI is now coming up with another retail bonds issue for Rs.1000 cr with a coupon rate of 9.75%(10 year with call after year 5) and 9.95%(15 year with call after year 10). These instruments pay higher interest than the current market benchmark(9.20%) for a comparable paper. The issue is given the highest rating of AAA.

If you purchase a 9.75% bond for 10 years, this is how your cash flow looks like - SBI pays you interest at 9.75% on the specified interest payment dates every year. After 5 years, based on the prevailing interest rate scenario, the bank may decide to call back the bond and pay you the principal amount. Two scenarios are possible

1. Interest rates after 5 years are too high - SBI may feel that its wise to pay 9.5% coupon to existing bond holders rather than borrow from the open market at higher rates
2.Interest rates moderate in the next 5 years - SBI may feel its too costly to service a loan at such high rates and may choose to recall the bond and pay off the principal

Also, SBI plans to list this bond in NSE. What this means to an average investor is that he may go to the market and sell of the bond at a premium, in case the interest rate moderates.

Who can invest?

Individuals (50% reserved for retail)
Institutions(25%)
HNI(25%)
NRIs are not eligible to apply

Though there is a cap for each category, based on response SBI may increase the issue to Rs.2000 crore.

What are the documents i require for investing?

Filled up application form
PAN copy
Cheque/Draft favouring "SBI bonds public issue 2011(Tranche 1)- Escrow account" marked as A/c payee only

What are the important dates for this issue?

The issue opens on 21st Feb 2011 and closes on 28th Feb. It has been clearly mentioned that the allotment would be on first-come first-serve basis. Its prudent to get the application submitted on day 1 itself.

Where should i submit forms?

You can visit the nearest SBI branch, fill up the form and submit it to them. The earlier you do it, better would be your chances of getting allotment. If you wish to have a look at the draft prospectus, you can find it here - http://bit.ly/ebukhf (PDF file)

Do i need a DEMAT account to invest?

Yes. You need a working DEMAT account as the bond issue is entirely dematerialized.

How is the tax treatment for this issue?

The SBI retail is not income tax exempt. This means that the income that accrues out of the bond would be taxed as per your tax slab. Your returns matrix is as below

Tax bracket	Effective post tax return(for 9.75% bond)
10.30%	8.74%
20.60%	7.74%
30.90%	6.74%

As it can been seen, if you fall under the lowest tax bracket it would make sense for you to invest.

How much should i invest?

Minimum of Rs.10,000 and maximum of Rs.5,00,000 for retail investors

Who should invest?

Senior citizens who have exhausted their SCCS(Senior citizens savings scheme) should look at SBI bonds as an option.
Investors who have built a decent equity portfolio and expect an annual expense, say a child's education etc should consider this bond issue.
Investors nearing retirement and wish to go for a steady, low risk investment

Who should not invest?

Investors who wish to build a portfolio for long term. As income is non cumulative, there is no real corpus building that happens in such instruments
Investors who fall under the highest tax bracket should shun this issue as it would return them only 6.74%.

Alternative investment avenues

PPF - Gives you steady interest free returns of 8% annually
FD - Gives you lower returns. But high reinvestment risk as one has to scout for investment avenues once the FD matures.
Debt funds - They also give comparable returns and are more liquid

Now that food inflation has moderated, RBI may choose not to hike interest rates again in the mid-march review. If crop numbers turn out well, we shall soon return to moderate inflation mode. The era of high interest rates may soon come to an end after this financial year. So go ahead! Assess your portfolio, invest and make the most of it!

Happy investing!!

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Lets talk Psychology!- A survey on perception of death and bereavement

2011-01-20T17:01:00.001+05:30

"Every soul shall taste death; In the end to us shall ye be brought back” – The Holy Quran.

Let’s accept it. Death is inevitable and no one escapes it. Humans have always had this fear of the unknown and any morbid discussion in public is frowned upon. One is not encouraged to talk about this eventuality by elders, teachers and the society at large. Though we strive to know what’s on the other side of death, we are not bold enough to face it. Death has always remained an enigma even to the spiritually enlightened souls.

This survey is an attempt by me to try opening peoples’ minds and finding out what humans actually think, perceive and look at death and bereavement. The topic is a delicate and touchy one. I have tried my best not to hurt any sentiments or revive any memories. If you feel you can’t handle such questions, I suggest you withdraw from the survey at any point. Your participation in this study is completely voluntary. There are no foreseeable risks associated with this project. It is very important for me that you open your mind for me to learn your opinions on this topic. All questions are mandatory.

Your survey responses will be strictly confidential and data from this research will be reported only in the aggregate. No personal details would be collected from you. If you have questions at any time about the survey or the procedures, you may contact me at salarbijili@gmail.com.

Here is the survey link - (RIGHT CLICK AND OPEN IN A NEW TAB)

https://spreadsheets.google.com/viewform?formkey=dGdnd1RxTllsZkZjMjNaSjdKUHdJelE6MQ

ULIPS - To invest or not to?

2011-01-17T15:39:00.001+05:30

Rewind to mid 2007. The economy was booming. India was termed as the next big thing. Real estate peaked. Sub prime crisis was at its nascent stage and i-bankers brushed it aside citing bloated 'strong' fundamentals. Signs that the economy was heating up were ignored by investors. Everyone wanted to ride the boom wave and make lots of money. In the middle of all this , an interesting phenomenon was happening in the Indian insurance circle. Its termed as ULIPS (Unit Linked Insurance Plan). Wiki defines it as "A unit-linked insurance plan (ULIP) is a type of life insurance where the cash value of a policy varies according to the current net asset value of the underlying investment assets" It was gaining popularity in this period as liquidity was too high, FIIs were pumping in lots of money into a bubble that would eventually burst a year later. The idea of ULIPs in India brings back memories of UTI launching a mutual fund with tax cover in 1960s. UTI played around with double benefit of Insurance and Returns. It crashed big time once liberalization came into force and others took over. The rest is history

I remember every second friend/acquaintance/relative doubled up as an agent selling ULIPs. I used to get non stop calls from them promoting the promoting the product as 'never like before' / 'best of both worlds' et al. What was not disclosed is the sky-rocketing charges which would be hidden from you. Lets dissect and see what this product is all about and why one should look at better options.

Every investment of a prudent investor should always be tied to an objective. Eg. "To generate wealth for my children's' education". ULIPS are meant to be an Insurance product that invests in equities. This violates the very basic principle of investing that "Insurance and wealth generation can not and should not be mixed". Each objective should have a specific instrument that serves only that purpose. Insurance is something that should be taken considering the well being of the near and dear after ones' gone and not for the attractive returns. It should not be a hasty decision purely based on investment myopia or some mis-selling pitches. As ULIPs would be the product that would be pushed the most by agents(for higher commissions), be well informed about the instrument and its features

Be wary of the following things before deciding on ULIPs

1. Your agent says that you can exit the product n 3 years and stop all your premium payments and still enjoy the Insurance cover.

Truth- Though its true that the policy would be in force, be ready to see your capital erode in lieu of mortality charges/admin charges. Once the corpus is eroded by these charges, only then the policy ceases to exist. You wont be even able to recover your capital. Also your agent would insist you pay your premiums once a year. Though this doesnt constitute mis-selling, it increases risk of reduced persistency as paying bulk once a year maybe taxing for the investor that he may stop paying premium. The agent would get his commission anyway :)

2. Promise of Guaranteed returns - Your agent may say that the product returns are guaranteed. SEBI has stipulated that no investment in equity investments can be guaranteed(Except for some pension plans that need to guarantee 4.5%- They are finding it tough even then!)

3. Lack of history- As we know, ULIPs are fairly new in the market. There is no proven track record of them as of now. This puts a question mark on their sustainability. As most of mortality data is wit LIC, God knows who these ULIPs do their underwriting. Also remember that effective underwriters are very few and most are with LIC. LIC scores heavily because it has seen claims happening in the past and has a wealth of expertise in handling the same. Am afraid if any ULIP has faced the same!

4. ULIPs work best only when invested in a time period of 15 years and above. Dont try to short any ULIPs and expect sky high returns.

5. Be very clear on the admin and other charges. ULIPs typically are front loaded, in the sense that most of charges are upfront. For the first year, the typical allocation would be 50%. Be ready to face it!. Read the offer document carefully. A typical premium break up looks like the one below

6. Future tax treatment - This would impact all of us as we go for ULIPs only during the tax saving period of Jan-March. While the DTC draft still maintains that Insurance premium paid is exempted, there is a catch

the revised discussion paper on the DTC has made it clear that only pension schemes administered by the Pension Fund Regulatory and Development Authority (PFRDA), pure life insurance products and annuity schemes will be taxfree at all three stages

This implies that ULIPs may lose its tax shield. Even if it comes under the umbrella of 80C, the sum assured should be atleast 20 times the premium paid, which sadly is not the case with many ULIPs.The typical ratio for ULIPs is 1:5

As we speak, ULIPs today contribute close to 80% of premia in life Insurance sales. Though its an encouraging sign that investors look at equity as an investment avenue, its disturbing to see the lack to investment discipline that is the heart of investing.

The best thing for any prudent investor would be this -

1. Be sure of what you want out of your investments. Get your life covered by some term insurance policy. Though the returns are very low, it provides you with some certainty in cash flow once you are gone. LIC comes up with traditional term plans. Also you dont have to worry about tax planning as DTC would treat 1:20 policies as EEE

2. Set an investment horizon and look at pure equity/Balanced funds as an avenue for wealth generation. Also dont fall prey for child plans that are floated by, well again, ULIPs. They are camouflaged to hide the costs and just sell purely on sentimental value and some sweet looking ads.

3. Even if one is convinced to look as ULIPs, i suggest they do the following.

Go through the annual report of the insurance company

Look for their claims ratio. How much part of annual premium collected is paid out for claims? (Any number around 60% should be good). A lower ratio would mean that either the premium is too high or claims are too low. A high ratio means the reverse - Both these mean "Ineffective underwriting"

Track their expense ration - Total expenses to premium (Any number around 18% should be good)

Persistency ratio - The ratio of investors who have persisted paying premiums on the policy (Any number above 90% should be good)

For the benefit of investors, I have made this matrix that helps deciding on the right instrument based on your objective

[caption id="attachment_34" align="alignleft" width="500" caption="Matrix - Investment alternatives"][/caption]

Now that jurisdiction of ULIPs have been taken over by IRDA, some welcome measures have been taken by IRDA. Have listed a few of them

The minimum number of premium paying years and the lock in period has been increased to 5 years.

The charges will be evenly distributed over the term of the investment

IRDA has also reduced the surrender charges to 15 per cent in first year to 5 per cent in 5 th year with gradual reduction.

For pension products: IRDA has fixed a guaranteed return of at least 4.5 per cent. This is a great step.

Provision for loan against investment: The investors can now take a loan of 40 per cent of NAV value from an ULIPs fund with 60 per cent equity component while the loan can be 50 per cent if the equity proposition is 40 per cent

Hope this has cleared the cloud of mystery surrounding ULIPs. Though agents are blamed, the average investor should shun greed and invest in the long term to reap the benefits of his/her investments, ULIPS or otherwise!

Happy investing!!

Maruti Suzuki- Fake job offer email- SPAM ALERT!!

2011-01-13T10:40:00.002+05:30

Just noticed an innocuous looking email in my inbox. More often than i ignore such emails. But this email was different. It claimed to be from Maruti Suzuki India and was regarding a 'job offer'. The devil in me woke up. I thought why not do some googling(waise am jobless at ofc lol) and nail someone and pamper by sadistic ego. 4QY89PWJNPD4

The email was circulated from hrd@marutisuzukijob.com. At first glance none would doubt the authenticity of the source. The catch was that a sensible company like Maruti wont have an email with "@marutisuzukiJOB.com. Come on gimme a break!!. Any scamster would have a few 'sitting duck/Orkutiya' lines in the email that would spill the beans and expose the trickster. I have listed a few of them

The SUZUKI Company is the best Manufacturing Car Company in India -- Come on why would suzuki want to blow its own trumpet, that too in an email??

The Company is recruiting the candidates for our new plants in Delhi, Bangalore, Pune and Mumbai - Excuse me? U gotta be an Ambani to open a plant in Mumbai. Get ur facts before spamming

You are to make a cash security deposit of Rs.12, 800/-(Twelve Thousand Eight Hundred Rupees) as an initial amount in favour of our company accountant name in charge of collecting payment - Now here is the real spoiler. Why would a sane person deposit cash in the name of a 'Accountant'. ?

This is a measure we have taken to check bogus applications from 'unserious' candidate - Unserious ah? Confirmed orkutiya!

"....but rather convert the air ticket to their own personal and selfish use which is a huge loss to the company and the interview becomes shabby and hence we fail to recruit the needed manpower...." --- blah blah blah

Regards, Mr. Aiko Hiroko -- Well thats a true samurai warrior i say!! Hehehehe semma comedy sir neenga :)

I hereby warn the junta not to get carried away by such scams and exercise due diligence in handling such touts.

You can find the email here -http://www.consumercomplaints.in/complaints/maruti-suzuki-india-ltd-c484046.html

MARUTI SUZUKI INDIA LTD (MSIL)

Head Office Maruti Suzuki,
India Limited Nelson Mandela Road,
Vasant Kunj, New Delhi-110070.
Board No.46781000.

Fax: 46150275, 46150276
Tel: +91-9873654797
E-mail: suzukimaruti@live.com

REF: "MARUTI SUZUKI" DIRECT RECRUITMENTS OFFER.

Your Resume has been selected from MONSTER.COM for our new plant. The Company selected 62 candidates list for Senior Engineer, IT, Administration, Production, marketing and general service Departments, It is our pleasure to inform you that your Resume was selected as one of the 62 candidates shortlisted for the interview.The Company SUZUKI is the best Manufacturing Car Company in India, The Company is recruiting the candidates for our new Plants in Delhi, Bangalore, and Pune and mumbai, your interview will be held at The Company Corporate office in New Delhi on 18th Of December at 11.30 AM, You will be pleased to know That The 62 candidates selected 55 candidates will be giving appointment, Meaning that your Application can progress to final stage. You will have to come to the Company corporate office in New Delhi.Your offer letter with Air Ticket will be sent to you by courier beforedate of interview. The Company can offer you a salary with benefits forthis post 62, 000/- to 200, 000/- P.M. + (HRA + D.A + Conveyance and otherCompany benefits. The designation and Job Location will be fixing byCompany HRD. At time of final process. You have to come with photo-copies
of all required documents.

REQUIRED DOCUMENTS BY THE COMPANY HRD.
======================================
1) Photo-copies of Qualification Documents.
2) Photo-copies of Experience Certificates (If any)
3) Photo-copies of Address Proof
4) Two Passport Size Photograph.

You have to deposit the (Cash) as an initial amount in favor of our
company accountant name in charges to collect your payment Rs.8,200/-(Eight Thousand Two Hundred India Rupees only) through any branch of [STATEBANK OF INDIA, ACCOUNT NAME: AMAR KUMAR, ACCOUNT NUMBER: 31433355666] This
is a refundable interview security fee. Your offer letter with Air ticketswill be sent to your Home Address by courier after receiving theconfirmation of interview security deposited in any of the STATE BANK OFINDIA Branch closer to you. This Company will pay all the expenditure toyou at the time of face-to-face meeting with you in Company. The Jobprofile, salary offer, and date -time of interview will be mention in youroffer letter. Your offer letter will dispatch very shortly after receivingyour confirmation of cash deposited in STATE BANK OF INDIA.

We wish you the best of luck for the subsequent and remaining stage. The last date of security deposited in bank 14th Of December 2010 you have togive the information after deposited the security amount in bank to theCompany HRD -direct recruitment via email.

Your Letter with supporting document will be dispatch same time by courierto your postal address after receipt of security deposited onfirmation inbank. The interview process and arrangement expenditure will be paid bySUZUKI COMPANY. Lodging, traveling and local conveyance actual will be paid by SUZUKI COMPANY as per bills. The candidate has to deposit the initialrefundable security as mentioned by HRD.NB: You are advice to reconfirm
your mailing address and phone number in your reply and Rs.8,200/- (EightThousand Two Hundred India Rupees only) will be the refundable amount, as200 rupees will be deducted as bank charges for funds deposit and if you are been selected or not, still the amount will be refunded to you, as the amount is just to prove that you will be coming for the interview in order for us not to run at lost after sending you the air ticket and you don't show up on the day of interview. Wishing you the best of lucks"

UPDATE: Maruti Suzuki India have displayed a notice prominently on the site to warn unsuspecting candidates. You can find the link here - http://www.marutisuzuki.com/Public-Notice.aspx

Welcome to my blog

2010-11-24T10:28:00.001+05:30

Have been contemplating for quite some time to have a blog of my own. Here we go!. Would be blogging about things that touch us in our day to day life. Keep visiting for more infotainment :)

Salar