LoanRaja Blog- Personal Finance Guide

Set under the bridge, the masterpiece dialogues between Amitabh and Shashi Kapoor…we’ve rewritten them for the 21st century…

When a slowdown comes, can stimulus packages make a difference to India’s current affairs? After the US, EU and China announced infusion of huge amounts of money to get their economies kick started again, it was India’s turn to do the same.

Of course, apart from the economic downturn where everyone talks about India’s current affairs (which in our case was really not as bad as that of the others), we had the terror attacks to add to the gloom. No wonder then, that the Government announcement on Sunday of a Rs 20,000-crore package was met with more than warm enthusiasm. If you have not seen the videos search it on Youtube to know the actual India current affairs.

The initial reaction has been one of optimism. In response to the across the board cuts on Cenvat, automotive, consumer durables and IT hardware industries have already announced intentions to pass on the benefits. So, one can look forward to cheaper cars, white goods and electronic items.

Speaking about current affairs, fuel prices are also down, though only marginally, compared to the global price fall, but indications are that it will go down further.

In the last few months, the RBI has tried every trick in the book to increase liquidity in the market through monetary measures.Even the Sensex, which had refused to come out of its dumps, has brightened up a little.

So what stands as focus during such current affairs? For India the package is focused on three areas; mainly – manufacturing industry, housing and public expenditure. Most manufacturing industries had cut back production.

The 4 percent cut in Cenvat is aimed at setting in motion the cyclical growth process once again. A cut in prices should see an increase in demand, which in turn will lead to an increase in production, an increase in trade and an increase in jobs, increase in amount of money with individuals and therefore an increase in spending power.

It is the same theme that runs through the RBI’s monetary measures to infuse liquidity, though those measures did not see the expected impact.

The affordable housing sector has been one other clear area of focus as banks have already announced cut in rates. Public sector banks are also expected to announce new packages for borrowers of loans in the Rs 5-20 lakh range. This is targeting the middle and low income categories specifically, while also trying to revive the housing industry, which is a large employer of labour.

The largest part of the package is the additional Rs 20,000-crore Plan expenditure. More money is expected to be poured into public infrastructure projects. However, this is the sector that has also attracted the largest amount of criticism. Historically, public expenditure has been equated with leakage, corruption and misuse of funds. Will the money really go into the works as announced is one doubt.

Assuming that this really works out, then public expenditure should spur on private investment and set the entire economy rolling again.

All the new measures will keep the growth rate from slipping below 7 percent. The growth rate has dropped from 9 percent last year, as a result of the global slowdown. In fact, critics have started pointing fingers that the growth rates in the case of Indian economy would be muted in the coming few quarters. What has also added to the skepticism is the fact we are staring at general elections in less than two quarters. Typically, in an election year, you don’t expect to see fire brand economic politics or push towards reforms. However, the recent concluded assembly elections and the public pressure in the aftermath of terror attacks might push the government to speed up its reform process. The economic stimulus package is a reflection of government’s thinking and let us hope that political parties are forced to try their hand at revival of economy for their own good.

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.