LoanRaja Blog- Personal Finance Guide

The uncertainty of the US elections is still not resolved for India. Yes, Barrack Hussein Obama will be the new US President, starting Jan 2009. But what he will do as President and how that will affect India is still very much in question.

Politically, Obama’s victory has been hailed as good for Indo-US relations, given his support for the nuclear deal and his statements on India and the US being “natural partners” and his anti terrorism stance (The only uncomfortable bit was the possible interference in the Kashmir issue).

But economically, the Obama effect is still an unknown. True, the stock markets fell further on the day the election results were announced. It happened all over Asia. But a lot of this had more to do with the worldwide financial slowdown than any confidence or lack of it in Obama.

Something else has happened which has little to do with Obama per se. For a country that worshipped capitalism to turn to government bailouts and talk of protectionism is to do a complete U-turn. In an environment like that, there is no saying what kind of changes may come about in trade and business and what effect it may have on its trading partners.

Whatever President Obama decides will impact not just the US economy, but the entire world. We have enough evidence in the US home loan crisis to prove that the global economies are so closely intertwined that the slightest upset in one part can result in a ripple effect across the globe.

Obama has already declared that the topmost priority for his government is to nurse the badly damaged US economy back to health. How he does it remains to be seen. If he goes the protectionist way – as he has been advocating in his campaign speeches – supporting American companies and American jobs while discouraging jobs going to foreigners or foreign nations – it may spell bad news for countries such as India which depend heavily on exports to the US.

For India has been most worried about his stand on outsourcing, affecting as it does the forex earning IT and ITeS. Obama has also gone on record to oppose increasing the number of H1B visas issued, a regulation that the IT industry has been using to its fullest advantage.

This is only adding to the fear that US companies will anyway cut down on their IT budgets in a slowdown and offshoring projects may decrease.

Saner voices tell us that Obama’s aim to turn around the US economy would only have a positive impact for the other economies of the world. The proposed stimulus package is expected to go into rebuilding the economy which in turn will help regenerate demand in the world’s greatest consumer country, opening up opportunities for trade once for all other economies once again.

There is also the assurance that is being offered by various experts. The US cannot afford to isolate itself or its markets in today’s highly interdependent world. The US needs other countries just as much as we need the US. In the Indian context, they have to depend upon India to access the trained IT skills, simply because they don’t have enough of it at home.

While there are likely to be changes in the way the H1B is issued and therefore some changes in outsourcing, analysts are also banking on the view that a slowdown is the best time to outsource, as it will help cut costs.

Still, economic health of nations and consumer sentiment patters do not change overnight. According to analysts, it will be at least the second half of 2009 before we can see any positive recovery happening.

When the stock market goes through an uncertain phase, it is not only the equity investors who have tough times but even those who have invested in insurance plans with ULIP features. Unit-linked plans, as you know, allows investors to take exposure to equity markets as the premium amount gets invested in a combination of various equity schemes or debt schemes chosen by the insurance policy holder. The popularity of ULIP was in direct proportion to the stock market performance as investors realised that their insurance policies were capable of offering a annualised returns, in excess of 20%, besides providing the comfort of risk cover.

With the stock markets changing gears completely in the current year, many have suddenly turned away from ULIPs. While market uncertainty should not be a concern for those signing up for long term insurance plans, investors can also look at other options. One of the simpler strategies is to go for a combination of insurance policies and those who don’t like endowment or ULIPs can settle for a combination of both! In fact, ICICI Prudential Life Insurance has this combo product, Invest shield.

As the name suggests, this is an insurance plan with the primary objective of protecting the premium paid by the policyholder. Hence, the policy offers the guarantee of premium, similar to endowment plans. The similarity between this product and endowment ends there. Some of the other features are a derivative of ULIP with much lesser risk. For instance, the premium paid by the policyholder gets into a balanced fund which will have an equity allocation of 60% and the balance would be in debt.

However, the investor does not enjoy the choice of funds like ULIP. The allocation of 40% in favour of debt enables the fund manager to reduce the risks of equity and arrests the negative returns in a bearish market. Even in the current market environment, the performance of balanced funds has been less painful when compared with diversified equity funds.

Life Insurance Policy with Tax Benefit & Flexibility In Payment of Premiums

One of the key features of ULIP is that it allows flexibility in payment of premium. For instance, an investor can discontinue his premium payment after five years and still enjoy the life cover for the next five years. ICICI’s Invest Shield too offers similar advantage as an investor can discontinue the premium payment after three years. However, he would not be eligible for premium guarantee in such a case but would be eligible for survival benefit (or death benefit as the case may be). The maturity amount in this case would be the fund value depending on the market conditions.

The product is ideal for those who worry about their contribution in an investment product. The premium guarantee ensures that the investor gets back the amount contributed though in reality, one can expect double digit returns as the premium is invested in a balanced fund. Over the long term, balanced funds have the capability to provide good returns and in a bull market, their returns are on par with diversified funds. However, investors should take a long term view as this will enable them to enjoy the cycles of equity markets.

Besides providing the comfort of premium guarantee, the product also offers tax benefit under Section 80C and offers higher insurance cover like ULIP. For instance, a premium of Rs 25,000 per annum can ensure a life cover of Rs 1.25 lakhs the multiple goes up when the premium amount is high. The product can be part of a young investors tax planning portfolio in the early stage their of career. LoanRaja can help you help you narrow down the right options for ULIPs and other life insurance investments — all you need to do is fill out our short life insurance application.

If you are an individual waiting on the sidelines for good news on the interest rate front, this article is apt for you. The good news has been pouring in on the interest rate front with repeated cuts in repo rate and cash reserve ratio. If you are wondering how this is going to affect you, below is the answer.