Back in Business!

With more professionals joining hands with us, We are happy launching our website ( www.capitalmoney.in) and relaunching our business, with a more sanguine model…

CapitalMoney- Lets add wings to our dreams!

Insurance- the Right Mix

Very often, when you visit your bank branch, or when the so called relationship manager who claims to provide privilege service only for a select few customers like you, calls you, there is a higher chance of him asking you to invest in Insurance products. You will be introduced to unknown catastrophes, death, the ultimate and unavoidable reality of life, and you will be forced to imagine your wife and children struggling for a roti when you are dead. That moment of gyan will make you feel the importance of taking insurance, or even if you have one, you will be made to feel that is not sufficient.  Even before you come out of that feel, he will open his laptop and will be ready with an illustration for you and your family. Now you will constantly be bombarded with a particular word, ULIP and if he senses any sign of discomfort in your posture, he will talk about his friend, who left a huge fortune for his family by means of insurance when he died. (Believe me, they are the masters of body language).

Now he will start comparing a lot of product names and their pros and cons. But when you zero down on two products for Investing (as he says), it will be the same product under two different product name.  Even when you talk of Investing in stocks, he will say yes this product will take care of that. You say mutual funds, yes; they will invest in Mutual funds too. You will be left wondering what you were doing all these years without knowing such a rocket… Sorry, Product… Before we go into what would be the better ‘Insurance’ product, let us see what this ULIP is all about.

ULIP or Unit Linked Insurance Plans are products which gives an investor –

1)      Life cover – Death Benefit

2)      Invests in stocks-via mutual fund route- to give a better return of investment for the period of investment higher than the traditional insurance products.

Here you should know about two other major products in a nut shell:

1)      Term Insurance- Benefit will be given only when the investor deceases. To be renewed every year, just like our motor insurance.

2)      Endowment Products-  Fixed tenure- on maturity the amount invested will be paid back with a nominal interest rate (around 3.5%), and if investor dies before maturity period, entire assured money will be paid- all our children plans, marriage plans etc

Now, you will find ULIP’s logical, as what the Relationship manager says. The product gives me life cover, also gives me a chance to participate/invest in mutual funds and gain a return of even 134% (yes guys, once kotak opportunities gave a return of 134% in 2006-2007… Hmm good old days…). But what we are not told or not tend to read the 40 pager document is that the charges we pay for the product and the amount which they are investing in mutual funds. Let’s have a look at two tables; One, the Manager who keeps calculating in the back of his mind and the other which all managers know and easily neglects…

  

The Manager’s Bible:

Product	Incentive/Commission
ULIP	27% to 60%
Endowment Plans	15%
Mutual Funds	2.25% to 4%
Term Insurance	Hardly 2 %. (in their Slang, that’s Peanuts!!)

 

Now let’s see the table which illustrates what is invested for the money we give;

The Hidden black book of Hamnaputra J (Watched the movie Mummy?)

Product	Initial Investment	Life cover/Sum assured on death	Premium for life cover	Other Charges (Fund management charges & handling charges)	Commission	Net Investment Amount
ULIP	1lac	10 lac	1200 Rs	4000rs	Avg 30000	~65000
Endowment  Plans	1 lac	10 lac	1200 Rs	500Rs	13000	~85000
Mutual Funds	1 lac	-	-	1000	2500( Nil if you invest directly)	~97000
Term Insurance	Only life cover; so refer column 4	10 lac	1200 Rs	-	Max 100 Rs	-

 

Now you should have got a picture of what is happening. ULIP also invests in Mutual funds and gives you return, but the amount invested is much lower than what you pay for.

Think of a situation if A invests in ULIP paying a premium of 1 lac for 3 years; i.e. he thinks he has invested 3 lacs.

So, amount invested – 3 lacs

Insurance cover – 10 lac

Net invested amount – 2.25 lacs, (deducting all commissions for 3 years and the commission comes down to 15 % in 2^nd and 3 rd year .Remember your broker calling to remind you well ahead of the next payment date!!! Ya you will be paying him for 3 years.)

So his investment of 2.25 lacs will start delivering returns only after 4^th or 5^th year, because for him to regain his initial investment amount, it will take at least 3 years even with a return of 15 % and in market conditions like this, where Sensex delivering a return of -58% YoY, a life time is required..

Now what if he invests in mutual funds, and takes a Term insurance plan for the same cover,

Insurance cover- 10 lacs

Premium – 1200 Rs.

Commission for Mutual funds- 2.25 % for 3 lacs =6750Rs.

Net amount invested- 2, 92,000 and the chances of making returns are higher in terms of money and time.

So the effective insurance plan will always be a term insurance plan, which now comes with additional riders for accidents, illness, critical illness and loss of vital organs also. There you pay very less amount of premium and get better life coverage. If there is a specific need like saving for son’s education or marriage, start a Systematic Investment Plan with mutual funds and a term insurance for the amount you wish to have.

And folks, it is just the fear of the Relationship manager losing his job /failing in his targets which makes him to sell all these ULIP’s and they are no saints. Also, kindly do not blame the relationship manager or the investment Manager, because there are chances that you might be blaming a super Ex-Investment manager, who might be authoring this article. J

 

 

Structured Products -2: An Overview

Structured Products : An Overview

Structured Products are alternative instruments to direct investments, providing for risk-return balance; thereby reducing the risk exposure of a portfolio.  Structured Products provide for protection of principal if the instruments are held until maturity. They have some features of bonds that pay regular income and offer capital protection and also of equities that provide greater returns, but the catch is they have higher risk exposure.

The nature of structured product is predeterminethe instruments are held until maturity. They have some features of bonds that pay regular income d before issuance and they remain the same throughout the life of investment. Structured products are designed to provide investors with highly targeted investments tied to their specific risk profiles, return requirements and market expectations. Structured Products provide for various levels of capital protection for diversified portfolios and can be exercised to boost returns. Suave investors can make perfect use of the derivative-linked instruments. These instruments may not be suitable for individual investors.

Various structured products available for investors are:

§         Equity-linked notes & CDs

§         Index-linked notes & CDs

§         Inflation-linked notes

§         Commodity-linked notes

§         Derivatives (futures, options and swaps)

§         Credit-linked notes

§         Currency-linked notes

Prime Characteristics of Structured Products:

      §         Alteration of Risk/return of underlying primary product

§         Impersonate the risk/return of an underlying instrument

§         Derivative is not considered as just a hedging instrument but an integral part of the structured product

§         Combine primary product and a derivative to form a complete structure.

Need For Structured Products:

 Principal Protection: Structured Products aid in capital protection, providing for better returns against the risk exposure.

Enhancement: The portfolio’s return can be amplified using structured products.

Diversification: Risk/ Returns can be diversified using structured products.

Alternative Asset Exposure: Structured products when linked to various instruments like precious metals, real estate, etc. provide returns based on alternative assets with varying degree of principal protection.

Growth: Structured products aid in growth of a portfolio by protecting the downside and gaining the upside of the portfolio.

Market View; Structured Products allow for capitalizing on a specific market view.

Income: Structured products resemble bonds in the sense that they provide for periodic income in exchange for assuming principal risk.

Superstars… Best of the class…..

In this post , I have decided to give a list of some of the good, performing (!!)funds , in this market, Keeping only investors (those who can stay put for  a minimum period of 2 yrs) in mind. Also tried to give a heads up of all those selected funds….

I have kept my selection criteria simple…

1)      Should  have shown a decent performance in the last one year( where we witnessed the real meaning of being volatile… moved from 14 K to 20K then coming down to 12K and keeps going..)

2)      Fund manager’s ability/willingness to be flexible to the external conditions..(coming out of few stocks and entering into promising arenas…)

3)      Fund House’s versatility in the indian market..( Might be a bigwig in Uncle sam’s land.. but when comes to India, those are the guys who went wrong !!)

4)      Portfolio Content..Simple…stock picking…

So, In my views, the following are the funds which I wud  prefer to have it in my nest….

1)      Reliance Banking Fund

2)      DSPML Technology .com Fund

3)      IDFC Premier Equity Fund

4)      Kotak Opportunities fund

5)      Sundaram  Select focus fund

 

These five funds will give you a good mix of large cap, mid cap and promising sectoral allocation for your portfolio.

 

 

Reliance Banking Fund:

One basic reason behind the selection  of this ‘performer in its category’ is that, for all transactions you make-business/financial/buying a property/selling a property/ Industrialization/even investing, banks and financial services companies are making money and bound to make lots..

The Fund has not gone down more than 40% from its yearly high, even in worst scenario, and has beaten the benchmark index in all the comparision period. It has also included PSU heavyweights  substancially in its portfolio in the last one month( Actually seems bottom picked- picking stocks at their lows) and also holds a substantial (13~16 %) portion as cash to capitalize on the volatile market.

The technicals aslo sounds good, with a higher R-Squared value ,and lowered beta, it offers you a better risk adjusted  return and a subdued index following.  A higher deviation from its index( comparable to IT stocks!!) promises you of a good return.. With a Loyal fund manager, Sunil, handling this fund for more than 3 years,  picking this fund for your portfolio should be a great value addition in a longer term.

 

DSPML Technology.com Fund:

When ever I think of  this fund, it makes me smile..( This Fund shares a special bonding with me and my Father figure in chennai…A man of Values and the  person whom I respect the most  ..In touch since the beginning of my career .. ).. okie coming to the point, Depriciating Rupee against Dollar….IT cos earns in dollars…what else do you need for  to have this fund in your portfolio??

A Special note of appreciation for this fund’s manager- Smarter than his peers… once he sensed a downturn in IT industry, he quickly moved to Service and media/equipments stocks and also downsized the exposure to large cap IT stocks and concentrated on Midcaps, and niche services companies. It also has a considerable exposure to the beaming industry- Telecom,Media and tech enabled cos. Technically,it is one among the few funds which ahs a higher Sharpe’ ratio and at the same time a higher Alpha ratio….

With a Portfolio structure of Midcap & Growth, it has delivered in the past and seems promising.

 

IDFC Premier Equity Fund:

A  Best of the equity product from the masters of debt products..( Grindlays- then Standard Chartered- then  now IDFC).Diversification is the core mantra of this fund, but as Ramadorai, says it has Cautious Diversification.( he said Cautious Optimism- In buying his co’s stocks?? J) It has a good stock pick, the best stocks of each category it is into.. One best thing is that they have reduced their level of exposure to basic industries in the mid of the year and re-entered again when the co’s value gone down beyond 50 % of their peak values.( Remember BHEL/Siemens/Larsen??)

One surprising factor regarding this fund, is that its product structuring.. It will be a close ended fund, whenever  its net assets cross beyond  threshold limit ( they have raised the limit now) and becomes open ended when ever  the value goes down… One should see the rush of investors when ever it opens….awesome…This will stand as a proof for its performance..

A upper mid cap fund, with an outstanding return, should be a Star in your portfolio, if you ought to be…

 

Kotak Opportunities Fund:

The Fund which made me a star in the industry… a whooping business of 7 crores in one single fund…( still I can look up and say I have contributed  to 1% of its net asset size even today… in 2006, the ratio was  5 %). It grabs opportunities  when ever and in whatever space it can..the recent example being  weighing down all mukesh ambani’s stock and adding up few banking/fin services in the last month.. a clever move indeed.. With higher exposure to Technology, Finacial services  and energy sector, it offer you a bouquet of large caps with a blended (growth and Value) investment style.  Interestingly in the last one month (July- Aug) the NAV has moved 15 % upwards..Though technically it seems to follow the broadbased index, it has a better deviation. Another point to note with this fund, is that it has a consistent track record of very good dividend hsitory… a msut have diversified fund in your portfolio.

 

 

Sundaram Select Focus:

A Stallion from the stable of Sundaram…The AMC’s name  by itself has a brand value in southern india, esp in my state…Trustworthy…and it stands to prove it again and again….( it has even got Lipper ratings and awards..)

The composition of fund will show you what a perfect diversification is… Has earmarked the best of the Co’s in all major sectors and it palys in altering the holdings pattern accordingly. You might see a wide representation from Nifty composition in its portfolio, staying true to its name.. Select focus.. Also, you can somehow tel that market is going for a volatile mood, just by checking their cash positions… perfectly they will haike up the cash levels in a downtrend market, and have good bottom picks…

Like movie review’s( incidentally the fund is the only one which is advertised in Movie halls also- Sathyam cinemas-more often!!!) One line   verdict – If you  are focussed, select this one…

 

so, now its up to you to choose/not to….