LoanRaja Blog- Personal Finance Guide

There has been a flood of guaranteed return options from insurance companies but check out whether it meets your long term needs. Wealth creation needs more money and period through fixed return products.

You just need one year of weakness in equity markets for investors to rush for guaranteed returns. Forget the investor, even product manufacturers (your mutual funds, insurance companies and the like) are rushing in with structured products which offer the comfort of fixed returns. While downtrend is the best time to accumulate in an equity market, investors invariably end up looking at debt during the downtrend and vice-versa.

Now, take the case of two leading insurance companies which have come up with guaranteed returns on their insurance schemes. While LIC has launched Jeevan Aastha, a fixed return product, ICICI Prudential has launched a fund, RGF, with the buy-back option of first year premium on four of its schemes. In the case LIC, the product is one-time premium and comes with tenure of 5-10 years. The product offers guaranteed return and loyalty return and the effective yield is projected to be around 9%. Since the product also comes under tax saving option under Section 80C, there has been an unusual rush among investors for the product. The product is being pitted against fixed deposit which is far less tax efficient because of tax on interest income. Interestingly, the pamphlets of insurance advisors project the superior benefits of the product vis-a-vis FDs and hence, investors have been made to believe that the insurance plan offers superlative returns. In fact, some of the advisors on the blog claim an annualised returns of 17% for the scheme!

Countering LIC’s plan has been ICICI with its latest fund, RGF (return guaranteed fund). This fund, which is more of a feature for four of its insurance schemes, offers a guaranteed return of slightly over 8%. The company promises to buy-back the first year premium at an NAV of 15 after five years from the date of investment. If the NAV happens to be higher than Rs 15 at the end of five years, the actual NAV would be applicable for the investor.

If an investor signs up for an insurance policy for a term of five years, he has the option of choosing for RGF for first year premium and can opt for change of fund for the remaining four years of premium paying period. The investor, however, need not worry about the choice of fund immediately and can take the call on investment option at a later date. The basic idea behind the fund is assuring the investor of returns in a year where equity has proved to be volatile. With the coming year too being expected to be volatile, the investor may feel comfortable with guaranteed return products.
Suitability: the assured return products are suitable for risk-averse investors and for those who are looking at the prospect of protecting returns. Hence, investors who are looking at parking large sums in the first year can opt for such products. On the other hand, the product may not serve the purpose for young investors as they need to look at options which have the potential of creating wealth. With guaranteed returns, either it would take longer time or investors will have to park larger sums for building wealth. More importantly, equity is closer to its three year bottom and chances of equity providing single digit returns from current level is limited. For instance, even at current market levels, five year returns from equity outperform debt products. Take all of these options keeping in mind the risk-reward ratio which is loaded in favour of equity at present.

Apply for car loan today! If you are looking for a fresh car for your portico, you can’t get luckier. Falling petrol prices, lower interest rates and struggling auto companies will make your life easy even in this recession.

Around fifteen years ago, I first started noticing that the number of cars was growing, while the number of two wheelers was reducing. This was a trend (at least in Bangalore), that continued till about a few months back. Somehow, it seemed as if the number of two wheelers was increasing and the number of cars was coming down.

This, let me hasten to add, is a purely personal observation, and in no way backed by in depth research or painstaking market surveys.

Again based purely on conjecture and conversation with friends and relatives, this could well have been a response to the increased fuel prices and the decreased job security as more people parked their cars in their garages and began to blow the dust off their scooters and motorbikes again.
Now, hard facts tell me that car sales have indeed dropped this year. And so have car prices.
So, is this a good time to buy a car?

This year, there have been so many twists in the auto industry that the answer to that is going to be a long winded one.

On the face of it, yes, it does seem like a good idea. Car companies have been announcing price cuts, interest rates are lower and fuel prices have dropped.

But scratch a little deeper and it is interesting to see why we have this situation at all.
The simplest one first. Fuel prices have been cut a little, a small nod in acknowledgement of the crash in global crude prices. The Government is obviously giving some breathing space for oil companies to recover losses before it (hopefully) announces more cuts.

The price cuts have been driven by a combination of reasons. In October and November 2008, car sales showed a sharp fall, as both individuals and companies put off buying decisions following high interest rates and lack of credit from financing companies, and the general economic condition. Saddled with huge inventories, car manufacturers have announced discounts to get rid of their stock.
Moreover, it is the end of the year, when car manufacturers in India usually drop prices. This is to avoid being stuck with the previous year’s stock, going by the date of manufacture.

Interest rates too are lower, thanks to the various monetary measures taken by the Government. Car makers have also promised to pass on the 4 percent reduction in Cenvat announced by the Government for all manufacturing industries.

So the cars are ready and the buyers are ready, but according to reports, it is the car finance companies, which are acting spoil sports.

As in the housing industry, only demand can drive production and only easily available low cost financing can drive demand. And only higher demand can help the industry out of its rut.
Because, right now, the auto industry has been shutting down factories, bringing down number of shifts and cutting back on production. This situation of excess capacity is likely to last all of next year too.

However, prices will begin to rise if there is no off-take. This, despite the fact that input costs, specially cost of steel, have come down. Companies may not be able to sustain lower prices if the demand continues to be depressed, as they will have to bear the costs of idle capacity.
But new model launches are still on the anvil. Both Maruti and M&M are expected to make some announcements soon. With Tata’s Nano gearing to hit the roads in 2009, you will have a lot more to choose from in future. However, if you are on the look-out for a new car, this is a perfect time. For the first time, you don’t have to worry much on the fuel front with global crude prices sliding downwards on a regular basis.

If you look at the returns of ELSS funds, it may not be heartening. But that shouldn’t stop you from investing in ELSS this tax planning season

December may be the month to relax at the work place with a string of holidays but many may not be allowed to if they have not completed the tax planning exercise. With the year almost coming to an end and with slightly over a quarter to go for the financial year, it’s time to focus on tax planning.

A number of products offer tax relief as they are covered under section 80 C but this time investors can have a higher allocation towards equity markets as equity markets have come off their highs in the last three quarters. That provides a good opportunity for fresh investors if they are looking at building corpus over the next 3-5 years. With tax planning instruments like ELSS (equity linked savings scheme) and ULIPs (unit-linked insurance plan) allowing exposure to equity, investors can look at these two options.

In the case of ELSS, options are plenty as almost every mutual fund company has the product under its portfolio. However, going by the past performance and investment strategy, SBI Magnum Tax Saver, HDFC Tax Saver and Franklin Templeton Tax saver can be your preferred choices as these funds have been consistent with their performance. While returns from some of these funds may not look pretty at present (if you were to compare 1 and 2 year returns), the fact is that equity markets at present is going through one of the challenging times. In addition, weakness in the market is a good opportunity for fresh buying and hence, allocate a portion of your tax saving fund into this product.

Besides ELSS, unit-linked plans can be another option for tax saving as it allows exposure to equity. The advantage with ULIP is that equity is not the only option and the investor has the option of switching from one fund to another. However, at current market level, equity can be a better option for long term investors. In the case of ULIPs, plan features are similar among various insurance companies, but costs such as allocation charges, administrative charges and policy charges are the ones to look out for. Here again, these charges can make a huge difference for those looking at insurance as a short to medium term investment option with the payment term being less than 10 years. In the long run, however, there is not cause for concern, as most companies have similar cost structure after five years.

Even when tax planning is a necessity for many, not many have the advantage of liquidity. For many fresh and young investors, tax deduction tends to bring a better relief than tax saving investments as they need not worry about the investment! Such investors can go in for monthly payment mode through SIPs for ELSS and ECS in the case of insurance. However, such luxury may not be available for last minute tax savers with the year coming to an end in the next four months. So, look for lump sum for the current year and from next financial year, make it a point to sign up for SIPs.

Another option for monthly saving is SIP in a general fund or a debt fund and the amount can be transferred to an ELSS fund at the time of providing investment details to the employer. While debt funds give the comfort of accumulation without risk, equity funds provide the element of opportunity of earning higher returns but with the baggage of risk. Go for an option that suits your risk taking abilities.