Here’s a headstart on safe investments, making sure you have explored all the choices that you have.
We have often spoken about asset allocation and the split between equity and safe debt. But what should you put into that risk-free debt bucket? That's what well tackle today.
We're so besotted with equity markets and its ups and downs; we almost tend to forget there's a whole universe of investments out there which is steadily building wealth for you. These are the investments in your debt bucket- hugely safer investment options than equity.
Some you definitely are invested in and perhaps don’t even count when you tally up your savings like provident fund. Then there are a few you may have missed out on not having enough information about them. So we decided to do a checklist of whether you've explored all your really safe debt investment options and making the best of them.
Safe is music to the ears right now, isn’t it?
Markets are irrelevant; these are products are those that you will use in any kind of market. We're looking at safe fixed return products that you will use for the debt part of your asset allocation.
Beginning with a checklist; what are debt investments?
What is a debt instrument?
# Gives fixed return
# At a fixed time
# Usually guaranteed
Role of a debt product?
# Provide safety of money
# Target an assured sum
# Give regular income
# Give stability to portfolio
Bank FDs, post office deposits, PPF and now bonds. It is always difficult to choose. The best way to choose is to look at utility:
# Products that allow us to build a corpus
# Products that give off a regular income.
We first talk of products that allow us to build a corpus. It can be done in two ways:
# Lump sum investing
# Regular investment
So let me take you through safe investment options of lumpsum investing; right now we feel the best in the market is a Bank FD. The rates are phenomenal and all of you should be booking some FDs in your portfolio; also we believe the rates could come down, so this window of high FD rates is not a big one. Here's a list of best Bank FDs going round bank town:
# DBS Bank- 1 year-2 years: 11.25 per cent
# Axis Bank- 500 days: 11 per cent
# ING Vysya Bank-1 year: 11 per cent
# IndusInd Bank- 400 days: 11 per cent
In case you need to block in for 5 years, a bank FD is paying about 10.75 per cent, that's the best return.
This is seriously good, risk free returns; aren't they?
Post office savings and the KVP as the other two options for lump sum savings:
Bank FDs today work the best when you compare them to other products in the same space - like the post office deposits and the KVP.
# Post office deposits are returning at most 7.5 per cent on a 5 year deposit
# KVP gives 8.4 per cent over 8.7 years
So this is what you will end up earning if you put away some money in Post Office savings- a lakh will fetch you1 lakh 6000 rupees and a little more in one year. The interest is compounded quarterly and if you can keep it for longer than 3 years you can get 7.25 per cent safe returns.
In 3 years, you will get (Int. 7.25 per cent) Rs 1,24,055, and in 5 years- just 5 rupees short of a lakh and a half.
Then there's one other long term option of lumpsum investment- Kisan Vikas Patra- your money is blocked for 8 years and 7 months and doubles in this period ( 2 lakhs).
There's one more product right now being advertised heavily - a bond from Nabard offering over 12 per cent returns. That's mouthwatering risk free returns, aren't they?
NABARD Bonds
# NABARD Bhavishya Nirman Bonds: Rs 1 lakh will become Rs 2.35 lakh in 10 years (rate of interest is 8.93 per cent)
NABARD is advertising 12.18 per cent but that is simple interest. There has been some argument with the CBDT on the taxation of the return - whether it is interest or capital gain. According to the Nabard Offer document this is capital gains and that works better for us than an income tax.
We are talking about how to choose debt products to fill our debt bucket. We saw that bank FDs are the best option today to target a corpus if we have a lump sum today. But what if we want to use a safe product to use regular savings to target a future goal? There are two products here and we all know about them, don't we?
Here's a quick look at your regular investment options to build a long term corpus:
# Bank recurring deposit: You get Rs 3.6 lakh if you invest Rs 5,000 a month for 5 years; that’s at 7.5 per cent interest per annum.
# Much better option of course is PPF; 70,000 is the limit, which you and your spouse should definitely be maximising every year.
In PPF you get Rs 19 lakh in 15 years at Rs 70,000 saved a year.
# And there's EPF; you get Rs 1.5 crore in 30 years if your present basic salary is Rs 15,000 and growing at 10 per cent per annum- 8.5 per cent per annum. That's a lot of safe money in every employed person's kitty.
1.5 crore- now that's a nice whole number. This number is on the assumption of a starting salary of Rs 15,000 a month that grows at 10 per cent per year and this person works for 30 years without withdrawing from the EPF account. EPF is one of the best ways to target our retirement since the money is deducted before the salary comes into our hands. A little known fact is that if you maintain a EPF account for more than 10 years you become eligible for pension. A checklist to get the best out of your EPF:
# Max your contribution to 12 per cent of your basic salary plus dearness allowance.
# Don't encash your EPF account when you move jobs. Get a transfer.
# If you stay in the EPF for at least 10 years, you can get pension when you turn 58.
# Don't withdraw your pension scheme money even if you encash your EPF.
# Instead, get a scheme certificate, which you can give to your new employer and carry forward your pension account.
What if you've already build a substantial kitty of savings and are looking safe regular investments- these are the options you could look for regular investments:
# Post Office Monthly Income Scheme (MIS): Here each individual can invest upto 3 lakh rupees, not more and you are allowed a joint account with spouse that can take this upto 6 lakhs per annum and this 6 lakh invested gives back Rs 48,000 a year. That's 8 per cent per annum, interest payable monthly.
# For senior citizens there also Senior Citizen Bonds: Rs 15 lakh invested gives back Rs 1,35,000 a year. 9 per cent per annum is your returns and you get money back quarterly.
In ranking these investments, you will have to mix and match here. If you need regular money right away- you should look at the Senior Citizen Bond. If you have more than Rs 15 lakh, you can use the post office MIS.
But if you are able to defer this income need by 1 or 2 years, I would use the bank FD to get that over 11 per cent rate of interest and then use MIS and Senior citizen bonds to give me a regular return.
A checklist for you:
# Have you and your spouse maximised investment of 70,000 rupees each year in public Provident Fund ?
# We also recommended you should be Maxing your EPF or employee provident fund contribution to 12 per cent of your basic salary plus dearness allowance. Must talk to your company today and tell them to do that.
# Then we recommended that for 1 to 5 years lumpsum investments- with rates likely to come down we would recommend that you do put some of your surplus investments in those.
# There are also government backed investments like Post Office deposits and Kisan Vikas Patras which most of us tend to ignore simply because they are not available easily; only a select list of agents sell these products.
Source:ndtvprofit.com
Tuesday, December 9, 2008
Sunday, December 7, 2008
What is rights issue?
Raise additional capital
A rights issue is a way by which a listed company can raise additional capital. However , instead of going to the public, the company gives its existing shareholders the right to subscribe to newly issued shares in proportion to their existing holdings. For example, 1:4 rights issue means an existing investor can buy one extra share for every four shares already held by him/her. Usually the price at which the new shares are issued by way of rights issue is less than the prevailing market price of the stock, i.e. the shares are offered at a discount.
To raise fresh capital
Why does a company go for it?The basic idea is to raise fresh capital. A rights issue is not a common practise that a corporate organisation resorts to. Ideally, such an issue occurs when a company needs funds for corporate expansion or a large takeover. At the same time, however, companies also use rights issue to prevent themselves from being conked out. Since a rights issue results in higher equity base for the organisation, it also provides it with better leveraging opportunities. The company becomes more comfortable when it comes to raising debt in the future as its debt-to-equity ratio reduces.
A rights issue affects
What is the effect on the company and what if a shareholder does not exercise his right?A rights issue affects two important elements of a company — equity capital and market capitalisation. In case of a rights issue, since additional equity is raised, the issuing company’s equity base rises to the extent of the issue. The effect on m-cap depends on the perception of the market. In theory, every new issue has some kind of diluting effect and hence as a result of a fall in the market price in proportion to an increase in the number of shares, the market capitalisation remains unaffected. However, if the market sentiment believes that the funds are being raised for an extremely positive purpose then price of the stock may just rise resulting in an increase in the market capitalisation . If a shareholder does not want to exercise the right to buy additional shares then he/she can sell the right as the rights are usually tradable. Alternatively, investors can just let the rights issue lapse.
Investor be careful
What should an investor be careful about in case of a rights issue? An investor should be able to look beyond the discount offered. Rights issue are different from bonus issue as one is paying money to get additional shares and hence one should subscribe to it only if he/she is completely sure of the company’s performance. Also, one must not take up the rights if the share price has fallen below the subscription price as it may be cheaper to buy the shares in the open market.
Source:Economictimes.com
A rights issue is a way by which a listed company can raise additional capital. However , instead of going to the public, the company gives its existing shareholders the right to subscribe to newly issued shares in proportion to their existing holdings. For example, 1:4 rights issue means an existing investor can buy one extra share for every four shares already held by him/her. Usually the price at which the new shares are issued by way of rights issue is less than the prevailing market price of the stock, i.e. the shares are offered at a discount.
To raise fresh capital
Why does a company go for it?The basic idea is to raise fresh capital. A rights issue is not a common practise that a corporate organisation resorts to. Ideally, such an issue occurs when a company needs funds for corporate expansion or a large takeover. At the same time, however, companies also use rights issue to prevent themselves from being conked out. Since a rights issue results in higher equity base for the organisation, it also provides it with better leveraging opportunities. The company becomes more comfortable when it comes to raising debt in the future as its debt-to-equity ratio reduces.
A rights issue affects
What is the effect on the company and what if a shareholder does not exercise his right?A rights issue affects two important elements of a company — equity capital and market capitalisation. In case of a rights issue, since additional equity is raised, the issuing company’s equity base rises to the extent of the issue. The effect on m-cap depends on the perception of the market. In theory, every new issue has some kind of diluting effect and hence as a result of a fall in the market price in proportion to an increase in the number of shares, the market capitalisation remains unaffected. However, if the market sentiment believes that the funds are being raised for an extremely positive purpose then price of the stock may just rise resulting in an increase in the market capitalisation . If a shareholder does not want to exercise the right to buy additional shares then he/she can sell the right as the rights are usually tradable. Alternatively, investors can just let the rights issue lapse.
Investor be careful
What should an investor be careful about in case of a rights issue? An investor should be able to look beyond the discount offered. Rights issue are different from bonus issue as one is paying money to get additional shares and hence one should subscribe to it only if he/she is completely sure of the company’s performance. Also, one must not take up the rights if the share price has fallen below the subscription price as it may be cheaper to buy the shares in the open market.
Source:Economictimes.com
Wednesday, December 3, 2008
Term Plan Better Now
Pure term policies have become more attractive than earlier due to lower premiums offered by some insurance companies
The premium that pure term plans charge is the lowest among life cover policies as they provide only life insurance for a specified number of years. Term plans don’t offer any returns as they focus only on providing life cover and have no savings element. If you outlive the policy, you will not get anything, but if you die during the term of the plan, your nominees will get the sum assured. So, if your aim is not to use insurance as an investment avenue, but to only protect your dependents from a financial crisis in case you die prematurely, pure term is the product as it will serve your need at the lowest cost.
WHAT TO LOOK FOR WHILE BUYING TERM INSURANCE
As term plans don’t have any surrender or maturity value, purchase decisions are often based on premium. However, choice should be guided by other factors too.
Paying term. Limited PPT, in which a higher premium is paid for only a few initial years of the plan, can be a better option than paying premium every year if you want a big cover and can afford high premiums over the first few years. While limited PPT lowers the total premium outflow, it also prevents the policyholder from benefiting from falls in the premium in the future. The PPT advantage is also diluted if the policyholder dies early.
Duration. Unlike endowment plans, premium of term plans rises as its duration increases. However, life is uncertain and you should ideally choose a plan that covers you for long. Term cover can be dropped easily once financial responsibilities are over. It does not make sense, for instance, if a 30-year-old person buys a term plan for just 25 years.
Maturity age. If you expect to have dependents till late in your life, look for term plans that have a high maturity age. Most term plans provide coverage till age 60 or 65 years.
Top-ups. Some plans allow hikes in cover at regular intervals without any financial or medical underwriting. Higher incremental premiums may be required as age advances, but they may still prove helpful in circumventing age-related health problems. These annual hikes are capped, but even small increases at regular intervals add up to a neat overall rise. For instance, if a cover of Rs 10 lakh is increased by 5 per cent every year, the total cover would become Rs 15 lakh in 10 years.
WHY BUY EARLY
The right time to buy term cover is when one finds someone financially dependent on oneself. Apart from low premium, there are other reasons for purchasing a pure term cover early in life.
Health issues.
The health status of the person buying a term plan goes a long way in deciding the premium and even whether the policy would be issued to him at all. There are stringent medical tests and processes before a policy is issued. In some cases, extra premium is charged if the health reports do not fall within the insurer’s underwriting limits.
Saving the surplus.
Buy a term plan with adequate coverage to keep worries away. Once your life is protected, it will be possible for you to deploy your savings more efficiently. It will help if you choose the right instruments with the aim of creating wealth over the long term.
MORE TO COME
Premium is largely a function of mortality rate (number of deaths per thousand), the insurer’s expenses and interest rates. The mortality rate being used by all insurers is based on the 1994-96 mortality tables. Fall in mortality rate due to higher life expectancy will push premiums further down. Insurers can afford to charge less if policyholders pay premiums for longer periods on account of increase in average longevity. A recent US report records this. According to Insurance Information Institute, a US trade group, term cover premiums have fallen by 50 per cent over the past decade in the US. The reason cited for this is change in the mortality tables due to rise in life expectancy.
Though a similar situation is likely to develop in India too, you should not wait till it does to buy a term plan. When that happens, you can decrease your overall cost by buying more.
Note : This article is an extraction from another site.
The premium that pure term plans charge is the lowest among life cover policies as they provide only life insurance for a specified number of years. Term plans don’t offer any returns as they focus only on providing life cover and have no savings element. If you outlive the policy, you will not get anything, but if you die during the term of the plan, your nominees will get the sum assured. So, if your aim is not to use insurance as an investment avenue, but to only protect your dependents from a financial crisis in case you die prematurely, pure term is the product as it will serve your need at the lowest cost.
WHAT TO LOOK FOR WHILE BUYING TERM INSURANCE
As term plans don’t have any surrender or maturity value, purchase decisions are often based on premium. However, choice should be guided by other factors too.
Paying term. Limited PPT, in which a higher premium is paid for only a few initial years of the plan, can be a better option than paying premium every year if you want a big cover and can afford high premiums over the first few years. While limited PPT lowers the total premium outflow, it also prevents the policyholder from benefiting from falls in the premium in the future. The PPT advantage is also diluted if the policyholder dies early.
Duration. Unlike endowment plans, premium of term plans rises as its duration increases. However, life is uncertain and you should ideally choose a plan that covers you for long. Term cover can be dropped easily once financial responsibilities are over. It does not make sense, for instance, if a 30-year-old person buys a term plan for just 25 years.
Maturity age. If you expect to have dependents till late in your life, look for term plans that have a high maturity age. Most term plans provide coverage till age 60 or 65 years.
Top-ups. Some plans allow hikes in cover at regular intervals without any financial or medical underwriting. Higher incremental premiums may be required as age advances, but they may still prove helpful in circumventing age-related health problems. These annual hikes are capped, but even small increases at regular intervals add up to a neat overall rise. For instance, if a cover of Rs 10 lakh is increased by 5 per cent every year, the total cover would become Rs 15 lakh in 10 years.
WHY BUY EARLY
The right time to buy term cover is when one finds someone financially dependent on oneself. Apart from low premium, there are other reasons for purchasing a pure term cover early in life.
Health issues.
The health status of the person buying a term plan goes a long way in deciding the premium and even whether the policy would be issued to him at all. There are stringent medical tests and processes before a policy is issued. In some cases, extra premium is charged if the health reports do not fall within the insurer’s underwriting limits.
Saving the surplus.
Buy a term plan with adequate coverage to keep worries away. Once your life is protected, it will be possible for you to deploy your savings more efficiently. It will help if you choose the right instruments with the aim of creating wealth over the long term.
MORE TO COME
Premium is largely a function of mortality rate (number of deaths per thousand), the insurer’s expenses and interest rates. The mortality rate being used by all insurers is based on the 1994-96 mortality tables. Fall in mortality rate due to higher life expectancy will push premiums further down. Insurers can afford to charge less if policyholders pay premiums for longer periods on account of increase in average longevity. A recent US report records this. According to Insurance Information Institute, a US trade group, term cover premiums have fallen by 50 per cent over the past decade in the US. The reason cited for this is change in the mortality tables due to rise in life expectancy.
Though a similar situation is likely to develop in India too, you should not wait till it does to buy a term plan. When that happens, you can decrease your overall cost by buying more.
Note : This article is an extraction from another site.
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