Endowment plans were the darling of insurance companies, before ULIPs came into the picture. Over the years they might have lost their top slot but are not out of demand; conservative investors still prefer them for their survival benefits, which are missing in term plans. ‘LIC Jeevan Anand’ is one such popular endowment assurance plan which also comes with whole life benefits.

Product highlights/benefits

• An endowment assurance cum whole-life plan that provides survival benefits in the form of a lump sum at the end of term and also pays an additional sum assured to the nominee on the death of insured till the end of life
• In addition to sum assured, it pays simple reversionary bonuses and terminal bonus, if any

Highlights

It’s a unique endowment plan that offers whole life benefits at a little extra cost Whole life risk cover continues even after the premium paying term is over, till the death of the insured Double accident benefit is available during the premium paying term and thereafter up to age 70

• An additional accidental cover (up to Rs. 5 lakh) is paid as a lump sum on death due to accident, up to the age of 70. No additional premium required.
• Option to get extra protection at a very nominal cost
• Guaranteed surrender value up to 30 per cent of the total premium paid, excluding first-year premium and other riders’ premium after 3 policy years
• Policy available to people in the age group of 18-65 years. Premium paying term is 5-57 years.

Analysis

LIC Jeevan Anand provides the dual benefit of endowment and whole life plans, for a little extra premium. A 30-year-old individual will have to pay an annual premium of Rs. 20,978 for Rs. 5-lakh cover with a term of 25 years. Let’s see what benefits he will receive. LIC Jeevan Anand has a good bonus history since its inception in Feb. 2002. On an average, it has declared an annual bonus of Rs. 46.5 per thousand. For our calculation, we will take the average bonus at Rs. 45 per thousand (refer Table 1). Considering that LIC has distributed Final (Additional) Bonus (FAB) in its other schemes consistently, we assume an FAB of Rs. 550 per thousand in Jeevan Anand (in line with other schemes under similar conditions) at the end of term. As per Table 1, net return in this case comes to 6.60 per cent (approx.). Besides, the policyholder enjoys an accidental benefit of Rs. 5 lakh till the age of 70 and death benefit of Rs. 5 lakh (similar to the initial cover) till the end of his life. If we take into account these benefits, the return (gross of charges) will further increase for the policyholder.

Now take a look at Table 2. It presents endowment plans by other insurers. These plans are cheaper than LIC Jeevan Anand and have similar benefits. But they do not offer the whole life benefit.  Moreover, the bonus rates announced in these products are not at par with LIC Jeevan Anand.

Thus, at the outset, LIC Jeevan Anand looks a little expensive than plain vanilla endowment plans but given the benefits in later years, the additional cost is justified.

Equating with other products

We always advise against mixing insurance with investment. As there are no similar products available in the market, we will compare LIC Jeevan Anand with a combination of a term plan and PPF (based on their benefits). But the term plan will provide cover till the age of 65 only, unlike in Jeevan Anand where whole life benefits continue till the end of the individual’s life. One can also combine a whole life policy with PPF. But again the policyholder will need to pay premium till the end of his/her life. This sets LIC Jeevan Anand apart from other non-ulip policies. Now, let us turn to Table 3 for a comparative analysis between Jeevan Anand and other asset classes. The term plan (SBI Life Shield) has been taken for an individual of 30 years for a period of 25 years for a sum of Rs. 5 lakh at an annual premium of Rs. 1,632. An additional accident cum disability benefit (Royal Sundaram Accident Shield) for Rs. 5 lakh has been taken at Rs. 589 per year. The remaining amount of Rs. 18,757 has been invested in other asset classes for a period of 25 years as mentioned in the table 3.

Tax benefits

• Premium paid up to Rs. 1 lakh is tax exempt under Section 80C.
• Maturity or death proceeds are tax free under Sec 10(10D).

Things to look into

• The additional whole life benefit comes at an inflated price (refer Table 2).
• Reversionary bonus, though announced regularly, is not guaranteed. Moreover, Final Additional Bonus (FAB) is also not guaranteed.

Recommendations

• For whom: Conservative investors willing to put money for a longer period
• Risk: Capital safe, but loyalty benefits are linked to performance of the company in future
• Investment horizon: 5-57 years
• Returns (post tax): Moderate in line with debt funds at different conditions. But unlike debt funds, it provides tax benefits under Sec 80C in addition.
• Beats inflation: No, it won’t be able to beat inflation even in case of a longer term
• Tax bracket: Preferable for all tax brackets
• Alternatives: Whole life plan, PPF plus term plan, mutual fund (through SIPs) plus term plan, etc.

Bonanza year 2009 ended on a happy note and would be remembered for many reasons. Indian stock markets recovered remarkably from their March 2009 lows and went on to register the best year-to-date (YTD) performance in the history of Indian stock market since 1991, with more than 80 per cent return in 2009 and above 110 per cent from their March lows. But it was not all rosy for the investor community, especially for retail investors, with some of them managing the bull ride and a majority missing it.

Indian key benchmark indices, BSE’s Sensex and NSE’s S&P CNX Nifty, moved northward from a low of 9,647.31 and 2,959.15 as on Dec. 31, 2008 to 17,464.81 and 5,201.05 as on Dec. 31, 2009 respectively, a splendid gain of more than 75 per cent for both bourses. Similarly, stock prices too multiplied; some stock prices tripled or even more. The ‘double dhamaka’ was common among all stocks. The fundamentally-strong stocks did exceptionally well, beating their own all-time highs of 2007-08 boom. However, the rally was driven by foreign inflows rather than domestic inflows. The foreign investments touched $17 billion – an all-time high – in 2009, thanks to the continued low interest rate regime in the developed economies which prompted FIIs to invest in the developing countries. Despite India ranks among the countries with high domestic savings rates in the world, Indian stock markets remain largely dependant on foreign inflows. Indians are still not taking to stock trading in a big way, either directly or through mutual funds. Currently, only 7 per cent of the total savings goes into mutual funds and the rest into other non-equity instruments; bank fixed deposits lap up a major share.

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Now let’s check out the performance of stocks listed on NSE’s index S&P CNX Nifty – one of the highly-traded indices in India – which comprises 50 well diversified stocks from 22 sectors of the Indian economy.

The list of top performers comes as a surprise. The auto sector which was on the verge of collapse in 2008 revived dramatically in 2009, thanks to the government’s active support in the form of allowing increased depreciation and other policies. Tata Motors and Mahindra & Mahindra clocked the highest returns of 395.18 per cent and 293.75 per cent, each. Though Tata Motors is still reeling under the debt of Jaguar Deal it hopes to avert debt crisis with the help of increased sales activity and ‘Nano’ magic, surpassing the last boom period. The steel sector too made a dramatic turnaround. SAIL and Tata Steel gained 211.87 per cent and 184.39 per cent, respectively. Moreover, these two emerged as the largest in the world in terms of profit, leaving behind steel giant Mittal Steel. IT stocks too gave a decent return. In comparison, IT-dominated mutual funds have provided the highest return in the same year. However, telecom stocks are bleeding as companies are facing an added revenue pressure due to one-second billing.

Read: 7 tips for investing in stocks

But as we always advise, investors should not take into account only the past year’s performance to select stocks. The other factors they need to look at are Price/Earnings ratio (PE), Price/Book value (PBV), Return on Equity (RoE) and other fundamentals of a company. Though the current valuations may not look cheap and attractive enough, the growth saga will continue for the domestic markets. So if you are looking at a long-term investment, equity investment will serve your purpose.  Happy Investing!

Mutual funds are an ideal product for the retail investors who do not have the required knowledge or time to invest in stocks. They have become an effective means to create wealth by maximising returns and minimising risks.

Indian mutual fund industry experienced a bad patch in 2008 when it was hit by liquidity crunch coupled with the global liquidity crisis. The industry, which was growing at 30-50 per cent in terms of AUM on year-to-year basis, plummeted to an AUM of Rs. 4.02 lakh crore in Nov. 2008 from a high of almost Rs. 6 lakh crore in May 2008, a substantial fall of 33 per cent in just six months. The SEBI and RBI acted swiftly and opened a new lending window for all mutual fund players.

Monetisation of the economy by the government along with the improved economic sentiments lifted the ailing Indian mutual fund industry in 2009. In addition, SEBI announced a series of investor-friendly regulations – from no-entry loads to online trading of mutual fund units on stock exchanges – which made it difficult for small distributors and Independent Financial Advisors (IFAs) to earn commissions. The average AUMs touched a new high crossing Rs. 8 lakh crore in Nov. 2009; it was mainly driven by corporate money which flowed in Liquid Funds, Liquid Plus Funds along with Income Funds. However, Equity Funds witnessed continuous outflows month-after-month indicating no major resurgence of confidence among retail investors albeit the markets gained renewed confidence. One of the reasons is said to be the IFAs that have switched their loyalties to insurance companies selling ulips. They have not fallen for the bait of extra bucks that fund houses are ready to shell out to bring them back.

Now coming to the performance, mid- and small-cap funds – which bore the maximum brunt during 2008 downturn – emerged as the best performer in 2009. In the diversified equity category, the top ten performing funds are as given below:

The above table presents the best performing diversified equity funds, picked from large cap funds, mid-cap funds and small-cap funds, including thematic funds. We have taken into consideration the fund performance in 2009 only.

Readers should not consider the list as a criterion to select a mutual fund scheme as there are other important factors that they need to take into account. So how to choose a mutual fund scheme? Check performance record of a scheme, preferably over 3 years and 5 years, along with its risk-adjusted returns. Go for the schemes that have consistently beaten their benchmark over a longer period, looking at Jensen’s Alpha will help.

It’s showdown time for the two biggies in the housing finance sector: SBI and HDFC. After the economic meltdown, most banks switched their attention from not-so-profitable commercial lending to retail lending, which have formed a sizeable part of their credit portfolio in the recent past. State Bank of India (SBI) was the frontrunner with its special 8 per cent home loan scheme till it was challenged by Housing Development Finance Corporation Ltd (HDFC). So what does HDFC offer to outdo SBI’s much-publicised scheme?

HDFC’s new home loan product comes at a fixed rate of 8.25 per cent per annum for the first three years (up to March 2012). However, these rates are applicable for loans up to Rs. 30 lakh and a maximum tenure of 20 years, and not on the other two slabs, i.e., loans between Rs. 30 lakh and Rs. 50 lakh; and Rs. 50 lakh and above. From fourth year onwards, HDFC will charge a floating rate of 5 per cent below its retail prime lending rate (RPLR) – the institution’s benchmark rate – on the loan. Currently, the RPLR is 13.75 per cent. This rate is available under special festive offer to all new home loan customers who apply before Jan. 31, 2010 and take at least part disbursement before March 31, 2010. NRIs and PIOs will also be benefitted from the festive offer rate.

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SBI vs HDFC
HDFC’s new loan offer is in direct competition with SBI’s Easy Loan scheme, but it is difficult to guess the winner. Now let us have a rundown on SBI’s Easy Loan scheme. Loans under this scheme are offered at a fixed rate of 8 per cent for the first year, 8.5 per cent the next two years and thereafter at a floating rate of 2.75 per cent below its benchmark rate (SBAR, State Bank Advance Rate) or at a fixed rate of 1.25 per cent below SBAR. Currently, SBAR stands at 11.75 per cent. The comparative rates of both SBI and HDFC are given in Table 1. Recently, SBI extended its special loan offer till March 31, 2009 to maintain its credit growth target and build up retail portfolio in lieu of a slump in commercial lending.

Earlier, HDFC was averse to the idea of discounted rate; it even criticised SBI special home loan scheme. HDFC stressed the point that the teaser rates offered in the initial years could cause widespread defaults when rates surged in later years. So what made HDFC change its stance? It has reasoned that ample liquidity, improved operational efficiency and good quality portfolio have made the discounted rate possible for it. Whatever may be the reason, it is important to see whether borrowers will benefit from these new rates.

Analysis

We, at Rupeetalk, always try to provide fair understanding and impact of the special loan rates on customers (Read: SBI special home loan: A boon or bane?), and what effect they will have on their cash flows.

Read Home loan tax implications

Here, we have analysed HDFC and SBI offers in terms of interests paid in the first three years, total interest paid and effective interest rate for the complete tenure (refer Table 2 and 3).  In Table 2, we see that there is a marginal difference in the first 3-year interest components of both the lenders. However, in terms of total interest payments, HDFC scores over SBI; HDFC borrowers save Rs. 75,683 in interest compared to SBI borrowers. The effective interest rate in case of HDFC comes to 8.69 per cent compared to SBI’s 8.85 per cent.

However, in case of a Rs. 60-lakh loan (refer Table 3), interest component in the first 3 years varies considerably, i.e., 19.90 per cent and 22.34 per cent of the total interest paid for SBI and HDFC, respectively. If the borrower is looking to prepay his/her loan, SBI’s offer would be a good bet in this case. SBI also scores over HDFC in terms of total interest paid, and thus, the effective interest rate comes to 9.69 per cent for SBI in comparison to 9.78 per cent for HDFC. Here, HDFC borrowers end up paying Rs. 70,348 more than SBI borrowers.

No respite for existing customers

It is clear that these schemes are sales gimmick to lure new customers, for the banks have completely ignored their existing customers. These reduced floating rates are not applicable to the existing customers of both the schemes. In this condition, the existing customers can either renegotiate rates with their banks for a levelled interest rate or shift their loan to other lender for a better rate. Note that refinancing a loan may require a customer to pay prepayment penalty as high as 2 per cent.

Conclusion

The steady recovery of the Indian economy has spread cheer to almost every sector, and the real estate market is no exception. After going through a rough patch, it is regaining its composure. This is the time to buy a house for many, with the property prices coming down by 20-30 per cent and banks offering special rates to sell home loans and achieve their individual credit growth targets. SBI and HDFC, which control a sizeable portion of retail lending in India, are better placed to take advantage of these conditions with their special loan schemes. Both the festive rates seem to have marginal difference in terms of effective interest rates, however, borrowers are advised to read the fine print before closing a deal so that there won’t be any regrets later.

India’s domestic economy has started showing some signs of revival which is evident from the encouraging numbers that are received from different quarters. On the other hand, the global economic outlook is still not very clear. In this situation, the Reserve Bank of India (RBI) is forced to initiate some precautionary steps on account of abundant liquidity, inflationary pressures and weak credit off-take. As a result, the RBI has announced exit from its expansionary policy and has taken out some of the liquidity windows offered to the ailing sectors during the global crisis.
In order to stabilise the economy, the RBI in its second-quarter review of monetary policy 2009-10 has maintained a status quo in its lending and borrowing rates. “While reversing of conventional measures is not considered appropriate for now, many of the unconventional measures can be reversed immediately,” the RBI said in its quarterly monetary policy review.

What has not changed?
• The RBI kept the repo and reverse-repo rates unchanged at 4.75 per cent and 3.25 per cent, respectively.
• It has also not touched the Cash Reserve Ratio (CRR) – the portion of deposits commercial banks need to keep with the RBI – which is at 5 per cent currently.
• It has also kept the GDP target unchanged at 6 per cent with an upward bias.

What has changed?
The central bank has hiked the Statutory Liquidity Ratio (SLR) – the amount commercial banks need to maintain in the form of cash, government-approved securities (G-Secs) and/or gold before providing credit to borrowers – to 25 per cent from 24 per cent, effective from Nov 07, 2009. This move will lead to over Rs 30,000 crore being absorbed from the system.

What’s on the anvil?
The central bank also aims to reduce surplus liquidity and fight inflation which is moving in upward direction on account of a deficit monsoon (22 per cent deficit) that led to the increase in food prices. The rise in inflation has prompted RBI to revise its inflation estimate from 5 per cent to 6.5 per cent. Within one-and-a-half month, inflation has gone up from -0.12 per cent to 1.21 per cent, a rise of more than 1 per cent.

More tightening
The RBI has initiated exit from expansionary policy so as to meet its growth and inflationary targets and also to bridge the fiscal gap. To tighten the credit further, it has discontinued a forex swap facility for banks and cut an export credit refinance facility to 15 per cent, a pre-crisis time level, from the current level of 50 per cent. It has also ended the special repurchase window for banks, mutual funds and NBFCs with immediate effect. The central bank has also increased the provisioning requirements for loans to commercial real estate from 0.4 per cent to 1.0 per cent.

Market response
After the RBI’s quarterly policy review, the domestic markets collapsed. The barometer index BSE Sensex tanked by 386 points on profit-booking across all sectors except for IT companies. The BSE Realty index fell by 6.24 per cent while BSE Metal index slipped by 5.43 per cent. On debt front, the 10-year G-Sec yield slipped from 7.41 per cent to 7.31 per cent, a gain of 0.1 per cent or 10-basis points.