Life after August 1, 2009 Aug 01, 2009

Life after August 1, 2009

Aug 1, 2009

Weekly Facts
	Close	Change	%Change
BSE Sensex	15,388.0	157.0	1.0%
Re/US$	48.4	0.1	0.2%
Gold Rs/10g	14,725.0	295.0	2.0%
Crude ($/barrel)	67.1	0.6	1.0%
FD Rates (1-Yr)	5.75% - 7.25%

Weekly change as onJuly 30, 2009

Life after August 1, 2009

Impact

August 1 has arrived, and many fund houses and distributors are exploring their creative side to come up with a fee structure. On one hand, fund houses are looking for ways and means to compensate distributors for bringing business. On the other hand, distributors are planning to charge fee to the investors to run their business.

Some of the steps which the fund houses may take include:

Increase the exit loads. However, it should be recalled that only 1% of the exit load charged can be used for meeting expenses including distributors' commission. In fact few fund houses have already announced an increase in the exit load.

Compensate distributors by paying upfront commission out of their own pocket

Increase in trail commission paid to the distributor.

Many distributors are also planning to charge a fee to the investors for the services rendered by them - obviously after negotiating with the investors.

The big question amidst all this confusion is - What should investors do? We believe, banning of entry load has come as a never before opportunity for investors. Earlier investors were forced to pay the entry load irrespective of the quality of services offered by their distributors. But now, the investors can decide the amount of commission depending on the quality of service and advice offered to them.

At PersonalFN, it has always been our endeavor to advise our clients what suits them the best. Our services and research offerings are designed to cater to the needs of all types of investors.

Home loan sops continues - Are they enough to attract buyers?

Impact

In a bid to kick start the housing market and indirectly give a boost to the economy, the finance minister has announced a bonanza for a category of home buyers. Home buyers will now get an interest rate subsidy of 1% for the first year on home loans of upto Rs 10 lakhs, but there is one pre-requisite - the market value of the home should not be more than Rs 20 lakhs.

This means, if you take a loan of Rs 10 lakhs for 10 years at an interest of 10% p.a. then, you will save Rs 6,720 in the first year.

EMI @ 11%	Rs 13,775
EMI @ 10%	Rs 13,215
Savings per month	Rs 560
Savings in the first year	Rs 6,720

The 1% interest i.e. Rs 6,720 in the above case would be paid by the government to the bank and it is expected to cost the government Rs 1,000 cr.

First, the restriction that the market value of the home should not exceed Rs 20 lakhs should have been capped depending upon the real estate rates in different cities. This might not serve as a big incentive for an individual who is planning to buy a house in a metro like Mumbai but it would serve as a big incentive for someone in a tier-II city like Nashik.

Second, savings of Rs 6,000 - Rs 7,000 would not impel many individuals to hasten their decision to buy a house. The government should have either increased the duration for this sop or it should have increased the rate subsidy. However, saving something is better than nothing.

Shriram NCD offers returns upto 11.5% p.a.

Impact

Shriram Transport Finance Company Limited (STFC) has announced a public issue of Secured Non-Convertible Debentures (NCDs). The issue has 5 investment options as depicted in the graph below:

Additional interest at the rate of 0.25% p.a. for senior citizens
for option I & II. In Option III, Coupon of 11.03% is compounded quarterly.

Minimum Application Amount is Rs 10,000

The NCD is available for subscription from July 27, 2009 till August 14, 2009

They will be traded on the NSE (National Stock Exchange)

They are rated 'AA+' by CARE and 'AA(ind)' by Fitch

The tenor is 60M for all the options except Option V which has 36M of tenor

Put & Call Option available for Option III & IV at the end of 48 months

The NCDs are taxable, so the post tax return would be in the range of 7.5% to 8.0%

Investors who are looking for attractive returns can consider investing in these NCDs as they offer higher returns than bank FDs. But, before investing in them, investors should not ignore the risk.

As an NBFC, STFC is into lending and investment activities like banks. Therefore, the risk of not being able to recover monies from customers can adversely affect its profitability which in turn will impact its ability to pay interest on the debt.

India's first housing index - Residex

Impact

One of the advantages of equity indices were that one could see prices and price trends very clearly, so decision making was easy.

Ever wondered, whether housing prices are going up or down? Ever wondered which city is offering attractive prices? Till recently this was not the case in properties but now you can know price trends and prices by looking at an index. NHB Residex, a housing index was launched in 2007 to track the movement of prices in the residential housing segment in India. The project initially covered 5 cities Delhi, Mumbai, Kolkata, Bangalore and Bhopal; later on ten more cities were added as depicted in the graph below. Subsequently, it would expand to cover 63 cities to make it a truly national index.

The base year of this index is 2007. Each of the 15 cities is divided in different zones. The prices for each zone is tracked and updated to arrive at one prices for each city. For example, in Mumbai, the Price Index is as depicted in the graph below:

This index will be helpful for home buyers and investors to track the prices offered at different locations. For example, a person residing in Delhi wants to buy a house in Ahmedabad can use this index as a starting point to find out the prices offered at different locations and accordingly decide the one that fits his budget. This will also be useful for banks and housing finance companies in portfolio evaluation and collateral security for housing loans.

RBI maintains status quo in credit policy

Impact

In what may come as no surprise, the Reserve Bank of India (RBI), in its first quarter review of the Monetary Policy 2009-10 has maintained a status quo in several key areas:

It has left its key rates i.e. Repo, Reverse Repo, Bank Rate and CRR unchanged.

It has projected WPI Inflation for end-March 2010 at 5%.

It has projected GDP growth for 2009-10 at 6% with an upward bias.

The major challenge remains managing the fiscal deficit, without crowding out private credit demand.

RBI has been cutting rates persistently since October 2008, when the effects of the global slowdown impacted the domestic economy. However, with the global economy showing signs of stabilization, and emerging markets like India and China showing an upturn in industrial activity, the RBI, this time around, refrained from reducing the key rates any further. In fact it has slightly increased its GDP growth projection.

Let us understand how this will impact the common man? If the economic outlook remains positive and the economy starts recovering from the slowdown, companies would start expanding businesses for which they would hire people, which in turn would boost overall demand and lead to an increase in corporate earnings. Individuals who had lost their jobs and employees who have been waiting for salary increases can expect things to turn in their favour. But, if the fiscal deficit results in crowding out of private investments, then corporate India will have a tough time expanding or sustaining their businesses, resulting in longer than expected recovery cycle.

IRDA to set up an online complaint "box" for investors

Impact

In a move that would cheer, both the existing insurance policy holders and new buyers, the IRDA - Insurance Regulatory and Development Authority, is setting up a web-based complaint tracking system with the insurance companies. In this online portal, the consumer as well as the regulator would be able to track the status of complaints online. IRDA would monitor this closely.

All the 3 parties viz. the consumer, the insurance company and the IRDA would communicate under a single platform and enhance the coordination amongst them for addressing complaints. Also, insurance companies would have to decrease their turnaround time in resolving these complaints. Hence, customer service is expected to improve.

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