Crude shock : pricing blues could worsen

Spiralling prices of crude oil have been wreaking havoc with our pockets in more ways than one. Prices of products that need crude oil as a raw material have risen 30% since the beginning of this year.That's everything from toothbrushes to tyres.

So,consumers have more to worry about than just the rise in petrol prices which looks imminent.

Gold 'Hallmarking' in India

Indian gold traders and jewellers are protesting the impending 'Hallmarking' regulations. Hallmarking is the process by which jewellers will have to certify the purity of gold they sell in jewellery. This regulation is expected to come into force on 1 January 2008. Traders/jewellers are up in arms claiming that the regulations have been put together without consulting them and operational issues such as limited testing centres will make it very onerous for them. In addition, they are not happy with the penalties suggested in the regulation.

This is obviously an excellent regulation from a consumer perspective. Resistance from traders/jewellers is to be expected. However, the government must persevere to create this much needed transparency for consumers.

Why you rather that Mr. Pandit be CEO of Citigroup ?

Why would anyone want to be CEO of Citigroup at this stage ? All Mr. Pandit, who recently accepted this uneviable job, has to look forward to is:

1. Selling off businesses making a once revered corporate behemoth a smaller and probably a bank similar to many others
2. Reducing headcount in huge numbers increasing hardship to countless families around the world
3. People within the organization looking for every opportuntity to bring him down
4. Very little chance that anyone would remember his legacy after all the chopping !

Gievn all this, aren't you thankful it is Mr. Pandit rather than you who has the responsibility of trimming Citi ?

India Sensex - Be careful of speculative interest !

It appears that speculation has played a significant role in recent Sensex run-ups. Sharp price rise in some recent high performing stocks have not been backed by adequate delivery based volumes. For example, Reliance Capital, Essar Oil, Reliance Natural Resources Limited and Ispat Industries have attracted lower than average delivery based volumes. Reliance Capital had only 9% delivery based interest on Friday indicating that 91% of the transactions were speculative !

Longer term retail investors need to be wary of such run-ups and be willing to ride out volatility.

Calculating life insurance coverage

The fundamental concept in assessing whether you have adequate life coverage is to check that, should something unfortunate happen to the bread winner, your family continues to ideally get the current annual income. To get this amount right, you would therefore need to calculate the insurance payout that is required to get you current annual income when invested in relatively safe instruments.

An easy way to calculate this amount is to take the bread winner's current annual income, divide this number by current 1 year bank fixed deposit rate and multiply the result by 100. For example:

1. If current annual income is Rs 3,00,000
2. Current 1 year bank fixed deposit rate = 8%
3. The amount of life cover you may want the bread winner to seek = (300000/8)*100 = Rs 37,50,000
4. Amount could be lower if you feel that actual living expenses (after paying off all debts) are lower than Rs 3,00,000 - in which case, substitute that number for Rs 3,00,000 is the above calculation.

Is your family adequately insured ?

India Insurance: ULIP

Unit Linked Insurance Policies (ULIPs) are insurance policies that combine risk coverage with investing in the stock/debt markets. In effect, they are designed to behave as normal insurance policies plus mutual funds.

An investor contribution to ULIPs gets invested in specific types of portfolios that he/she chooses. The policy typically pays back based on market returns on investments at the end of the insured period. Therefore, it forms an interesting savings instrument that can get good risk cover.

Features of ULIPs include:

1. Units allotted under ULIP schemes have Net Asset Values (NAV) declared regularly, like a mutual fund

2. Investors can invest across types of portfolios similar to mutual funds - growth equity, balanced, debt funds, etc. Investors can move across portfolios, typically at nominal costs

3. Investors can invest as a lump sum (single premium) or make premium payments on an annual, half-yearly, quarterly or monthly basis. Premium amounts can be changed over the course of ULIP's life

4. Investments qualify under Section 80C of the Income Tax Act. Maturity proceeds from ULIPs are tax free. There are no long term capital gains tax and 10% short term capital gains tax on equity portfolios within ULIP. For debt funds, long term capital gains tax is 10% while short term is at the investor's marginal tax rate.

5. However, charges charged by insurance companies can be quite confusing - therefore, investors should compare them with similar mutual funds to see if charges quoted are reasonable.

Despite their interesting structure and potential benefits, investors are better off clearly understanding portfolio types offered, performance of fund managers and expenses/fees before investing in ULIPs.

Infosys, TCS and Wipro stocks - drags !

India based technology companies like Infosys, TCS and Wipro are facing a serious challenge. From being hyped as darlings of the markets, they are now facing a situation where their stock prices have declined significantly while the Sensex has gone up significantly over the last year.

For example, stock prices on 1 Dec 2006 and 1 Dec 2007 for various scrips are as follows:

1. Infosys: Declined from Rs 2193.75 to Rs 1604.05, a decline of 26.8%
2. TCS: Declined from Rs 1186.80 to Rs 1013.95. decline of 14.5%
3. Wipro: Declined from Rs 600.90 to Rs 460.30, decline of 23.4% !

All this when the Sensex has gone up by 39.8%, despite having these three as part of the index.

Retirement savings myths

Following is an interesting article by Niranjan Rajadhyaksha in www.livemint.com. For those who have not experienced the new finance paper 'mint' in India, we strongly recommend including it in your regular diet:

"Retirement saving myths

The standard portfolio model is flawed because it ignores human capital, according to economist Joseph Stiglitz
Cafe Economics Niranjan Rajadhyaksha

Most of the financial advice we get is hopelessly inadequate and simplistic—if not outright wrong.

Last week, I heard Joseph Stiglitz launch a typically blunt and brilliant attack on some of the sacred cows of the financial advisory business. The economics professor at Columbia University in the US and winner of the 2001 Nobel Prize in economics is popularly known as a trenchant critic of some aspects of globalization, though his academic work spans a wide range of economic issues, including financial ones.

“Long-term financial planning is a very complex task. Individuals cannot judge what they need to do and so they fall prey to wrong advice. This gives rise to fashionable rules of thumb,” said Stiglitz in a presentation at the Second European Colloquia organized by Pioneer Investments in Vienna at the end of November. (Disclosure: I was in Vienna as a guest of Pioneer Investments.)
Most of our value as economic animals resides in our ability to earn over our working lives—our human capital. The most common rule of thumb is that an individual should invest heavily in equities at a young age and then gradually move into bonds as the age of retirement nears. A popular and pseudo-scientific way of defining this rule is as follows: subtract your age from the number 100, and you get your ideal exposure to equities. For example, a 30-year-old should have 70% of his long-term savings in equities (100-30) while a 50-year-old should bring it down to 50%.

Neat, huh? But also wrong, said Stiglitz.

Most financial advice—and the economics that underlies it—is flawed. It assumes that an individual has only two types of capital: relatively safe fixed-income bonds and equities that are more risky but which also give more returns. The question is how long-term savings should be distributed between the two as we age.

“The standard portfolio model ignores other forms of individual capital,” said Stiglitz. One important form of this is human capital, which is usually calculated as the present value of all the future earnings an individual will earn over his working life.
Most of our value as economic animals resides in our ability to earn over our working lives—our human capital. According to some estimates, nearly 80% of an individual’s capital is human capital. This form of capital and its risk profile should ideally be considered while designing a good financial plan for retirement.

Human capital is usually more risky at a young age, points out Stiglitz. You are just starting off on your career and the future is uncertain. As you age and get settled into your chosen profession, the uncertainty about your ability to earn starts declining. Human capital gets less risky as you age.

Seen from this perspective, most financial plans are built on shaky foundations. A 25-year-old setting out down a fresh career path faces huge amounts of risk in his overall portfolio (financial and human), because his future earnings are uncertain. Ideally, his financial portfolio should have low risk to balance out the high risk in his human capital. He should be buying more bonds than he is usually advised to do. But the cookie-cutter financial advice that he gets is to put most of his savings into equities—and increase his overall risk.

The big question is whether human capital resembles a safe bond or risky equity. In a separate presentation, Stephen P. Zeldes, a professor of finance and economics at Columbia University, asked: “Is labour income stock-like or bond-like?” He suggested there are no easy answers here. Without disagreeing with Stiglitz, Zeldes said labour income has both characteristics, depending on the circumstances.

All this makes financial planning a complicated process. Besides, other factors such as which industry one is working in, the nature of one’s family responsibilities and home ownership also need to be thrown into the consideration. In a country such as India, for example, where a large part of the population is self-employed, labour income would tend to be risky.

Perhaps we are wrong in blindly assuming that we should cut our exposure to equities as we age. In fact, a well-settled professional with stable earnings perhaps has more reason to invest in equities than, say, a young entrepreneur in a technology start-up.

These are nuances that are often ignored, even in our grander debates on how pension fund money should be used in India.

One challenge before those involved in designing social security systems is how to balance freedom of choice and good guidance. Choice is important because an individual knows about his retirement needs than outsiders. But, as Stiglitz pointed out, individuals make rational decisions by learning from past experiences—their own and of others. That’s not possible for retirement planning. A person who realizes at 60 that he has not saved enough for his retirement cannot say: “I’ll do better next time.”

There is no second chance.

Your comments are welcome at cafeeconomics@livemint.com"

India bank service extension

MINT reports that banks in India have started using third parties called 'correspondents' to take banking services to the unbanked. The technology involves a bank correspondent carrying a hand held device that can credit or debit a smart card held by the customer. Correspondents can disburse small loans, collect small deposits, sell micro insurance and mutual fund products. These distributors are paid mainly in the form of commissions on number of transactions done along with number of customers and business secured. Taken together with growing mobile banking, we may be seeing early signs of greater financial inclusion.

Be ready for the vegetable vendor who can now sell you carrots while conducting your banking business !

India medical insurance premiums under check

IRDA (The Insurance Regulatory and Development Authority, India), has directed insurers that the premium in any year should not be more than 75% than what was paid last year. Following deregulation of general insurance tariffs, medical insurance premiums were in some cases revised by 200% +. This led to many people discontinuing medical insurance and lodging complaints with the regulator.

While the price increase cap is good for consumers (compared to a 200% + increase !), it would be be detrimental to insurers who have been facing significant claims, especially in medical insurance.