My Article In IBSAF World Magazine.

 

 

My Article in IBSAF WORLD Magazine. (June – July 2011)

 

Are Consumers Loyal towards Loyalty Programs..?

The retail scenario is one of the fastest growing industries in India over the last couple of years. India retail sector comprises of organized retail and unorganized retail sector. Traditionally the retail market in India was largely unorganized; however with changing consumer preferences, organized retail is gradually becoming popular. Unorganized retailing consists of small and medium grocery store, medicine stores, subzi mandi, kirana stores, paan shops etc. More than 90% of retailing in India fall into the unorganized sector, the organized sector is largely concentrated in big cities. Organized retail in India is expected to grow 25-30 per cent yearly and is expected to increase from Rs35, 000 crore in 2004-05 to Rs129, 000 crore by 2012.

Quick Facts

• Indian Retail sector is the fifth largest global retail destination.

• India retail market is dominated by the unorganized sector.

• The top five companies in retail hold a combined market share of less than 12%.

• Currently the share of retail trade in India’s GDP is around 22 per cent, and is estimated to reach 30 per cent by 2015.

• According to Government of India estimate the retail sector is likely to grow to a value of ` 2,00,000 crore (US$45 billion) and could yield 10 to 15 million retail jobs in the coming five years; currently this industry employs 8% of the working population.

• More than 80% of the retail sector in the country is concentrated in the large cities.

Loyalty Programs in Retail Sector.

Loyalty gets rewarded. Well, almost always. In the retailing world, retailers have unique loyalty programs for their customers. Store chains have an array of membership cards ranging from basic privileges to premium cards. Customers receive discounts, advanced notice on sales and special deals, and other preferential treatment for being a member of the rewards program. In this way, the retailers can keep in contact with their loyal customers and make them feel special. This works in favour of the retailers also as it is only a small group of customers who bring in a bulk of sales.

The concept

A membership card is a plastic card with a unique identity that entitles specific customers to additional benefits over other customers. One way to get a card is to pay money and buy it. The other way is to make a minimum one-time purchase of a specified sum (this sum varies across chains) and you get the card for free. Customers obtain rewards on purchases which they can use for buying other goods on discounted prices or even free of cost. There are a few non-monetary benefits as well like valet parking, free home delivery, dedicated lounges and billing counters with specialized staff assistance.

These days, retailers such as Future Group Pantaloon Retail, Landmark Group, Reliance Retail, Indus League and Shoppers Stop are experimenting with mobile-based mechanisms so that a customer does not have to carry these cards every time he goes shopping.

Loyalty Programs by Retailers

Retailer	Loyalty Program
Pantaloon	Green Card
Shopper Stop	First Citizen
Life Style	The Inner Circle
West Side	Club West
More	Club More
Reliance Fresh	Reliance One
Star Bazar	Star Power
Wills Lifestyle	Club Wills

Advantages to Retailers

Loyalty programs help the retailers in acquisition of information relating to the customers’ spending habits. This data is employed for highly efficient inventory management. It enables the companies to identify, communicate, and market to the end users, and also maintain the distributor relationships at the same time.

It helps in building an emotional connect with the buyers. Retailers have dedicated special days on which members get discount/ more discount than the other shoppers. This goes a long way in creating brand loyalty among consumers. With the same objective in mind private labels were also introduced by the retailers.

As stated earlier, it is only a small group of customers who bring in a bulk of sales. Thus, retailers benefit out of their focussed efforts on these. They earn a substantial portion of their revenues on account of their loyalty programs.

Sales from loyalty programs

Company	% of sales	No. of members (in millions)
Pantaloon	55%	1.8
Shoppers Stop	75%	1.9
Lifestyle	50%	2

Also, it is much cheaper to retain an old customer than it is to find a new one. A person who has already made a purchase at a retail store has more chances of repeating it. Retailer needs to put in fewer efforts towards retaining him.

Challenges

Are they actually loyal? A Independent survey states that 76% of the retailers, and 75% of the shoppers are engaged in one loyalty program. One third of the customers are involved in multiple loyalty programs.

Maintaining loyalty programs is not an easy task. It requires promotional and implementation expenses. A retailing company may not see the benefits of such efforts for initial few years. If the program does not turn out to be the way it is conceived, it may prove to be quite an expensive failure.

A dedicated team has to be assigned this task. In the retailing sector, attrition is a huge problem, thus employing the right people for this job is a challenge. They have to be well trained about all the features of the loyalty programs.

Conclusion

Maintaining customer loyalty these days is not an easy task. The key to loyalty lies in gaining commitment from customers and involving them to the point where it is hard for them to walk away. It has been proved by retailing companies like Shoppers Stop and Lifestyle that these costly activities result in better revenues. However, the challenge lies in customizing programs for different segments of the shopping community. Also, with more retailers getting into the industry and FDI in retail being enforced, the retailers will face a hard time maintaining absolute loyalty to their stores.

With Personal Regards,

Harshal Vinay Shelat.

“People Make Fortune’s, I Make Difference”

All That Glitters Is Not Gold….

Investing in gold has become increasingly popular in recent months, as evidenced by all-time high gold prices. So, should you buy gold? And if so, how much?

Gold is something that has a place in the portfolio of any person doing serious investing, but it can’t be the thing that you rely upon solely. Many individuals have made the mistake of investing in gold as their primary investment. While investing in gold might be better than just keeping your money in the mattress, there are better ways to invest than just going with gold coins, bullion, bars, or even gold funds

 The yellow metal is going through a golden era. For an investor (not for a trader) gold has always been the safest investment.

Economic uncertainties – Think of the gold,

Real estate uncertainties – Think of the gold,

Stock Market uncertainties – Think of the gold

Why Gold should be integral part of your Portfolio

• Gold acts as a hedge against market volatility, it has been relatively stable as compared to other asset classes like equity, commodities

• Gold has historically been a hedge against inflation.

• Gold has been a hedge against depreciating dollar.

• Gold “a safe haven” in uncertain financial and geo-political stress.

• Gold can act as a hedge against dollar currency exposure.

• Gold has been a consistent good protection against exchange rate fluctuation.

• Gold can be used as an instrument of trade in a barter economy and could be your only way to purchase critical necessities in a financial crisis or in the event of financial disaster.

• The Central Banks across the world store their wealth in gold for the reasons already stated; they have little faith in the currencies.

• Paper currencies have come and gone, empires and world powers have disappeared. The world has changed in many ways and yet gold can still be used as money anywhere in the world. 

• The best use of gold is as a portfolio diversification tool, since it provides a nice bit of  security for investors, and helps hedge against inflation, political and economic uncertainty.

Gold as an asset class has protected investor’s wealth in times of downturn, when it is needed the most. Historically, gold has been relied upon for its safe haven characteristics in times of financial or economic crisis. Adding gold to a portfolio may help improve risk adjusted returns or reduce volatility for the expected return. Hence in my view long-term investors should keep increasing their exposure in gold.

My Outlook for GOLD.

 Weakening dollar outlook:

• China, United Nation among others have expressed concern over US dollar as the world reserve currency.

• Gold tends to benefit from weakening dollar.

Higher inflation expectation:

• Unprecedented monetary and fiscal policy stimulus is likely to lead to higher inflation.

• G-20 countries intend to maintain loose money policies until economies recover clearly.

• Gold is seen as a good hedge against inflation.

Investment demand and Portfolio diversification:

• Robust Investment demand in Bars, Coins and ETFs driving prices higher.

• Lack of significant correlation with other asset classes drive up gold demand.

jewellery demand:

• Jewellery has been low due to high prices as investors have been waiting for a major price correction and correction didn’t take place.

• This uncatered jewellery demand should cap the downside as investor will rush to buy jewellery if prices correct.

Central Banks likely to diversifying their foreign exchange reserves into gold:

• China has increased its gold reserves by 75% since 2003 and now holds around 1054 tonnes of gold reserves.

Indian Scenario for GOLD.

There is no doubt about the popularity & demand of gold in a country which buys it for jewellery, contingencies, gifting, wedding, mortgage requirement Gold has ritual, religious sentimental values attached to it, so it can’t be substituted and demand is more or less indispensable. Inspite of subdued gold demand over a period, I expect the gold prices in India to stay firm on strong global investment demand of gold coins, gold bars and gold exchange traded funds. There is a need for an instrument which is available in small denomination, convenient for long-term holding, cost-effective and offers easy liquidity.

How we can invest in Gold

• Physical Gold/Jewelry

• Commodity Exchange

• ETF’s (Exchange Traded Funds)

ETF’s is the most safest and reliable avenue to Invest in Gold.

Exchange Traded Funds (ETFs) are open ended mutual funds that are passively managed and most of them seek to mirror the return of an index, a commodity or a basket of assets. ETFs are listed and traded on stock exchanges like stocks. They enable investors to gain broad exposure to indices or defined underlying asset (commodity) with relative case, on a real-time basis, and at a lower cost than many other forms of investing.

Gold ETFs provided investors a means of participating in the gold bullion market without the necessity of taking physical delivery of gold, and to buy and sell that participation through the trading of a security on stock exchange. Gold ETF would be a passive investment; so, when gold prices move up, the ETF appreciates and when gold prices move down, the ETF loses value.

Gold ETF tracks the performance of Gold Bullion. Gold ETFs provide returns that, before expenses, closely correspond to the returns provided by physical Gold. Each unit is approximately equal to the price of 1 gram of Gold. But, there are Gold ETFs which also provide a unit which is approximately equal to the price of ½ gram of Gold.

Why should an investor invest in Gold ETF?

• No worry on adulteration

• Gold provides diversification to the portfolio

• Gold is considered as a Global Asset Class

• Gold is used as a Hedge against Inflation

• Gold is considered to be less volatile compared to equities

• Held in Electronic Form

• Store of value

• Extremely Liquid

Advantages of Investing in Gold ETFs

• Potentially cheaper to have price exposure to gold price as compared to other available avenues

• Quick and convenient dealing through demat account

• No storage and security issue for investors

• Transparent pricing

• Taxation of Mutual Fund

• Can be traded on stock exchange like buying / selling a stock

• Ideal for retail investor as minimum lot size to trade is one unit on secondary market

• NAV of a unit will track price of approximately ½ or 1 gram of gold

Comparison of Gold ETF with Physical Gold

Sr No	Parameter	Jeweller	Bank	Gold ETF
1	How Gold is held	Physical (Bars / Coins)	Physical (Bars / Coins)	Dematerialized (Electronic Form)
2	Pricing	Differs from one to another. Neither transparent nor standard.	Differs from bank to bank. Not Standard.	Linked to International Gold Prices and very transparent.
3	Buying Premium above gold price	Likely to be more	Likely to be more	Likely to be less
4	Making Charges	Charges are incurred	Charges are incurred	No Charges are incurred
5	Impurity Risk	High	Nil	Nil
6	Storage Requirement	Locker / Safe	Locker / Safe	Demat Account
7	Security of Asset	Investor is responsible	Investor is responsible	Fund House takes the responsibility
8	Resale	Conditional and uneconomical	Banks do not buy back	At Secondary Market Prices
9	Convenience in Buying / Selling	Less convenient, as Gold needs to be moved physically	Less convenient, as Gold needs to be moved physically	More Convenient, as held in electronic form under the demat account
10	Quantity to Buy / Sell	Available in standard denomination	Available in standard denomination	Minimum is ½ or 1 gram according to the fund
11	Bid Ask Spread	Very High	Can’t Sell Back	Very Low
12	Risk of Theft	Yes, possible	Yes, possible	No, Not possible
13	Wealth Tax	Yes	Yes	No
14	Long Term Capital Gains Tax	Only after 3 years	Only after 3 years	After 1 year

Tax treatment of Gold ETF

The Gold ETF is classified under mutual fund and will be taxed as per non equity mutual fund taxation rules. Investor investing in Gold ETF need not pay wealth tax. Investor has to pay taxes after redemption as per the tax laws applicable for non equity mutual fund. But, when the Gold ETF is redeemed for physical gold the taxation rules will be similar to that of physical gold.

Suggestions for Investing in gold

• When investments in gold are made in the form of ornaments a large part of the appreciation in value is lost while selling it apart from the making charges, waste removal and sales tax. Buying in the form of gold bars or coins from approved valuers is considered to be best.

• Buying Gold in seasons other than wedding season and festive seasons like Diwali will offer best returns.

• The investor has to lose the making charges when invested in the gold deposit scheme

Studies conducted by Securities Exchange Board of India reveal that gold has been the second most preferred option among the Indian public after deposits in banks. An increased pace of liberalization measures in India will account for many new options to emerge to invest in gold bars, gold coins, gold funds and gold options.

The benefits of investing in gold are that besides earning a decent rate of return there are no headaches about keeping it safe. When investments are valued in a depreciating currency allocating a portion to gold is similar to a financial insurance policy.

With Personal Regards,

Harshal Vinay Shelat.

“People Make Fortune’s, I Make Difference”

Utterly, Butterly, Delicious…. Taste of India.

"The Taste of India"

Like a movie scripted to contain the most incredible moments and passion that hits the silver screens across the world, Amul the most elemental Indian brands comes out with a strikingly original advertisement on every intersection across the roads of India as the dawn breaks over the horizon every Friday. Who would have though that the largest co-operative movement in India created way back 1955 would actually script a new form of advertising in India.

Call her the Friday to Friday star. Round eyed, chubby cheeked, winking at you, from strategically placed hoardings at many traffic lights. She is the Amul moppet everyone loves to love (including prickly votaries of the Shiv Sena and BJP). For 50 odd years the Utterly Butterly girl has managed to keep her fan following intact. So much so that the ads are now ready to enter the Guinness Book of World Records for being the longest running campaign ever. The ultimate compliment to the butter came when a British company launched a butter and called it Utterly Butterly, in year 1997.

The history of the advertisement campaign goes way back to 1966 when Sylvester daCunha, then the managing director of the advertising agency, ASP, clinched the account for Amul butter. The year Sylvester daCunha took over the account, the country saw the birth of a campaign whose charm has endured fickle public opinion, gimmickry and all else. They thought of a little girl and so it came about that the famous Amul Moppet was born. And she has always remained the cute little 4-year-old girl eating butter. In 1969, when Bombay  first saw the beginning of the Hare Rama Hare Krishna movement, Sylvester daCunha, Mohammad Khan and Usha Bandarkar, then the creative team working on the Amul account came up with a clincher — ‘Hurry Amul, Hurry Hurry’. Bombay reacted to the ad with a fervor that was almost as devout as the Iskon fever. That was the first of the many topical ads that were in the offing.

It is interesting to note that the Amul girl has always been flying high on the hoardings but never seen on television. Amul followed the umbrella branding strategy in its advertising. Amul is the common brand name for the company’s products across categories — the Amul girl has also been used to advertise Amul ghee and milk. Its ad campaign ‘Amul doodh peeta hai India,’ conceptualised & created by Draft FCB-Ulka, was drafted to proclaim its leadership position, and was targeted at people across all income categories. The corporate campaign ‘The Taste of India’ caters to people belonging to all walks of life and across cultures.

The Amul girl, apart from promoting a $1-billion brand, has been bringing smiles to millions. Where does Amul’s magic actually lie? Many believe that the charm lies in the catchy lines, which revolves on humour that anyone could enjoy.

Rahul daCunha, Creative Director, da Cunha Associates elaborated, “Amul’s advertising has become a little edgier, a little more satirical in the last few years. We tend to focus more on popular culture and Bollywood now. My favourite in the last year was ‘Pow Bhajji’ when Harbhajan Singh slapped Shreeshant, and ‘Jhoota Kahin Kaa’ when the shoe was thrown at George Bush. The Amul ads have been loved so much because the idea is so simple and usually, the topic deals with something that everyone is thinking about, hence instant identification. There is no fixed budget for Amul advertising, and that the spends vary every year.

The Amul Butter billboards have become a culture by itself. I do not think there has been any Indian moment of significance – whether its sports related, film related, politics related, personality related, achievement related, etc that has not been celebrated cheekily by Amul Butter. I once saw a take on India Shining too — they called it India Dining. I was touched.

Taking on the role of a social observer, Amul hoardings have played a significant part in paving the way for a novel, no holes barred and tongue-in-the-cheek Indian, who mocks, celebrates and comprehends contemporary issues and history in a brand new way. As the sun dawns over the horizon on Friday morning, look out for yet another illustrative depiction from Amul that teases its way through into the minds of a satirical new India. With advertising and marketing expenditures amounting to less than one percent of its total revenues, Amul stands out for its quality and variety. Indeed, a Taste of India.

With Personal Regards,

Harshal Vinay Shelat.

“PEOPLE MAKE FORTUNE’S, I MAKE DIFFERENCE”

ANALYSIS OF UNION BUDGET 2011.

Analysis on Union Budget 2011-12.

By :- Harshal Vinay Shelat.

 

Key Highlights:

• FY11 fiscal consolidation impressive
• Food inflation at 20.2% in Feb-11 – still a big concern
• GDP growth pegged at 8.6% for FY 11
• Divestment target set at Rs 40,000 Crs.
• FIIs allowed investing in MF schemes
• FDI allowed in MFs
• FII investment in Corporate bonds hiked 100% to USD 40 bn
• Taxfree bonds worth Rs 30,000 crs for infra to be allowed
• IIFCL disbursement target upped to Rs 25,000 Crs.
• Pension eligibility age cut to 60 yrs from 65 yrs
• FY11 fiscal deficit seen at 5.1%
• FY12 fiscal deficit target set at 4.6%
• FY13 fiscal deficit target set at 4.1%
• Tax exemption limit raised to Rs 1,80,000 from 1,60,000 for male. No change in limits for female tax payers. For senior citizens limited hiked to Rs 2,50,000
• New tax exemption criteria for very senior tax citizens above 80 yrs. Exemption upto Rs 5,00,000
• MAT raised to 18.5% from 18%. SEZs to be under the MAT ambit.
  Surcharge for companies reduced from 7.5% to 5%.
• Rs 20,000 exemption for investment into infra bonds extended by another one year.
• Service tax maintained at 10%.
• Government market borrowing target set at Rs 3,43,000 Crs. for FY12
• Base rate on excise raised to 5% from 4%.
• Health checkups under service tax ambit.
• Life insurance service providers to be taxed.

View’s of Harshal Vinay Shelat:

• Fiscal deficit FY 11 projections in previous budget at 5.5% have come out to be just 5.1% on actual basis.
• Although the actual have come out to be low, the numbers were expected to be much lower looking at huge one time credits like 3G spectrum auctions. Projections for fiscal deficit numbers for FY 12 and FY 13 look quite impressive.
• Market borrowing has been pegged at just Rs 3.43L Crs for FY12 which is way below the previous years’ numbers. Low borrowing has been a big positive for the bond street and would help the yields soften over the year.
• Inflows through divestment of Rs. 40,000 crs would help improve fiscal health – a positive for both equity and debt markets.
• Allowing FIIs to invest in MF schemes a big move. The move is expected to give depth to the markets. With India providing premium interest rates vis-à-vis developed economies and many emerging nations, we expect the move to boost FII inflows into the economy. Reduction of surcharge for corporates also a big boost for debt mutual funds.
• The government has given a big push towards infrastructure spending by a) allowing issuance of Rs. 30,000 Crs of tax-free bonds, b) Setting up disbursement target of Rs. 25,000 Crs for IIFCL, c) extending the Rs. 20,000 exemption limit on investments on infra bonds by 1 year – thus inviting retail investment into the said sector.
• After a year of scorching food inflation, the government has given much deserved attention to investments into agriculture sector. It has raised target of credit flow to agriculture sector to Rs 4.75 trillion. Government has also given 3% interest subsidy to farmers in 2011-12. Announced to developed warehousing/storage facilities upto 4M tones in FY12. And cold storage chains to be given infrastructure status and thus inviting huge chunk of institutional investments into the said sector.
• The tax exemption limit for senior citizens should have been hiked to atleast Rs 3,00,000 looking at the spiraling food inflation and medical costs. The new tax exemption of Rs. 5,00,000 for senior citizens above 80 years is a big move and is expected to benefit a huge section of the society.
• Extending service tax on medical checkups and diagnostic services would make medical services costlier. With the already existing sky-rocketing prices of medical services, this would be a big drain on the pockets of senior citizens who avail these services on a regular basis and have very few sources of income.

Union Budget 2011 – My Wishlist for Pranab Da.

 

 

Governments come and go. But their visions outlined in the annual fiscal planning (the Union Budget) have a long lasting impact on the economy. The Budget of 1992 was one such document. It was a threshold that set India on a superior economic growth path. The first Union Budget of the current decade also comes to meet several challenges. It should not just counter risks within and outside the economy. But it needs to also fortify India’s position amongst global heavyweights.

Here is my wishlist for the upcoming Budget, which we hope will be announced keeping in mind the country’s social and economic pitfalls.

• Higher short term capital gains tax for FIIs: The volatility in Indian stock markets over the past six to nine months can to a large extent be attributed to fickle mindedness of the FIIs. Loose monetary policies in developed markets have not helped either. Hence, a stricter policy to curb short term capital gains earned with the hot money is in order. While the DTC has proposed to tax all FIIs, the current budget should lay a foundation for the same by hiking the taxes on short term gains.
• Incentivise low income housing: The construction sector is unlikely to have a very peaceful fiscal ahead. Low bank funding and high interest rates could stall projects and build up inventory in the sector. Allowing higher fiscal incentives on low income housing loans could address the problem of high cost for the houses as well as offer a solution to builders to increase sales.
• Incentivise long term investment in equities: Institutional investors such as insurance companies, PFs and mutual funds should be offered fiscal incentives on their schemes wherein investments are locked in domestic equities for 5 years and above. This could help draw more retail savings into equities for a longer term.
• Pool in private sector funds for infrastructure investments: Floating SPVs that can pool in private funds for meeting the 12th and 13th Five year plan targets may be an ideal way to meet the funding gap. Especially given that the contribution from the private sector is seen going up from 30% in the Eleventh 5-Year Plan to 50% in the Twelfth Plan.
• Deepen India’s corporate debt market: Developing a vibrant corporate debt market is paramount to serving the long term funding needs of corporates. The Budget should initiate policies in this direction so that retail participation in corporate debt issuances becomes easier and more transparent. The debt papers also need to be rated to suit investors’ risk profiles.
• Rejig subsidies and off balance sheet items: An increase of 245%! This is exactly how much the cost of major subsidies has gone up in India in the last five years. And mind you, this does not even include oil. In CAGR terms, it amounts to a huge 28%. When one considers India’s nominal GDP growth rate of 14%-15%, it quickly becomes clear that such a growth in subsidy is not sustainable at all. Fortunately, the Government seems to have woken up to this fact. Hence, rather than trying to increase subsidies further, it is now looking to reduce pilferage in the system. As a big step towards the same, it has set up a task force to create a way to directly transfer cash to the ultimate beneficiaries of various subsidy schemes. We believe in addition to reducing indirect subsidies, investing more in warehouses and logistics could help keep the food prices in India under control to an extent.

While this wishlist may not be all encompassing, policies in these directions will certainly help the government make better use of Indian tax payers’ money. At the same time, these may address some of the issues threatening to thwart India’s long term economic potential.

 

 

With Best Regards,

Harshal Vinay Shelat.

 

USER GUIDE TO LIFE INSURANCE FUNDAMENTALS…

What is Life Insurance?

Life insurance is a contract that pledges payment of an amount to the person assured (or his nominee) on the happening of the event insured against.

The contract is valid for payment of the insured amount during :

• The date of maturity or
• Specified dates at periodic intervals or
• Unfortunate death if it occurs earlier

Among other things, the contract also provides for the payment of premium periodically to the Company by the policyholder. Life insurance is universally acknowledged to be an institution, which eliminates ‘risk’, substituting certainty for uncertainty and comes to the timely aid of the family in the unfortunate event of death of the breadwinner.

By and large, life insurance is human civilisation’s partial solution to the problems caused by death.

Life insurance, in short, is concerned with two hazards that stand across the life-path of every person:

1) That of dying prematurely leaving a dependent family to fend for it.
2) That of living till old age without visible means of support.

Why do I need Life Insurance?

Life is uncertain and it is not possible to predict exactly the different events that can occur. However, there is always a need to earn income to support yourself and your dependents in case of any eventuality. Life Insurance provides for financial security in the wake of such unfortunate events like death or on the inability to earn due to physical disabilities. Besides providing for financial security in the case of one’s untimely death, it can be used to accumulate a kitty for your old age, to systematically build assets, to fund your child’s education and also to save on taxes.

Who can buy a policy?

Any person who has attained majority and is eligible to enter into a valid contract can insure himself/herself and those in whom he/she has insurable interest.

Policies can also be taken, subject to certain conditions, on the life of one’s spouse or children. While underwriting proposals, certain factors such as the policyholder’s state of health, the proposer’s income and other relevant factors are considered by the insurance company.

Life insurance Vs Other savings options

A contract of insurance is a contract of utmost good faith technically known as uberrima fides. The doctrine of disclosing all material facts is embodied in this important principle, which applies to all forms of insurance.

At the time of taking a policy, the policyholder should ensure that all questions in the proposal form are correctly answered. Any misrepresentation, non-disclosure or fraud in any document leading to the acceptance of the risk would render the insurance contract null and void.

Protection:

Savings through life insurance guarantee full protection against risk of death of the saver. Also, in case of demise, life insurance assures payment of the entire amount assured (with bonuses wherever applicable) whereas in other savings schemes, only the amount saved (with interest) is payable.

Aid To Thrift:

Life insurance encourages ‘thrift’. It allows long-term savings since payments can be made effortlessly because of the ‘easy installment’ facility built into the scheme. (Premium payment for insurance is either monthly, quarterly, half yearly or yearly).

Liquidity:

In case of insurance, it is easy to acquire loans on the sole security of any policy that has acquired loan value. Besides, a life insurance policy is also generally accepted as security, even for a commercial loan.

Tax Relief:

Life Insurance is the best way to enjoy tax deductions on income tax and wealth tax. This is available for amounts paid by way of premium for life insurance subject to income tax rates in force.

Assesses can also avail of provisions in the law for tax relief. In such cases the assured in effect pays a lower premium for insurance than otherwise.

Money When You Need It:

A policy that has a suitable insurance plan or a combination of different plans can be effectively used to meet certain monetary needs that may arise from time-to-time.

Children’s education, start-in-life or marriage provision or even periodical needs for cash over a stretch of time can be less stressful with the help of these policies.

Alternatively, policy money can be made available at the time of one’s retirement from service and used for any specific purpose, such as, purchase of a house or for other investments. Also, loans are granted to policyholders for house building or for purchase of flats (subject to certain conditions).

Why is it better to buy insurance at an early age?

There are many advantages of buying an insurance policy as early as possible. First, the consideration for an insurance policy or the premium is significantly lower at younger ages (the reason for that is as you grow older, the mortality risk is greater and hence insurance companies would charge a higher premium to cover that risk). By buying a policy at an early age, you would be able to protect your dependents against the unforeseen event like death at a much lower overall cost. Second, as you grow older, the chances that you would suffer from health problems are higher, and obtaining insurance could become difficult at that stage even if you want to. Third, if you are buying insurance with a view to create a large sum of money at a pre-determined age to meet certain planned expenses like your children’s education or for your post-retirement expenses, then saving early on in you life is highly beneficial. You will have to save much more or for longer durations to get the same amount of money if you start saving late in your life.

How much Life Insurance do I need?

The need for life insurance is based on various factors including your current lifestyle, expected outflows in future, your present age and your family size. The first step should be to estimate how much financial support your dependents would need in order to continue to enjoy the same lifestyle as they enjoy today in the event that you are not around to provide that support. In estimating this support, you should consider all regular monthly expenses including food, rentals, conveyance, school fees, medical expenses, any debts to be repaid, etc. and also estimated ones like for children’s education and marriage and your expected needs after retirement. Always provide for unforeseen contingencies that your dependents might need during the period of adjustment. Based on this analysis and the expected returns on the investments in future, you can work out a sum of money that would help your dependents achieve financial independence even if you are not around to support them.

While the situation of every individual would be different, and should be evaluated separately, one rule of thumb is to buy a cover for an amount equal to 6-10 times your annual income. Clearly, the need for insurance is not static and will change as your life-stage changes so you must re-work the requirement periodically and review the coverage available from time to time. It is advisable to speak to a trained financial consultant / insurance advisor to determine the extent of coverage that you require.

Are my existing policies enough for me?
(I already have life insurance policies, what should I do?)

Your need for protection is not fixed as life progresses, there are new developments that happen and these developments impact the extent to which you need protection. Hence the requirement for protection should be reviewed periodically and if there is a shortfall, it should be covered as soon as possible by buying additional insurance cover. For the purpose of illustration, some of the events in your life that are likely to have an impact on the levels of protection that you need are:

• You or your children are getting married.
• You have become or are becoming a parent.
• Your parents or your spouse have retired / are retiring and are / will be financially dependent on you.
• The health of your dependents or your own health has taken a downturn.
• You have acquired large capital assets like a new home or a car.
• Your children are about to enter school or college.
• You or your spouse has got a large raise in salary or the family income levels have significantly increased.

Various types of life insurance products

Life insurance products can be classified into two broad categories:

• Pure protection plans or Term plans
• Protection cum investment plans like Unit Linked endowments.

Pure protection plans or Term plans

Pure protection plans or Term plans are those products that provide benefit only upon death of the life insured. These are the cheapest form of life insurance and are suitable, especially in younger ages when you are yet to build up your finances.

Protection cum Investment plans

These plans not only insure the individual to the risk associated with one’s life but also help in wealth creation. Portion of the premiums paid by insured go in for insuring life and the balance is invested on their behalf by the insurance company. The unit linked plans offer huge flexibility and complete control to insured on how these investments need to be managed. They also provided options to withdraw money from the policy incase of need or to invest over and above the premiums in case of extra cash flows.

 

Happy Reading.

 

With Personal Regards,

 

Harshal Vinay Shelat

People Make Fortunes, I Make Difference”

 

MAKING SENSE OF “SENSEX”…

What Is A Stock Market Index?

• Stock market indices basically convey the mood of the market and act as the market’s messengers

• Indices represent different clusters of stocks/ industries and the rise and fall in these indices’ values is a close representation of the market’s view on the stocks that make these indices. Hence, stock market news is cumulatively reflected in the movement of the index

• Simply put, an index represents the composite value of shares of different companies traded on a particular stock exchange

• Till late 1980s, there was no index for India’s stock markets, till the Bombay Stock Exchange (BSE) introduced the ‘Sensex’ in 1986 (which represents composite share value of 30 selected companies trading on BSE).

• Later in the 1990s, the National Stock Exchange (NSE) introduced another index, popularly known as the Nifty (which represents composite share value of 50 selected companies trading on NSE)

Stock market indices provide us with a common measurement tool for the rise and fall in prices of shares that are traded on the index.

How Is An Index Constructed?

Three basic ingredients have to be judged:

1. Base year for measurement

2. Number of companies to be included

3. Base value (For eg: 10/100/1000)

For BSE Sensex:

Base year:1978-79

Number of companies: 30

Base value: 100

Date of launch: January 1, 1986 (baselined to 1978-79)

Index calculated every 15 seconds

No written rule which specifies number of companies to be included or base value to be considered (Sensex considered 100 as it was neither too large nor too small a value).

On What Basis Are Companies Chosen To Be Part Of An Index?

• Composition of the companies in an index can keep changing periodically

• Some factors on which the decision to include a company depends on:

v  Size of free float market capitalization

v  Frequency of trading

v  Listed history and track record

v  Industry representation

• When the BSE Sensex was originally formed, it used the weight of market capitalization of companies, but from September 2003 onwards, it shifted to the free-float market capitalization method.

Selection Criteria For BSE Sensex

• Listed History: The scrip should have a listing history of at least 3 months at BSE. Exception may be considered if full market capitalization of a newly listed company ranks among top 10 in the list of BSE universe. In case, a company is listed on account of merger/ demerger/ amalgamation, minimum listing history would not be required.

• Trading Frequency: The scrip should have been traded on each and every trading day in the last three months at BSE. Exceptions can be made for extreme reasons like scrip suspension etc.

• Final Rank: The scrip should figure in the top 100 companies listed by final rank. The final rank is arrived at by assigning 75% weightage to the rank on the basis of three-month average full market capitalization and 25% weightage to the liquidity rank based on three-month average daily turnover & three-month average impact cost.

• Market Capitalization Weightage: The weightage of each scrip in SENSEX based on three-month average free-float market capitalization should be at least 0.5% of the Index.

• Industry/Sector Representation: Scrip selection would generally take into account a balanced representation of the listed companies in the universe of BSE.

• Track Record: In the opinion of the BSE Index Committee, the company should have an acceptable track record.

What Is Free-Float Market Capitalization?

• Free-float is defined as the total number of shares which are actually available for day-to-day trading (hence this excludes shares locked with promoters, institutional investors, government etc)

• Multiplying the number of free-float shares of a company with the current market price gives us the value of free-float market capitalization (FFMC)

• How is this used?

v  Suppose in base year, FFMC of A: Rs 100, for B: Rs 200 and so on, adding up to overall FFMC for all 30 companies in the index: Rs 1000

v  Base Value of the index: Rs 100

v  Establish a proportional relationship between base value and FFMC (termed as index divisor) by equating the overall FFMC (Rs 1000) to value of the base (100 points)

v  Hence, each Rs 10 of FFMC is worth 1 point in terms of base value of the index

v  In other words, if market cap rises by Rs 100, index should rise by 10 points

• Free-float market capitalization defines how much money will be required if one were to buy all the shares of a company that are available for trading

What Is The ‘Index Divisor’?

• It is the proportional link between the base value of the index and the free float market capitalization

• Dividing the FFMC (Rs 1000) with the index divisor (10 from the previous example), gives one the base value

• If the FFMC increases next day by 30% (hence the value increasing to Rs 1300), then dividing this value by the index divisor will give the index value at that point in time

• Hence, the index divisor acts as a link between the past and the present value of the index

• It also helps in ensuring that corporate actions such as stock splits, bonus and rights issues, mergers etc don’t distort the value of the index.

To calculate value of index at any point in time, one needs to divide the free-float market cap of all shares with the index divisor.

Other Benefits Of The ‘Index Divisor’

• Apart from helping to derive the value of the index, the index divisor also plays a great role in ‘maintenance of index’ (in technical terms)

• This means making necessary modifications in the value of index divisor to counterbalance the effects of corporate actions such as those mentioned in the previous slide

• Supposing that the number of free float shares of a company suddenly increases due to some reason, for eg because of a bonus issue.

v  Even though the market price of the stock doesn’t move at all, the free-float market cap shows an increase, hence increasing the value of index as well (which would be a misrepresentation)

v  In such a scenario, necessary adjustments are made in the index divisor so that the continuity of the index is not affected

• The index divisor plays an important role in not only determining the value of the index, but also to ‘maintain the index’. Hence choosing the right index divisor is always important.

Advantages Of Free-float Methodology

• Reflects the market trends more rationally: takes into consideration only those shares that are available for trading in the market

• Makes the index more broad-based by reducing concentration of top few companies in Index

• Aids both active and passive investing styles

v  Aids active managers by enabling them to benchmark fund returns vis-ã-vis an investible index, enabling an apple-to-apple comparison thereby facilitating better evaluation of performance of active managers

v  Being a perfectly replicable portfolio of stocks, a Free-float adjusted index is best suited for the passive managers as it enables them to track the index with the least tracking error.

• Improves index flexibility in terms of including any stock from the universe of listed stocks, improving market coverage and sector coverage of the index.

v  For eg, under a Full-market cap methodology, companies with large market cap and low free- float can’t generally be included in the Index because they tend to distort the index by having an undue influence on the index movement.

v  However, under the Free-float Methodology, since only the free-float market cap of each company is considered for index calculation, it becomes possible to include such closely-held companies in the index while at the same time preventing their undue influence on the index movement.

• Globally, the Free-float Methodology of index construction is considered to be an industry best practice and all major index providers like MSCI, FTSE, S&P and STOXX have adopted the sameMSCI, a leading global index provider, shifted all its indices to the this methodology in 2002.

v  The MSCI India Standard Index, which is followed by Foreign Institutional Investors (FIIs) to track Indian equities, is also based on the Free-float Methodology.

v  NASDAQ-100, the underlying index to the famous Exchange Traded Fund (ETF) – QQQ is based on the Free-float Methodology.

Adjustments For Corporate Actions (Bonus, Rights & Newly Issued Capital)

• Index calculation needs to be adjusted for issue of Bonus or Rights shares, if no adjustments were made, discontinuity would arise between current value of index and previous value despite the non- occurrence of any economic activity

• At the BSE Index Cell, the base value is adjusted, which is used to alter market capitalization of the component stocks to arrive at the SENSEX value. The Cell keeps a close watch on the events that might affect the index on a regular basis and carries out daily maintenance of all the 19 Indices

• Adjustments for Rights Issues – When a company issues right shares, free-float market cap is increased by the number of additional shares issued based on the theoretical price. An offsetting or proportionate adjustment is then made to the Base Market cap

• Adjustments for Bonus Issue – When a company issues bonus shares, the market cap does not undergo any change, so there is no change in the Base Market cap, only the ‘number of shares’ in the formula is updated

• Other Issues – Base Market cap adjustment is required when new shares are issued by way of conversion of debentures, mergers, spin-offs etc. or when equity is reduced by way of buy-back of shares, corporate restructuring etc.

Adjustments For Corporate Actions (Bonus, Rights & Newly Issued Capital)

Base Market capitalization Adjustment

The formula for adjusting the Base Market capitalization is as follows:

New Base Market capitalization= Old Base Market Capitalization X New Market Capitalization / Old Market Capitalization

To illustrate, suppose a company issues right shares which increases the market capitalization of the shares of that company by say, Rs.100 crores. The existing Base Market capitalization (Old Base Market capitalization), say, is Rs.2450 crores and the aggregate market capitalization of all the shares included in the index before the right issue is made is, say Rs.4781 crore. The “New Base Market capitalization ” will then be:

New Base Market capitalization= 2450 X (4781+100)/4781 = Rs 2501.24 cr

This figure of Rs. 2501.24 crore will be used as the Base Market capitalization for calculating the index number from then onwards till the next base change becomes necessary.

I sincelrely hope it will help u to make SENSE of SENSEX now…

Happy Reading…

With Personal Regards,

Harshal Vinay Shelat

“People Make Fortunes, I Make Difference”

MUTUAL FUNDS MADE SIMPLER…

About Mutual Funds:

Mutual Funds in India is gaining ground and getting popular as an investment option. The fund industry has witnessed healthy growth in last five years or so. Mutual Fund is a common pool of savings created by a number of investors. Mutual Fund is an ideal investment product for an individual investor. Different investors with common investment objective contribute to create a common pool of money. This money is then invested by fund manager according to the objective of the scheme.

Structure of Mutual Funds:

In India mutual funds function as trust created under the Indian Trust Act, 1882. There are three layers of mutual fund in India.

(i) Sponsors

(ii) Trustee and

(iii) Asset Management Company.

Sponsors work as Promoters of the company. They take responsibility of starting mutual fund business. Sponsors contribute initial capital (40% of net worth of AMC) and appoint Trustees and Board of Trustees.

Board of Trustees act as guardians of investors and ensure that money invested by investors is used according to the objective of the scheme.

Asset Management Company is the public face of fund management business. Sponsors and Trustees together form AMC and appoint Fund Manager. Fund manager with help of fund management team makes all investment decisions.

How safe is investing in Mutual Funds?

In India mutual funds function as trusts. The sponsor of the fund appoints Board of Trustees who act as guardians of investors’ money. The board or Trustee Company, as an independent body acts as protector of the unit holder’s money. These trustees ensure that investor’s interest is safeguarded and that the AMC’s operations and Fund managers’ actions are along the professional lines. To ensure independence of Board of Trustees, SEBI mandates a minimum of two-third independent directors on the board of Trustee Company.

Apart from Trustees, the entire mutual fund industry functions under the preview of SEBI. This structure and stringent guidance make investing in mutual funds safe and easy. Fund Managers also have to function within the broad framework and rules & regulations designed by AMC.
Investing in Mutual Fund: Mutual funds are considered as favorable investment vehicle for individual investors particularly for investors who have limited resources available in terms of capital and ability to carry out their investment decisions.

Advantages of investing in mutual funds:

• Portfolio Diversification: ‘Do not Put All Eggs in One Basket’. Mutual Fund is the best vehicle to apply this proverb in practical life as a diversified equity scheme invests across multiple sectors and stocks. A typical diversified equity scheme holds around 30 to 50 stocks in portfolio so even if few stocks or sectors do not perform well investor’s money can get protected.
• Diversification of Risk: Whatever is your investment amount, that amount gets diversified across multiple stocks held by fund manager.
• Liquidity: Mutual Fund investment provides high degree of liquidity as investors can sell units to the fund if scheme is open-ended or in the stock market if scheme is close ended. Investor normally gets money credited in bank account or receives cheque within three working days of redemption.
• Professional Management and Expertise: Through mutual fund, individual investor can take advantage of expertise of fund manager and his fund management and research team. This kind of detailed research work is not possible to do for an individual investor. Fund managers are highly qualified and experienced in their field which allows investors to take advantage of their expertise.
• Convenience: Mutual Funds score over other products in terms of convenience and ease. What investors require is to fill an application form and attach a copy of PAN card and cheque.
• Tax Advantage: Investment made in mutual funds offer multiple tax advantages and prove tax efficient. There is no long-term capital gain in equity schemes if an investor stays invested for one year. Dividends are also tax-free in hands of investors in equity schemes.

Different Types of schemes available under mutual funds:

Equity Mutual Funds:

These types of funds invest investors’ money in equity shares. This funds work on basic concept of “High Risk ‘ High Return”. Among all categories of products this type of funds have potential to generate highest return but investors have to face highest risk. As money gets invested in equity market, the performance of these type of funds largely depend on equity markets but fund managers due to their expertise and research tend to outperform benchmark indices over a long investment horizon.

Among equity funds, fund managers adopt different investment strategies and accordingly schemes can be divided. There can be different schemes like value funds, growth funds, sector funds, contra fund etc depending on the style of investment.

Equity mutual funds are most suited for investment horizon of three years and above as in short-term equity markets remain highly volatile. Within equity mutual fund basket there are number of options available to investors to choose from according to his risk taking capability. Equity funds can be broadly classified into Large Cap Funds, Mid Cap Funds and Blend Funds. Large Cap funds invest in bluechip companies which offer stable return with low volatility.

Mid Cap funds as name suggest try to generate higher return by investing in small & mid cap companies which offer higher growth potential.
Blend funds do not follow any market cap bias and create portfolio from any market universe.

Income Funds:

These are the debt category of funds. They invest in fixed income generating instruments and that is why they are broadly called income funds. They invest in large universe of debt instruments like money market instruments, T bill, corporate bonds, government securities etc.

The main objective of Income funds is to generate steady return at lower level of risk. Based on underlying assets and duration these funds can be classified in different categories like gilt funds and income funds. As name suggests gilt funds invest only in government securities where as income funds invest in corporate bonds and debentures along with G secs. As gilt funds invest only in G sec there is no default risk involved. Both Income funds and Gilt funds are mainly affected by changes in interest rates in the economy.

Liquid Funds:

These funds are normally used to park very short-term funds on a temporary basis. Investment horizon should ideally be from one day to three months. Investment is done in very short term debt instruments like inter bank call money market, T bills, Certificate of Deposits issued by government. As investment maturities are short, they are not vulnerable to interest rate risk.
As name suggests, liquidity level is very high as investor gets money credited in his/her account within 24 hours of redemption.

Equity Linked Saving Schemes (ELSS):

These schemes are similar to equity schemes with only difference being it comes with 3 year lock in period and provide Section 80 C benefit under income tax. By investing Rs.1 lakh in any of the ELSS scheme available, an investor can save tax by claiming deduction under Section 80 C. Like equity funds, ELSS also invests in equity shares and subject to risks associated with stock market.

Open End and Close End Funds:

This is another type of classification of schemes.

An open end fund is the one that sells and repurchase units at all times. An investor can buy or sell units from fund itself at prevailing NAV.

In close end fund, only one time sale of fixed number of units are made and investor can purchase units during that specific period. Closed end funds do not allow investors to buy or sell units directly from the fund.

However to provide liquidity, close ended funds do get listed on the stock exchange and trade at premium or discount to NAV based on investors’ perception about fund performance and other factors. The number of outstanding units of a close-ended fund does not vary on account of trading in the funds’ units on the exchange.

I hope this has made the FUNDAMENTALS OF MUTUAL FUNDS clear for you.

With Personal Regards,

Harshal Vinay Shelat

“People Make Fortunes, I Make Difference”