Mini Contracts in Derivatives

Given the buoyancy in the stock markets for the last couple of years, SEBI has mentioned that they they would introduce a mini derivative contract with a minimum contract size of Rs 1 lakh at the time of introduction in the markets.

This means that retail traders and small time traders will be able to take derivative positions with smaller amounts of margins as the contract size decreases.

Today the contract size for most of the shares and index in the derivative segment is approximately anywhere between Rs 2 lakhs and above. With the margin requirement of atleast 20% in most cases, this will be a welcome move for small investors.

The contract will start on both the Sensex and the Nifty.

The risk containment and other measures applicable for existing exchange traded equity index derivatives contracts will be applicable to the mini derivative contracts.

Medical Insurance insights

I am pretty sure that many of you would not have taken any kind of medical insurance under the pretext that the company provides the same for the family.

However, I am sure most of you would have taken some kind of life insurance policy by now and would probably be having a couple of life insurance policies. It is quite possible that many of you would have taken medical illness raider or some kind of a dreaded disease benefit as well as part of the overall cover and have combined the life insurance cover with the medical illness benefit. So far so good that you have done a wise thing.

However, have you folks claimed the income tax benefit that ones as part of Section 80D of the income tax rules. This benefit is over and above the Rs 1 Lakh deduction that one can get as part of Sec 80C (investment in PF, PPF, ELSS, Pension schemes, qualified bonds etc). Typically part of the insurance premium that you pay for your policy which has illness or medical insurance related benefits goes towards medical insurance premium for which you can get income tax benefits under Section 80D.

When you get the receipt for the insurance premium payment, there will be separate mention of the amount that one can get as a rebate for Section 80C and Section 80D. So please relook at your premium receipts and make sure that you get the benefit of Section 80D.

Here is a small note on Sect 80D - Under this section, the income tax assesse can claim a benefit of upto Rs 10000 per annum for the premiums paid towards medical insurance. The amount of the premium (Rs. 10,000) is fully deductible under Section 80D of the Income Tax Act. Thus, you save Rs. 3366 on your tax payable if you are in the highest income tax bracket.

SEBI to clear launch of Real Estate Investment Products

Yesterday, the SEBI Chairman, Mr M. Damodaran has mentioened that the decks have been cleared for the launch of the real estate investment products in the market.

The last hurdle had been cleared with the Association of Mutual Fund Industry and the Institute of Chartered Accountants of India having firmed up the valuation norms for these products.

Explaining the process, he said that these two bodies looked at whether it was possible at all to accord a valuation and the frequency with which one needed to do it. Valuation, almost on a continuing basis, is needed as people enter and exit schemes on a regular basis.

The above means that Real estate fund that were privy only to the High networth individuals will start being available to the common man. Also, the high frequency of price disclosure means that one will be able to get in and get out of the fund just like any other Mutual Fund unlike the current Real estate fund which have long term commitment and lock in.


Learn more about Real estate funds in the links given below

1. Investing in Real Estate Part - I

2. Investing Real Estate Part - II

Increase in Tax collections - How does it affect you

The existing taxpayers are paying more taxes this year, thanks to higher incomes from a booming economy and improved compliance with tax laws. Also contributing to the direct taxes are the addition in the number of new tax payers.

In April-October 2007, personal income tax collections of the Centre grew 39.39 per cent at Rs 49,890 crore, significantly higher than Rs 35,805 crore collected in the same period last year. The buoyancy in personal income tax collections can be attributed to both deepening and widening of the tax base.

Tax experts also emphasise that while salary levels have seen significant rises, avenues for financial savings remain limited at around Rs 1 lakh a year, thus bringing more income to taxation.

At the same time, the number of new tax payers has seen a steady increase. In 2004-05, there were 15.97 lakh new assesses and the number went up by 19 lakh in 2005-06 and 21.28 lakh in 2006-07.

The direct tax base as on end-March 2007 stood at 3.19 crore assessees, with majority of them coming under the category of ‘individuals’. The corporate tax base has been more or less stagnant in the recent years and comprised about 1 per cent of the total direct tax base.

Despite this, corporate tax revenues continue to be buoyant, with collections during April-October this year recording 45.71 per cent growth at Rs 78,785 crore (Rs 54,072 crore). The overall direct tax collections for the period under review grew over 40 per cent to Rs 1,28,864 crore, up from Rs 90,180 crore in April-October last year.

Given the huge backdrop in the collection of Taxes by the government, there are already talks that the tax rates might be reduced etc. Here are some of the options that the Finance has in front of him for the next year that will be presented in teh budget in Feb. Also, this could be a last budget before the next general elections and hence there is a possibility that the Finance minister will give more sops than the usual. Some of the sops that could be expected are

1. Reduction in the Tax rates for the different slabs
2. Alteration in the tax slabs
3. Increase in the Standard deduction
4. Reduction in the surcharge or abolition of the same.

Variable Entry Load for Mutual Fund Investments

In a new report in the Business Standard, The Securities and Exchange Board of India is likely to allow mutual fund houses to charge a variable entry load for their schemes, providing investors freedom of choice based on the services they get from a distributor.

Industry sources said Sebi will hold a final round of discussions with the Association of Mutual Funds in India (Amfi) and other market participants next week on the issue before a circular to this effect is put out.

Entry load is charge levied by a mutual fund when an investor steps in. At present, open-ended mutual fund schemes charge between 2 and 2.5 per cent of the amount invested as entry load to meet their marketing costs, distribution commissions, et cetera.

In their last meeting, Amfi and other market participants had suggested that a variable load structure should be introduced, which would give the investors freedom of choice, the sources said.

The variable entry load structure for mutual funds is prevalent in developed markets such as the United States and Australia. In India, a variable fee is slowly being introduced in the stock broking industry.

The variable entry load could vary from zero to 2.25 per cent depending on the services required by the customers. The customers will be informed about the charges and it will be calculated depending on the quality of the service.

In August, Sebi had brought out a concept paper proposing to do away with the entry load charged by mutual funds through the direct route. The proposal had suggested that mutual fund investors would not have to pay entry load for applications filed online or through the asset management company's collection centres.

The services provided by an agent or a distributor can include a full financial plan for investors, a mere product suggestion, risk-return calculation, research reports, or facilitating the monthly or quarterly statements.



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Birla Sun Life Special Situations Fund

Birla AMC has come out with a new fund called the Birla Sun Life Special Situations Fund which is an open ended diversified fund. The objective of the scheme is to generate long-term growth of capital by investing in a portfolio of equity and equity related securities. The scheme would follow an investment strategy that would take advantage of special situations and contrarian investment style.

Special situations are defined as those where there was huge share holder value unlocking by way of merger of a company or take over by a company or delisting of the company or some event which is not normal and is defined as Special.

The company aims to invest 80%-100% of the amount in equity while 0 - 20% will be invested in Fixed income securities including Money market instruments.

Snapshot
Face Value: Rs. 10
Date of opening - 17th Dec 2007
Date of closing - 15th Jan 2008
Plans: Retail and Institutional
Options: Dividend (Reinvestment/Payout/Sweep) & Growth
Minimum Investment: Retail: Rs. 5000 and subsequently in multiples of Rs.1
Benchmark Index: BSE 2000
Load Structure:

Entry Load (including SIP):
For less than upto Rs. 5 crores – 2.25% of the applicable NAV
For Rs. 5 crores & above – Nil
Dividend Reinvestment: Nil

Exit Load (including SIP):
For purchase of units less than Rs. 5 crores – 0.5% of the applicable NAV (within 6 months from the date of allotment)
For purchase of units of Rs. 5 crores & above – Nil

UTI Investment Bond Fund

UTI Mutual Fund has come out with a new debt fund called UTI Investment Bond Fund Plan 60 (60 months plan). It is a close ended income fund, comprising of four series. This is the first series being launched by the AMC and is open for subscription from November 26, 2007 to December 31, 2007.

The scheme aims to generate regular returns by investing in a portfolio of fixed income securities normally maturing in line with the maturity period of the respective plans. It would invest 70 to 100 per cent in debt and money market instruments and upto 30 per cent in equity and equity linked instruments.

Snapshot
Face Value: Rs. 10
Plans: Retail and Institutional
Options: Dividend (payout and reinvestment) and Growth
Minimum Investment
Retail: Rs. 5000 for the growth option and Rs. 10000 for the dividend option
Institutional: Rs.1 crore
Benchmark Index: Crisil MIP Blended Index

Load Structure: The plan would offer redemption facility on a half-yearly basis after the closure of the issue. The investor may redeem the units on the stipulated date (based on the date of the closure of the issue).

What is Recession ?

As promised in my previous blog, here is a short note on Recession.

Recession is defined as a significant decline in activity spread across the economy, lasting longer than a few months (for the purpose of definition, this state should exist for atleast 2 consecutive quarters). The technical indicator of a recession is two consecutive quarters of negative economic growth as measured by a country's gross domestic product (GDP).

To know more about GDP,

What is Gross Domestic Product (GDP) ?


Recession is a an unpleasant part of the business cycle. A recession generally lasts from six to 18 months and in this period, the central bank reduces the interest rates to stimulate the economy by offering cheap rates at which to borrow money and so that businesses can offer compeeling values for their products and remain profitable.

What is Stagflation ?

In the recent past you would have heard of everyone talking of inflation and the effects it has on the economy, stock markets, interest rates etc.

Learn more about inflation at

What is Inflation ?

As we speak about inflation, it is equally important that one be aware of Stagflation which is a condition of slow economic growth and relatively high unemployment - a time of stagnation - accompanied by a rise in prices, or inflation.

Stagflation occurs when the economy isn't growing but prices are, which is not a good situation for a country to be in. This happened to a great extent during the 1970s, when world oil prices rose dramatically, fueling sharp inflation in developed countries. For these countries, including the U.S., stagnation increased the inflationary effects.

In the last week reports that came out of the US, Inflation rose alarmingly at 0.8% while the there was increase in unemployment also. Thus, there is a growing feeling that the Fed may not decrease the interest rates as was widely expected as decreasing the interest rates while could spur economic growth, it could also fan inflation which is not something that the central bank would like to have.

Thus it is quite possible that the current phase in the US could be termed as Stagflation which could lead to recession which we will try and understand in subsequent blogs.

'Interest'ing facts about home loan

Given the recent talks about reduction in interest rates by banks, reduction in inflation, weakening of global interest rates etc, i thought it is important to share with you some of the interesting facts about the rate of interest and the EMI that one pays over the tenure of the loan and the total amount that one ends up paying as a percentage of the total amount borrowed.

If the rate of interest rate for the home loan is taken as 10% pa then the EMI (Equated Monthly Installment) per month will be as given below

5 years - 2125. Total Amount repaid during the tenure of the loan - 129120
10 years - 1322. Total Amount repaid during the tenure of the loan - 158640
15 years - 1075. Total Amount repaid during the tenure of the loan - 193500
20 years - 966. Total Amount repaid during the tenure of the loan - 231840
25 years - 909. Total Amount repaid during the tenure of the loan - 272700

From the above, it is quite clear that as the number of years increase the EMI decreases but also on a very important note, the total EMI paid increases significantly. If one takes a 15 or 20 year period, one ends up paying almost twice the actual amount borrowed to the bank.

If the rate of interest rate is taken as 12% pa then the EMI per month will be as given below and if one takes a 15 or 20 year period, one ends up paying almost 2.5 times the actual amount borrowed to the bank.

5 years - 2225. Total Amount repaid during the tenure of the loan - 133500
10 years - 1435. Total Amount repaid during the tenure of the loan - 172200
15 years - 1201. Total Amount repaid during the tenure of the loan - 216180
20 years - 1102. Total Amount repaid during the tenure of the loan - 264480
25 years - 1054. Total Amount repaid during the tenure of the loan - 316200

Thus in future if you get a small bonus or some extra income, focus on paying back some of the loan as your tenure will reduce which will have a magical impact on the total tenure of the loan.

SBI cuts fixed deposits rate by 25 basis points

State Bank of India has announced a 25 basis point cut in interest rates on fixed deposits for various slabs up to 550 days. But interestingly the bank has raised rates on two medium-term slabs.

As per the revised rate structure, SBI will continue to offer a maximum rate of 8.5% for three to ten years. For one year to 549 days the bank will offer 8.25% against 8% and for 550 days the bank will offer 8.5% against 8.75%. The bank will offer a minimum rate of 4.75% for 45 days against 5%. The revised rates are effective from December 17.

Given the low rates of inflation, it is quite possible that other banks will also follow suit. However, none of the banks have cut their interest rates on home loans except for the diwali mela which they announced some time ago.


If the oil prices remains stable and the government does not increase the oil prices it is quite possible that the inflation rate may remain low thus leading to possible fall in home loan rates.

Franklin Asian Equity Fund

Franklin Templeton Investments has launched an equity fund called Franklin Asian Equity Fund. This open ended fund will invest in companies in the Asian region, excluding Japan.

The scheme will deploy at least 50 per cent of its assets in foreign equity while the domestic equity can go up to 40 per cent. Overall, equity and equity linked instruments would account for at least 70 per cent of the portfolio while up to 30 per cent may be invested in fixed securities.

One of the problems in this fund is that given that that this equity fund will have less than 65% allocation to domestic share market it will be deprived of the capital gains exemption for long-term gains, lower short-term capital gains tax and tax-free dividend.


Scheme Details
Issue Opens: November 19, 2007
Issue Closes: December 18, 2007
Type: Open-end, equity scheme
Benchmark Index: MSCI Asia (ex-Japan) Standard Index
Minimum Investment: Rs 5,000 and multiples of 1 thereafter
Entry Load: 2.25 per cent for investment of less than Rs 5 crore
Exit Load: For investment of less than Rs 5 crore, an exit load of 0.50 per cent will be charged, if redeemed within one year of allotment. For investment of more than Rs 5 crore, an exit load of 1 per cent will be charged upon redemption within six months from the date of allotment

Kotak Indo World Infrastructure Fund

Kotak Mahindra Asset Management Company has come out with a three-year close ended equity fund called Kotak Indo World Infrastructure Fund. The fund seeks to generate long-term capital appreciation by investing in stocks of domestic as well as global infrastructure companies. This fund would automatically be converted into an open ended fund after the expiry of three years.

The fund proposes to invest at least 65 per cent of the fund proceeds into Indian equities. It has an option of investing between 10-35 per cent in overseas infrastructure fund and upto 35 per cent may be invested in debt and money market instruments.

The fund has short-listed a global infrastructure fund of T. Rowe Price (to be launched soon) as the vehicle to invest in overseas markets. Kotak Mutual Fund had launched a fund focused on the emerging markets in July this year, which primarily invests in the units of T. Rowe Price SICAV-TGEMF.

Scheme Details
Issue Opens: November 27, 2007
Issue Closes: December 22, 2007
Type: Closed-end, equity scheme
Benchmark Index: S&P CNX Nifty to the extend of 65 per cent of the portfolio, and MSCI World Index to the extend of 35 percent of the portfolio.
Minimum Investment: Rs. 5,000
Entry Load: Nil
Exit Load: Nil. However, redemption will be permitted after deduction of unamortized initial issue expenses
Cost: Initial issue expenses, not exceeding 6 per cent of the corpus collected, would be amortized on a daily basis over the three-year close-ended tenure of the scheme.

LIC Top 100

LIC Mutual Fund has launched a new closed ended fund called LIC Top 100. The primary investment objective of the scheme is to seek capital appreciation by investing in equity and equity related instruments from the universe of CNX 100 index.

It will turn into an open ended fund after 36 months. This is a good where diversification of the investments will happen.

CNX 100 is constituted by taking 50 stocks of Nifty and 50 stocks of Jr Nifty.
Captures mid-cap,small-cap as well as large cap stocks. These companies represent 22 broad sectors lending support to our economy i.e. Auto, Banks & Financial services, Cement, Power, Metal (ferrous & non-ferrous), Pharma, IT, Telecom, Construction, FMCG, Capital goods, Forging, Hotel, Logistics, Oil & Gas, Petrochemical & Refineries, Textiles etc.

Market Capitalization of CNX 100 represents 62.4% of the total traded Market Capitalization.


The scheme will have an exposure between 80-100% in Equity and equity related securities of CNX 100 while 0-20% will be invested in Money Market Instruments / Debt (including securitized debt).

Scheme Details
Issue Opens: November 15, 2007
Issue Closes: December 14, 2007
Options : Dividend and Growth
Fund Category: Closed-end (will become open ended after 36 months), Equity Scheme
Minimum Investment: Rs 5000 and Rs 1 for additional purchases
Entry Load: During New Fund Offer Period there will be no entry load as close ended schemes are not permitted to charge entry load
Exit Load : Units will be redeemed only after recovering the balance unamortised expenses
Liquidity : Investors can repurchase their investments once in a week during close-ended period and on all business days after the scheme becomes open-ended.

Types of Life Insurance Policies

There are a huge number of schemes that Life Insurance companies have these days when a person wants to take up a policy. It might all sound very different and also could be very confusing for a lay person. However, the truth is that the various schemes are just derivatives of the 5 basic schemes that are given below

Money Back Policy
In this type of policy, the policy holder will get back fixed amounts at certain intervals during the life of the policy and also a lump sum at the end of the tenure. In case the policy holder dies in between, the dependent will get the total sum assured and also there is no need to pay the future premiums.

Endowment Policy
In this type of policy, the policy holder will get a lump sum at the end of the tenure if one survives. In most, the returns are similar to the fixed deposit returns of government securities. In case the policy holder dies in between, the dependent will get the total sum assured and also there is no need to pay the future premiums.

Term Policy
In this type of policy, there are no survival benefits for the policy holder. In case the policy holder dies in between, the dependent will get the total sum assured and also there is no need to pay the future premiums. This is the cheapest form of risk cover as there are no returns in the future in case of survival.

Whole Life Policy
In this type of policy, premiums are typically paid through the life of the policy holder and one can get a life cover even after the age of 60 which other schemes may not provide. Also, this is more like an investment on an ongoing basis. Typically schemes come with options of profits and without profits.

Unit Linked Investment Plan
In this type of policy, part of the premium that one pays goes towards investment in equity or debt related instruments like a mutual fund. There are significant advantages in such schemes as it does not have entry and exit load. In case the policy holder dies in between, the dependent will get the total sum assured or the investment value which ever is higher and also there is no need to pay the future premiums.

JM Agri & Infra Fund

JM Mutual Fund has launched a new fund closed ended fund called JM Agri & Infra Fund. The primary investment objective of the scheme is to seek capital appreciation by investing predominantly in equity / equity related instruments of companies that focus on agriculture and infrastructure development of India.

It will have an exposure between 65-100% in Equity and equity related securities of industries in the Agri & Infra Sector while 0-35% will be invested in Money Market Instruments / Debt (including securitized debt).


Scheme Details
Issue Opens: November 19, 2007
Issue Closes: December 18, 2007
Options : Dividend and Growth
Fund Category: Closed-end, Equity Scheme
Minimum Investment: Rs 5000 and Rs 1000 for additional purchases
Entry Load: During New Fund Offer Period there will be no entry load as close ended schemes are not permitted to charge entry load
Exit Load : For ongoing redemptions/switch out after three months from the date of allotment, the exit load till maturity of the scheme will be Nil. However, at the time of redemption, the unitholders will be charged the balance proportionate unamortized initial issue expenses applicable to their investments.

Entry / Exit Load on an ongoing basis after the conversion of Scheme into an open-ended Scheme:

Entry Load :
(i) In respect of each purchase / switch-in of units less than Rs. 3 crores in value: 2.25%;
(ii) In respect of each purchase / switching of units equal to or greater than Rs. 3 crores in value: Nil;
Investments made through Systematic Investment Plan (“SIP”): Nil

Exit Load : Nil. However, investments made through SIP will attract 2.25% if redeemed within 1 year of allotment / transfer of units from the respective instalment.