Review on Lic Policy - Bima Account

LIC Bima Account is the latest product launched by LIC of India on this festive tax season (generally known as JFM , JAN-FEB-MARCH, Tax saving season) . There are mainly two variation of this insurance plan called LIC Bima Account 1 and LIC Bima account 2, which differ a bit in terms of premiums, tenure etc. No wonder that it’s the best time to launch the insurance plan as everyone is looking forward to invest for tax-saving, and when something has a tag of “Guaranteed returns” + “LIC” , its a instant favorite.  A lot of risk-averse investors will be investing in these plans. However It’s important to know what these plans have to offer in terms of returns and see if it’s as transparent as it looks like. The company claims to pay 6% return, but will it be 6% by the time it reaches your hand ? Lets look at it..

Did you notice the above picture? It’s very much related to our financial services industry. Every other financial product has a face, which is shown to public, but if you analyse it further and look at  it from the mirror of IRR , you can see its real face which is too horrifying sometimes .I have tried it find the real face of LIC Bima Account policy here .. Its upto you to decide is it beautiful or not !

Features of LIC Bima Account 1 and LIC Bima Account 2

The chart below gives you an idea of both the variants of the policy . While LIC Bima Account 1 is for investors who can pay smaller premiums , Bima 2 is

for investors who are looking fo paying higher premiums .

The lock in period for these policies is 3 yrs, You can surrender the policy after paying the premium for 1 yr, but you will be paid back only after completion of 3 yrs lock in period .The common part of both the plans is that you will get 6% returns from these plans if you continue paying the premiums till maturity , but only 5% return if you make it as paid up policy. There will be bonus also paid by LIC in these plans, but it would depend on the company experience with the plan and bonus is not guaranteed . Also the bonus will only be applicable for investors who have completed the whole tenure .

Important : Taxation of LIC Bima once DTC is in Force

Another important point worth nothing is taxation of LIC Bima Account policy after Direct Tax Code is in effect . As per DTC , the tax exemption will be allowed only if the the Sum assured is more than 20 times the yearly Premium , however both LIC Bima Account 1 and LIC Bima Account 2 offers options where a person can choose Sum Assured which is less than 20 times the yearly premium

In that case ,they will be able to claim the tax deductions in this current year and next year also , however there after they wont be able to claim any deductions on this policy . I am not sure how many investors are looking at this point . The majority of investors in LIC Bima are going to be from small cities , who will definitely have no idea about this taxation point .

What is the returns from LIC Bima plans ?

This is where one has to pay attention. Note that the returns of 6% are offered only in the Net amount invested (Final Amount in the charts below) . We will take an example of LIC Bima account 2 Plan 806 below .

Suppose you invest 1,00,000 per year in this plan for tenure of 10 yrs ,then at the end of the tenure you will receive  12,36,911 , guess how much actual return does it translate to ? So we have to do an IRR analysis for this to find out the actually CAGR return an investor will get. As per IRR analysis the returns turns out to be 4.217% . So this is the return an investor would earn in 10 yrs , note that is the return without considering any bonus .  For investors who will make the policy paid up or surrender it , for them the IRR would be drastically low and might be as low as 0% or negative also depending on how early investor makes it paid up .

Look at the chart below which shows you the IRR analysis for LIC Bima Account 2 policy 

So the main point here is that why is an investor not informed about the actual return which he gets in his hand ? Why the returns of 6% is shown in a way that common public will not be able to find it out .. One can also show the returns as 9% or 10% and then increase the charges to such a level, so that the investors in hand returns is just 4-5% . These plans are going to generate a lot of attention and crores and crores will be generated. Do you feel it can be called as misselling or Mis-use of Public trust, as the returns are in a way mis-leading ?

This is a question from you as an investor !!!.

Article Shared by Manish Chavan

Review on Reliance Gold Savings Fund (NFO)

Reliance Mutual Fund has launched the Reliance Gold Savings Fund & there is a big buzz in market around this product. What a great time to launch such fund when gold is rising and equities are a bit in problem.  First let’s understand this product, its benefits, taxation, how it’s different from Gold ETFs & later we will see if Worth Investing is or not.

What is Reliance Gold Savings Fund

Reliance Gold Savings Fund is a bit of a new concept of investing in gold as it allows you to invest in gold without a demat account. Reliance Gold Saving fund is a Fund of Fund & it endeavors to near the returns of Reliance Gold Exchange Traded Fund which in turn invests in physical gold.  But unlike a ETF the fund does not require a demat account and the stock market route for buying and selling the units.

Reliance Gold Savings Fund is a passively managed fund suitable for a long term investors, who can invest through SIP or lump sum. As a long term investment it gives an opportunity to invest in the GOLD commodity, in a convenient way, which is one of the fancied assets for any investor.

Features & Benefits of Reliance Gold Savings Fund

Reliance Gold Savings Fund opens a new avenue for investing in gold. This fund enables to reap returns closely to returns provided by Reliance Gold ETF.

1. No need for having demat account: so no need to open a demat account and pay the annual maintenance charges.
2. Systematic Investment Plan (SIP): Benefit your investment by investing through small amount over a period of time. Even Small Amount like Rs 100 or Rs 500
3. Systematic Transfer Plan & Systematic Withdrawal Plan: A benefit of STP and SWP makes it a convenient mutual fund product
4. Easy to Invest & Liquidate: similar to investing in a mutual fund scheme.
5. Purity & Safety: investment is in highest quality gold with no theft or warehousing problems. 

Taxation on Reliance Gold Savings Fund

·         Long Term Capital Gain Tax(after 1 year) of 10 % or 20 % with indexation will be applicable

·         Short Term Capital Gains (before 1 Year) applicable as per tax slab for the investor 

Reliance Gold Saving Fund Vs Gold ETF Fund 

A Gold ETF is an ETF that has gold as the underlying security. So, the value of the ETF is derived from the value of underlying gold. 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.

In ETF incure charges like annual maintenance charges for demat account, delivery brokerages charges, transaction charges incurred for investing through the dematerialized mode. The investors will be bearing the recurring expenses of the scheme, in addition to the expenses of underlying Scheme.

Hidden points in Reliance Gold Savings Fund

Now comes the warning sign board which normally is hidden in the scheme related document so here it is…

The investors of the Scheme will bear dual recurring expenses and possibly dual loads, viz, those of the Scheme and those of the underlying Schemes. Hence the investor under the Scheme may receive lower pre-tax returns than what they could have received if they had invested directly in the underlying Schemes in the same proportions.”

Should you buy Reliance Gold Savings Fund

Everyone is ready to convince you that gold price will only go higher but we just want to say – gold should be small part of asset allocation and the reason of buying gold should not be rise in price. I think I have already expressed my views on Gold Prices & also shown you expenses in this product. End of the day it’s your hard earned money.

I would still advice demat account holders to Invest in Gold via ETF Route only.. It will give you more returns that this fund.

Many Analyst will show you Gold Return for last 5 Year & 10 year – ask them for 20 years & 30 years chart. You will find gold have even underperformed Fixed Deposits.

Have you ever wondered where were these guys 5 years back when gold was 1/3rd of its current price??

Review on IDFC Infrastructure Equity Fund (NFO)

IDFC Mutual Fund is offering an open ended equity fund focused on Infrastructure theme from Feb 14 to Feb 28, 2011.

At a time when all Infrastructure funds are under-performing the equity diversified funds, I was skeptical of IDFC bringing on yet another Infrastructure fund. (Even though they should have been the first to launch, IDFC being a infrastructure development company!!)

But the contrarian rule of investing says, buy when others are selling that stock and sell when everybody is buying! So it might be an interesting thing to dig in deeper. Let’s go in.

Why Sector Funds Do Not Make Sense

It’s good to start with some skepticism. Stock market investing is a continuous process of finding new ideas and identifying future growth sectors.
But once a sector gets into mainstream discussions on TV/Print/etc, everyone rushes in to invest in that sector. So while everyone is buying into that sector, the valuations sky-rocket and newer entrants pay a heavy price for entering into that growth sector.

Street smart companies get into that sector and make money with the help of the investor frenzy as all companies in that sector get increasing good valuations.

So all this creates a sector bubble and all it takes is a prick!


What About Infrastructure Sector?

The infrastructure theme has been in the news for a good part of the last decade. India’s biggest bottleneck is infrastructure and India really needs this sector to grow and prosper. The India growth story will be built on Infrastructure.

With this in mind, a lot of Infrastructure funds came up and the demand for such stocks was very high. The valuations in 2007-08 went sky high. A lot of Real Estate companies took advantage of that bubble and were quoting at astronomical PE.

Meanwhile, while some of the business scaled in size it was at the cost of profitability. Few companies could match the balance sheet build up with commensurate profits. As a result scores of them report a virtual single digit return on their capital employed.

All this was further aggravated with the challenges that long term projects face – timely availability of cheap capital, execution delays, material availability and policy risks.


What is the Opportunity in Infrastructure?

The opportunity remains as significant as ever.

We are short on power capacity. Our current peak power demand is estimated at 190GW and given our projected growth we will need significantly higher generating capacity. The Chinese will deliver a generating capacity of well over 900GW into this year while the USA is slightly ahead of the Chinese.

In the roads we have one of the largest private public partnership programmes in the world.

Investment in ports by the private sector are dotting the coastline and a private port in the next couple of years with be amongst the top two in the country.

Airports, Metros etc are all assets that have been tendered out to the private sector.


What IDFC MF says :


We believe that infra sector will see return of profitability and sizeable reduction in balance sheet/debt by all companies operating in this space. With this high conviction idea we are doing a soft launch of our Infrastructure fund, the fund is designed to be ‘true-to-label’

Even though I started out skeptical of “yet another Infrastructure” fund and the risk of confining yourself to one sector which is prone to a bubble, I also see the merit of getting into infrastructure stocks/funds when the valuations are favorable and the growth prospects sounds good.

DWS Short Maturity Fund

The Macro Economic Environment

• World Economy Recovery is on Twin Track

• Developed world recovery is expected to remain muted due to ongoing deleveraging, fiscal restraints and other crisis legacies
• Emerging markets, led by Asia are exhibiting strong recovery backed by robust domestic demand 

• Developed Economies Recovering From Set Backs

– US economy to exhibit slow growth on heavy debt burden.

– Federal Reserve's US600 billion purchase program is expected to boost growth

– Euro zone continues to be plagued by sovereign debt worries


• Emerging Market

– Asia is leading the world recovery

– Rising inflation is becoming a key concern.

– Countries like China, Korea, Indonesia, Australia and India have aggressively raised rates to manage inflation expectations

• India's 2QFY11 GDP grew at 8.9%, beating expectations

• Industrial production continued to be volatile. After showing 4.4%YoY (revised) in Sep'10, the
  growth jumped to 10.8% in Oct'10

• Exports continued to be resilient, growing by 21.3% YoY in Oct'10, while imports slowed to
  single digits, printing 6.80% YoY.

• WPI Inflation continued to be sticky, going slightly up to 8.58% for Oct'10. Inflation for Nov'10 
  is expected to be around 7.5%

View on Debt Market
• Liquidity continues to remain tight as government collections exceed the spending

• Credit markets continue to function smoothly despite liquidity constraints, though short term  
   rates continue on an uptrend

• Longer term credit spreads have remained stable, despite tight liquidity conditions, as the  
  Liquidity is expected to ease in the last quarter of the fiscal

• There is a good supply of quality papers from corporates and PSUs allike. Recent issuers include
   NHB, NABARD, IOC, HDFC, IRFC, PFC, REC, and PGC.

• Though supply of government bonds is lesser in the 2HFY11, increased credit growth in the  
  busy season may affect demand for government paper.

• This is likely to increase demand for corporate bonds. This could be positive for DWS Short   
   Maturity


Why DWS Short Maturity Fund

• Liquidity situation changed dramatically since start of this calendar year

• The large monies received by the government from 3G/BWA (around Rs.1,06,000 crore) put 
   the systemic liquidity in deficit, since June'10

• With economy growing strongly, tax collections have been healthy

• With government collections exceeding its expenditure, the cash surplus of the government with
   RBI has been increasing on a monthly basis

• Currently the cash surplus of government with RBI is around Rs.90, 000cr

• This continues to create a “temporary” liquidity shortage, till the government spends these  
  funds

• RBI has resorted to OMO purchases to tackle the liquidity issue. It also cut down auction size   to reduce pressure on liquidity

• It is expected that liquidity will improve in the last quarter of the fiscal   2010-11

China Online Gold Trading Starts

Private investors can now buy gold through the Internet in China. Online Gold Trading is the latest move that will bost gold deamand in China.

Individuals can now buy gold for investment online from the Bank of China and other selected banks which are members of the Shanghai Gold Exchange. By using Intrnet Banking, investors can transfer money from their bank account into a gold saving account, making gold trading more convenient.

Gold has always been revered in the Chinese culture. But not until 2003 have Chinese citizens legally been allowed to buy gold. One might think that 1.2 billion Chinese now able to invest in gold would have sent the gold price much higher. The reason it has not is until now is due to poor gold distribution. There hasn't been the resources to get gold to the people. Now the four major Chinese banks are providing customers with the ability to buy gold.

China has also recently cut the import tax on gold jewellery to 21.3 percent from 23.3 percent to help encourage foreign investors to set up jewellery factories as well as to boost China's gold consumption.

China is gradually liberalising its gold market, although a few restrictions including the import tax, remain. Local dealers in China still have to pay a 17% tax to import gold jewellery into China.

Currently China has one of the lowest gold ownership rates in the world with just 0.1 grams of gold owned per capita. In contrast gold ownership in India is 0.73 grams of gold per captia and the U.S. is 1.41 grams per captia.

Once Chinese banks increase distribution, a lot of gold will be sold in a relatively short time. This huge increase in gold demand in China has the potential to dramatically increase the gold price in years to come.

Global worries, lower IIP data pull down Sensex by 848 points

The BSE benchmark sensex declined sharply by 848 points and the Nifty by 241 points following all-round selling led by realty, banking, PSU and metal segments due to weak industrial output data amid distinctly sluggish global advices.

Selling was so strong that all indices ended lower between 0.23 per cent and 6.52 per cent.

The Bombay Stock Exchange 30-share barometer index opened slightly higher at 21,041.97 and moved up further to 21,075.71 but immediately declined to 20,108.40 before closing the week at 20,156.89, showing a sharp loss of 848.07 points or 4.04 per cent from its last weekend's level.

The NSE 50-share nifty also tumbled by 240.80 points or 3.81 per cent to 6,071.65 from 6,312.45 previously.

Asian stocks closed sluggish on Friday with the China's Shanghai Composite index dipping by 5.16 per cent, its biggest percentage loss in 14 months, as wary investors offloaded financial and resource counters on expectations of further monetary tightening. Other key indices from Hong Kong, Japan, Singapore, South Korea and Taiwan too ended in the red.

Worries over sovereign debt levels in Europe also prompted investors to scale down exposure in riskier assets like equities. European markets too displayed a weak trend on concerns over the Ireland's debt problems and China's overheating economy.

L&T Infrastructure Finance Company Limited

Company Profile

L&T Infrastructure Finance Company Limited, a 100% subsidiary of Larsen & Toubro Limited, was incorporated in 2006, and is registered with the RBI as a systemically important non deposit taking NBFC and classified as an IFC.

The company’s business comprises the provision of financial products and services for customers engaged in infrastructure development, construction and operations & maintenance with a focus on the power, roads, telecommunications, oil and gas and ports sectors in India.

The company is registered with the RBI as an Infrastructure Finance Company, or "IFC", which allows it to optimize its capital structure by diversifying its borrowings and accessing long-term funding resources, thereby expanding its financing operations while maintaining its competitive cost of funds.

The total income of the company for Fiscal Year 2010 was Rs.4,504.23 million.

The total loans and advances outstanding of the Company as at March 31, 2010 were Rs. 42,884.99 million and total disbursements for Fiscal Year 2010 were Rs.37, 955.14 million.

Salient features of the issue

• Public issue of bonds by an infrastructure finance company under Sec 80CCF

• Rating(s): - CARE AA+ by CARE and LAA+ by ICRA

• These bonds will be issued only to Resident Indian Individuals (Major) and   

   HUF.

• Security: The bonds are fully secured with Exclusive first charge on

  specific receivables of the Company with an asset cover of one time of the

  total Outstanding amount of Bonds and first pari-passu mortgage/charge on

  the leasehold rights on land.

• The Bonds bear an attractive combination of coupon rate ranging  

   between  7.50% and 7.75% p.a. coupled with tax benefits of upto Rs 20,000

   under Sec 80 CCF.

There are 4 investment options, suiting the needs of different categories of investors

• The bonds will be issued in either demat form or physical form at the option 

   of bondholders

• No TDS shall be deducted for bonds issued in demat form. In case of bonds

  issued in physical form, TDS will deducted in case interest amount exceeds

  Rs.2,500 p.a.

• The bonds will be listed on NSE and can be traded after the 5 year lock - in

  period

• Investors can mortgage or pledge these bonds to avail loans after the lock-

   in period.

• Under Section 80 CCF of the I.T. Act, an investor in such infrastructure

   bonds will be entitled to tax deduction of investments of up to Rs 20,000.

   The deduction is over and above the Rs 1,00,000 deduction available under

   section 80C, 80CCC & 80CCD read with section 80CCE.

Issue Structure:

Maturity: The Bonds, with a maturity of 10 years, will be issued in 4 series.

Face Value: Each Bond of face value of Rs 1,000 each.

Minimum Application : 5 bonds. 

Lock in: 5 years from the Date of Allotment.

Buyback facility: Buyback option available to the Investors at the end of 5

                           Years or 7 Years.

Benefits to investors:

• Bonds offer an additional window of tax deduction of investments of up to 

  Rs 20,000 which result in attractive yield to investors

• The deduction is over and above the Rs 1,00,000 deduction available under

   section 80C, 80CCC & 80CCD read with section 80CCE