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| October 17, 2014 |
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| Weekly Facts | | | Close | Change | %Change | | BSE Sensex* | 26,108.53 | -188.85 | -0.72% | | Re/US$ | 61.85 | -0.79 | -1.29% | | Gold Rs/10g | 27,925.00 | 675 | 2.48% | | Crude ($/barrel) | 83.12 | -7.92 | -8.70% | | FD Rates (1-Yr) | 8.00% - 9.00% | Weekly change as on on October 16, 2014
*BSE Sensex as on October 17, 2014 |
Impact 
A robust insurance sector is important for any economy, much as the banking sector. The insurance sector in India is growing rapidly, but to strengthen it further, the Government is keen on getting the parliamentary approval to the new insurance bill this winter session.
What will change?
The insurance Bill proposes some key amendments to Insurance Act of 1938. At present, the Government has referred the Bill to the Parliamentary select committee for evaluating crucial aspects. And if the Bill is cleared in the winter session, the insurance sector may witness a number of changes which include:
- Foreign companies would be allowed to hold upto 49% equity in an Indian Insurance companies (as against 26% allowed at present);
- Senior positions would be held by Indians;
- Standardisation of commission structures for insurance agents (whereby it could have 7-8% commission for the first and second year (as against 15% at present for the first year on five year policies) and 1-3% later;
- Detailed norms for electronic insurance and use of technology in insurance; and
- No repudiation of claims after 3 years of the policy coming into force, even if a fraud is detected
Furthermore, the new insurance Bill stresses on health insurance. Health insurance business will require to be operated by a separate section, headed by a senior team as per the Bill. Unlike expected earlier, banks may not get a nod to become distributors of insurance products, as there is no clarity whether the parliamentary committee would approve it. At present, banks can act as corporate agents of only one insurance company, at a time.
Also in order to curb mis-selling of insurance products, stringent penalties would be levied and a grievance redressal mechanism will be focused on.
PersonalFN is of the view that, proposed changes touch some key areas such as ownership and management, commission structure and claim settlement among others. If the Bill is cleared in the parliament, insurance companies would be able to attract foreign capital. However, care should be taken while selling insurance policies while the commission based model is in place. You see, historically, life insurance products are not proactively bought in in India; rather they have been pushed and unfortunately mis-sold. Therefore, insurers will have to establish a much stronger consumer grievance redressal system. Also PersonalFN believes consumer awareness programmes need to be initiated for educating people and agents should engage in need based advisory rather than selling. Unless, that happens it is unlikely that people buy an appropriate insurance policy and the Bill will bring much benefit at large for policyholders.
As regards health insurance is concerned, awareness about buying a cover is growing. Thanks to ballooning cost of healthcare. But here as well, policyholders need to know basic facets governing health insurance policies to benefit the most.
PersonalFN is of the view that, you need to take a holistic view of your finances. You must buy insurance only with an aim of safeguarding yourself and your family from a possible financial loss. Investment and insurance needs to be dealt separately. There shouldn’t be any motive of earning a return over the premiums which you defray. This essentially means, you should think twice before buying endowment plans, Unit Linked Insurance Plans (ULIPs) and money back policies. They may give you inadequate cover and may generate lower returns as well, while commanding a hefty premium.
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Impact
Paying upfront commissions may soon become a thing of past for mutual funds. The Association of Mutual Funds in India (AMFI) has proposed that fund houses should stop paying upfront commissions to their distributors. Such developments reinforce the fact that the world is dynamic in true sense.
There was a time when, mutual fund investors used to pay hefty 2.5% of entry load for investing in a mutual fund. And the fund houses in turn used to pay commissions to their distributors using money collected by way of entry load. Thus now if the practice of paying upfront commissions is discontinued, it would be an important development.
You see, during the exuberant bull phase of 2002-2007 mutual fund houses had adopted a very simple strategy for expanding their asset base: Pay commissions generously to distributors and aggressively promote New Fund Offers (NFOs). However, over a period of time a lot of things changed. Entry loads were banned in August 2009. This reined in the galloping horse of mutual fund houses. However since they couldn’t figure out any other model other than the commission oriented one, fund houses continued to pay upfront commissions to distributors from their own pockets.
Aren’t mutual funds learning from their mistakes?
As the old proverb describes, "old habits die hard". Riding high on the current market tide, mutual funds are busy garnering more assets these days. This happens every time during a phase of exuberance as investor interest gets rekindled and fund houses make hay when the sun shines. A noticeable change this time was the number of close-ended schemes launched by fund houses. Again, mutual funds paid high commissions. Tax savings schemes and the close ended schemes usually pay the highest upfront commissions as investments coming through them are considered more stable.
Taking a serious note of this, the Securities and Exchange Board of India (SEBI) lambasted mutual funds.
Now whether the upfront commissions will be banned indeed may become clear in coming days. PersonalFN is of the view that, if mutual funds stop paying upfront commissions, their pace of acquiring new assets may slow considerably, as there is no immediate reward for the intermediary for promoting products. However, in the long term this may prove to be beneficial to all - the fund houses, distributors as well as investors. Fund houses may end up paying less upfront and paying trail commissions would be directly proportional to the age of investments, which is well justified. Furthermore, for persuading investors to stay in for a longer term, distributors and the mutual funds will have to educate them adequately. Eventually, this will help the investor understand benefits of long term investing.
PersonalFN believes, mutual funds provide you a good investment avenue, but you must refrain from investing in them in an ad-hoc manner. Instead since mutual funds can play a vital role in the journey of wealth creation and help you achieve your financial; they should be selected wisely to have only robust and consistent performers in the portfolio.
Do you think, the mis-selling of mutual funds would reduce if fund houses stop paying upfront commission to their distributors? Share your views
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Impact 
Most of us love watching melodramatic Hindi movies. You may have watched one typical scene quite often; a patient miraculously survives despite his electrocardiogram (ECG) showing a straight line. The Indian industry is also passing through a same phase. It looked like the economy was getting back on track when the industry recorded strong revival in growth during the first quarter of the current fiscal. However, the growth measured by the movement of Index of Industrial Production (IIP) has nearly come to a halt in July and August. During these two months, IIP grew at a same rate, forming a straight line on graph. Now the question is whether the industrial growth revives or we may go back to square one. Unlike that in a Hindi movie, Indian economy doesn’t have any messiah to do some miracle.
Growth comes full circle …
(Source: CSO, PersonalFN Research)
IIP advanced by just 0.4% in August. The growth number for July was revised downward from 0.5% to 0.4%. It is noteworthy that, the industry had grown at the same rate even in August 2013. So it wouldn’t be wrong to say that industry hasn’t moved anywhere over last one year. IIP for May has been revised upwards from 5.0% to 5.6%, but considering the loss in growth momentum thereafter, such a revision holds negligible importance now.
To read more about this news and PersonalFN’s views on it, please click here.
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Impact
Energy prices are falling in the international market. Crude oil has lost nearly 25% since June 2014 and recently reached a 4-year low. You see, India gets dual benefit when global crude oil prices falls. One, it results in a lower oil import bill, and two reduces inflationary pressures (as fuel gets cheaper).
You may be pleasantly surprised to know that, India has got some respite from rising inflation witnessed for quite a while. Inflation measured by the movement of Wholesale Price Index (WPI) and the Consumer Price Index (CPI) fell to 2.38% and 6.46% respectively in September 2014. With this retail inflation (measured by CPI) reached its lowest ever and wholesale inflation (measured by WPI) too recorded a 5-year low. For the same month a year before, CPI had come in at 9.84% while WPI stood at 7.05%.
To read more about this and PersonalFN’s views on it, please click here.
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- You must have heard it somewhere, "no risk-no gain." But what if you don’t understand the risk element properly? Yes it is possible, when it comes to investing in mutual funds. However, if you are ardent reader of www.personalfn.com, you may well aware about the risks associated to different categories of mutual funds. PersonalFN has written over and over again, in the benefit of investors presenting an unbiased picture and educate them.
But still for those who have not much information about functioning of mutual funds, the Securities and Exchange Board of India (SEBI) has made it mandatory for mutual funds to indicate risk profile of each scheme by a specific colour. At present, we have a three-colour system in pace. Funds with low risk profile are assigned the blue colour, those with moderate risk are given yellow colour and funds with high risk profile are marked with brown. However, now it is being realised that, it is impossible to properly classify funds under just 3 colours. For example, a largecap fund and a small cap fund or a sector fund would be indicated with brown; where in fact their risk profile may be significantly different.
Therefore, the regulator is mulling over including more colours in the current categorisation system.
PersonalFN is of the view that, suggestions made to the regulator based on which the changes are being considered are very much valid and logical. PersonalFN also believes that, one shouldn’t rely only on colour codes for knowing the risk profile of a fund. Detailed research would help you separate funds (within the same category) having different risk profile. PersonalFN uses advanced metrics to gauge the level of risk involved in a particular fund. A detailed research report of PersonalFN would give you a comprehensive view on risk profile and the return potential of a fund.
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Velocity of Money: The rate at which money is exchanged from one transaction to another, and how much a unit of currency is used in a given period of time. Velocity of money is usually measured as a ratio of GNP to a country's total supply of money.
(Source: Investopedia)
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Quote : "You have a class of investors and you have a class of speculators. The speculators historically haven't been big enough to cause the investors to doubt the long-term vision of stock." - Jim Cramer
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