Impact 
 In order to reinstate policyholders’ trust in the pension plans, the Insurance Regulatory and Development Authority (IRDA) plans to make annuity compulsory for all traditional products. According to Mr. J. Hari Narayan - Chairman of IRDA, if the annuity is not mandated, the policyholder is given a lump-sum at the end of the policy tenure. Thus it works just like a retirement fund, where the accumulation happens but the policyholder is devoid from an annuity.
Thus, once again making its pro-policyholder stance, IRDA has clarified that the guideline for pension products will apply to all individual and group unit-linked pension products, as well as all individual and group variable insurance pension products.
In our opinion the move adopted by IRDA is certainly in the interests’ of policyholders as the annuity feature provided in the pension plans can help provide steady stream of returns during golden years.
But we believe, in order to build a substantial corpus to take care of one’s retirement it is vital to start investing regularly at an early age. SIPs of winning mutual funds can help in infusing the habit of investing regularly, but the equity oriented one should be preferred because over the long-term it can accelerate the process of wealth creation and even hedge you against inflationary pressures.
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Impact
 In order to assists life insurers to raise money through Initial Public Offering (IPO) the Securities and Exchange Board of India (SEBI) has withdrawn a major irritant for life insurance companies, the three-year profitability clause that is applicable for all companies as a precondition for tapping the capital markets. However, insurance companies will have to go for additional disclosures as required by the Insurance Regulatory Development Authority (IRDA) over and above the disclosure norms set by SEBI.
According to the draft guidelines, insurance companies, which have completed 10 years of operations, will be allowed to tap the capital market and the valuation should be based on the embedded value, calculated by a method designed by the Institute of Actuaries of India. Insurers planning IPOs will have to disclose their economic capital as well as the embedded value to the regulator.
Furthermore, insurers first need to seek formal approval from the insurance regulator and then the final approval from SEBI. Typically under the disclosure norms, insurance companies will have to disclose their balance sheet, premiums, commission expenses and operating expenses on a quarterly basis. Apart from this the guidelines are expected to follow the usual norms, like individuals holding more than 10% stake would be considered as promoters and the company will have to maintain a solvency ratio of 1.5. Moreover, the IRDA will not have any mandate on the extent of dilution, and it is up to individual companies to decide on the size of the issue. However, SEBI guidelines mandate 25% of the shares of a listed company be retained by the public.
We believe that profitability should be an important criterion for insurers who want to access the equity markets for need of funds. A three-year profitability track record could have been considered by the capital market regulator. Doing away with this criterion is absolutely against the interests’ of the investors as well as the policyholders. If a company is not competent enough to make profits then long-term investors should refrain from investing their hard earned money into such IPOs, because dividends could get hindered, since dividends are an appropriation out of profits.
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Impact
 In its latest stint on tightening screws on mutual funds, the Securities and Exchange Board of India (SEBI) under the mutual fund committee constituted is planning to extend a “Marked-to-Market” (MTM) basis of bond valuations to debt papers below 91 days. The committee is worried about the concentration of investments in liquid funds which invest in real short-tenured instruments.
Under several instances, liquid fund portfolios have had 80-85% of investments in instruments below 91 days. As on September 30, liquid funds manage assets worth Rs 1,28,537 crore, accounting for about 20% of the net asset base. This according to the committee involves systemic risk.
This is the second time in eight months liquid funds have come under the scanner of SEBI and its advisory committee. In July 2010 the capital market regulator had asked mutual fund houses to value their bond portfolios over 91 days maturity on a MTM basis, thus attempting to reduce “carry portfolios”.
In our opinion the move to bring liquid funds under MTM valuation could infuse in volatility in an otherwise risk-averse debt mutual fund investment category. Moreover corporate treasuries – which are amongst the largest investors in liquid funds could get upset as the change in portfolio valuation from accrual basis (by following weighted average method) to MTM may not be taken lightly by institutions. Also a noteworthy point is that, many any corporate treasuries don't have the mandate to invest in MTM-based instruments.
At present retail investors too, who wish to invest their very short-term funds prefer liquid mutual funds, as they are relatively risk-free and are not subject to wild movements. But if the MTM basis of valuation is adopted, returns on their portfolio could be subject to unwarranted volatility.
Hence we believe SEBI should re-think on the proposal of getting the liquid funds category under MTM valuation method, and help investors keep volatility at bay.
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Impact 
The Foreign Institutional Investors (FIIs) have remained quite conscious towards India as an investment destination right from the beginning of the calendar year 2011. Major global factors hindering FIIs from investing in India are the burgeoning Euro zone crisis and fears of ballooning fiscal deficit in the United States. Apart from the global factors, the major domestic factors affecting FII flows from coming to India are stubbornly high inflation, poor political image and inherent bureaucracy and red-tapism in the country. Hence we believe SEBI should re-think on the proposal of getting the liquid funds category under MTM valuation method, and help investors keep volatility at bay.
(Source :ACE MF, PersonalFN Research)
However, since the month of June 2011, FIIs seem to be treading the path of BSE Sensex as shown in the above graph. Further investments by the FIIs in India will be dependent on how the inflation numbers come in and developments taking place in the Euro zone and the United States.
FII flows have always been volatile and very much influenced by the developments taking place around the globe. However, our country needs more stable and long term investments like the Foreign Direct Investment (FDI) for the overall development of the economy.
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| Weekly Facts |
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Close |
Change |
%Change |
| BSE Sensex* |
16,785.64 |
(297.0) |
-1.74% |
| Re/US$ |
49.81 |
(0.7) |
-1.38% |
Gold /10g |
26,200.00 |
(430.0) |
-1.61% |
| Crude ($/barrel) |
109.65 |
(0.5) |
-0.48% |
| FD Rates (1-Yr) |
7.25% - 9.40% |
Weekly change as on October 20, 2011
*BSE Sensex as on October 21, 2011
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In an interview with Mr. Adrian Mowat - Chief Emerging Market Strategist at JP Morgan, shared his views on the Euro zone impact on Emerging Markets (EMs) and RBI’s rate hikes.
Mr. Mowat believes that equity market in EMs may witness further sell down because of the Euro crisis and that would set the mark for what could prove to be a very profitable 2012. “What I think we will be seeing in 2012 is inflationary pressures have eased and that will then allow EM policy makers to use their flexibility and ability to cut interest rates to maybe increase fiscal spending. That policy flexibility relative to the constraints that Japan, euro area and the US face, will make EM equities outperform developed market (DM) equities. But your buying opportunity is not now, it is after we get the next down leg due to Europe,” said Mr. Mowat.
As far as RBI’s rate hikes are concerned, Mr. Mowat believes that the consensus that RBI may raise rates may prove to be wrong. “One should greet, rather strangely, weak economic data as good news if you have been worried about a capital market because of inflation. Weak data will tend to mean that there will be less demand in the economy and less inflationary pressure. So I treat this as a good sign in terms of marking low points in markets rather than negative news,” he said.
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Market-to-Market: When the net asset value (NAV) of a mutual fund is valued based on the most current market valuation.
(Source: Investopedia)
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QUOTE OF THE WEEK
"When defeat comes, accept it as a signal that your plans are not sound, rebuild those plans, and set sail once more toward your coveted goal."
-Napoleon Hill
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