Choosing between insurance and investment products

If you have plans to invest in an insurance product, are you confused about whether to take a pure risk-cover (a term plan) or an investment (ULIP)-oriented one? Well, at the initial stages of career when your salary has just inched into to the taxable slab, you can’t take chances because every penny matters. Risk profile and investment objectives differ with each person. You have to do a bit of analysis to see if the ‘combo’ product offered by your insurance agent fits your profile.

Two options At the age of 25-35, if you’ve plans to acquire or have already acquired assets such as a home or a car, your financial commitments may be high. Yet you may want to invest for the future and set up a risk cover on your life so that your family is taken care of, in the event of your demise. With the monthly surplus oscillating, you can’t take up a high financial commitment every month or even every year. This makes it necessary for you to choose your investment/insurance option cautiously so that it doesn’t pinch your pocket later.You can achieve your objective through two means. You can take exposure to a ULIP (a unit linked insurance plan) that combines a life cover with investments in stocks and bonds. Or you can invest separately in a term policy and mutual funds of your choice to meet your two key needs. A cost-benefit analysis should help you decide on the right option.

Insurance

Insurance companies offer a multitude of variants to the basic life insurance product. A life insurance policy could be a term policy or endowment policy or an ULIP. A term policy is a basic policy that offers a risk cover based on the premium paid by the policy holder. In the event of death of the insured during the term, his family gets the sum assured on the policy. You stand to receive nothing if the risk (in this case, death) does not materialise. A term policy could be the cheapest insurance option for youngsters. An endowment policy differs from the above on grounds that if the insured survives the term, he would be given a sum assured plus a bonus for the investment he made over the years. But do note that the premium on endowment policies is much higher than on a pure term policy because of the savings element.

Mutual Funds

If you take the term policy route, you may like take care of your investments though mutual funds. Mutual fund houses offer a host of open-end funds which can be plain vanilla or focussing on specific themes and market cap segments. Low costs (annual charges of 2.5 per cent or less), transparency an good liquidity (you can sell units whenever you want) are the key advantages of mutual fund schemes.

ULIPs

An ULIP (Unit Linked Insurance Plan) is an option that combines the features of a mutual fund and an insurance scheme. The premium paid by you would entitle you for a life cover and for returns from a portfolio created with your premium payments. The insurer here pools the premium collected from the policy holders and invests it in the stock or debt markets. The investors are also given the option of choosing between debt, equity or a combination of both. Though ULIPs might look like an attractive option, the proportionally lower allocation for investment in the initial years of the policy due to expenses and the relatively high premia, are their key limitations.

The annual premium on an ULIP would typically be several times that on a pure term policy because of the investment component. Based on the specific product, a good portion of the first year premium could also be deducted towards charges — initial administration charge, regular administration charge, policy administration fee and fund management charge, which be as high as 25-30 per cent in the first year and fall from the second year. These reduce the corpus invested on your behalf and moderate the final returns. ULIPs usually have a lock-in period of a minimum three years. This limits your ability to redeem units for a financial emergency. Investors also need to compare features across products before zeroing down on a specific investment option.

So don’t just commit yourself to a hefty premium because your insurance agent pushed you. Sign on the dotted line, only after you do your homework.

Fuel price hike not on cabinet agenda - oil minister

The issue of whether to raise domestic fuel prices in the face of surging global crude prices is not on the agenda for Friday’s cabinet meeting, Oil Minister Murli Deora said.

"We need to take immediate steps to save oil companies and I have discussed the issue with the prime minister last night," Deora told reporters. "We are trying to see that some action is taken immediately."

Earlier, Petroleum Secretary M.S. Srinivasan said an increase in domestic fuel prices was inevitable and the government would work out the size of the rise by Friday evening.

Any rise in prices could be politically damaging to a government facing crucial state elections over the next few months.

The cost of the crude oil India imports has doubled since June 2006 but after a series of retail price revisions fuel costs less now than it did two years ago.

Nifty market Find crucial support @ 5000

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  As shown in the daily chart, the Nifty has just closed above the lower end of the Trend line (5010 – 5000).If it breaks 5010 – 5000 crucial support levels then it may test 4980 – 4940 levels. The immediate resistance remains at 5050 – 5060 levels. On closing basis, if Nifty closes below lowerside Trendline then we see 4800 in coming days.


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  At 9:56 am, the Sensex was up 125 points at 17,031 and the Nifty up 29 points at 5,054. The CNX Midcap rose 54 points at 6,893.


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  At 10:40 am, the Sensex was up 73 points at 16,984 and the Nifty up 17 points at 5,042.


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  5,000 is an important psychological level 5,049-5,050 is not a big deal or 4,900 is not a big deal. But somewhere around those zones you need to find support. So lets see over the next few days whether we can get away with holding those kind of levels because that will be very crucial in determining where the market could be headed from here. The next big move could be decided by the hold of 5,000 or not.


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  One another take is if 5,000 actually holds out in this kind of an environment it is a very bullish situation for the market because the environment is quite bad right now for equities. Even the bulls will admit that the kind of news flow we are getting is not good and conducive for out performance at all, so if with this kind of news flow you hold out 5,000 Nifty then the market is showing a lot of strength.


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  So the fact that we are at 17,000 with all that is happening around us or 5,000 with all that is going on is pretty bullish. So if we get away with 5,000 it would be great.

Indian Rupee to Climb 9%, Interest Rates to Rise, Fortis Says

India’s rupee will rise 9 percent through to the end of the year as the central bank raises borrowing costs by July to fight inflation at the fastest pace in 3 1/2 years, Fortis Bank SA said.

The currency will rebound from its lowest in 13 months as the Reserve Bank of India increases the repurchase rate to 8 percent from 7.75 percent before its next meeting on July 29, according to Fortis Bank’s Joseph Tan. The bank is among all 21 respondents in a Bloomberg News survey predicting the currency to rise in 2008. The rupee is the second-worst performer this year among the 10 most-traded currencies excluding the yen.

``Economic growth is pretty much intact but inflation is a new threat and there is no scope for the central bank to have a neutral monetary policy approach,’’ Fortis Bank’s Singapore- based strategist Tan said in an interview. ``I am leaning towards believing that the central bank will tighten monetary policy further, despite what the economy is going through, and will also use the exchange rate.’’

The rupee dropped to as low as 43.21 against the dollar yesterday, the lowest since April 3, 2007, before closing at 42.965 in Mumbai, according to data compiled by Bloomberg. It may rise to as high as 39.4 at the end of this year, Fortis predicts.

Inflation accelerated to 7.83 percent in the week ended May 3, the fastest pace since November 2004, as crude oil rose to a record. The central bank last month increased its inflation estimate to 5.5 percent for the year to March 31, from 5 percent.

India’s Growth

``Economic growth should be the main concern only for the U.S. and for the rest of Asia should be inflation,’’ Tan said.

Growth may decelerate to about 8 percent, the slowest since 2005, in the fiscal year that started April 1, according to Finance Minister Palaniappan Chidambaram. The economy expanded 8.7 percent in the 12 months through March, slower than the 9.6 percent growth in the previous year.

India expanded an average 8.7 percent a year since 2003, second only to China among the world’s 20 largest economies. The central bank forecast the $912 billion economy will grow as much as 8.5 percent in the 12 months through March 2009.

The Reserve Bank last month raised for a second time this year the percentage of cash banks must set aside to cover deposits to 8.25 percent, beginning tomorrow, the highest since March 2001. Tan expects the measure, known as the cash reserve ratio, to be raised again by July.

The rupee’s rise will be supported by the easing global credit market slump prompting investments in emerging-market economies, Tan said.

``We must understand that we had more of a crisis of confidence more than a liquidity problem,’’ Tan said.

The world’s largest banks and securities firms have reported more than $300 billion of writedowns and credit losses from defaults in U.S. subprime mortgages.

Oil inches back from profit-taking after $135-high

Oil rose on Friday, recovering from a strong bout of profit-taking in the previous session that pulled prices back more than 3 percent from the record high above $135 a barrel.

U.S. light crude for July delivery was up 44 cents at $131.25 a barrel by 0334 GMT. It surged to $135.09 on Thursday before slumping to settle at $130.81, the first time in five sessions that it settled lower.

London Brent crude was up 74 cents at $131.25.

"Supplies not growing is still the main thing. OPEC can turn the tap but they cannot do it forever, and non-OPEC growth is not enough," said Tony Nunan, risk management executive at Tokyo-based Mitsubishi Corp.

"But demand is important too, and it is not falling as much as expected," he added.

Oil production from countries outside OPEC is stagnating and forecast to remain below 50 million barrels per day this year, at 49.56 million bpd, lower than earlier forecast, a Reuters survey of 12 analysts showed on Thursday.

The failure by non-OPEC producers to increase output has helped drive oil prices up more than a third since the beginning of the year.

It has also sent long-term prices even higher at close to $150 a barrel, as concerns mount that supplies will not be enough to meet demand from developing countries in a few years’ time.

Weekly U.S. inventories data released this week also hiked short-term concerns, with crude oil stocks unexpectedly down by a large 5.4 million barrels, gasoline inventories also down by 800,000 barrels, and a lower-than-forecast 700,000-barrel rise in distillates stocks.

OPEC Secretary-General Abdullah al-Badri on Thursday repeated the group’s stance that it can do nothing to lower oil prices in a "crazy" market, blaming record prices on factors such as geopolitical tensions, speculation and the weak dollar.

The cartel’s view seemed shared by the chief executive of Royal Dutch Shell Plc, Jeroen van der Veer, who told Reuters Television that oil prices are rising due to market sentiment rather than a shortage of supply.

A stronger dollar on Thursday also contributed to lower oil prices as investors have increasingly been using oil as a hedge against the falling currency, setting off inverse trends in the dollar and oil.

The greenback steadied on Friday, but the currency stayed in sight of a one-month low against the euro on worries that inflation could lead to a deeper U.S. slowdown.

Rupee edges higher on firm Asian stock cues

The Indian rupee backed away from 13-month lows on Friday as gains in Asian shares raise hopes of capital inflows to the market, with traders also saying the central bank could step in to check the currency’s fall.

* At 9:10 a.m. the partially convertible Indian rupee was at 42.87/88 per dollar, below 42.96/97 on Thursday and backing further away from an intraday trough of 43.21, its lowest since early April 2007.

* Asian stocks edged higher on Friday, helped by a slight dip in oil prices from record highs, and government bond yields climbed on fears of rising inflation.

* The central bank was seen selling dollars around the rupee’s lows on Thursday, dealers said, estimating its sold $100 million to $150 million. If so, it would be the first time the central bank had sold dollars since March, according to data.

10 rules for a profitable investment portfolio

Asset allocation - the way you divide your capital among different investment options - accounts for more than 90 per cent of your portfolio’s overall return. Which is why it’s so very important to get the asset allocation right in your investment portfolio.

The portfolio’s the thing

Get used to the fact that, at any one time, a few parts of your portfolio will be doing terribly. Over a long enough time period, each and every component will have had a bad year or two. This is normal asset-class behaviour and cannot be avoided. So, focus on the performance of the portfolio as a whole, not the individual parts.

In asset allocation, job one is to pick an appropriate stock / bond mix

This is determined primarily by your risk tolerance. Do not bite off more risk than you can chew - a classic beginner’s mistake. Calmly and coolly planning for a market downturn is quite different from actually living through one, in the same way that crashing a flight simulator is different from crashing a real airplane. Time horizon is also important. Do not invest any money in stocks that you will need in less than five years, and do not invest more than half unless you will not need the money for at least a decade.

Allocate your stocks widely among many different asset classes

Your biggest exposure should be to the broad domestic stock market. Use small stocks, foreign stocks, and real estate investment trusts (REITs) in smaller amounts.

It makes a difference where you put things

Some asset classes, such as large foreign and domestic stocks, and domestic small stocks, are available in tax-efficient vehicles; put these in your taxable accounts. Other asset classes, particularly value stocks, REITs, and junk bonds, are highly tax-inefficient. Put these only in your tax-sheltered retirement accounts.

Don’t rebalance your portfolio too often

The benefit of rebalancing back to your policy allocation is that it forces you to sell high and buy low. Asset classes tend to trend up or down for up to a few years. Give this process a chance to work; you should not rebalance more often than once per year.

These rules apply to tax-sheltered accounts. In taxable accounts, rebalance only with outflows, inflows, and mandatory distributions; here, the rebalancing benefit is usually outweighed by the tax consequences.

The recent past is out to get you

Human beings tend to be most impressed with what has happened in the past several years and wrongly assume that it will continue forever. It never does. The fact that large U.S. growth stocks performed extremely well in the late 1990s does not make it more likely that this will continue; in fact, it makes it slightly less likely. The performance of different kinds of stocks and bonds is best evaluated only over the long haul.

If you want to be entertained, take up sky diving

Investors like to have fashionable portfolios, invested in the era’s most exciting technologies. Resist the temptation. There is an inverse correlation between an investment’s entertainment value and its expected return; IPOs, on average, have low returns, and boring stocks tend to reward the most.

An asset allocation that maximizes your chances of getting rich also maximizes your chances of becoming poor

Your best chance of making yourself fabulously wealthy through investing is to buy a few small stocks with good growth possibilities; you just might find the next Microsoft. Of course, it is far more likely that you will lose most of your money this way. On the other hand, although you cannot achieve extremely high returns with a diversified portfolio, it is the best way to avoid a retirement diet of cat food.

There is nothing new in investing

Knowledge of financial history is the most potent weapon in the investor’s armamentarium. Since the dawn of stock broking in the seventeenth century, every generation has experienced its own version of tech bust. The recent dot-com catastrophe was just one more act in finance’s longest running comedy. Be able to say to yourself, ’I’ve seen this movie before, and I think I know how it ends.’ The only thing that’s new is the history you haven’t read.

A portfolio of 15 to 30 stocks does not provide adequate diversification

The myth that it does results from a misinterpretation of modern financial theory. While it is true that a 30-stock portfolio has no more short-term volatility than the market, there is more to risk than day-to-day fluctuations. The real risk is not that short-term volatility will be too high, but that long-term return will be too low. The only way of minimizing this risk is to own thousands of stocks in many nations. Or a few index funds.