Common cold or Swine flu Sep 11, 2009

Rising markets but ULIPs yet to recover from the downfall

Sep 11, 2009

Weekly Facts
	Close	Change	%Change
BSE Sensex	16,216.86	818.5	5.32%
Re/US$	48.63	0.3	0.57%
Crude ($/barrel)	69.58	2.3	3.39%
FD Rates (1-Yr)	5.00%-6.50%

Weekly change as on Sep 10, 2009

Common cold or Swine flu

Impact

Investing in a financial product or even in a physical asset must be in accordance to your financial goals. Investing over a long-term must ideally show an element of wealth creation and not depletion. Well, this can happen only when your investment consultant is equally disciplined and prudent as you are while handling your finances. We all believe that we can handle our investments by ourselves - and in a way that might be true. However, not using a consultant is like not going to a qualified doctor for something important just because you can self treat a common cold - which incidentally can be a swine flu and hence, may require medical advice.

It is our constant endeavor to bring you some simple quick read points on financial prudence, which you as investors must follow:

1) Understand the phase of your life cycle and wealth cycle

2) Understand and try to evaluate your risk appetite

3) Quantify your total savings available for investments

4) Plan for every phase of your life cycle

5) Invest with an objective - set financial goals

6) Classify your investments broadly into financial and physical asset classes
- Financial Assets: Equity and Fixed Income Securities
- Physical Assets: Real Estate, Gold, etc.

7) Analyze whether the asset class aligns with your risk profile

8) Track your investments quarterly and not every day!

9) Invest for the long-term and not the short term - Investing is a marathon and not a sprint

10) Engage in investor education programs

The D. Swarup committee has made some initial recommendations on regulating investment advisors across the spectrum.

Should you get on the IPO Bus?

Impact

With the economy seemingly on the road to recovery and equity markets buzzing, there are several companies which are having their Initial Public Offers (IPOs). But, the question lies whether you should get on the IPO bus?

We have done a comparative study of the risk return characteristics of investing in IPOs vis-à-vis investing in secondary markets over a 3-Yr period.

Risk-Return Comparison

Index	3-Yr (%)	Std. Dev. (%)	Sharpe ratio
BSE Sensex	10.59	8.9	0.11
BSE Midcap	5.63	11.10	0.09
BSE IPO	10.85	12.56	0.12

Relative Performance

(Source: Crisil Fund Analyzer)
(Returns and Ratios calculated from September 8, 2006 to September 8, 2009)

This is indicative that the IPOs (10.85% CAGR) have certainly performed better than the BSE Sensex (10.59% CAGR) and the BSE Midcap (5.63% CAGR). The risk adjusted return as indicated by the Sharpe ratio of 0.12 is also better than the large cap and mid cap index.

But, the catch point here is that investors are taking much higher risk by investing in the IPO segment as indicated by the standard deviation of 12.56%, which is very high as compared to that of the BSE Sensex (8.90%) and BSE Midcap (11.10%).

In today's scenario many investors are putting in money into the Primary Markets -IPOs, without really understanding the risk characteristics and fundamental attributes of the company having the IPO. It is also very important to deploy your money with an investment philosophy rather than a speculative philosophy, with the latter's sole aim being to make listing gains or short term trading gains. There have been instances of people following the rat race by even borrowing funds to invest in IPOs and then making losses post listing.

Hence, while investing in the IPO markets, investors should take an informed decision by studying the fundamental attributes and risk characteristics of the company rather than getting onto any bus that comes along.

Make sure the bus is going to your destination!!!

Gold becomes Bold

Impact

Gold is the oldest precious metal known to man. It has traditionally been a sacred, ornamental, and decorative commodity since centuries. Gold was primarily used for personal adornment, rather than for monetary purposes.

Today, gold is seen as an asset class to hedge against inflation and bring stability to ones portfolio. It is also a vital reserve asset.

The price of gold on September 8, 2009 breached the psychological barrier of $1000-per ounce (31.13 grams) in the international market and Rs.16000 per 10 grams in Delhi.

So, if you were invested in gold for a period of one year, you would have generated a return of approximately 37%.

The current surge in the price of gold has been on account of:

Weakening of the U.S. Dollar

Inflationary pressures forcing people to buy gold

The current rally in risky asset classes like equity - encouraging investors to shift asset classes

Buying before the festive seasons like Dassera, Diwali and the wedding season

Increase in money circulation

Increase in the Gold ETF holdings

If you were an investor, after one year your investment would have generated a return of 35.87% in Gold Exchange Traded Funds (ETFs), 7.89% in BSE Sensex, 7.21% in S&P CNX Nifty and an average of 11.04% in diversified equity funds.

SCORECARD

	1-Yr (%)
Category Average of Diversified Equity Funds	11.04
BSE Sensex	7.89
S&P CNX Nifty	7.21
Gold ETFs	35.87

(Data Source: Crisil Fund Analyzer)
(Returns calculated for the period September 8, 2008 to September 8, 2009)

Gold peculiarly has shown a secular upward move since January 2000, and if equity markets correct, your investments in gold may generate further better returns. Inflationary situation too would add to the demand for gold leading to a price increase.

Hence to be an intelligent investor and make your portfolio shine, one must be bold and invest in gold. At Personal FN we recommend an allocation of 10-15% of your portfolio to gold.

Lock-in period on ULIPs increased

Impact

The IRDA has announced that the lock-in period for Unit-Linked Insurance Products (ULIP) will increase from 3 years to 5 years. This is applicable for all new products filed after September 30, 2009 and for existing products from January 1, 2010. Although the minimum tenure currently for Ulips is 5 years, partial withdrawals after 3 years are permitted. The lock-in period has been increased to prevent mis-selling and to reinforce the concept of insurance being a long-term product. Previously, IRDA had also decided to ban surrender charges on Ulips after 5 years.

This move will benefit both policyholders and insurance companies, as the former will earn higher returns and the latter's costs will be spread over a longer period of 5 years. However, policyholders should not redeem their investments after 5 years just because they have the flexibility to do so without paying any surrender charges. The cost in the first 3 years itself is very high, which means the investor's portfolio will take a minimum of 5 years to break even. Only after this an investor will see his portfolio grow. Hence, you should invest in ULIPs only if you have a mind-set to stay invested for atleast 8 years.