ULIP charges capped at 3% Jul 24, 2009

ULIP charges capped at 3%

July 24, 2009

Weekly Facts
	Close	Change	%Change
BSE Sensex	15,231.0	980.8	6.9%
Re/US$	48.5	0.3	0.5%
Gold Rs/10g	15,020.0	195.0	1.3%
Crude ($/barrel)	66.5	4.1	6.6%
FD Rates (1-Yr)	5.75% - 7.25%

Weekly change as onJuly 23, 2009

ULIP charges capped at 3%

Impact

After Mutual Funds, it is the turn of ULIPs (Unit Linked Insurance Plans) to face the music from the regulatory body. Insurance Regulatory and Development Authority (IRDA) has issued a circular stating that the charges on ULIPs will be capped at 3% from October 1, 2009. The difference between the gross and the net yield to investors should not exceed 3% incase of insurance contracts less than and equal to 10 years, of which fund management charges shall not exceed 1.50%. For contracts more than 10 years the difference should not exceed 2.25%, of which the fund management charges shall not exceed 1.25%.

Lets understand what this means. Consider, you have invested Rs 50,000 per year for 10 years in a ULIP. Assuming it generates a return of 10% CAGR and the overall expenses for 10 years is 3% CAGR; then the maturity value of your investment would be Rs 739,180. At present, the overall expenses of these plans work out to 3.75%-4.00% on an average. This results in maturity value of Rs 698,582. With the cap of 3% your invested amount will rise by Rs 40,598.

	Gross Yield in CAGR (%)	Overall Expenses in CAGR (%)	Net Yield in CAGR (%)	Maturity Value (Rs in lakhs)
From Oct 1, 2009	10	3	7	739,180.00
Current	10	4	6	698,582.00
			Total Savings	40,598.00

(Gross Yield - Overall expenses = Net Yield)
A Step in the right direction!
Such steps taken by regulatory bodies like SEBI and IRDA will encourage investors to invest their money as they will pay lower expenses and this will result in higher returns.

Do you have risk appetite for corporate fixed deposits?

Impact

Shriram Transport Finance Company Limited (STFC), a player in commercial vehicle finance, is offering fixed deposits at attractive rates. As depicted in the graph below, the rates offered by this company are more than the bank rates by 2% - 4%. What makes this even better is that the cumulative fixed deposit scheme is compounded quarterly. For example, if you invest Rs 25,000 for 1 year @ 9% p. a. compounded quarterly, the maturity value of your investment would be Rs 27,325 and the effective rate will be 9.3% p.a. Whereas Rs 25,000 invested in HDFC bank for a year will fetch you Rs 26,469; a difference of Rs 856.

However, bank FDs are less risky than corporate FDs. The ability of the company to service these deposits depends on its ability to generate cash flows which in turn depends upon various factors like the nature of its business, demand for its products, competition in the industry it operates, which involves analyzing and forecasting the company's financials. If the company faces financial difficulties it will find it difficult to service these deposits. Hence, investing in this FD would depend on the investor's risk-appetite.

Improve your service or pay a fine - RBI warns banks

Impact

Reserve Bank of India (RBI) has now imposed strict norms to deal with erring ATM transactions. The customer's bank account often show debit transaction even though the ATMs have not disbursed cash for various reasons. Even after repeated complaints, banks take as much as 2-3 months to re-credit the money to the customer's account. RBI has issued a circular stating that banks are now required to re-credit customer's account with the amount wrongfully debited within a maximum period of 12 days from the date of receipt of customer complaint. If a bank fails to do so, then it would attract a fine of Rs 100 for each day of delay. This compensation should be automatically credited to the customer's account on the same day when the bank re-credits the customer's account for failed transaction.

This move will benefit customers, who had to run from pillar to post to claim their money.

Retail shops will function as ATMs very soon

Impact

RBI has issued another circular stating that debit card holders in India can use their cards to withdraw upto Rs 1,000 per day from retail shops. The card holder doesn't have to make purchases from the shop to avail this service. This facility may be made available at any merchant establishment designated by the bank after a process of due diligence.

This will benefit customers, especially in small towns and rural areas who have to travel far to withdraw money from ATMs. However, there may be fees on cash withdrawals from retail shops.

DSP's World Energy Fund - A unique proposition

Impact

DSP BlackRock World Energy Fund (DWEF) is a newly launched global fund of funds. It will invest in units of BlackRock Global Funds - World Energy Fund (BGF - WEF) and BlackRock Global Funds - New Energy Fund (BGF - NEF). These global funds in turn will invest in the stocks of companies in the Energy sector and the New Energy sector, across the globe.

DWEF's performance will be linked to the price of oil and company specific factors. Though DWEF offers a unique investment proposition to domestic investors, there are few things that investors should keep in mind. One, being a sectoral fund, it is important to time the entry and exit from these funds to clock superior returns. Second, apart from the market risk, one needs to factor in the additional 'currency risk' in case of global funds. Third, the expense structure of this fund is very high; over a period of time this will reflect on the overall performance of the fund.

We believe that investors should consider investing only if they can time the entry and exit from the fund and are ready to stay invested for a long haul.

Flash your ID to make lavish purchases

Impact

If you intend to make any high-value purchases with your credit card or debit card, then don't forget to carry your identity card (ID) along with you. This is part of a new initiative introduced by major card companies and card-issuing banks to prevent fraudulent transactions and misuse of cards. There is a typical list of what constitutes a high-value purchase and it can vary from bank to bank and across different merchant establishments.

A typical list

Items	Purchases (Rs.)
Jewellery	7,500 or more
Cellphones	5,000 or more
Electronics	8,000 or more

* Note - the purchases and items can vary from bank to bank & merchant shops
Although, flashing ID cards can cause inconvenience to customers, they will benefit from this as this will curb the misuse of credit and debit cards.

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